There seems to be a competition heating up.  It’s always been there.  The battle of the CD versus the fixed annuity.  Now most of you probably don’t see this as a battle.  Most people don’t see this as a competition.  Do you think the bans want fixed annuity money?  You bet.  Do you think the insurance companies want CD money?  Definitely.

So I consider it a competition.

Short-Term vs Long-Term

The deciding factor here is you.  Short term and long-term are relative terms.  Usually short-term is less than 5 years and long-term is longer.  This might be different for your personal situation but we’re going to use this guideline today.  CDs would then be a short-term investment.  I would guess that most people use CDs for 18 months or less.  They do however have terms that extend out to 5 years maybe even further.  Annuities tend to be used in the 5 to 7 year range.  Some companies do offer them for as short a term as 1 year but this is rare in today’s environment.  So you might be asking where the competition is?

Have you heard of the hybrid CD?

BusinessWeek has an article titled Investing: Should You Test-Drive a Hybrid CD? Banks are now starting to introduce equity-linked certificates of deposits.  The main driving force for this is that rates are just so low on CDs.  How do you beef up rates?  Apparently you tie them to the S&P 500 and hope for the best.  In order to make this work banks will need to use longer term CDs.  Mentioned in the article are between 3 and 5 years.  The article talks about interest caps as low as 3% with surrender charges as high as 9%.  Isn’t this the outrage over Equity Indexed Annuities?

The Industries

It looks like it is going to be a bit of a competition.  As a consumer you get to weigh your options.  The banking industry or the insurance company.  The CDs are FDIC insured, the annuity has a lot higher reserve requirements and a state guarantee fund.  The commission of the insurance agents going against the bailout of the banking industry.  Do you think either will try to educate you on your decisions or just try and sell you something?

From the early information I’ve seen, the same problems with EIAs will apply to the hybrid CDs: high surrender charges with low and confusing crediting rates.  The one thing the bank will hide is commissions.  Since they don’t have the traditional sales force of an insurance company the consumer won’t see whose getting paid or be clear on how much they are getting paid.  Don’t be confused though, the banks will stand to make plenty of money on these hybrid CDs.  If you have a 3% cap or a 20% participation rate guess who keeps the extra money?

There might be another dilemma.  An independent insurance agent or financial planner should technically be shopping around to find the best EIA product for the client since commission have become so similar.  These could theoretically mean that the consumers are getting more of the better EIAs since they all aren’t created equal.  What happens in a bank?  There is no independent bankers to do the work for you.  It is up to the consumer to do their homework and comparison.  The consumer will have to understand the different crediting rates, caps and surrender charges and how they vary from bank to bank.  If they just go into ABC Bank all that they will be told about is ABC Bank’s CDs.

Would you rather support a salesman trying to make a living or the infamous banking industry? That’s quite the coin flip.  Call it in the air…

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Have you lost your faith in banks yet?  You read it in the newspaper.  It’s all over the place.  The government needs to save them.  A lot of them might not have survived without the government.  A lot of them won’t even survive with help.  The smaller banks are failing.  Do you still use banks?

Is a bank a forgone conclusion for you?  You get money it goes into the bank.  That’s just the way it is right?  It can’t be any other way.  What if it could?  Do you really need banks?

We are taught from the beginning that money goes into a bank.  You have a question about money you go to your banker.  They know all things.  You buy savings bonds at the bank, invest in CDs at the bank, save your money at the bank even pay your bills at the bank.  They are the greatest business in the US.  They have succeded in having all things flow through them.  What other business can say that?  Better yet would the general public allow that from any other business.  Microsoft has tried in the computer world and there is backlash.  Google fights, Apple fights, the consumer fights it.  Does anyone fight banks?

You could argue that financial institutions are fighting banks but not at the core.  They want the question of where to put my money but they don’t offer the transactions that banks offer.  They want to give you a different way for long term savings but aren’t worried about the short term.  They want your CD and savings bond money.  Where do you go for that the bank or the financial institutions?

Do you even need to use a bank?  How do you use them now?  Now that they have been humanized, they can make mistakes and huge ones at that, do you still trust them?  Trust them with your hard earned money?  Trust them for financial advice?  I was at the teller the other day and I overheard an older gentleman next to me just tell them to put his money into a CD.  No shopping around, no questioning the rate, just trust that they’re the best way to do this.  He hasn’t lost faith?  Have you?  Have you changed the way you interact with your bank?

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