A cautionary tale: No free lunches!

Seminar invites and ads should be scrutinized for “red flag” language that SEC investigators say is meant to lure you in.

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The Security and Exchange Commission (SEC) reports that 75% of the nation’s consumer financial assets are held by Americans age 50 and older. The value of those assets? Approximately $16 trillion—that’s $16,000,000,000,000!

Because seniors are a growing segment of investors, financial services firms are increasingly focusing their marketing and sales of investment products to investors in or nearing retirement. One common marketing approach is to invite seniors to an investment seminar and offer them a free meal. A few years ago, the SEC and the North American Securities Administrators Association (NASAA) conducted an investigation into these so called “free lunch” financial seminars.

They had reason to be concerned about unscrupulous and abusive practices as some data indicates that those age 60 and older account for 30% of fraud victims even though they make up just 15% of the total population.

They conducted 110 examinations, and as a result, 78% of the firms offering these events received deficiency letters that outlined apparent rule violations, and 23% warranted further investigation or action by the state, the Financial Industry Regulatory Authority (FINRA), or the SEC. In half the cases, the sales materials—including the invitations and advertisements for the events—contained claims that appeared to be exaggerated, misleading, or otherwise unwarranted. And 12 percent of the seminars appeared to involve fraud, ranging from unfounded projections of returns to sales of fictitious products.

You’re invited!

If you are in or near retirement, chances are high that you have received an offer to attend a free-lunch financial seminar. FINRA found that 4 out of 5 investors age 60 and above received at least one invitation to a free investment seminar in the past three years—and 3 out of 5 received six or more.

Harold and Mel McCarthy of Chilton, Wisconsin, have received many such offers over the years and attended a few as well. “You mean the ‘educational retirement seminars’ with the succulent dinner and beverages?” Harold chuckles. “Sure, I’ve gone to a few. I went to my first one when we became eligible for Medicare and there was a seminar about Medicare supplemental insurance.” That was 15 years ago—Harold is now 80.

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Mailer, August 2017

Since then Harold has accepted a number of invitations to financial seminars, but he won’t likely be going to more. “My experience has been that you don’t get the whole truth. Unfortunately, you get tunnel vision and you only see the numbers they put on the board...and those numbers look pretty good.”

The McCarthy’s son, Tim, a middle school band teacher in Glendale, was surprised and concerned to learn that his parents were interested in listening to these sales pitches for financial products. “My parents are not ignorant about money matters, but it made me and my siblings uncomfortable that they were considering major financial decisions based on guidance from a commissioned sales representative who clearly didn’t have their best interest in mind.”

The untold story

One of the salespeople did convince Harold and Mel to invest with their company. They were told that the new account would pay them a 10% bonus for the investment and pay 7% for ten years, so the account would double in ten years. What they didn’t say was that they wouldn’t have access to their money. And, after 15 years, they can only take out 5% per year. “I’m 80 years old,” says Harold. “If I’m going to live out that plan, I’ll be 95. What the heck am I going to do with the money at that time? The good news is that we don’t need this money today.”

Reality check

The details of the annuity contract that Harold and Mel had purchased were confirmed during a consultation with Brenda Echeverria, Financial Planner for Member Benefits. “We’re learning more about this after we’ve done it,” Mel says. “We came to see Brenda because Tim and our other son—both are teachers—encouraged us to come in. They have a lot of experience with WEA Member Benefits.”

Tim said he and his siblings felt it would be best to have an independent, noncommissioned financial specialist take a look at what their parents had and discuss their financial options. “They needed to hear from a nonjudgmental source. To have your retirement finances scrutinized by your children can make even the savvy investor uncomfortable,” says Tim. “Fortunately for my parents, the investment was not a big percent of their retirement nest egg, because that money is locked up for the next ten years.”

A common trap

For older investors, losing access to their money can be devastating if they need it to cover expenses. The seduction of high returns or quick profits can cause many to make serious financial mistakes. “Unfortunately, it’s not uncommon for seniors to fall into this trap, hoping to get big rewards quickly,” Brenda says. “They don’t realize until it’s too late that if they need to take their money out, they can’t do so readily.”

Brenda says that the problem with these free lunch seminars is that they talk about a specific product. They don’t offer choices or talk about your particular situation.

“The product might be appropriate for someone younger or someone who came into some money through inheritance,” Harold suggests, “but not for people like us who are in their 70s or 80s.”

The time with Brenda was beneficial. She provided them with an objective assessment of their situation as well as the annuity. “She walked through what we had and gave us information about what we could do to reduce the tax burden for our beneficiaries. That’s helpful for long-term planning.”

Annuitize with caution

Brenda adds, “Annuities are complicated and can be very difficult to understand. Wisconsin public school employees already have two forms of annuities in retirement: WRS and Social Security. There may not be a reason for another one in their financial plan.” Brenda encourages extreme caution when being presented with annuity options.

“One attractive sales pitch is that an annuity offers an income stream for a guaranteed period of time,” Brenda says. “WRS and Social Security do the same but without the fees. Another income stream could be created from the growth on mutual funds. It’s an option that could fill the need without losing access to your money.”

The “free lunch” appeal

According to Harold, it’s not difficult to understand why seniors are open to these seminars. “When you’re retired, you have time on your hands and you get lured in by the nice meal. It’s free. You have conversations with other people there who are just as uninformed as you.” He laughs but turns serious. For Harold, it comes down to honesty. “Just tell me the whole truth, the whole story.”

Mel says, “We hope our experience can help others.”

Be aware for you and yours

Tim urges others with retired parents to be on the alert. “Be sure to talk frequently with your retired parents about the “free lunch” investment hook. These salespeople will tell your parents whatever they feel is necessary to make a sale. They have no shame. Just look at the gimmicks they use to entice new clients—free lunches and dinners, casino trips…WEA Member Benefits is a great resource for information and investing retirement dollars. Their noncommissioned services provide options that make commissioned salespeople uncomfortable.”

In the event of buyer’s remorse

If you buy an annuity and have buyer’s remorse afterward, there may be a way out. Some have a 30-day look-back period during which you may terminate your contract without paying any surrender charges and receive a refund for the contract. But it depends on the contract.

For those tempted to use their WEA Member Benefits 403(b) or IRA account to purchase another investment product, be aware that while participants in our IRA and 403(b) can keep their accounts with us for as long as they want and continue to take advantage of our low fees, if an account is closed there may not be an opportunity to come back. Before you close your account, give us a call to learn about what that means for your eligibility to return.

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FREE! Sponsors of “free lunch” seminars offer incentives to attend such as free meals commonly held in upscale hotels, restaurants, or resorts. Many also offer door prizes, free books, and vacation deals.

For Seniors Only. Titles like “Seniors Financial Survival Workshop” make it clear that senior citizens are the target. Even when advertised as educational, many investment seminars are intended to sell something—financial products or the speaker’s books or services.

Limited Seating! By Invitation Only! Reservations Required! Invitations often imply a sense of urgency or exclusivity to encourage attendance.

Exaggerated claims or guarantees. These statements were taken from actual promotional materials found by the SEC investigative team:

  • “Immediately add $100,000 to your net worth.”
  • “How to receive a 133.3% return.”
  • “How $100k can pay 1 Million dollars to your heirs.”

Remember, if it sounds too good to be true, it probably is. 

Learn more: Beware the free lunch! But if you MUST go...

This article is for informational purposes only and not intended to be legal or tax advice. Consult your tax advisor or attorney before taking any action. All investment advisory services are offered through WEA Financial Advisors, Inc.

Harold and Mel McCarthy

Harold and Mel are retired and live in Chilton. Both are college graduates—she was a nurse for 48 years and he was an agriculture teacher who went into the dairy industry. They have five children; two teach in public schools and three are in the medical field. “Life is very good. Our kids and grandchildren—we have eleven grandchildren—are just wonderful. They keep a watchful eye on us,” Mel says.

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