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

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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.]

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26 Comments

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  1. Was this financial planner from Ameriprise?

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

  7. 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. 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. 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. 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.

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