Bonus or Bait?

by Gary Foreman

Dear Dollar Stretcher,
Some time ago I saw a tip about being paid to do internet banking. The specific one I was interested in was an offer to deposit $1,000 either in stocks or a money market fund. If the amount was still there after six months they will give the depositor $150. Do you have any experience with these offers? Do you think there is a catch? Could they be on the verge of bankruptcy and are desperate for cash? If they go bankrupt before the six months are up, would my $1,000 and/or the $150 be at risk?
Lisa F.

Sounds like a good deal, doesn't it? Let us help you manage your money and we'll give you $150. If it is a legitimate offer you'll get a great return. But Lisa asks a good question. Is it too good to be true? Many scams count on greed to get the victim hooked. Is the offer legit? Or could my money disappear in six months?

Let's look at the possible risks that Lisa could face in responding to one of these offers. There are three common risks that we all take when we go to a bank or broker: the bankruptcy of the broker or bank, fraud, and a bad investment performance.

The risk that a broker or bank enters bankruptcy is fairly easy to protect against. Legitimate brokers and bankers, including those doing business online, carry insurance to protect their customers.

Brokers must carry Securities Investor Protection Corporation (SIPC) insurance. The coverage is for a situation where the broker becomes insolvent. The investor is covered for most stocks, bonds, CD's and cash. Certain types of securities that are not registered under the Securities Act of 1933 and options contracts are not covered. The individual is protected for cash up to $100,000. The limit for the entire account is $500,000.

Banks are similarly insured. The Federal Deposit Insurance Corporation (FDIC) covers savings deposits, checking deposits, NOW accounts, and certificates of deposit. Each depositor is covered up to $100,000.

These corporations were set up to give us confidence in our financial institutions. The government doesn't want a single bank failure to trigger an avalanche of depositors lining up to take out their money. And so far, it's worked pretty well.

The bottom line is that if either an online bank or broker has the required insurance and should happen to go out of business, Lisa would be covered up to the maximum amount. So her $1,000 deposit would be safe. Years from now when her deposit grows she'll need to watch that she's not over the maximum coverage.

The next risk, fraud, is the most dangerous to Lisa's savings and is also hard to spot. In part that's because the people who commit fraud don't mind lying to us. And they're experts at not telling the truth. They'll do or say anything to look like a legitimate business. That's important to them.

Part of the game is to look substantial and respectable. So you can't depend on a good looking website. The trick is figuring out whether the facade is real or not.

I'm not about to guess whether any particular online bank or brokerage is a fraud. The truth is that unless it's already been exposed, the only people that know of a fraud are those who are involved it or the police who are investigating it.

But there are some things that Lisa can do to protect herself. First, she should look to see whether any online broker or bank has SIPC or FDIC insurance. They should be covered. She can contact either SIPC (at 202-371-8300) or FDIC (at 800-276-6003) and ask if that specific bank or broker has coverage. If they're not covered it's time to take your money and run.

Next, just because an online bank or broker has insurance doesn't guarantee that they're safe. But it certainly helps. It also means that if something should happen Lisa should be able to rely on the insurance to get her money back.

Lisa does need to recognize that if something goes wrong it's highly unlikely that she'll actually receive the $150 bonus. Unless it's set up as interest on her $1,000 investment (which isn't likely) basically it's just a promise from the bank or broker. And the insurance isn't going to make good those promises.

Lisa should also do a "smell test" on the bank or broker. Does the offer smell fishy? Does it sound too good to be true? Think through what's being presented. Take Lisa's broker offer. What they're really doing is paying you instead of buying advertising. And it probably does cost them $150 in advertising to get a new client. So the offer isn't unreasonable.

The third risk that Lisa faces is the risk that the investment she chooses could lose money. And, again, the insurance doesn't guarantee against that. Choose a bad stock and bad things happen. But, some of the current offers allow you to "invest" the money in a certificate of deposit or money market fund. Those should be safe enough to protect Lisa's money.

Right now there's a lot of competition in the bank and brokerage business. Many are making offers that can benefit people like Lisa. The trick is to do enough homework to make sure that you don't lose your money. But that little bit of work can pay off handsomely in this competitive environment.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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