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Originally published Sunday, July 5, 2009 at 12:00 AM

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Do your homework before buying brokered CDs

Even relatively safe, federally insured certificates of deposit issued by banks and credit unions can pose hazards for investors seeking to squeeze the biggest returns from their portfolios amid a slumping stock market and historically low interest rates.

The Orlando Sentinel

ORLANDO, Fla. — William Katker thought he was playing it safe and smart when he parked some retirement money last year in a high-yield certificate of deposit he purchased through his stock brokerage.

Katker's government-insured six-month CD had an annual percentage yield of nearly 4 percent, which easily beat the returns of the money-market funds to which many investors fled last year during the stock market's plummet.

It seemed like a low-risk move — until the bank that issued the CD failed. Then Katker had to get in line with other former customers of California-based IndyMac Bank to recover his cash. It took him nearly a month.

"I didn't lose my principal, but I lost access to the money and almost a month's worth of interest," said the retired stockbroker, who lives in Orlando. "It upset me because my brokerage knew IndyMac was having problems but didn't tell us."

Even relatively safe, federally insured certificates of deposit issued by banks and credit unions can pose hazards for investors seeking to squeeze the biggest returns from their portfolios amid a slumping stock market and historically low interest rates.

In some cases, investors are turning to their brokerages, which offer them higher CD rates based on special deals negotiated with certain banks. In other cases, nonbrokerage firms are luring investors with high rates they claim to have tracked down at relatively unknown banks.

Experts say that, even with something as straightforward as a savings CD, you should be wary of any claim that sounds too good to be true.

"There is a real need for consumers to be on their toes and do their homework," said Greg McBride, senior financial analyst for Bankrate.com in North Palm Beach, Fla.

Start with the basics, such as the current limits on Federal Deposit Insurance Corp. coverage. Generally, each account holder at a single bank or credit union is covered for as much as $250,000, though people can increase their coverage by having both joint and individual accounts.

Next, you should know something about the bank or credit union whose CD you're planning to buy. The FDIC (877-275-3342 or www.fdic.gov) can tell you whether the bank is still in good standing. For credit unions, call 800-755-1030 or go to www.ncua.gov. Any sign of financial difficulty should give you pause, even if it is insured by the FDIC. If the bank does fail — as 64 U.S. banks have since early 2008 — you may have an aggravating and income-losing wait before you regain your money.

Buying a CD through a broker, as Katker did, can complicate things further.

You should also be sure you know how long your money will be tied up before you bite on a high rate. Fidelity Investments, for example, recently offered its clients a CD paying 5.5 percent from a community bank in Georgia. The catch? You would have to lock in your money for 20 years.

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Buying through a brokerage also may expose you to account fees, said Jason Chepenik, managing partner of Chepenik Financial in Orlando.

Potentially worse are high-yield CDs promoted by unfamiliar companies that may, in fact, be peddling much riskier investments.

Investors should call the Office of Financial Regulation (800-848-3792) to find out if a company is properly registered with the state and whether anyone has filed complaints against it.

Copyright © 2009 The Seattle Times Company

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