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If you’re a senior citizen and an advertisement comes in the mail asking you to attend an absolutely free meal at a well-known local restaurant, while listening to a financial freedom workshop, make sure you have a tight grip on your wallet. “Free lunch” sales seminars have been one of the fastest growing marketing programs designed to sell investment products to those nearing retirement age or seniors already in retirement. It is estimated that by 2025, more than 75 million Americans will be aged 60 or older, and this has become an attractive field for aggressive investment promoters. One recent survey by the North American Security Administrators Association (NASAA) showed that senior investment fraud accounted for almost half of all the complaints received by regulators. A new study detailing some of the questionable methodology and practices of sponsors who provide free lunch sales seminars has just been released. This report is a joint venture of the Securities and Exchange Commission (SEC), the NASAA and the Financial Industry Regulatory Authority (FINRA). It details the results of their examination of 110 free lunch providers for the period between April 2006 and June 2007. The results of their findings should be a good guide to anyone lured by the temptation of a free lunch to attend one of these seminars. Generally speaking, a free lunch seminar is a very attractive proposition to many investors. The inducement to intend is often a free meal, either lunch or dinner, to be held at a well-known location. Free trips, free golf and various other attractive door prizes help entice people to attend. Such free benefits are a very powerful incentive to get people to simply attend an educational seminar. Typically, the attendees are solicited either by direct mail or through advertisements in local publications. The mailings often stress that seating is limited or time is of the essence, in order to create a sense of urgency to attend. Often, in the case of seniors, there is a direct appeal in the mailing to their fears about outliving their resources or failing health. Although these workshops are often advertised as “educational” and they promise that nothing will be sold, the intent of the promoter is often contrary to that promise. Most of these seminars are designed to get the attendees to either open an account or buy a product from the sponsor. Equity indexed annuities, private real estate, variable annuities, reverse mortgages and private securities placements are some commonly promoted products at these free lunch seminars. Often, the seminars will cover the advantages of investing in a combination of two or three of these products at the same time. While technically nothing might be sold at these seminars, they are clearly designed to result in a follow-up sale of the products discussed. Shockingly, the regulators found that 57 percent of the sponsors of the free lunch seminars who were examined used advertising promotions and sales materials that were exaggerated or misleading or that made unwarranted claims. Many of the advertising materials, even where required, were never submitted to the National Association of Securities Dealers (NASD) for regulatory review. Direct comparisons between investments that were not comparable, misrepresentation of risks and fraudulent testimonials were typical faults that the regulators found. There were also several instances where the expertise or credentials of the seminar presenters was designed to mislead the attendees into thinking the presenter had special knowledge or credentials that were nonexistent. One persistent problem that they encountered was a lack of full disclosure. Many attendees never knew, or never asked, who was actually paying the bill for this “educational” experience. While the adviser listed as the presenter on the invitation might have their credentials, background and expertise prominently displayed, they were not always paying for the event. These events are often sponsored by undisclosed mutual funds or insurance companies that hope the professional presentation of the materials will prompt attendees to use their products in the following sales opportunities. Often the attendees were either unaware of or not provided with the name of the firm that was picking up the bill. The examiners found that 13 percent of the reviews they conducted had possible indications of fraudulent practices. That is, one out of seven of these “free lunch” sales seminars targeted at seniors had potential criminal problems. One serious problem observed was deception or misrepresentation about the risks and returns of the products discussed. The examiners observed many recommendations of products that were unsuitable for individual clients needs. In fact, 23 percent of the examinations conducted raised concerns that recommendations to purchase investments as a result of one of these seminars were unsuitable for individuals to whom they were recommended. Although many of the products and investments discussed at these presentations are suitable for some investors, they were generally not suitable for all investors. This is where the problem comes in. Promoters, in their rush to make sales, often fail to take into proper consideration the investor’s objectives, time horizon and risk tolerance. There are several types of products that stood out as needing close examination before anyone should consider investing in them. Private real estate investment trusts, variable annuities and recommendations that customers use existing home equity to fund investments all require careful scrutiny before investing. There are certain warning signs that potential investors can look for in assessing whether or not to attend one of these presentations. First, they should carefully examine the advertising circular. Are there any claims saying they will guarantee you’ll never run out of money or that you can earn returns of 25 percent to 35 percent? Or are their claims about stock market-like returns with no risk of loss? All of these types of claims are at best exaggerated; these are the types of advertisements that need to be run to get people to attend. Any time you see claims that seem to be exaggerated, proceed with caution. Your residence might be a tip-off to shady promotions. Areas with demographics that show high populations of seniors and retirees often become the primary focus for many of these unscrupulous promoters. The advertisements and literature often target seniors. Over-55 communities and senior citizen communities are prime areas to see these promotions. Often the financial advisers will represent themselves as experts in senior citizen advice. They sometimes use titles like “Chartered Senior Planning Specialist” to denote some type of special regulatory credential, when none such exists. These made-up designations and titles are intended to dazzle or mislead potential attendees. If you have any questions about the validity of a credential, you can look them up on the Financial Industry Regulatory Authority (FINRA) Web site at www.finra.org. It is also advisable to check the background of any advisers you are considering doing business with. This information is also available through the old NASD broker check system, which is now part of the FINRA system. It’s a simple matter to check a broker or firm for previous complaints or compliance problems. It’s important to see if there have been prior disciplinary history citations or customer complaints. If there are, you should ask for a full explanation and not invest until you are entirely satisfied with the explanations. If NASD members sponsor the presentations, ask about the advertisements and sales literature that is being presented. Have these materials been filed with and reviewed by the NASD? Even when they have been approved, you should ask hard questions and demand a full explanation for any claims of performance, liquidity or risk. Be very careful about accepting any type of testimonial at face value. There have been instances of paid attendees at seminars standing up and saying how well they liked the quality of the firm or the investment program under discussion. If you are over the age of 50, you are a prime target for many of these promotions. It is of the utmost importance that you understand that even though these are billed as “free lunch” educational events, they are sales seminars. The intention is that as a result of your attending the event, you will make a follow-up purchase. Once you understand that, you can do a thorough background check to make sure the adviser and the products are appropriate. Remember, don’t rush into a decision that might be irreversible, no matter how much urgency the promoter insists upon. There is always time to do some research before investing. William Z. Suplee IV is the president of Structured Asset Management Inc., a financial planning and investment advisory firm located in Paoli, Pa. He may be reached at 610-648-0700 or [email protected].

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