Financial seminars offering a free lunch are popular with the elderly, but seniors attending the events should keep their eyes wide open and ask lots of questions.
“Investors should remember that there is no such thing as a free lunch,” said Robin Carnahan, Missouri Secretary of State, in a warning to seniors who like to attend the programs. Carnahan recently shut down a free-lunch enterprise after charging a financial advisor with committing securities fraud during the seminars.
Carnahan moved in when seniors were sold equity-indexed annuities without realizing that their advisor stood to gain large commissions from the sales. These elderly investors were allegedly harmed because their investment goals would have been better served by cheaper, less-restrictive products. The advisor, who is bound by a high fiduciary standard, violated securities law by failing to act in his clients’ best financial interests.
Missouri may be the latest state to crack down on free-lunch investment seminars, but the programs have long drawn fire from regulators and consumer advocacy groups. Most invitations come from legitimate businesses that offer legitimate products and services, but a minority of promoters use free lunches and dinners to lure in targets for their scams. Last June the SEC moved against an Illinois corporation called USA Retirement Management Services for operating a Ponzi Scheme that raised at least $20 million from more than 120 investors in Illinois and California.
The SEC alleges the company invited potential investors to a free dinner and estate planning seminar. The company followed up with a letter inviting attendees to the office for a personal consultation and advice on setting up a Living Trust or Will. The investors were then offered safe, guaranteed investments in Turkish Eurobonds through the purchase of promissory notes that would earn between 8 percent and 11 percent a year. The SEC alleges this money was used to buy luxury cars, homes and vacations.
To help protect seniors from becoming victims of free lunch scams the advocacy group AARP has launched a Free Lunch Monitor program in collaboration with the North American Securities Administrators Association. About 5.9 million Americans 55 and older attended free-lunch programs, and respondents 65 and older are twice as likely to go, reports AARP in is 2009 Free Lunch Seminars Report. Almost two out of five attendees – 39 percent – reported that the presenter tried to sell them something either during or after the free seminar, and more than half – 54 percent – said they were promised returns of 7 percent or more.
A year-long examination of free lunch investment seminars conducted in 2007 found widespread problems that put seniors at risk. Though many of the seminars were advertised as “educational workshops” or that “nothing would be sold,” 100 percent of the seminars were sales presentations, said the SEC, who conducted the study with NASAA and FINRA, the Financial Industry Regulatory Authority.
Half of the sales pitches featured exaggerated or misleading advertising claims, such as, “Immediately add $100,000 to your net worth,” “How to receive a 13.3 percent return,” and “How $100K can pay 1 Million Dollars to Your Heirs,” the SEC said.
Nearly one-fourth - 23 percent - involved possibly unsuitable recommendations, such as a risky investment presented to an investor with a conservative investment profile, the SEC said. Thirteen percent of the presentations appeared to be fraudulent and faced possible disciplinary actions.
“Free lunch sales seminars are routinely targeted at senior citizens and are commonly held at upscale hotels, restaurants, retirement communities and golf courses,” the SEC said. FINRA has found that 78 percent of seniors have received a free lunch seminar invitation and 60 percent received six or more in three years.
A number of advocacy groups urge seniors to do their homework before attending a free lunch seminar. The credentials and records of the professionals offering the program can be verified by contacting the securities regulators in each state. Investors can also verify whether a product has been registered with the SEC by checking the agency’s EDGAR data base. Advocates also urge seniors to take their time and go home to consider the products offered.
“Promise yourself before the seminar that you will not purchase anything or open an account on the spot,” advises AARP. The group also recommends considering the following questions before committing to a product:
• What are the risks of the investment?
• How much does it cost initially to buy the investment?
• What, if any, additional or ongoing costs will I have to pay?
• How liquid is this investment? If I need to sell or cash in the investment, how readily can I do so?
• Will my investment be tied up? If so, for how long?
• What happens if I decide to sell or cash in my investment? Are their surrender charges or other fees? For what type of investor is this investment a good idea? For what type of investor is this investment a bad idea?
• Is the investment registered? If so, with which regulator?
• Will they give you their answers in writing?
“If the speaker can’t or won’t answer your questions to your satisfaction, the investment is not right for you,” AARP said.