(MONEY Magazine) – . Desperate to recoup flagging commissions, brokerage firms and sponsors of investment products are resorting to a new marketing gimmick to lure chary buyers into risky investments with high fees. The ploy: divert attention by using the word insured or guaranteed in a product's title or its marketing brochure. ''There is an attempt to make high-risk investments look more like CDs or similar products,'' says Barry Guthary, director of the securities division of the Office of the Secretary of State of Massachusetts. ''The implicit comparison is to the federal insurance that guarantees bank accounts.'' As evidence of investors' craving for safety -- and the growing array of products being marketed to satisfy it -- consider the following: -- Sales of insured municipal bond unit investment trusts soared $4.1 billion in 1988, a gain of 35% -- nearly three times the gain for uninsured trusts -- while assets of insured municipal bond funds jumped 20% to $7.8 billion. -- Over the past year and a half, major brokerage firms and syndicators have launched 35 or more real estate limited partnerships -- which together could take in as much as $3.1 billion -- that claim to offer some sort of guaranteed return or minimum cash payout each year. -- Since the 1987 stock market crash, an estimated $500 million has flowed into commodity trading partnerships that ballyhoo a money-back guarantee that is of limited value. Even some potentially volatile mutual funds are trying to pass as ultraconservative investments. In December and January, Shearson Lehman Hutton sold $190 million worth of a new fund that invests in stocks and zero-coupon bonds. Although actually named the SLH Principal Return Fund, brokers refer to it as the SAFE fund -- the Secured Asset Fund for Equity Investing. The fund's come-on: assurance that it will return investors' original principal after seven years. But that implied promise isn't as impressive as it sounds. Because the fund invests less than half your money in stocks, your potential for capital gains is reduced. And in the extremely unlikely event that after seven years you get back only your original investment, inflation and taxes on the interest from the zeros may have wiped out a third of your purchasing power. In practice, the guarantees in supposedly low-risk investments are more hype than help. Says Michael Hatch, the commerce commissioner of Minnesota: ''Partnerships are buying insurance as a marketing gimmick, not as a cushion against poor performance.'' Sometimes the guarantee or the ostensible insurance contains so many loopholes that it is difficult to invoke. And even when the insurance is legitimate, it may last for only a limited term or cover a narrow range of risks. In real estate limited partnerships, for example, investors are protected against minor dangers, such as a tenant defaulting on a lease, while being left unprotected against serious perils, such as a general decline in property values. Concerned that investors are being lulled into a false sense of security by airy promises, securities regulators are cracking down on investments that use the word insured or guaranteed in their titles or in marketing materials. Since last spring, the Department of Commerce of the State of Minnesota has denied registration in that state to two real estate limited partnerships with misleading titles; three other partnerships withdrew voluntarily. Spurred by Minnesota's campaign, the North American Securities Administrators Association, which consists of state regulators, passed a resolution last October calling for restrictions on the use of the words insured and guaranteed. The Securities and Exchange Commission is also taking a harder look at such investments. In preparing this article, MONEY ran across two partnerships that had deleted the word insured or guaranteed from their names after questioning by the SEC. Still, the SEC takes a less aggressive stance as a consumer advocate than many state regulators do. Rather than denying a sponsor the right to sell an investment, the SEC merely tries to ensure that risks are fully disclosed in the investment's prospectus. Says Irving Borochoff, assistant director of the SEC's division of corporation finance: ''You can sell anything anyone wants to buy, but you have to tell them what it is.'' Even if an investment passes muster with the SEC, don't assume that it's safe. To avoid being bamboozled by a guarantee, make sure you understand exactly what is covered, what the limitations of the promises are and who stands behind them. To help you spot the catches and escape clauses, here's a critical look at some of the guaranteed investments that are currently being sold: Federally insured CDs. Despite the highly publicized financial problems of some banks and savings and loans, the federal insurance on certificates of deposit is the closest you can get to an unequivocal guarantee (see Money Flash on page 52). Even if thrift or bank losses should sink the Federal Savings and Loan Insurance Corporation or the Federal Deposit Insurance Corporation, the U.S. government ultimately guarantees payment of principal and interest, up to $100,000. Ginnie Mae mutual funds. The words government guaranteed emblazoned on ads have helped attract more than $29 billion into Ginnie Mae and other mortgage- backed securities funds. What many investors still don't realize, though, is that while the interest and principal payments on the securities held by the funds are guaranteed, the prices of the mutual fund shares are not guaranteed at all. The securities that Ginnie Mae funds invest in are guaranteed against default by a federal agency such as the Government National Mortgage Association or a federally chartered corporation such as the Federal National Mortgage Association (Fannie Mae). But just like any other fixed-income investment, the value of Ginnie Mae fund shares will fall whenever interest rates rise. When rates ticked up more than half a percentage point in April 1987, for example, some funds dipped 5% to 6%. Unlike bond fund investors, though, Ginnie Mae shareholders don't enjoy big capital gains if interest rates fall. The reason: when rates drop, homeowners often refinance their home mortgages, which shortens the overall life of high-yielding Ginnie Maes and limits their gains. Insured mortgage partnerships. Like Ginnie Mae mutual funds, limited partnerships that invest in government-insured mortgages also lose market value when rates rise -- and can miss out on capital gains when rates fall. In addition, insured mortgage partnerships often have other shortcomings: sales commissions, loan-origination fees and administrative charges can eat up 10% or more of your investment -- which means that only 90 cents or so of each dollar you invest actually goes into mortgages. And since these partnerships may not be traded actively, it can be difficult and costly to unload them. So-called insured partnerships may also invest as much as 20% of their portfolios in investments that are uninsured. KP/Wingate Insured Partners' prospectus, for example, allows the partnership to put up to 10% of its $70.5 million assets in uninsured mortgages and another 10% in uninsured short-term loans. Other partnerships, such as Integrated Resources' American Insured Mortgage Investors LP-Series 88, invest in some mortgages that have reduced levels of government insurance. Such a partnership could lose as much as 27.5% of the principal value of these loans. Insured municipal bond funds and unit investment trusts. By limiting their portfolios to municipal bonds whose interest and principal payments are backed by an insurance company that has received the highest (triple A) rating from Standard & Poor's or Moody's, insured muni bond funds and unit investment trusts greatly reduce the risk of losses resulting from a bond default. As with any insurance, there is a premium cost, which is why investors often receive a yield one-quarter of a percentage point or so lower than that of uninsured funds. Even so, this insurance does not put insured muni funds on a par with federally insured CDs. While the rating agencies have judged leading bond insurance companies to be capable of covering any probable level of defaults, ''any single company has a limited amount of capital, and its insurance can't be as good as a federal guarantee,'' says Richard Smith, chief bond insurance ratings analyst with Standard & Poor's. Further, there are major risks that bond insurance does not protect against. If interest rates rise, the value of insured bond funds and unit trusts will fall right along with the value of uninsured funds and trusts. Investors would also suffer if the rating of a bond's insurer is downgraded from AAA to AA, say, since the ratings of bonds insured by the company would also drop. Such downgradings are rare, but they have occurred. In 1985, for example, Industrial Indemnity was downgraded to AA. The result: the bonds it insured dropped 5% in value. The most important question with insured muni funds and trusts, though, is whether the insurance protection is worth the cost. ''In a diversified mutual fund, the yield give-up is not worth it,'' says Ralph Norton, editor of the Muni Bond Fund Report (P.O. Box 2179, Huntington Beach, Calif. 92647; monthly, $95 a year). Muni bond defaults are rare -- less than 1% of all bonds issued. An uninsured muni fund portfolio consisting of a hundred or more issues could easily sustain a single default. Insurance makes a bit more sense for unit investment trusts because they contain fewer bond issues, generally 20 or so. But you will pay an up-front sales fee of 4% to 5%. If you have more than $25,000 to invest, you can just as easily buy insured bonds directly and forgo making this cash contribution. Real estate limited partnerships. The new crop of insured real estate limited partnerships is perhaps the most egregious example of how sleight of hand is being used to disguise an investment's true risks. Says Robert Mills, president of Nationwide Partnership Marketplace, a firm that buys and sells existing partnerships: ''With guarantees and insurance, people lose sight of the more important questions about real state investments -- namely, what are the fees, what income is being generated, how much are you paying for the properties, and what is the likelihood of appreciation?'' To appeal to income investors who might normally invest in CDs, some partnerships offer limited guarantees of minimum cash distributions, typically 6% to 8% a year. But the general partners usually commit themselves to making this distribution for only a limited time -- perhaps two to eight years. Further, a guarantee of distributions does not assure that the partnership will actually earn enough to make those payouts. The guaranteed distributions may have to be financed by loans from the general partner. For example, Paine Webber Equity Partners Three can borrow up to $1 million from the general partners to make its distributions. Obviously, those loans would eventually have to be repaid. Therefore, you could be sacrificing return in the later years of a partnership for the illusion of a healthy rate of return in the early years. Another partnership ploy is the use of rental guarantee insurance, which supposedly assures a steady stream of income. For example, TMI Income Plus (known as TMI Insured Income Properties before the SEC raised some objections) leases fast-food facilities to Taco Bell franchises and takes out insurance that will pay up to 80% of the rent for any that fail. The catch is that the insurance company will make those payments for only 12 months. After that, unless TMI can find another franchise willing to pay the same rent -- which may be unlikely after the first franchise goes belly up -- the value of that property could turn more sour than a five-day-old burrito. Other real estate partnerships purport to guarantee your principal by buying insurance policies that, in effect, promise to make up the shortfall if the value of properties when the partnership dissolves is not as high as was originally estimated. One problem is the difficulty of actually enforcing the insurance policy, which is filled with escape clauses. For example, the insurer may not have to pay if a property loses value because of a lawsuit or a change in environmental regulations. In addition, the guarantee is usually made to the partnership and not directly to the investors. Thus if a property drops in value because of litigation, insurance proceeds could easily be eaten up by legal costs. Says the SEC's Borochoff: ''The partnership might collect, but whether investors get the cash is another story.'' Commodity futures partnerships. These partnerships -- which trade contracts for the future delivery of everything from pork bellies to foreign currencies -- are blatant speculations. Although their sponsors trumpet money-back guarantees, partnerships such as Shearson's F-1000 Guarantee Futures Fund and Dean Witter's Principal Guaranteed Fund do not really protect investors from the loss of purchasing power. Shearson's program shows how some guaranteed partnerships work: the commodity fund uses 70% of your capital to buy zero-coupon bonds and the rest for daredevil commodities trading. The theory is that even if the commodities portion of the fund gets wiped out, the zeros will appreciate enough to return your original capital on a redemption date, five to seven years in the future. In the meantime, though, because zeros themselves are highly volatile, the value of your fund can fluctuate wildly. Thus if you need to sell before the fund's redemption date, you could easily suffer a substantial loss. And even if you recover your original capital seven years from now when the zeros mature, its purchasing power will have been eroded by inflation and taxes. The only guaranteed winners are the sponsors, such as Shearson and Dean Witter. By charging brokerage fees as high as 8% a year and taking as much as 20% of any trading profits the fund earns -- while sharing in none of the losses -- they make scads of money no matter how their funds perform. Given stocks' volatility, insured equity investments are rare. But a number of master limited partnerships (MLPs) -- which trade publicly like stocks -- offer a guarantee that can lure investors into losses. The partnership units were sold with the assurance that the parent company would guarantee a distribution rate for a time -- presumably until the partnerships became self- supporting. ''Now many of these guarantees are running out,'' says Bruce Garrison, the real estate analyst at brokerage firm Lovett Mitchell Webb & Garrison in Houston. One MLP, La Quinta Motor Inns, earns only $1.25 in cash flow, but pays a guaranteed $2 distribution. That gives it an enticing 16.3% yield -- until October when the parent company's obligation comes to an abrupt end. Once the CARE packages for such MLPs stop arriving, says Garrison, ''the dividends will have to be cut, and by then the prices of the MLPs will have fallen 50% or more.'' The moral, of course, is not that all insurance and guarantees are frauds -- but that they usually offer emotional rather than financial security. ''If you really think an investment is risky enough to warrant the guarantee,'' says Mills, ''then it's probably something that risk-averse investors shouldn't consider buying in the first place.''

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: At a Glance What's actually guaranteed -- and what's not