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Wall Street Steward Blog

The Literal Free Dinner

About a month ago, my parents received an invitation to a financial seminar.  This is very common since they are retired and live in a decent neighborhood.  Being the good Dad he is, my father always gives me the invitations they receive so that I can copy the good marketing ideas.

Why reinvent the wheel?  I would much rather copy someone else’s good idea than expend what little brain power I have trying to come up with my own idea.  Don’t judge me….at least I admit it!

All of the previous invitations had invited my parents to a sit down dinner with a group of people to hear a financial presentation.  Nothing wrong with that, as I believe these dinners are an effective way to attract new clients.  From the prospect’s perspective, they have the opportunity to go enjoy a free dinner, and to also learn something new about the financial industry.  From the advisor’s point of view, they are buying access to a group of people so that they can demonstrate their competence in an effort to convince the people to meet with them.

All pretty standard stuff. 

However, this invitation was different.  VERY different. 

It was a LITERAL free dinner.  To be precise, it was offering my folks a $100 Outback Steakhouse gift card just to go sit down with the advisor.  This was, to put it simply, DISTURBING to me. 

I have many issues with this.  First of all, in order to offer $100 for an appointment, one has to believe that there is going to be some HARD selling going on.  Think Timeshare/Amway/Used Cars type of “cannot take no for an answer” selling.  This would be very uncomfortable for the prospect, but hey, they are handing you a C note, and you didn’t think the money was free, right?

The second thing that occurred to me is that in order to make that offer and remain profitable, that firm probably has to push HIGH commission products.  Think about it.  I will use some assumptions and examine the numbers.

100 offers of Steak Dinner ($100 each)
½ of the people accept the offer
50 gift cards at $100 each is $5,000 out of pocket

Of those 50 prospects, I will assume that 10 of them are serious (i.e.….not meeting JUST for the free dinner).  Of those 10, if the advisor closes half of them, he/she gets 5 new clients. 

The average return (to broker) on assets under management in our industry is around 1%, meaning that for every $1 million under management, the advisor will generate $10,000 per year in gross commissions on average. 

If the average account size of the 5 new clients is $100,000, then the advisor gathers $500,000 in new assets, which will generate $5,000 in gross commissions per year.  This particular advisor was an independent advisor, which usually means they will net 60-65% (after expenses) of their gross commission in pre-tax pay.

$5,000 out of pocket
$5,000 in gross commissions (1% average ROA)
$3,250 after expenses (65% of gross for independent advisor)
25% assumed taxes (federal and state combined)
$2,437.50 take-home pay

They spent 5 grand, and made less than $2,500.  That formula doesn’t work out too well, so what is the problem?  Are my assumptions bad?  Where is the catch here?  I mean, would you give someone $5 only to get $2.44 back?

A-ha!  What if we assume a higher up front commission?  Then the numbers would be something like this:

$5,000 out of pocket
$25,000 in gross commissions (5% up front)
$16,250 after expenses (65% of gross)
25% taxes (federal and state combined)
$12,187.50 take-home pay

Spent 5 G’s, take home over 12k.  Nice day at the office. 

Some of you out there must be thinking “why does this guy care how someone else is building their business and how that person chooses to get paid?”  They sent the invite to my parents, so I feel that I am allowed to comment.  IF (and it is a big IF) the advisor is disclosing all of the fees to the client and explaining all applicable surrender charges, I have no issue with this type of selling.  However, please forgive me for being skeptical as this rarely happens in my experience. 

There are two lessons here.

One – Please be careful what offers you respond to, and what products are being pushed down your throat!  If you happen to purchase a bad product, your money could be locked in for a very long time, and you will pay more fees than need be.

Two – Please call me if you get a free $100 to spend at Outback.  I will be happy to eat that other steak with you.

Important Disclosure: Mathematical assumptions provided are hypothetical and not based on an actual experience.