Comptroller of the Currency Administrator of National Banks November 1993

Deposits Investments There's a critical difference

Maybe you've been thinking about putting some money into one of the investment products you can now get at your bank. You know that some of these new products currently earn higher interest than your certificate of deposit (CD). Who doesn't want to earn more money?

This brochure is about these new products that some banks are now selling. It tells you about deposits, which are insured by the Federal Deposit Insurance Corporation (FDIC), and investments, like mutual funds and annuities, which are not insured by the FDIC or guaranteed by the bank selling them. It tells you about the U.S. government's role when it comes to deposits and investments. It has basic information about some types of investment products and lists references where you can find out more. It offers some ideas about personal financial goals that might help you decide what's right for you. And it tells you what you can if you have problems.

About Deposits and Investments

A deposit is the money you put bank account in a checking need all your money right away--for example, you want to save some money for retirement--you may decide to put your money in a special kind of bank deposit called a certificate of deposit (CD). When you buy a CD from your bank, you agree to keep your money in the bank for a certain amount of time, generally six months to five years. The amount of interest the bank will pay on your CD often depends on how long you agree to keep your money at the bank. In most cases, the longer you keep your deposit at the bank, the higher the rate of interest you earn.

The bank must give you your deposit back when you ask for it. Even if you want to take your money out of a CD before it matures, you generally can withdraw your money if you are willing to pay a penalty. If something happens to the bank and it can't pay your deposits in the bank generally are insured by the U.S. government up to $100,000.

An investment product, like a mutual fund, is not a deposit. The bank is simply selling you a product. The bank generally receives a commission for performing this service, and may charge you other fees for administering your investment account, but it is not obligated to compensate you if the investment is not successful. If interest rates or market values change, you may lose income you have earned--you may even lose some of the amount you invested (your principal). The U.S. government does not insure you against such losses, even if you purchased the investment product at a bank. In other words, if you buy an investment product, there's no guarantee that you'll get all of your investment back. But--there may be a good chance that you'll earn more!

The Role of the U.S. Government

The U.S. government has strict rules and regulations to monitor the safety of your bank. These rules and regulations protect you from unsafe banking practices. They also allow the U.S. government to protect bank depositors if a bank fails. As a general rule, your deposits in a bank are insured up to $100,000.

The U.S. government plays a different role when it comes to investments. Investment products are not insured by the FDIC and can involve risks. The U.S. government has rules and regulations to make sure that the features of the investment product are clearly disclosed to you so that you can make an informed decision before you buy. It also monitors industry rules to be sure that sellers of investment products follow certain standards of conduct. These rules are meant to make sure that you are treated fairly and to ensure that the product that is recommended for you to buy is suitable for your personal investment needs.

The U.S. government also oversees the Securities Investor Protection Corporation (SIPC). This corporation protects customers of broker/dealers who are insured by SIPC against the physical loss of securities, including mutual funds, if the broker/dealer holding the securities for you fails. It does not protect investors against a decline in the market value of securities. SIPC insurance is not the same as federal deposit insurance provided by the FDIC.

The Role of the U.S. Government

Not all banks sell investment products. Of those that do, the most widely available are mutual funds and annuities.

When you invest in a mutual fund, your money is combined or pooled with the money of other investors and used to purchase specific types of securities. Mutual funds are run by investment professionals who decide which investments to buy or sell for the fund. The professional picks from a wide variety of stocks, bonds, money market instruments, or other financial instruments. The investments selected will depend on the fund's investment objectives. That's why it's so important for you to choose a fund with objectives compatible with yours.

Some mutual funds, such as money market mutual funds, are designed for individuals who want to invest for only a short time and have easy access to their money, sometimes by writing a check. Many of these funds invest primarily in government securities or very short-term bank CDs. Many people who don't want to take too much risk invest in this type of fund. Other funds invest in bonds sold by corporations or municipalities that pay regular dividends and carry higher interest rates. These funds can provide steady income but may be more risky. See the reference list at the back of this brochure if you want to know more about these and other types of mutual funds. The types of investments that a mutual fund holds, its investment goals, the fees charged, and information about who manages and advises the fund are described in a prospectus. You should receive and review a prospectus before investing.

The prospectus usually tells you how well the fund has performed in the past. This information can give you an idea about what you might earn on your investment. As with all investments, however, past performance is no guarantee of future result. All investments carry some risk, including loss of principal.

Banks use different arrangements to sell mutual funds. Some banks simply rent space in bank lobbies to outside companies. Other banks sell proprietary funds. These funds are sponsored by an outside entity. The bank then advises the fund about what investments to make. It receives a fee from the fund for that service. Other banks offer private label funds. These funds are sponsored and managed by an outside entity but are sold exclusively through the bank.

Some mutual funds have names similar to a bank's name. But just like other mutual funds or investment products, those funds are not backed by the bank or insured by the government. Some banks sell annuities. Annuities are investment products that can pay you a return annually or at regular intervals. When you buy an annuity, the insurance company invests your money and agrees to pay you back according to the terms of the annuity contract. Annuities can be part of a long-term retirement savings plan. Like mutual funds, annuities are not insured by the U.S. government or guaranteed by the bank.

Some annuities help you set aside money on a tax-deferred basis until you retire. You don't pay taxes on the income earned by this money until you retire. Other annuities allow you to receive income immediately--but the income you receive can go up or down with changes in the financial markets and the income won't be tax deferred. For more information about annuities, see the reference list at the end of the brochure.

Before you buy an annuity, you should review the annuity contract. That document will spell out the terms of your agreement with an insurance company. You should also ask whether your annuity contract can be transferred to another company.

What if you have a problem?

Once you have made an investment, problems can still come up--just as they can when you buy a car or any other product. If you have a problem, it's always a good idea to explain it in writing and to send your explanation and copies of any documentation to the place where you bought the product. And, of course, keep a copy of everything for your files.

If you have a problem with an investment product you purchased at a bank, you should write to the bank. The bank should respond to you and keep a record of your complaint on file.

If the bank doesn't respond or if you are unhappy with the response, you should contact the federal or state agency that regulates the bank and/or the Securities and Exchange Commission, which regulates registered broker/dealers and the securities business. If your problem concerns an annuity, you can also contact the insurance company that issued the annuity or your state's insurance regulatory department.

Tips for First-Time Investors:

* You don't have to rely on telephone or mail solicitations to purchase an investment product.

* If you are contacted by a bank about an investment product and you want to find out more, make an appointment to visit the bank.

* Don't ask the bank teller for advice about the bank's products. Tellers generally are prohibited from giving investment advice.

* Make sure you understand what you're getting into. After all, it's your money that's at risk. Don't be afraid to ask questions about anything you don't understand. You're entitled to a simple explanation of what you are being offered, what it will cost, and what risks you could be taking.

* Don't rely solely on oral explanations. Ask for information in writing. Written explanations of the products and fees should be understandable. Make a list of things you don't understand and ask the salesperson about them.

* Get advice from other sources, such as an investment advisor, your accountant, or a tax advisor. The more you know about what you are buying, the more likely you are to make a wise choice.

* Shop around. See what other banks, investment houses, or brokers in your area are offering.

Making Your Investment Decision

If you've decided to buy an investment product, you now have to decide what is best for you. There are thousands of investment products for you to choose from. Don't think you can't make an informed decision because "it's just too complicated."

You can start by asking yourself:

* How much risk am I willing to take? Are some investment products less risky than others? If I choose less risky investments, does that mean that I'm going to earn less on my investment?

* Am I planning to invest for a short time or over the long

haul? * What do I want out of my investment? For example, do I want an investment that will give me a steady source of income each month after I retire?

* Do I need a product to help me start saving--perhaps for my child's education? Can I put aside a certain amount of my paycheck each week for an investment that will grow over time?

* How does my tax bracket affect my investment decisions? Do I need something that will allow me to defer taxes until a later date?

You can see that not everyone has the same investment goals. That's why there are so many choices available to you. only you know what's best for you.

You should also know that the investment salesperson is required to ask you these kinds of questions before recommending which product is suitable for you.

What are some of the fees associated with investments?

When you buy an investment product, you are likely to be bombarded with terms that are unfamiliar or confusing. For example, one of the first things you want to know is: "What's it going to cost me?" But with investment product sales the answer may lead to more questions. What in the world are "front-end loads"? What about "no-loads" or "back-end loads"? Or, how about "12b-1 distribution fees"?

If you don't understand these terms, ask questions. You should always ask your investment salesperson for a simple explanation of anything you don't understand.

To help you get started, here is some basic information about the kinds of fees that may be charged by banks and other entities that sell investment products. The reference list at the back of the brochure will give you more information.

Front-end loads or asset-based sales charges are sales commissions. This is how a bank or any other intermediary makes money. These fees are set as a percentage of the amount you invest. They can range up to 8.5 percent of your investment.

Back-end loads, also known as contingent deferred sales charges or redemption fees, are sales charges that you don't pay until you redeem or cash in your investment (sell your shares back to the fund). Back-end loads are generally calculated on how long you keep your investment: the sooner you sell, the higher the fee.

12b-1 fees are fees charged by some funds to cover advertising and marketing costs. Management fees cover the cost of paying the fund's investment advisor, who is the person or entity that recommends which investments the fund should buy or sell. These fees can also be called investment advisory fees or account maintenance fees.

What about fees on annuities?

Surrender charge fees are fees the insurer charges if you withdraw your funds before a certain period of time. This is a little like an early withdrawal penalty on a CD.

Annual charges cover the cost of administering the annuity contract.

Directory of Federal Agencies

National Banks
Compliance Management
Comptroller of the Currency
Washington, DC 20219
Consumer Complaint Hotline (202) 874-4820

State Member Banks of the Federal Reserve System
Consumer and Community Affairs
Federal Reserve Board
Washington, DC 20551
(202) 452-3946

State Banks that are Not Members of the Federal Reserve System
Office of Consumer Affairs
Federal Deposit Insurance Corporation
Washington, DC 20456
1-800-934-3342

Registered Broker/Dealers
Office of Filings, Information, and Consumer Services
Securities and Exchange Commission
Washington, DC 20459
(202) 272-7440

For More Information

Building Your Future With Annuities: A Consumer's Guide (1990)
Financial Institutions: Consumer Rights (1987)
Investors' Bill of Rights (1987)
Staying Independent: Planning for Financial Independence in Later Life (1990)
The Consumer Information Center has many other free and low-cost federal publications on money management, finance, and investing. For a free copy of the most current listing of booklets, write the Consumer Information Catalog, Pueblo, CO 81009.
For additional information:
Directory of Mutual Funds, 1993-1994 (Investment Company Institute, P.O. Box 66140, Washington, DC 20035-6140)

How SIPC Protects You: Questions and Answers About SIPC (Securities Investor Protection Corporation, 1990)

Making Sense of Mutual Funds: Tricks of the Trade and Lessons for Investors (New York City, Department of Consumer Affairs, 1993)

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