Is a 3.45 Percent APY CD Too Good To Be True?

Last Updated Jan 25, 2010 10:38 AM EST

I was reading the Denver Post on Sunday when an advertisement caught my eye. It was for a CD yielding 3.45 percent, nearly two percent higher than anything I could find. The advertisement by American First Assurance looked something like this:

3.45% APY*

FDIC INSURED 6 MONTH CD

AMERICAN FIRST *ASSURANCE*


Fine print.........
The ad also gave phone numbers and locations, along with the customary fine print which noted, "Guaranteed insurance products are also available" and that the CD yield "may include a bonus." First thing Monday morning, I called American First *Assurance* to jump on this offer like a Doberman. I wouldn't walk away empty handed, as I knew I'd get either a high-paying CD or a column out of this.

Real CD or bait and switch?
I've written a great deal about insurance investing over the years which, as you might imagine, has not endeared me to insurance producers. All one has to do is read the many comments I received from insurance agents in my $100,000 challenge, to get a snapshot of their opinion of my "ignorance." But this column isn't about insurance products, it's about advertising tactics allowed by regulators. .

The web site for American First Assurance states that it is a "leader in locating superior insurance and banking products." It notes they work with 8,000 federally insured banks and goes on to explain what a CD broker is.

Luckily, one of the two Colorado locations happened to be in my building. So I thought I'd see if I could get this 3.45 percent six month CD without buying an insurance product.

In pursuit of my CD
The morning after reading the ad, I called and spoke to the local representative, who later asked his name not be included in this story. He explained that this CD was from Nexity Bank, an Alabama bank with a three and a half star (out of five) safety rating. According to the Nexity Bank web site, their six month CD was only paying 1.34% APY but the ad did mention a bonus. I also looked up the safety rating of Nexity at Bankrate.com which actually listed it as having a one star safe and sound rating, the lowest of all ratings.

For the next couple of days, I brought my checkbook to open the CD and kept leaving messages for the rep to call me back. I normally wouldn't ever consider opening a CD at any institution with ratings below a three star but, since it would be FDIC insured, I was willing to chance it. That and I didn't want to give American First Assurance an out.

I finally met with the local rep. He was very good about respecting that I didn't want an insurance investment and came only to open the CD. He gave me a "CD Bonus Disclosure" to sign that noted my CD rate was only 1.51% APY, but that I would get the rest from American First Assurance at a later date.

I explained that I'd rather have the advertised 3.45% APY CD that was FDIC insured. The rep floored me when he asked if I thought the ad was a "bait and switch." To my affirmative response, he noted that others had made the same comment to him over the past few days. He also stated he only made money when he sold an insurance policy.

What American First Assurance had to say
The local rep suggested I call the company headquarters in Utah, which I did. They were not willing to give me the name of the owner as they noted I should be able to understand why he would want this confidential. I actually didn't understand, not to mention the fact that it was public information.

Well I did my own sleuthing and found an entity called American First Assurance, LLC in Utah registered a little over two months ago, and one in Colorado registered just over a month ago. Both had the same managing member, Amanda Bennett. So I called back, and the receptionist said Ms. Bennett was associated with the company, but wasn't the owner and didn't work there. None of my calls were returned.

Among other things, I wanted to ask how American First Assurance becomes a "leader" in banking and insurance products in only two months. I sure wasn't going to put my money in a vehicle where most of the interest was coming from an entity that apparently was two months old, and certainly not in one that wasn't FDIC insured.

What Nexity Bank had to say
American First Assurance wouldn't speak to me but Nexity Bank would. I spoke with Cindy Russo, the bank's EVP of operations, who explained that Nexity bank didn't offer brokered CDs. She wasn't able to find anyone at the bank who knew anything about American First Assurance.

Why do regulators allow these bait and switch advertisements?

This isn't the first time I've written about advertisements using CDs that didn't seem to exist. In Trick or Treat Investments, I wrote of another CD ad placed to sell insurance products. The response from Marcy Morrison, Colorado Insurance Commissioner, regarding these ads to sell annuities was "the subject matter is not within our bailiwick." Obviously regulators are just as capable of reading a newspaper as I am, but have chosen to allow producers to profit from such tactics that prey on consumers. And frankly, it's a mystery to me as to why they allow it.

My take
Deceptive financial advertisements, and bait and switch tactics, existed well before the Wall Street collapse and still do. I wouldn't wait for regulators to start protecting the consumer, as this may not happen in our lifetimes. It's up to us to practice a little financial self-defense. Always be skeptical of any financial product, as well as the tactics that people use to sell them.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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