Beware the Expensive Free Lunch

Beware the Expensive Free Lunch

July 17, 2017

If you’ve received an invitation to a complimentary investment meeting at an upscale restaurant, you’re not alone. According to the Financial Industry Regulatory Authority (FINRA), 64% of people age 40 and above1 have been pitched an educational investing seminar with free food. But before you bite into that free meal, beware that it likely has an embedded hook.



There is a long and prevalent pattern of investors underperforming the stock market.  A major cause is investor behavior.  Numerous studies have documented a history of emotional investing that leads to euphoric purchases in high markets and panic-selling in low markets 2

Another cause of weak performance is what our firm likes to call ‘ICE’ investment vehicles - Illiquid, Confusing and Expensive. Illiquidity often forces the buyer to choose between large surrender fees or large internal and often hidden recurring fees. Confusing the buyer makes the product easier to sell; if clients truly understood the product, would they happily pay large fees or commissions for a product with a subpar record? Confusion is the natural result of the intentional development of complex products combined with often misleading or false verbal presentations that are not consistent with their long prospectuses, sales materials or written agreements signed by the purchasers 3.

In addition, many investments are expensive because they are created primarily for the benefit of the insurance company or brokerage firm and the sales persons. Large compensation allows sales representatives to invest large amounts of time and money into the marketing of these ICE products; thus the free lunch.

So why do many people fall down this ICE-y slope?



The “free” dinner environment is used to lead to emotional purchases. The purchase of an expensive meal coupled with free-flowing information and a (sometimes) hard sell, makes attendees feel responsible to return the favor. A free meal can be an informative “thank you” gathering from a valuable service provider, but often it is a baited hook delivered by a non-fiduciary-based salesperson 4.

Remember that you agreed only to accept the meal and listen to the presentation. You are under no obligation to give up private and personal information or engage in a follow-up conversation and meeting. Also, remember that your fellow attendees (especially ones who have already purchased something similar to the promoted product) are likely to be less informed that you are. In addition to the reciprocity effect, the free dinner may also use herd mentality or testimonials from fellow dinner attendees. Resist this approach;  use a disciplined and thoughtful decision-making process instead.



So now you know that free investment meals aren’t exactly free.  Are you still tempted to RSVP? Before you attend (or bite into that monetary, insurance 5 or real estate investment) ask your host a few key questions. 

  • For a time-share: How does the annual maintenance fee compare to the rent of that property or a similar property without a significant upfront payment and a lifetime commitment to maintenance fees?
  • How much compensation would the presenter receive if you invested x dollars into the product?  How much would the insurance company or other related parties earn from the purchase of the product?
  • What are the projected and guaranteed rates of return? If they refer to cash flow or monthly payments or even “income” stream, ask them to explain the difference between that and rate of return. Many individuals confuse a 6% cash flow with a 6% return.  With a 6% return on a $100,000 investment you would receive $6,000 per year and then $100,000 when you cash in your investment.  Too often and too late many purchasers discover they are receiving $6,000 per year, but it may be only a 1.5% return combined with a return of 4.5% of their original capital.  That combined with high surrender charges can lead to bad and unexpected outcomes. 6
  • Who is really sponsoring the event? The “expert specialist” could be an insurance or time-share company posing as an independent business owner to drive sales to the parent company.
  • Are there penalties for withdrawing from this investment before a certain period of time? Often, these conferences push non-liquid investments that tie money up for long periods of time or incur steep fees for early withdrawal. 
  • What’s the real upfront investment? Disclose clearly the investment itself, fees, surcharges, commission, surrender fees, etc.



So, there you have it. Chances are that sometime in your lifetime you will be invited to a free investment meal. Before accepting any free lunch, consider whether it is really worth your time and the risk of getting hooked.



  2. A great example is Peter Lynch & Fidelity’s Magellan Fund that made up to 29% annually between 1977 and 1990. However, the average investor lost money due to buying high and selling low. ,,
  3. Goldman Sachs is key example of selling confusing investments. The company paid fines and penalties of about $5 billion for activities at least related to if not significantly enhancing the great recession of 2008-09 by creating products to sell to their retail clients and then betting against those products.
  4. Fiduciary-based means that the person or company is legally required to act in your financial best interest even if that means making less money.
  5. Insurance-based investments are products commonly sold through free dinner seminars. As far back as 1979, the Federal Trade Commission recommended against consumers buying whole life insurance.
  6. Often times this is because they were verbally told one thing and signed a contract after allegedly having read a complicated and long prospectus indicating they were actually buying something else.  Some of the common characteristics of these products are annual internal fees of 3 ½ percent per year, products with commissions ranging 6-12% for simple lump-sum investments and much higher upfront commissions for multi-year purchase plans.