Almost everyone has been invited, at some point in their lives, to a ‘free dinner’ while they listen to some kind of product presentation. One of the most common sales pitches given at these ‘free dinners’ are to buy some kind of financial product.
The first question I have is this: How many good things have you found in life by going to a free dinner?
If you are anything like most people I know or work with, your answer is probably none. I hate to pigeonhole anything, but in this case I’m going to. Things like timeshares, pyramid schemes, and financial products are commonly sold at free dinners. When I think of advisors that put on free dinners to get an audience, every one that I can think of is trying to sell a product to their audience. In this past year there was an advisor in my area that advertised free dinner seminars in the local paper almost every week, who lost all of his insurance and securities licenses a couple years ago; the reason he lost his licenses was for unsuitable product sales.
It costs approximately $6,000 for an advisor to do a free dinner seminar. The advisor hosting the seminar has to pay for the newspaper ad, a list to mail to, postage and mailing costs, and the cost of the free dinner! You may think that $6,000 is a lot of money, but the commission the advisor makes on product sales can make $6,000 look like peanuts.
The most common financial products that are sold in free dinner seminars are annuities. While there are many different kinds of annuities, the ones that are typically sold in these seminars will lock your money up for a period of 5-10 years. The annuities also pay the agent selling them a commission of 5-10% of the amount that the client invests.
Here is the typical sales pitch for these annuities: if the market goes up, your account goes up along with the market, but if the market goes down, you don't lose any money. Sounds great right? Of course it does, but these are only half-truths.
General Rule of Thumb
Here is a general rule of thumb for investing - the longer the surrender period on your investment, the better it is for the salesman selling the product, and the worse for you. Also, the higher the commission paid to the agent, the worse the product is for the client. I’m not saying annuities are unsuitable for everyone, but it certainly isn’t the right fit for most people.
We had an article in the local newspaper last week from a couple that attended a free steak dinner and guess what it included? That’s right, an annuity sales pitch! The annuity salesman attempted to sell the couple a large annuity by emphasizing all of the benefits and half-truths and not including the negatives. The financial writer of the article said that the annuity salesman wanted to “take you to the dry cleaners, the carpet cleaners and the sewage cleaners.” It doesn’t sound like he is a big fan of the annuity salesman!
I have met with many people that have been talked into buying one of these annuities. When they talk to me, they usually want to know how they can get out of the annuity. Most of these annuities have surrender charges of at least 7%, and can even be north of 10%. If you invested $200,000 and changed your mind six months later it could cost you up to $20,000 to surrender the annuity.
This is the point where annuity holders are faced with a tough decision - take a large surrender penalty on the annuity and move on, or keep the annuity and risk a period of ten years with little to no growth, and the possibility of losing purchasing power due to inflation.
In extreme cases I have seen individuals invest most of their liquid assets in annuities and have life events come up that force them to pay surrender charges.
The real cost of that free $20 dinner can end up being tens of thousands of dollars in surrender charges, or you could end up being stuck with an annuity you don't want for a period of five to ten years.
One very important question
One question I love to ask salesmen is this, “what are you going to make on this sale?” As a consumer, I believe this is something we have a right to know. Or asked in another way, “how will you (the salesman) benefit from this sale?” I understand that I am going to pay a fee for services and even the occasional commission, but I believe the way that I pay that fee can tell a lot about the service or product I’m getting. If the salesman gets a large commission upfront and that’s it, will he really manage my money or will he sell me a product and run?
Common sense and due diligence
Common sense and diligence can go a long way in detecting whether or not the steak dinner sales pitch is best for the consumer or the agent selling it. Please take your time and thoroughly investigate any product sold at a free dinner seminar. Also, ask yourself, “If the information provided in this seminar is so good, why does the agent have to offer a free steak dinner to get an audience?”
Next time you get an invite to a free steak dinner, where you will undoubtedly hear about the greatest product in the world, you may save yourself a lot of money if you just stay home and order pizza. If you have fallen into the trap of buying one of these products, and would like some help, you are welcome to contact me by email at firstname.lastname@example.org.