Beware Your Banker -- He May Be a Broker

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.

It's certainly sad for savers that the Federal Reserve is punishing them with low interest rates in order to "save" the financial system. But you must remember the motto of the "chicken money" investor: I'm not so concerned about the return ON my money, as I am about the return OF my money!

These days, when the term "money in the bank" is not quite what it used to mean, it pays to remember that principle -- and to read the fine print. And that's The Savage Truth!

 

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