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MAKING CENTS OUT OF THE NEWS
Blog #47
(December 10th, 2009)
CURB YOUR APPETITE FOR A FREE LUNCH!
By Tom McAllister, CFP®
This blog post comes to you from sunny Florida, world center of the “free lunch and seminar”.
With the annual emigration of “Snowbirds”, a multitude of invitations to attend “free” lunch and dinner investment seminars has begun to populate Sunday papers and residential mailboxes here. While most of the invitations are legitimate offers (in that attendees are served the promised meals), almost all carry with them some sort of “sales pitch” for a particular investment, which may or may not prove appropriate for individual attendees. The question of suitability in any attendee’s situation seems to arise only if there is a positive response to the “pitch”.
AARP, in cooperation with NASAA (an organization of state securities regulators), launched a “Free Lunch Monitor” program last year. Armed with checklists, 180 volunteer senior citizens attended some of these seminars and reported what they saw and heard. Their findings, together with the findings of a telephone survey of 1,012 Americans 55 and older, are summarized in a new study; “Protecting Older Investors: The 2009 Free Lunch Seminar Report.”
78% of seminar attendees surveyed claimed the seminar invitation had led them to expect to learn more about financial issues. However, once they were at the seminar, specific investments products were the subject of the talk. More than half the attendees reported they were asked for personal information up front. 46 percent said the presenter tried to arrange a follow up appointment at their home; 39 percent claimed the presenter had tried to sell them something at or after the seminar. (As chief compliance officer for a broker/dealer,
I salute the attempt to determine “suitability” for what was about to be offered by asking for personal information from attendees prior to making the presentation.)
As one example, let’s look at seminars featuring annuities. These products typically feature relatively high commissions to sales persons, which are covered by “surrender charges”. These charges apply on a sliding scale for periods as long as 15 years. Often these charges are not apparent in the sales materials provided to seminar attendees. In fact, 67% of the volunteer monitors reported that the presenter did not mention surrender charges when discussing annuities. 48% reported the presenter did not discuss other risks involved, such as the inflation risk inherent in fixed annuities.
Instead, monitors found, attendees were consistently promised that these products were “low risk”, yielding high rates of return. Sometimes rates greater than 7% per year were “guaranteed”’. No annuity I know of will return a legitimate return of seven percent on investment! (What annuities can do is to return cash at this rate or highter, with part of the return being a non-taxable return of the investor’s principal!) Potential investors at seminars, in many cases, were not made aware of sales fees, insurance charges, and administrative costs “buried” in the sales contract.
There ARE some worthwhile educational investment seminars. I give dozens each year
on cruise ships at no charge or obligation, and with no sales pitch. Many well-known New York Stock Exchange member firms offer educational seminars also. So do a lot of Certified Financial Planners, attorneys, and CPAs.
Still, whenever an invitation to dine is related to an investment presentation, it’s wise to season your meal with quite a few grains of salt, recalling the old saying: There’s no such thing as a free lunch!
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