How market-linked CDs can provide a new solution for today’s market Featured

8:01pm EDT October 31, 2011
How market-linked CDs can provide a new solution for today’s market

Just when many investors were expecting the market to return to a steady growth cycle, they were caught off guard by an unexpected leap in market volatility, accompanied by a substantial decline in interest rates.

The dramatic swings in the marketplace seen over the last few months have been fueled by a variety of factors. The political system has been in turmoil as differing factions in Congress and the White House have gone toe to toe on whether to raise the debt ceiling. And, the recent first-ever downgrade of the United States government debt rating resulted in even more uncertainty for investors, says Thomas Schuller, CFP®, a vice president and financial consultant at Associated Investment Services Inc. Add to the mix a fear of defaults in Europe and a continued soft domestic economy with sustained unemployment numbers still near double digits, and investors seem to be running for the exits.

“In these difficult economic times, investors are looking for an opportunity to reduce market volatility and increase the yield of their individual portfolios,” says Schuller. “Market-linked CDs can be the answer to those concerns.”

Smart Business spoke with Schuller about how to determine if market-linked CDs are the right investment vehicle to help meet your financial goals.

What are market-linked CDs?

Market-linked CDs can offer a solution to help investors overcome the unexpected financial and investing hurdles they may currently face. The core characteristic of this unique solution is that it provides clients with a balance between risk and return.

These investments offer a guaranteed return of principal if held to maturity, and the potential for an attractive return above that of traditional CDs and fixed income products. The return is linked to the average performance from a basket of individual common stocks, subject to a capped maximum return.

Market-linked CD products have been experiencing a surge in demand across the country. Historically, investors have been advised to shift their allocation between stocks and bonds to find the proper asset mix. The typical investment advice is to increase bond exposure to reduce risk and increase the equity exposure to increase potential return. Adding a market-linked CD can help resolve these issues.

However, many clients feel like there is no safe place to turn. Current interest rate levels are not high enough to meet their goals, but the alternative of experiencing the value swings of the stock market is equally unappealing.

How do market-linked CDs work?

All bank-issued certificates of deposits provide clients with FDIC insurance and a guaranteed return of principal, if held to maturity. Market-linked CDs enjoy these same principal protection and FDIC insurance features. However, rates of return for market-linked CDs are linked to the average performance of an equity index, or a basket of individual stocks, subject to a capped maximum return.

For example, Associated Bank’s Power CDSM links its interest rate to the average performance of a basket of 10 individual common stocks that include recognizable companies such as 3M, Apple, DuPont, Kraft and Cisco. Market-linked CD offerings are priced monthly, with the capped maximum return finalized on each monthly issue date.

There is a risk that if the underlying basket of stocks does not generate a positive return, based on the conditions of each offering, that the client will receive a zero percent return, but the principal is always guaranteed if held to maturity. Market-linked CDs typically have a maturity range of five to six years.

It is important to also note that market-linked CDs typically have established minimum purchase levels that begin at $5,000 or even $10,000. And as with any investment, clients should always carefully read the term sheet and disclosure before determining whether this is the right product for their needs.

How can someone determine if this is the right solution for their investment needs?

If you are seeking a new solution to help provide a balance between risk and return, market-linked CDs may be an attractive addition to your portfolio. However, they do carry certain risks and may not be appropriate for those who do not have a long-term investment horizon, or for those who need guaranteed income to meet daily living expenses.

A specialist will be able to help you determine if this is the right investment vehicle for you needs.

The Associated Bank Power CD is issued by Associated Bank, N.A. (“AB”), Member FDIC, and is offered through Associated Investment Services, Inc. (“AIS”), Member FINRA and SIPC, d/b/a Associated Investment Services Group in Minnesota. AIS services the brokerage account in which your Associated Bank Power CD investment is held. These products may incur a significant loss of principal if sold or redeemed prior to maturity. AB and AIS are affiliates of Associated Banc-Corp.

Please see term sheet and disclosure for complete details prior to any purchase. This product involves a number of risks and may not be suitable for all clients. If you redeem the Power CD before maturity, you may lose principal. Contact your Associated Investment Services Inc. representative for more information, the current term sheet and disclosures.

Thomas Schuller, CFP® is a vice president and financial consultant with Associated Investment Services Inc. Reach him at (312) 565-4150 or