Pound Foolish: Exposing the Dark Side of the Personal Finance Industry
- Helaine Olen
- Portfolio Hardcover
- 304 pp.
- Reviewed by Randy Cepuch
- January 29, 2013
A critical and condemning look at the tricks and traps of the personal finance industry.
Reviewed by Randy Cepuch
More than 70 years ago, Fred Schwed’s Where Are the Customers’ Yachts? asked (and answered) a question every investor should strongly consider when working with a broker or financial advisor. Schwed’s amusing classic remains in print today and is well worth seeking out.
Helaine Olen’s Pound Foolish is just as wonderfully skeptical and snarky, while providing a modern-day look at how and why today’s personal finance charlatans … er, “experts” … are still much more likely to get rich than their followers. Olen pulls no punches as she takes on Suze Orman, Dave Ramsey, Jim Cramer, David Bach and the Rich Dad Poor Dad phenomenon, among others.
For decades, we’ve been told that with a good IRA and six months’ savings for emergencies, we’ll be just fine — but these days, it ain’t necessarily so. Personal finance isn’t anywhere near as simple as it used to be. Americans nearing retirement age grew up in a world without debit cards, ARMs, discount brokerages, online trading, money market funds, IRAs or 401(k) accounts. For most, it was also a world where you were able to live out your retirement years in relative comfort, thanks to Social Security, regular pension checks from the company where you’d worked for 40 or 50 years and a considerably shorter life expectancy.
The biggest changes began back in the early 1980s, with tax law adjustments opening IRAs and 401(k) plans to almost everyone — a development enabling employers to transfer the burden of retirement security to employees themselves. That, in turn, created a golden opportunity for investment marketers and a huge demand for personal finance advice. Not surprisingly, a lot of the advice consisted — and continues to consist — of “Buy what I’m selling.” (As Warren Buffett likes to say, “Never ask the barber if you need a haircut.”)
Fired up by magazine articles touting “10 Hot Stocks” and similar examples of what financial columnist Jane Bryant Quinn notably described as “financial pornography,” Americans with no previous investment experience quickly developed unreasonable expectations. They were sitting ducks for personal finance practitioners who said they could become millionaires if only they would buy stocks chosen by consulting a crystal shard (Orman), pay off their smallest bills first and not worry about the interest charges on the larger ones (Ramsey), buy, buy, buy or sell, sell, sell! (Cramer), avoid treating themselves to lattes but feel free to pay expensive sales charges for mutual funds (David Bach), or keep signing up for more expensive classes (Rich Dad Poor Dad). Of course, another way to get rich is to sell things to people who think you will help them get rich, and Olen suggests that the wealth of several household-name experts had little or nothing to do with investment acumen.
As the author pointedly observes, these experts were and are “oblivious to the messiness of the human condition.” They tend to portray bankruptcy as the result of irresponsible spending, for example, when medical bills are the cause nearly two-thirds of the time. They also cherry-pick past investment results and don’t take into account that some people will retire just before a prolonged market decline and end up drinking from a leaky bucket.
Sadly, investors are often poorly equipped to know when or how they’re being swindled. Free lunches or dinners are time-honored marketing tools, effective because humans feel obliged to reciprocate when treated to a meal. But, as Olen points out, the people who have time for (and interest in) such things tend to be older — often well past the age of 53, when financial smarts peak, according to a 2009 Brookings Institution study cited in the Wall Street Journal. It’s easy to forget that wherever there’s a free lunch, there’s a catch.
Olen notes that three in four investors believe — incorrectly— that brokers have a fiduciary duty to their clients. Currently, brokers need only recommend “suitable” investments, not necessarily those in a client’s best interests — which explains how brokers can get away with selling, to people who have already exceeded their life expectancies, variable annuities (insurance/investment hybrid products) with substantial penalties for withdrawals during the first few years. Investors in target-date funds — mutual funds managed with specific retirement dates in mind — tend to believe, Olen says, that the automatic rebalancing of the portfolios each year (to move toward more conservative holdings as the target date nears) means there are automatic gains.
Unfortunately, disclosure requirements can be laughable: until summer 2012, managers of 401(k) plans didn’t need to provide cost information to participants. Despite efforts by the SEC and other organizations to encourage “plain English” disclosure, investors are still confronted with a great deal of fine print — often to describe products that are themselves incomprehensible. Of course, the stuff that’s confusing is the stuff that tends to be toxic and is best avoided anyway.
These circumstances combine to make many investors feel they need help — an outcome the personal finance industry is delighted to encourage. Olen is especially cynical about the explosion of “financial literacy” programs touted by banks, mutual funds and personal finance experts. She feels that they can do more harm than good by giving people just enough information to feel cocky and take more risks, and that they tend to provide cover for overly complicated documents and products.
Even a financial literacy project put together by the Sesame Street gang comes under Olen’s scrutiny because it emphasizes the importance of living within one’s means but is sponsored by PNC Bank, which pays its CEO more than $16 million a year. Olen also observes that the program plants company names in the brains of preschoolers in hopes of creating clients for life (because, she says, studies show people remain most comfortable with companies they remember from childhood).
“How did we arrive,” Olen asks, “at the point where we think it’s OK for the companies who profit by our ignorance to teach us how to manage money?” And where are those customers’ yachts, anyway?
Randy Cepuch has been a financial writer for more than 25 years and is the author of A Weekend with Warren Buffett and Other Shareholder Meeting Adventures (Basic Books, 2007).