Last year's decline in interest rates was a rude awakening for many conservative investors, according to local stock brokers who are benefiting from an exodus of funds from bank certificates of deposit.
"What's happened is that because rates were high in the past, people with CDs are used to getting better rates," said Garth Terlizzi, investment broker at LPL Financial Services. "Now they're getting rate shocked, so to speak."
Steve Edmonds, a stock broker with Piper Jaffray & Hopwood, agreed. "People have CD shock," he said.
Because April is one of the peak months in which CDs mature, and also because taxpayers have until April 15 to make their 1991 individual retirement account contributions, local brokers say they've been fielding plenty of inquiries this spring from investors weighing other options.
"We're busier than we've ever been in history," Edmonds said.
HARDEST HIT by the drop in rates are retirees, said Harley Catlin, local broker for Edward D. Jones & Co.
"There are a lot of people who have been living on interest who are really having a problem," he said, noting that in some cases those investors' interest income is half what it was a few years ago. "They're really concerned because of their income being cut so drastically."
Although most of the investments brokerages sell don't carry the safety of federally insured bank deposits, local brokers say the reality of lower interest rates has raised the risk tolerance of even conservative investors.
"For the first time, these people are looking at common stock mutual funds," Edmonds said, noting that a balanced fund carries only modest risk by mixing stocks with less volatile bonds.
TERLIZZI SAID investors also are getting the message that leaving funds in a bank may actually be bringing them a net loss.
"I think right now there's some substantial risk in holding bank CDs," he said, approaching the issue from the viewpoint of return.
"When (one-year) CDs are paying 4.25 to 4.5 percent, it sure doesn't look attractive when utility stocks are yielding 6 percent," he said.
Terlizzi added that by factoring in inflation, which is now at about 3 percent, and taxes on interest income, the net return on a bank deposit can easily go into the red.
"A year from now you really haven't had any real growth in the value of that dollar," he said.
However, Edmonds said there are investors who prefer to stay with more conservative products. Those people have to be willing to lock their money up for five years or so to get a return that will beat taxes and inflation, he said. This is a switch from the way most investors have been doing things, he said.
"MOST INVESTORS for the past several years had put their money in shorter-term CDs or bonds," he said. The rationale was that by locking in a longer-term rate, investors might be giving up opportunities if interest rates went up.
Now, Edmonds said, "To get a higher return you have to lengthen your term."
Despite returns that may be lower than on other investment products, most brokerage firms sell CDs and shop for rates nationwide. They may be able to offer a client a CD with a higher rate than is available locally but which is issued by, say, an East Coast bank.
All three brokers also named Treasury notes and bonds as one relatively secure place to put money. Edmonds noted that five-year Treasury notes are yielding over 7 percent.
CATLIN SAID tax-free municipal bond funds, on which taxpayers generally don't have to pay state and federal income taxes, yield about 6.5 percent.
"Most people who have CDs have tax problems, too," he said.
All three brokers also mentioned utility stocks and mutual funds that hold them as other investment options.
Terlizzi noted that utility stocks tend to be recession-proof and carry little down-side risk because even when the economy is bad, consumers still need heat, electricity, water and telephone service.
Although IRAs traditionally have been regarded as a bank product, most brokerages handle self-directed IRAs which allow consumers to invest their retirement money in a mutual fund, common stocks or other investment vehicles. All the restrictions that apply to IRAs when a bank is the custodian also apply to self-directed IRAs.
"We've seen a lot of money move, especially in the IRA area, into alternative-type investments," Terlizzi said.
FOR THOSE investors interested in the common stocks and stock mutual funds, all three brokers said they expected the market would offer opportunities this year.
Although the Dow Jones average of 30 industrial stocks stayed in a range between 3,200 and 3,300 during the first quarter, all three said they expected the Dow to rise throughout the rest of the year.
They conditioned their optimism on stable interest rates and quarterly corporate earnings reports that show improvement over performances in 1991.
Edmonds predicted the Dow would end 1992 at about 3,500, while Terlizzi said he thought the index would close the year at 3,700. Catlin's forecast was for the Dow to wind up somewhere between 3,700 and 4,000.
"It may not make it but it sure isn't going to be down," Catlin said.