Surfing The Net For Better Returns

Brian Bollaert got so excited about the 6.1% interest rate on a six-month certificate of deposit a month ago that he immediately slapped about $40,000 into an account and bought the high-yielding CD. Good move when you consider that average six-month CDs are yielding just 4.55%. The catch? Bollaert could only buy the CD over the Internet.

Security First Network Bank, the bank that offered the cyber-CD, and a handful of other financial companies aim to harness the operating efficiencies of the Net to reduce the costs of selling and servicing financial products. The savings are passed on to consumers in the form of higher interest rates.

SMALLER PLAYERS. At the moment, there is just a trickle of investments specifically designed and priced for sale over the Internet. These include a fixed annuity recently launched by Liberty Financial Cos.' direct-marketing arm, Independence Life & Annuity (formerly Crown America Life Insurance Co.), and four federally-insured CDs that can be bought at four banks: 1st Source Bank, La Jolla Bank, Salem Five Cents Savings Bank, and Security First Network Bank. "Easy-to-understand, low-risk investments that need little maintenance, such as CDs and fixed annuities, make good products to sell over the Internet," notes Rick Adkins, a financial planner in Little Rock. All these product sites on the World Wide Web can be accessed with a standard Internet browser.

"These new products are opening up a new distribution channel and expanding market share for the smaller players," says Allen Wolpert, an Andersen Consulting managing partner. Indeed, Salem Five Cents Savings, a small regional bank in Salem, Mass., has CD clients in New Zealand and Tokyo.

Those foreign customers are among the thousands of do-it-yourself investors who thrive in the virtual corridors of cyberspace--the perfect locale for people who enjoy fiddling with their investment portfolios any time of day or night, without worrying about whether an operator will be there to answer a toll-free telephone call.

Yet, because of well-publicized concerns about Internet security, some things are still handled the old-fashioned way. Customers download an application for the CDs or annuity from the Net and then send that--plus a check--through the post office. No credit-card numbers are posted online. To view account information, Liberty's annuity customers, for instance, use a special access code, similar to those used at an automated teller machine. Even if hackers discover the code, they can't get their mitts on your money. Liberty will not dispatch account statements by E-mail until Internet messaging is more secure.

Are savvy financial institutions using the Internet as a marketing gimmick, or are the costs of these newfangled investments actually lower? The CDs are offered at rates that are at least 30 basis points above the annual Bank Rate Monitor Index. "It costs us $150 to set up and maintain a traditional CD," says Michael Fitzgerald of Salem Five Cents Savings. "We can justify offering higher rates [online] because we don't need the brick and mortar to service the customer." Marketing expenses are slashed because customers come to the bank's site on the Web. Printing costs are also reduced because rate changes and other account data are dispatched via E-mail.

EXPERIMENT. With its Internet annuity, Liberty says that it can reduce the distribution and selling expenses to just over 1%. That's a big saving over the 4% to 8% commission that agents and brokers pocket for each sale, according to Hersh Stern publisher of Annuity and Life Insurance Shopper.

The difference in yield of a fixed annuity is difficult to assess, but Glenn Daily, a fee-only insurance consultant in New York, estimates that Liberty should be able to add up to 75 basis points to the current competitive interest rate of an annuity. "This is an experiment, and we don't really know what is going to happen until next year," says Daily. One of Liberty's four offerings guarantees a 7.15% rate for the first year, which includes a 1% bonus. The rate changes every year from then on and is guaranteed not to fall below 3%.

Investors could buy a fixed annuity with a higher first-year bonus rate or one with equally low expenses through a direct provider such as USAA Life Insurance Co. Nevertheless, it is tough to get the rates and favorable terms found on the Web. Of course, those considering these made-for-Internet investment products still must do their due diligence. As with any CD or fixed annuity, scrutinize the issuer and be comfortable with its financial condition. That said, there is nothing like low-risk and high returns.