Before continuing with Helaine Olen’s critique of the personal finance industry, I’d like to frame the issue a little differently, using the idea of empowerment. I want to credit Knight Kiplinger, Editor in Chief of Kiplinger’s Personal Finance, for getting me thinking along these lines. In a recent editorial, he takes Olen to task for portraying Americans as “powerless victims,” for whom individual initiative and personal financial advice cannot provide financial security:
For more than 65 years, this magazine has tried to educate the American people about how to manage their money wisely to achieve basic financial security in good times and bad.
Judging from the testimonials we get from our readers, we’ve done a pretty good job of it by focusing on the basics: living simply, deferring gratification, putting saving on autopilot, reducing risk with insurance and diversified assets, and avoiding investment fads. Despite the financial challenges of the past dozen years, I fervently believe that financial security is still achievable by every productive American.
I was struck by how easily Kiplinger slides from talking about his own readers to generalizing about “every productive American.” The typical subscriber to Kiplinger’s–and I am one–probably does have a reasonable amount of power: an above-average income and a high level of financial literacy. Such people are not so likely to be financially victimized. And yet even my well-educated, economically successful clients have often come to me with portfolios weighted down by high-fee, low-performing investments they got from a “financial advisor” whose main job was selling. Power is a relative thing, even at the higher end of the scale.
Below that higher end, millions of other productive Americans are much less empowered, and the recent flow of income gains to the wealthy, along with the reduced chances of upward mobility–both well documented–are helping to keep them that way. But the heart of the personal finance ideology described by Olen is the message that you have the power to be successful, along with its corollary that if you don’t achieve success, it’s entirely your fault. Isn’t this just the old individualistic work ethic being used to justify an increasingly unequal society, just as it did in the Gilded Age? Kiplinger cites the historic progress of women, racial minorities and immigrants as evidence that individual initiative works and more “government help and regulation” are unnecessary. And yet none of those groups got ahead without a series of public policy changes, from collective bargaining rights to anti-discrimination legislation. Yes, we’ve had social progress, but is American society in such great shape and our citizens so empowered that no further social changes are called for?
For Americans who are struggling to find decent jobs, or pay for health care without insurance, or afford a home in a safe neighborhood with good schools, or send a child to college, the “you have the power” message rings a little hollow. And it becomes downright dangerous when it becomes a marketing tool to sell financial products that benefit the seller more than the buyer.
The chapter in Pound Foolish that I found the saddest was Ch. 8, “Who Wants to Be a Real Estate Millionaire?” Olen briefly reviews the history of home ownership, beginning with a time when most Americans were renters, and home mortgages were only for those who could pay them off quickly, usually within three to five years. Home ownership got a big boost from the 30-year mortages promoted by the New Deal administration of Franklin Roosevelt, as well as by the mortgage subsidies included in the G.I. Bill. For a long time, banks were careful to lend only to borrowers whose incomes could support the fixed payments. But that changed in the 1980s and 90s:
Looser bank regulations combined with advances in computer and securitization technologies and changes in government regulations begat a new wave of mortgage innovation. Now there were mortgages offered to buyers with no money down, variable interest rates, interest-only payments that would balloon with time, and so-called “no doc” loans which allowed buyers to state their income while offering little or no proof of it.
One can fault the borrowers for getting in over their heads, but they got a lot of help from the financial services industry in general, and from the purveyors of personal finance ideology in particular. David Bach, who had first achieved celebrity by telling readers that they could become millionaires by giving up little luxuries like lattes, now wrote The Automatic Millionaire Homeowner, saying that “It’s never too late to catch the real estate wave” (great advice, if you live on a planet where bubbles never burst). Bach and the many other writers of his kind kept promoting the American Dream of building wealth, at a time when the normal means of doing so–improvement in real wages–was available to fewer workers than it had been during the postwar economic boom. This time, the increase in homeownership was based more on excessive debt.
Then the promoters of do-it-yourself enrichment went even further, touting an even faster way of becoming a millionaire: flipping houses for profit. Here the leading voice was Guy Kiyosaki, whose Rich Dad, Poor Dad belittled the traditional way of getting ahead, through education and employment. Unlike the “losers” who tried to do it the old-fashioned way, Kiyosaki claimed to have made his fortune in real estate, a fortune, according to Olen, “that no one has ever been able to prove existed before his bestselling book turned him into a multimillionaire.” He steered his readers toward wealth seminars offered by organizations with which he partnered, one of which Olen attended.
The majority of the time in these seminars is not devoted to the secrets of real estate investing, but instead, selling attendees on even more “advanced” courses costing anywhere between $ 12,000 and $ 45,000. “About 70 percent of the time has been spent on the sales pitch and building up the belief in peoples minds that without them they won’t succeed in this business,” wrote one attendee….
The advice in such courses emphasizes the potential gains but not the risks, to put it mildly. People of limited means are even encouraged to get started by charging to their credit card the down payment on their first property. Then they are to flip it for a quick profit and be on their way to prosperity.
Certainly many, if not most of those who got caught up in such schemes were not so much empowered as victimized. They were victimized first by our winner-take-all economy, where the traditional routes to success didn’t work as well as they used to. They were victimized by hucksters who sold them little besides empty promises. Finally, they were victimized by the crash in housing prices, “a huge contributor to the almost 40 percent fall in the median net worth of American households between 2007 and 2010.