How to lose $1,365 per year and not know it

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26 comments — written on May 16th, 2007

I’m back!

—

Some people think it’s impossible to spend more money than you make without knowing it. Au contraire.

A few months ago, my brother called me up to invite me to lunch. He had put his business card in one of those bowls at a restaurant where you can win a free lunch, and he had actually won. A financial planner had called him and said, “Bring up to 7 friends to lunch. I’ll talk to you about financial planning for a few minutes and then I’ll buy you all lunch.”

The restaurant was 2 minutes from my house, and I love Mexican food, so I went and listened to the pitch. The funny thing was my brother and his friends are all in college and came looking completely disheveled, so when she saw them, you could see her heart sink. College students who woke up at 12:01pm with hair nearly touching the moon are not the most profitable customers. Still, she made the effort to try to sell her services by explaining what financial planning was, then asking us to fill out a form with our contact information.

Here’s the interesting thing: I was the only one to say, “No thanks.” The other students all filled out the form but half filled out fake contact information. Later, when I asked them why they did that, they said, “Well, she bought us lunch so I couldn’t just say no…but I didn’t really want to talk to her again.” Ah, reciprocity at its finest.

Afterwards, I sat down and thought about what a horrible marketing strategy this woman was using to reach people. She was taking out completely unqualified people to lunch and praying she could convince them to pay her lots of money to be their financial planner. She was spending money on lunch (granted, not a lot) with the hopes that by sheer numbers and persuasive ability, she could generate revenues. The problem is not really with the amount she’s spending on lunch, but with the pitifully small percentage of people who will convert to paying customers.

Now, earlier I said that it’s easy to spend more than you make. A lot of people don’t believe that, saying, “How could you do that? You would know if you spend more money than you had! Your bank account would be negative!” That’s not true. I have friends, for example, in exactly that situation. Some of them have a couple thousand dollars in their savings account, so it slowly seeps out without them realizing it. Others have all kinds of complicated accounts with transfers from here to there, so they just can’t figure out exactly how much they’re spending. And as we know with real estate, people systematically forget to factor in expenses like repair and maintenance.

In this case, I’m not 100% sure this woman was losing money, but I bet she is. It’s easy when you (1) don’t track your money in/out and (2) you get sporadic client signups, which make you think “This must be working!” (sort of like keeping a budget).

Here are my assumptions (feel free to play with them):

If you can’t see the embedded file in your RSS reader, click through to this post to see it. Thanks to Julie N. for helping with the spreadsheet.

What do you think? Are my assumptions right or wrong?

[Update, 10/17: Ameriprise is under investigation by "several states" for misleading practices. See other comments here.]

26 comments

Leave your own

1

May 16, 2007
Jeremy

Was this financial planner from Ameriprise?
2

May 16, 2007
Jason

Ramit, I follow your logic but I’d expect that of those who actually follow up and meet, more than 10% actually hire her.

I’m sure most of the uninterested candidates are weeded out before it comes time to schedule a follow-up meeting. Following the rest of your assumptions, she makes a profit even if she only hires 20% of those who schedule a follow-up meeting.
3

May 16, 2007
Amy

I was in one of these lunches with 10 friends also, and we all gave our real contact information, for one thing. Since the meeting in November, even though I told them I was moving out of the state forever and showed little interest, they have called me back four times to check up. I would expect with that kind of persistence that more than 10% of prospects end up hiring. Another thing is I was under the impression that financial planners charge between 100 and 300 dollars an hour, not so low as 75.
4

May 16, 2007
Casey Leavitt

I follow your logic and generally agree with your assumptions (I also get your point); however, I doubt a financial planner who solicits clients in this manner is a fee-based planner. I’m sure she probably gets commissions on the investment vehicles she sells.
5

May 16, 2007
Dy (www.dyphan.com)

It’s hard to believe that someone who is peddling financial services wouldn’t know the ROI on lunch clients. Your story makes the planner seem like an idiot. How could you market to college students who have debts and no money to plan for haha.
6

May 16, 2007
y0c

These financial advisers are reimbursed for the lunches by the firm they work.
7

May 16, 2007
Kinney

Well they usually get around marketing to college students by having people put in business cards. Obviously Ramit’s friend also has a job while he is in school. These ameriprise things are ubiquitous in DC. I don’t know this, but it could be that it is a company thing instead of an indvidual one. Sort of send the new guy out so he or she can possibly build their portfolio but also work on thier cold sell skills. Just a thought.
8

May 16, 2007
Matt K

You have calculated the earnings and expenditures on a per year basis, but these are only the first year expenditures and earnings. In the second year, for the client you have won the profit is much higher assuming you give them a free lunch. This works for both the fee based and commissions based CFP.
9

May 16, 2007
Moneymonk

Timeshares use the same pitch, instead of lunch they may give you show tickets or cash money if you agree to listen to their seminar.

I’m sure 99% of the audience do not buy the timeshare and take the money, but it is always a person that sign the contract.
So actually they already made their ROI off that one person.
10

May 16, 2007
kmac

Went to S’Buck’s to get some coffee, and there was a Fin Planner from Ed Jones buying coffee for everyone who came in. Don’t know how much that cost her, but she did have several people sitting down with her by the time I got there.
11

May 16, 2007
David

I agree with Comment 2. I think once the planner has a one-on-one meeting her numbers will be higher than 10%. Although I don’t know much about sales.
I also agree with Matt K that once you have a customer you probably don’t have to do very much to keep that customer.
12

May 16, 2007
Dave

It’s also about a lot more than just the people she sits and talks to at first. You’ve got referral business and mindshare going on with all those people she buys lunch for. Just because a bunch of college kids screwed her over once doesn’t mean that it doesn’t pay off through finding good clients, or finding people that know people that will become good clients. Network, Network, Network.

Not to mention that those lunches can be written off, some companies will let their financial planners expense the lunches, etc. If the lunches are expensed, she’s having lunch with people, not losing a thing, and expanding her network on the company dime. Sounds like a great idea to me.
13

May 16, 2007
Ken Blakely

Sorry, but this analysis is wanky – almost makes me think Ramit’s got writer’s block or something. Right off the top of my head, you haven’t factored in the tax implications of the business expenses, and you’ve assumed that each customer only hangs around for a year
14

May 17, 2007
zen

Lunches like this are tax right offs (TMU) – so technically she’s not blowing money.

Or I could be wrong, and anyone that doesn’t check with a CPA may end up with a visit from the IRS.

Dammit, Dave just posted that.

But I agree – there’s a chance she continues to do it because it pulls in enough clients/is free marketing. Think about anyone that overhears you at lunch discussing FP…
15

May 17, 2007
J.R.

Let’s not forget recurring customers/revenue. If she (or her company/agency) already have an established base of clientel generating income, she might already be turning profits, and here she is just reinvesting those profits in the form of lunch. Are there better ways of doing it? Probably.

However, I’ve been invited to these in here in Atlanta. A coworker invited 7 of us IBM’ers to a decent steak restaurant (I’d guess avg. cost of 20-something a head), we listened to the sales pitch for financial planners, and 4 of my coworkers signed up for a ‘free consultation’. One says he went with their services (I’m unsure of the specifics). Based on my limited observations of attending, my job/experience in sales, and the fact that lots of financial planners are doing this around the country, I’d argue that it’s possible that this model is earning money for some people. Although I agree it might not be the best way.
16

May 17, 2007
soon-to-be former Ameriprise advisor

Ameriprise does this company-wide; obviously it is mostly newer advisors. It is reimbursed by the company, so the advisor does not pay for it out of pocket. For some reason I am not able to see the embedded spreadsheet, but here are a few points based on other comments:
1. The primary business model drilled into new Ameriprise advisors is to sell financial planning for an annual fee (not hourly). This can be as low as $300/year, but in most places advisors get in trouble if they go below $500/yr. Ameriprise advisors are fee + commission; the company-wide average per planning client is about $2000 in the first year.
2. The lunch is reimbursed by the company, for which it is a business expense. So assuming the company is profitable (which Ameriprise is), the actual cost is ~30% less because of the tax savings.
3. The company-wide meeting to sale conversion rate is about 3-1 (33%).
4. Comment #7 was dead-on. The advisor has the option of offering lunch to everyone who submits a card, but many advisors will filter out what they consider to be bad cards, which often includes realtors, car salespeople, Avon, Mary Kay, VistaPrint cards (anyone can get free cards from VistaPrint), etc.
5. Part of it is also choosing restaurants carefully. New advisors sometimes just put out as many containers as they can, but after two or three lunches like this, they start to realize which restaurants are generating better leads.
6. Don’t forget the referrals. For every person who attends a lunch, advisors average about 1.1 referrals. (In fact, many people will give fake information like your brother’s friends, but then give good phone numbers for 2 or 3 referrals!) In talking on the phone, advisors get more referrals. Those who actually become clients will give more referrals and introductions.
17

May 17, 2007
J.R.

Oh yeah, and I’d also bet that they get spiffs or kickbacks on loaded mutual funds they sell, or assorted insurances/investments/tax info etc.

A good thing to know in life that very few ‘Financial Planners’ are required by law to act in your best interests. I imagine that some sort of added kickback, or recurring service charge is what makes these guys profitable.
18

May 17, 2007
K

Okay, here’s the dirty little secret I heard from a couple financial planners.

They don’t make money on the client, they make money on the friends and family that client brings with her.

That’s where the sweet spot is.

And often people who enter contests are, as Seth Godin calls them, noisy people.
19

May 17, 2007
Richer than most, Poorer than some

I think you’re over generalizing a bit, just because you and your brother’s friends weren’t interested or filled out fake information doesn’t mean most people does. Like you said, “when she saw them, you could see her heart sink.” so it doesn’t sound like your group were her typical clientele.
20

May 17, 2007
Starving Artist

I try and keep track of exactly how much money I’m losing in a given day…
No, but this is true. I get bonuses occasionally, and they really screw up my spending habits. I’ll let myself spend a few hundred extra a month, and get used to that, and then when the bonus runs out, or I’ve locked it away, my spending habits are out of control.
21

May 18, 2007
nubbin

I agree with post #15.

Recurring clients are the key. She’s not so bad that she loses every client after meeting with them once.

IOW cost of sales does not get incurred afresh for every deal.

If she’s good she’ll keep giving perks from time to time to reward her best clients, but the cost of perks averaged over service deliveries will go down initially and then gradually creep up for the best clients.

It’s a truism for most services, repeat business is where the money is.
22

May 18, 2007
unexpected

Ramit, was this with Ameriprise Financial?

We’ve done this lunch thing twice, and the Financial Planner doesn’t actually pay for the lunch himself.

Ameriprise (or whatever company they’re affiliated with) will pay for the lunch themselves.

Also, if they’re independent, they can take a deduction on it.

The financial planners here charge $300 per session.

If lunch for 10 people is $15 a person, you can take 20 people out to lunch, sign only 1 up, take the deduction, and still have profit.
23

May 18, 2007
true

I also went to one of these lunches (twice actually) and they are paid for by the company. It’s usually the newbies that do this as they begin to work on their spiel and as they build up a customer base that keeps them as their financial advisor for a yearly fee.

These people are making a lot by doing this, otherwise they would have stopped long ago. So shelling out $1000 total for say 3 different dinners totaling 21 people, will typically reap 4-5 leads where 2 will do a one time thing at $300-500 for advice, and the other 2 or 3 will keep you on as their financial advisor … paying you $500 a year …
24

May 21, 2007
I Will Teach You To Be Rich » My analysis was incomplete (but it was there)

[...] week I posted about the financial planner who I thought had a horrible marketing strategy. I made the assumptions and asked people what they thought, and the comments pointed out a bunch of [...]
25

May 23, 2007
Enrique

ramit:
Half analysis is okay but not good enough from a graduated from Stanford.
If she is good, and she makes money for her clients, she will be recomended to other associates.
Didn’t Warren Buffet started his company than way?
26

June 5, 2007
Sofia

The focus of your discussion in centered on the advisor when we should be analyzing the public. Who is so hard-up for a free lunch and willing to listen to a sales pitch (educational or not) that they are willing to put themselves through the difficult and uncomfortable task of disappointing (and in fact playing with) the lunch giver?
These kinds of prospects I would not want in my practice.