Everyone wants great returns, liquidity, safety, insurance & not have to pay taxes. The reality is… it’s not out there. If you find an investment which carries all 5 compenents.. please let me know cuase I will put my life savings in it.
MLCDs are excellent for retirees who don’t need the income and are also good for parents savings for their children’s college tuition. If your chilld is 12 years and you have $20,000 saved for his college, I would consider 5 to 6 year MLCDs. Principle is protected with upside.

Yes, I know 529 plans give tax free benefits, but you usually have about 5 to 10 mutual funds to choose from in a 529 plan and principle is not protected.

I also think that Anthony and many others do not understand risk and the devastation it can do to one’s portfolio and investing behavior. It is one thing to experience a 30-50% drop when you have $50k at age 35 and quite another when you have $500k at 60.

MLCDs are an excellent investment for those with low risk tolerances, but desiring more than the 1-2% guaranteed rates in CDs. And don’t believe for a second that interest rates can’t go down even more or remain low for an extended time as mentioned in some of the earlier posts from 2009 and 2010; we are lower today and this is another example of not understanding risk.

The market is adapting to people’s desire to transfer risk with such products as equity indexed annuities, variable annuities with lifetime income guarantees, equity indexed universal life, protected principal mutual funds and MLCDs. All of these products protect either an investor’s principal and/or income from the negative risk of the stock market.

The world is larger than just bonds and indexed ETFs.

Like Remy said, with a good MLCD, you pay interest on the income you earned that year and that’s it. And yes Anthony, there are still some MLCDs that may lock in at 10% or a little more as a cap. Most of the time it doesn’t happen, but it just depends and what it’s at when the CD issues. If it locks in at 7, 8, 9, 10, or whatever, it just means that each individual stock represented can pay you that cap that year. Some will and some won’t so you may get an average between the 10 stocks (if that’s how many are represented in the CD issued) of say 7%, or whatever. Heck, if all the stocks break even or are up that year, you can actually get the 10% on all of them so that your CD makes 10% that year, if that’s the cap. It does happen. Or you can get zero, or the minimum percent if you buy one with a minimum return. But as Remy said, this is safe money only. Mutual funds are securities and put your money at some risk. For people who like CDs and for those looking for decent returns with NO risk, MLCDs are a great option to look at. Held over a 5 to 7 year period, depending on the one you buy, chances are very good that the purchaser will experience a decent average return he/she will be happy with compared to traditional CDs, money market accounts, and savings accounts.

They’re not complicated. They’re FDIC insured, the principal is guaranteed, they are bank issued, and you have the opportunity to earn substantially more interest than a traditional CD over several years. You know going in that if you buy a 5 year MLCD, you leave your money there for the next five years, just like a regular CD. And if you pull it out prematurely, it could cost you, but not as much as some people may think. The main difference is how the interest in calculated. Your return is not guaranteed, only your principal. But if you have a 7% cap, you could make any where from 0 to 7% on any given year you own the CD. Will you hit 7% each year. Probably not. In a hot market over five years, probably. Will you get 0% each year. No. So if you average 5% over five years total return, is that better than your typical 1.50% 5 year CD. Heck yeah. The higher the cap, the better your average return. Six and seven year MLCDs have the highest caps.

There are many CD buyers that would like to have that opportunity to participate in the market’s growth within a CD and not have to worry about losing money. No complicated trading methods. No complicated investment decisions. Just buy the CD and make decent money. And those are the people who will buy these. Like Remy said, a ton of people are buying these and enjoying them.

I have a short power point on this that simplifies the explanation of this product. I may create a recording. If I do, I’ll post it here.

-Majority of issuers have corrected their tax treatment on annual income payments to a 1099 int. For instance…HSBC US Titans from June 10-June 11 paid 6.85% so on 100K you would receive a 1099 for $6,850. No more projected or OID tax treatment. If it returns 1.25% you pay tax on 1.25%.

-There are now many options offering a guaranteed minimum with a market average. Annual coupon of .50% plus market cap potential of 6% on top…this way in a down year at least you are earning a 0.50% which may or may not be competitive to a traditional 1 yr note. You can also opt for a higher market cap without a .50% guarantee.

-Strike price per stock is locked for term of the CD. Each anniversary the basket is looked at. If the stock is at the strike or higher, it automatically gets an “Auto Cap” of the 6%. For instance… let’s take Verizon. If Verizon locks at $37.00, as long as Verizon is at $37.00 or higher it is credited with 6%. Easiest way to figure your return is like a report card. Any of the stocks in the basket that are higher are automatically credited with 6%, subtract out the negatives, and divide by 12 for your coupon. Say 10 are up and 1 is down -8% and 1 is down -3%. (10 x 6 =60. 60-11=49. 49/12=4.08% plus the .50% if you chose that option)
-Strike price doesn’t change…Sticking with Verizon at 37.00. If next July Verizon is at 39, gets credited the “auto cap” of 6%. Verizon in July of 2013 moves to 43, gets credited the 6%. In July of 2014 Verizon retreats to 37.01. Even though Verizon was down -13.93% that year….Verizon is still at or higher than the original strike in July of 2011 so it gets credited with 6%.

Biggest thing to remember about Structured or Market Linked CD’s is to lower your expectations. It is not a mutual fund. It is there to compete with your safe money that is meant for a traditional CD. You are giving up an enormous amount of the upside for the FDIC insurance. Your risk is opportunity risk, not principal risk if held to maturity. Tax treatment is favorable now. Utilize this CD with other traditional notes, bonds, mutual funds, stocks, etf’s as you see fit but remember you are competing with CD returns because at its core it is still a CD. If you are ok with a return yearly between 0.50% with a max of say 7% on your safe money…it may be a good fit for you. I don’t like Well’s product. BNP Bank Of The West is decent. JP Morgan is Decent. I traditionally prefer the HSBC US Titans. Good product with a long history of performance. Also to answer where the difference of the percentage over the cap goes…. pretty much to the house. That’s like asking where the difference is when a bank lends at 4.5% on a note with your deposit and pays you 1.25%. Nobody ever asks. When you deposit into a CD it doesn’t sit behind the teller line. The bank figures out a way to utilize your capital to turn a profit whether it is in lending or by buying options on a basket of stocks. It still is FDIC insured and principal protected as long as held to maturity. Also, the bank doesn’t utilize all of your funds to buy options on the stock basket. Realistically, if you deposit 100K….the bank buys a zero coupon bond with about 85K that will grow back to the 100K in the 5 years. That is how they are protecting your funds and also why there is a penalty on early withdrawal. The remaining is used to create the Net Interest Margin. It is meant to be held to maturity like ANY cd. If you want all of the upside…then you also assume all of the downside. These products are new to investors but will be here for a long time and have been around for a long time. Expect many special interest groups to bash them as sales into MLCD’s last year were over 50 billion. You don’t think there are a number of fund companies or other groups dying to get that market share back.
- Hope this info helps a bit. Let me know if you have any questions guys.

- Traditional CDs have a stated rate that is guaranteed in almost every situation (except for bank failures, etc.). The rate on MLCDs is volatile and fluctuates with the underlying instruments.

- I can forecast the future interest earned for a traditional CD using a simple FV function in Excel. The interest on a MLCD isn’t known a priori, and most folks have a hard enough time deciphering the calculation from the offering documentation. I know, I’ve tried.

- With traditional CDs, you only pay taxes on the interest received. With an MLCD, you can be in a position where you have to pay taxes on an “imputed” interest amount and not have received a dime of interest.

Where are you pulling out that 10% figure? Actually, it doesn’t matter because the old adage still applies – past performance does not guarantee future results. When MLCDs track more than 10-12 securities (e.g. the HSBC offering linked above), then maybe I would feel like the label “market-linked” isn’t a misnomer.

So, like traditional CDs, they are FDIC insured, guarantee the principal, and issued by banks. They just credit the interest differently. They are better for money (the principal) not needed for 5 or 6 years. You pay tax on interest earned each year just like a traditional CD. Nothing different here. Just take the interest earned and put it somewhere else. Or use it for income. A retiree could dump $200K in one of these for five years and earn some decent supplemental income, like the old days.

Don’t talk about long term capital gains and dividends. IT’S A CD… This is for people who want a CD. They know how it’s taxed. The main question is how much interest can I earn? That’s it. If they are looking at a traditional CD paying 2 or 2.5 percent interest for five years, they may say what’s the use. They would probably love the idea of making 10% on a CD instead of 2.5 percent.

Even if the interest paid is unknown from year to year, more than likely they will earn quite a bit more over 5 years than having the money in a traditional CD. And that’s as simple as it is. They can shop them, and find the ones that are the most flexible and have the best possibility of high returns, and go from there. Pure and simply put, they are a great alternative for the traditional CDs and will work well for many people.

I’ve met with her on about 3-4 different occasions and gave her my information as far as investment statements and expenses. She filled out the ‘envision’ presentation and that’s how she came up with how my 100k should be split (more or less based on my risk tolerance). After reading as much as I can in the last couple days, especially, this blog, I find myself questioning this whole thing.

She gave an example of a capped scenario and I asked what happens to the remaining amount that goes above the cap and she couldn’t answer me. She assumed that nothing happens to it. I believe that’s one of the areas where the bank pockets their money. I’m also put off by the minimum. Last calendar year it was $50,000. Someone is cutting a fat hog. While the principal is supposedly protected, your upside earnings potential is also ‘protected’. I think I’m going to stick with Warren Buffets’ mantra; ‘don’t invest in what you don’t understand.’ Would welcome feedback. Thanks.