Helaine Olen. Pound Foolish: Exposing the Dark Side of the Personal Finance Industry. New York: Penguin Press, 2012.
As someone who has worked as a personal financial planner myself, maybe I should be upset by Helaine Olen’s scathing critique of the industry. Fortunately, I never went over to the “dark side,” as far as I know! I tried to give my clients insight into their financial situation, along with a dose of what Olen calls “basic, commonsense advice.” Live within your means. Get the power of compound interest working for you (by saving) instead of against you (by borrowing). Distinguish between reasonable risks, like putting a portion of your savings in stock for a long-run return, and unreasonable risks, like betting too much on any one investment. Diversify within asset classes, such as by owning many different stocks and bonds, and allocate sensibly among asset classes. Avoid unnecessary fees and expenses. Look for buying opportunities when an asset class is cheap, but don’t chase performance, buying whatever’s hot and selling whatever’s not. Take advantage of tax-sheltered investing. Plan to make your assets last with prudent withdrawal rates in retirement.
Olen acknowledges that this kind of personal finance “can make a valuable contribution, allowing us to plan, to get out of and stay out of debt, and to hopefully better our position when the time comes for retirement and other long-term goals.”
Olen’s complaint is that “personal finance went from aid to ideology.” It got entangled with a revival of American rugged individualism, the belief that economic progress is a matter of changing individuals one by one, instead of changing any business or government policies. “Seemingly beginning in tandem with the presidency of Ronald Reagan, we began to doubt the collective spirit of Franklin Roosevelt’s New Deal, and once again romanticized the pull-yourself-up-by-your-bootstraps ideology of Horatio Alger.” Social reform was out of fashion, and getting rich on one’s own was in. The story of Olen’s book is “the story of how we were sold on a dream–a dream that personal finance had almost magical abilities, that it could compensate for stagnant salaries, income inequality, and a society that offered a shorter and thinner safety net with each passing year.”
Ironically, the dream of getting ahead through saving and investing became more popular just at a time when real prospects for upward mobility were declining. “About 60 percent of the gains in income between 1979 and the 2000s went to the top 1 percent of earners.” Not only were wages stagnating for many workers, but the percentage of workers covered by traditional pension plans was declining steadily, from 62% in the early 1980s to half of that recently. Defined contribution plans, in which the individual worker assumes the risk of investment failure, replaced defined benefit plans, in which the employer was responsible to pay what was promised. Olen cites research showing that pension funds “offered their enrollees greater returns for lower cost, thanks to their stable, long-term professional management and lower expenses.” Although the richest 10% of households own over 80% of the stock, the requirement that workers save for their own retirement brought millions of small investors into the market.
The boom in individual investing was a bonanza for financial professionals, who could sell their services both to employers with 401(k) plans to manage and individuals who were buying their own securities, either in IRAs or taxable portfolios. Before 2012, managers of 401(k)s had no legal obligation to disclose to contributors the fees they charged to manage their contributions. Fees are crucial, because even small differences in fees can compound into big differences in asset balances by retirement.
The media also played a large role in promoting the ideology of personal wealth creation. They found it more profitable to celebrate the investment boom and the growing financial services industry than to scrutinize them from a consumerist standpoint. Their financial advertisers loved it, since the mere mention of a mutual fund in a financial magazine would draw money to that fund.
Markets work most fairly when buyers and sellers can transact from a position of mutual knowledge and strength. But most Americans were at a significant disadvantage in dealing with the “personal finance industrial complex.” They were faced with the responsibility to save and invest more to pay for retirement, as well as to finance increasingly expensive health care and children’s educations. But they were both financially insecure and poorly informed about financial matters, which made them easy targets for aggressive marketers. Olen describes a number of ways that purveyors of financial advice have enriched themselves while poorly serving those they purported to help:
- Media celebrities like Suze Orman and Dave Ramsey have made a fortune preaching a pseudo-religious gospel of personal financial salvation. The key to economic success is to transform oneself from financial sinner to financial saint. Ramsey, a self-confessed deadbeat who declared bankruptcy in 1990, got religion when he read Proverbs 22:7: “The borrower is the slave of the lender.” He then made his money preaching against debt in print, on the radio, and in public appearances, as well as by charging fees to financial professionals who wanted customer leads from among his followers. These celebrities do not usually make their money through their own investing skills, but from successfully marketing their ideas and products to others.
- Many stockbrokers, financial writers and media personalities promote individual stock picking as the key to success. Olen calls individual stock trading a “loser’s game,” although she doesn’t clearly explain why. (Essentially, it’s because individual investors have trouble knowing anything about a company that many others don’t also know. You may be able to see that a company is doing well, but if lots of other people know it too, then the stock may be priced too high to be a superior investment. What moves the price will be new information, but new information is hard for you to get first, unless you engage in illegal insider trading!) The illusion that any smart investor can beat the market leads people to pay brokers too much for frequent trading, or pay mutual fund managers too much for funds that usually don’t beat the market anyway. Stock pickers like CNBC’s Jim Cramer, whose own picks tend to spike briefly and then dive, do a great disservice by promoting this game instead of more prudent investment practices. Many studies have concluded that a portfolio consisting mainly of low-fee, no commission index funds works out better for most small investors.
- Most Americans of modest means cannot afford to pay hourly fees or an annual percentage of their assets to get professional advice. They have to rely on “free” advice from brokers or insurance agents. Those who offer that advice are usually sales agents whose recommendations are biased toward the products from which they earn the largest commissions. When brokers were presented with sample portfolios by actor posing as investors, the brokers “did almost everything wrong, from refusing to correct client investment biases to pushing high-cost active management over lower-cost and more efficient index funds, likely out of a desire to increase their own bottom line. Moreover, they almost always recommended massive portfolio changes, even if none was called for.” Insurance companies are notorious for offering customers products so complicated and weighed down by hidden fees that even professional planners can have trouble evaluating them. (I know, because my clients have often brought them to me.) They are also especially resistant to the idea of being bound by a “fiduciary” standard, requiring them to recommend only products that are in the best interest of their clients.
Olen is a financial journalist, not a Certified Financial Planner or other financial professional. She doesn’t analyze financial products in any depth, such as explaining the differences among different kinds of annuities. (For most people, an immediate annuity with a fixed payment is a much simpler and useful investment than, say, an equity indexed variable annuity.) By relying on relevant examples and the research of others though, she makes her case that in the present economic environment, personal finance does indeed have a dark side.
Like so many other things in life today, employees are expected to assume the burden and risk of planning an investment strategy for their retirement savings. Let’s hope that George W’s dream of self-managed social security accounts never become a reality.