Skip the Free Lasagna!
Saturday, July 28th, 2007Does this make any sense to you?
An elderly couple buys an annuity that they’ve been promised will generate regular income, just like their Social Security checks. These payments, however, weren’t scheduled to start for 42 years. If the husband had lived that long, and he didn’t, he would have been 115 before he could have cashed the first check.
What would prompt intelligent Americans from sinking money into investments that so many of us would appreciate as horribly inappropriate? Some of the blame can certainly be placed on the nation’s free meal epidemic. Every morning, across the nation, investors are munching on cherry Danish and endless coffee refills. At lunch, hungry investors are polishing off club sandwiches and plates of chocolate chip cookies. As evening approaches, steaming lasagna and salads tossed in bowls the size of sinks are rolled out to guests. All this food is gratis.
You see, the best way to get Americans to buy investments that don’t make sense is to feed them first. It’s amazing what you’ll agree to do when your stomach is full and your guard is down. Which is one reason why so many people, especially those who are retired or nearing that milestone, are invited to financial seminars, many of which serve food.
What can be particularly dangerous about all too many of these financial presentations is that the true mission of the sponsors is hidden. Imagine what would happen if a seminar sponsor invited retirees to sit through a two-hour presentation on expensive annuities that carry stiff insurance and surrender fees. With this sort of candor, the folding chairs in the rented room at the local senior center would remain empty. But what if the sponsor promises that he will reveal foolproof ways to protect guests’ assets, avoid probate court or provide a risk-free investment that starts with an upfront 7% rate of return? With that sort of marketing appeal, he may run out of chairs even though his motivation is still to push the annuities.
Deceptive marketing techniques have not gone unnoticed by regulators. The California attorney general and the state insurance commissioner, for instance, filed a $110 million-plus suit against the operators of some of these seminars. According to the authorities, the offending firms located in San Diego, Los Angeles and elsewhere, reeled in customers by ostensibly selling living trusts that the backers claimed would avoid probate and reduce estate taxes. The real intent of these living-trust mills was to sell the victims annuities, which was never adequately disclosed.
It’s not just senior citizens who are getting lured into presentations. After I wrote a column criticizing equity index annuities, a reader sent me an email about a seminar he had recently attended on leveraging home equity. The married, middle-aged dad with two kids was on the verge of ditching his 30-year fixed mortgage with a 5.25% interest rate and swapping it for a risky interest-only loan. He was going to sink the money that this refinance would free up into an equity index annuity. An insurance agent at the seminar had urged him to make this move. In fact, the agent was going to present the man with the paperwork the next day for his signatures. My immediate reaction, after reading the email, was to blurt out loud, “Oh, my God!”
How do you protect yourself from falling for slick marketing? The simplest way is to eat at home. Don’t attend financial seminars. And that includes free real estate seminars that are typically aimed at softening up attendees to buy expensive tapes and books that promise to share the secrets of amassing a real-estate empire. It’s amazing how fast these tapes end up on eBay.
I’m not suggesting that all financial seminars are worthless. There are reputable financial speakers and firms that sponsor seminars that impart solid information. But how are you supposed to tell the difference? A safer way to learn more about investing is to lay on the couch and read some good books.
If the lure of free food proves irresistible or you’re simply curious, take precautions. Before the day of the event, ask the sponsor to send you a biography of the speaker(s) and the firm. The material should include how long the person has been in the financial industry, his or her area of expertise, as well as a list of credentials and education. And for heaven’s sake, don’t provide your host with any of your financial information. During the presentation, listen for buzz words like “guaranteed,” “sure thing,” and “risk free.” There are no such things. Also pay attention to promises made by the speakers, especially when a graph or chart indicates what will happen to an investment years from now. If somebody starts talking about tripling or quadrupling money or making similar claims, it’s time to stop listening. No one can predict what returns an investment will generate in the future.
Once the seminar is over, remain resolute. That’s because you will inevitably receive a follow-up phone call from the guy who paid for the donuts or the spaghetti. He’s probably going to ask to meet you for a complimentary follow-up session where your financial situation will be explored. This time, don’t bite.
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