Beware Your Banker -- He May Be a Broker

You walk into your bank seeking safety -- but that safe haven has now become a danger zone. Consumer beware!

You trust your bank to provide only secure, FDIC-insured deposits. But you want higher yields than the bank certificates of deposit, where those 6-month CDs are currently paying less than 2% at most local institutions.

Now you're in the danger zone.

It's happening mostly to seniors, desperate to squeeze every last drop of interest from their remaining cash. But the desire is hitting all savers who want safety and more yield. And it's given new meaning to the term "money in the bank."

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A friendly banker senses your distress. He offers his business card. It says "Personal Banker." You relax. (Or maybe it's your mother who now feels she's found a friend to help her out of the low-rate dilemma.) Nobody notices that on the bottom of the card it also says "registered representative."

That's right. The friendly banker is also a broker.

That's because inside most banks there is a securities division, with brokers licensed to sell everything from annuities to unit investment trusts to stocks, bonds and mutual funds.

They sit in those desks right next to the teller's window. And those friendly "banker/brokers" are all too happy to help a senior in distress improve her monthly income. And, by the way, they are compensated by commission on the products they sell.

Isn't it misleading to have the business card read "Personal Banker" and also Registered Representative? One bank spokesperson denied the possibility, saying: "We make it clear to customers which products are FDIC-insured and which are investment products that don't carry federal insurance."

Greed Conquers Sanity

So now the "banker/broker" comes up with a money idea that offers a substantially higher return. Greed -- or necessity, or ignorance -- conquers sanity. How could the bank offer more interest without some kind of additional risk in the deal?

The answer is, it can't.

These products being sold inside the banks are actually quite different from those safe, insured money market deposit accounts or CDs. These products come with sales charges, ongoing management fees and penalties for early withdrawals. Even worse, many have the potential for loss of principal.

But the friendly "personal banker" doesn't quite explain all that. Instead, he draws a chart of how much more money you'll earn every month. And how much more you'll be earning at the end of the year, and after five years.

Do you think I made up this story to make a point? Well, I didn't. It comes directly from a co-worker whose mother, Margaret, went to one of the largest, best-known banks in town. She was looking for a certificate of deposit, but she came home with information about a Unit Investment Trust preferred securities portfolio -- a fixed portfolio of dividend-paying, preferred stocks.

Here's why this investment is definitely not an alternative to a CD:

• It carries a 1% sales charge upfront.
• It carries an additional deferred sales charge and fee amounting to 3.95%, which is subtracted from the account over months 4 through 9. The total fee is 5%!
• She has the potential to lose a portion of her investment through exposure to interest rate risk. (If interest rates rise, the value of the preferred stocks inside the fund will fall, and so will the price of the fund.) Then, when she sells, she could get back far less than she invested.
• It is not FDIC-insured. If the securities inside the fund default, there is no guarantee she'll get her investment back.
• There's no guaranteed liquidity. Many unit investment trusts that were sold as liquid, accessible "alternatives to money market funds" now are locked up because the internal investments -- auction-rate preferred securities -- are not being traded owing to the credit crunch.

This senior citizen -- and her son who asked me about it -- certainly didn't understand these exposures. I could clearly see the risks and costs in the fine print, because I'm used to looking at this stuff.

Remember, her "banker/broker" gets paid only if he sells her a product, so maybe that's why his handwritten illustrations only described the extra interest she would earn, not the risks!

For years, I've talked about the concept of "chicken money." That's money you can't afford to lose. It's money that belongs in short-term FDIC-insured deposits, Treasury bills or money-market funds.