Submit your questions to Steve at: money@csmonitor.com

January 5, 2009

Q: What is a callable leveraged spread CD? Is it a safe investment?

J.H. via e-mail

A: Callable CDs are a variation on the traditional certificate of deposit theme. At their onset, they typically pay a considerably higher interest rate than traditional CDs, but they also carry extra risks.

Further, after the interest rate period lapses on a callable leveraged spread CD, the rate varies. The value of the CD will then depend on that new interest rate, which is based on a special, complicated calculation called a spread, Ms. Cheng says.

The investor thus assumes the interest-rate risk with a callable leveraged spread CD, says Cheng. The principal may be protected only if the CD is held to maturity, so these CDs aren’t suitable for savers with a short investment time horizon. Those who are wary of their inherent uncertainties would be wise to steer clear, as well, she says.

Q: I recently found a new financial adviser who has signed me up for a deferred or indexed deferred annuity that guarantees a 7 percent return and income for the rest of my life. I’m also receiving a $21,000 signing bonus. I’m changing advisers because of the hefty management fees I’ve been paying. The new adviser is putting all the money contained in my rollover IRA and Roth contributory IRA into this annuity. Is this a wise move for me?

R.Q. San Francisco

A: If your only goal is to avoid paying fees for service, then you may have eliminated that part with the deferred annuity. But rest assured that this annuity carries a commission, which will be paid to the person who’s advising you.

Nicholas Yrizarry, a certified financial planner in Reston. Va. strongly suggests that before you commit to this annuity you consult with someone who can deliver some objective advice. The reason I stress this is that I have yet to see an annuity that has a guarantee for life that doesn’t have some other tradeoffs, he warns.

Mr. Yrizarry says that he often see advisers who claim there’s a lifetime 7 percent income, but when you read the fine print, that’s actually not the case. And with the fee issue, he often sees advisers who may not be able to justify their fee either by service or performance. Or they may have simply not communicated their actual value very well.

Lastly, says Yrizarry, you may want to leave money to heirs. That won’t happen with this type of investment.