'Ain't No Such Thing as a Free Lunch'

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Question: I recently received an invitation from a financial adviser for a luncheon presentation at a popular local restaurant? Should I go?

Answer: In mid-19th century America, “free lunch” was a commonplace term used by saloon keepers to attract drinkers. That tradition carries on today in various forms, from free food at Happy Hour to free breakfast at hotels. But the one common thread is that the consumer always pays the cost of the food in the price of his drinks or his hotel room.

According to a survey by the Financial Industry Regulatory Authority (FINRA), four out of every five investors age 60 and above received at least one “free lunch” invitation in the past three years and three out of five got six or more.

An SEC examination of free lunch “seminars” found that 100 percent of them were instead sales presentations. They may have been advertised as educational workshops with nothing to be sold, but they were intended to result in the attendees opening new accounts and ultimately the sale of investment products. The SEC found that 50 percent of the free lunch seminars featured exaggerated or misleading advertising claims with statements such as, “Immediately add $100,000 to your net worth,” “How to receive 13.3 percent return,” and “How $100,000 can pay $1 million to your heirs.” Other SEC findings included recommendations that were either unsuitable or fraudulent.

When you get an invitation to a free lunch from a financial adviser who promises to educate you about investment strategies or managing your money in retirement, it’s OK to go. But FINRA wants you to keep the following points in mind:

Seminars are designed to sell

Watch out for sales pitches that offer misleading comparisons of dissimilar investments and misleading information about safety, performance and returns.

Good shows aren’t always good deals

These seminars are often held in first-class restaurants and hotels by well-dressed, eloquent speakers. Don’t be suckered in.

The lead speaker may not be the actual sponsor

You might recognize the name of the person who invites you or speaks at the event, but the actual sponsor of the event might be an insurance company that sells annuities or a mutual fund that expects the speaker to drive sales of their products.

Education is a great idea

Be sure to learn about persuasion: watch out for these popular persuasion tactics:

  • “Phantom riches” — Promises of wealth or income that you want but can’t have.
  • “Source credibility” — Important titles and credentials can help a speaker sound believable.
  • “Social consensus” — You might be led to believe that other savvy investors have already invested.
  • “Reciprocity” — If you receive a meal and/or a door prize, you might feel obligated to reciprocate. Don’t fall for the pitch that if you buy now you’ll get a better deal, perhaps a break in the commission.
  • “Scarcity” — Some investment products, such as limited partnerships, might sell investments by the unit. The seminar presenter might claim that you need to buy now because the supply is limited.

Remember to Ask Questions

Ask questions while at the seminar, such as: What are the risks of this investment? How much does it cost initially to purchase the investment? What ongoing costs will I have to pay? How liquid is the investment? Are there surrender charges or other fees?

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to ken@montereypw.com.