Earlier this year, former LA Times journalist Helaine Olen - who was responsible for their popular Money Makeover series for many years - published a controversial new book entitled "Pound Foolish: Exposing The Dark Side Of The Personal Finance Industry." In the book, Olen tears apart most of the personal finance industry - tracing it from the roots of Sylvia Porter to Jane Bryant Quinn to today's world from Suze Orman and David Bach to Jim Cramer, the MoneyShow, and Robert Kiyosaki's "Rich Dad" series, and showing along the way how the conflicts of interest rife in the industry serve to undermine much of the value personal finance is purported to give.
Although Olen also shines a harsh light on many segments of the financial advisor space as well, the most notable part of the book is not merely that so much of the financial services world is conflicted and acts in its own interests at the expense of consumers, but that the underlying implication that the problems of most Americans are a result of their poor spending habits and failure to get financially educated may be placing too much blame on consumers and too much of an expectation on even the best that personal finance has to offer. Instead, Olen suggests that many of these issues must be viewed in a broader social light, where the struggle of bringing financial planning to the masses may be less about the problems of our industry business models and more about the fact that what financial planning has to offer simply isn't enough to rectify the real world challenges the average American faces.
The kinds of government safety net and paternalistic solutions implied by such concerns are likely unappealing to many planners, but Olen's book is nonetheless a worthwhile read for some fresh perspective on the intersection between what personal finance and financial planning have to offer, and the limits on what they can achieve without perhaps some social and economic reform and government oversight and assistance.
Helaine Olen - Attacking The "Personal Finance Gurus"
One of the themes that quickly emerges from Pound Foolish are the inherent conflicts of interest that are evident in the work of most "personal finance gurus" who provide advice to the masses. For instance, Suze Orman doesn't just provide financial advice and sell books; she also offers the Approved Card (a prepaid debit card that was lambasted by Chuck Jaffe as a "Stupid Investment of the Week" for its costs and overpromising its potential to help people with their credit scores), an Identity Protector kit, a series of "Must Have" estate planning documents, and the Money Navigator newsletter. While some of these are arguably quite useful and valuable to Orman's audience (for instance, most really do need to get their estate plans in place), it's often unclear where the in-the-interests-of-the-audience part ends and the self-interest begins; for instance, the Money Navigator offering, to which Orman's financial connection was "unclear", was found to include newsletter editor Mark Grimaldi's own 1.65% expense ratio Sector Rotation fund embedded in the recommendations, which in turn was found by Felix Salmon of Reuters to have many questionable short-term investments, and reported performance numbers were later shown to be exaggerations or outright false by Jason Zweig of the Wall Street Journal.
Similarly, Olen finds concerning conflicts amongst the products and services recommended by most personal finance gurus, from David Bach's Van-Kampen-Investments sponsored speaking tour (where attendees faced a potential pitch for A-share Van Kampen funds with a 5.75% upfront load at the end of the presentation) to a quasi-multi-level-marketing scheme to "help" people learn to work from home, to Jean Chatzky's eponymously named product line with Franklin Covey, to the Lampo Group (Dave Ramsey's privately-owned empire) which is estimated to do $20 to $25 million or more of revenue earned on everything from advertisers like "Zander Insurance Group" and "Gold Stash" on Ramsey's radio show to the revenue earned by advisors who pay to be listed as a Ramsey "Endorsed Local Provider (ELP)" even though the advisors under the program are apparently not vetted much at all for the apparent implied "endorsement" they receive.
Not surprisingly, the broad community of financial advisors get a tough look as well, as Olen digs into the "culture of commissions" in the financial services world. She relates both her own personal experiences after being solicited for questionable products at a dinner seminar from a local broker, and also her experiences in working with several people for whom she did Money Makeovers for her newspaper column. Olen does recognize that many of these problems are driven by commission-incentivized brokers in particular, and notes investor confusion about the lack of fiduciary duty that applies to such "advisors." Nonetheless, while it is obliquely acknowledged that there may be some "good" advisors out there, the focus of Olen's discussion is on how bad many (most?) are, as she highlights the inner workings of RME (the direct-marketing firm that dominates advisor seminar marketing while providing tips on how to turn seminar prospects into product sales), the way many commissioned marketing strategies use behavioral psychology techniques to help persuade people to buy, and how even many academics who appear to publish credible research papers are often backed by insurance or investment companies who clearly have an incentive to see the research results end out a certain way (and who ostensibly would pull the money from the academics and not continue to fund their research if the results published did not come out as expected). Olen notes that even the majority of financial literacy programs end out being sponsored by financial services companies, who are quite willing to support efforts to reach youngsters in schools with messages of financial responsibility in exchange for the opportunity to shower upon them the company's name and brand during their most impressionable early years.
Are Personal Finance Gurus Really All They're Cracked Up To Be?
Underlying Olen's arguably justifiable criticisms of much of the personal finance industry is a far more challenging message, though - that "as a nation, we've allowed ourselves to become convinced that with just the right amount of monetary planning we can protect ourselves from life's vicissitudes" - even though the reality of the broad-based economic data suggests that a few decades of fairly stagnant wages for the majority of Americans might have a not-so-trivial role, too. In other words, Olen suggests that our plunging national savings rate over the past several decades may be more a result of broader economic and societal issues, rather than the implication that it's our own collective faults for being a generation of financially undereducated overspenders.
Accordingly, Olen challenges Suze Orman's "new age self-help" style approach as being too ignorant of the real world challenges that the average American faces. Similarly, Olen questions the David Bach "Latte Factor" - which suggested in his "Smart Women Finish Rich" book that by eschewing the $5/day Starbucks habit could net someone almost $2 million by age 65 - noting that with a more modest growth rate (Bach's original number assumed 11% compounded returns!), accounting for taxes and inflation, and not buying the biscotti with the coffee (necessary to get to Bach's original $5/day number), the total comes out to be something in the $50,000 - $150,000 range instead. That amount is still useful, to be certain, but it's not a path to millions and an easy retirement.
At the same time, though, Olen notes research in the other direction - for instance, that the primary causes of bankruptcy tie to unexpected job losses and high medical expenses, which the daily latte savings isn't likely to fend off. In the meantime, the fixed costs of housing, health care, and education cost the average family 75% of their discretionary income in the 2000s, up from only 50% in 1973, even while median income to families age 35-44 fell by 14% in the last decade (and nearly 10% for those aged 45-54). In fact, Olen also notes a presentation by Walmart CEO Bill Simon in 2008, who observed that customers with food stamps would show up the evening before their cards were due to activate, wait until 12:01am, and then purchase their merchandise; these weren't overspenders, but people who were out in the middle of the night waiting for their food stamps to become usable so they could afford the baby formula they immediately purchased. The fundamental point: our financial woes as a country may be less a function of failing to implement Suze Orman and David Bach's advice, and instead more reflective of the reality painted in Barbara Ehrenreich's "Nickel and Dimed" - where it's difficult to get ahead and you need two jobs to make ends meet and the child care costs more than the part-time income from that second job anyway - may be a better picture of why most Americans can't seem to get ahead.
In fact, one of Olen's most poignant messages comes at the end of her introduction, when she suggests that one of her fundamental reasons for writing the book was simply to help people understand that "just because they're not millionaires [after trying to follow all the personal finance industry's advice], doesn't mean they're failures."
The Intersection Of Financial Planners And Personal Finance
As noted earlier, many real financial planners may be unhappy that Olen's negativity spread across the entire spectrum of the personal finance industry, without carving out any recognition of those few advisors who are genuinely trying to serve their clients well and act in their clients' best interests as fiduciaries. Although Olen does acknowledge the difference between fiduciary and suitability, and explicitly notes from her experience with her Money Makover column that "financial advisers who were paid by a percentage of fees under management or by the hour really did seem to do a better job than those whose compensation depended on convincing their clients to buy or sell financial products" she does not exactly recommend advisors as the solution to the average American's financial woes, either. Late in the book Olen gives perhaps the most positive acknowledgement to advisors in the context of the life planning and financial therapy movements, and their focus on the intersection between our mental behaviors around money and our financial woes. But even in this context, Olen is still critical that the financial therapists and life planners still may not be giving enough acknowledgement to the broader socioeconomic issues at hand.
And I have to admit, Olen does have a point in this regard. There is a tendency in the financial planning world to suggest that any/all financial woes of the average American are in no small part their own fault - a combination of failing to put in the time and effort for financial literacy, to get control of their (over-)spending habits, or to just put in the time to better themselves. Yet as the Urban Ministries of Durham's viral finance game "Spent" illustrates, the barriers to social mobility go far beyond just finding the intrinsic self-motivation to get financially educated and in control of finances, and look more like the world painted by Ehrenreich's "Nickel and Dimed" instead.
So what is the alternative? On the one hand, Olen is very negative on fixing financial advisors by just adding more disclosures (implying in support of the fiduciary movement that advisors should just be required to work in their clients' interests in the first place, not just disclose a battery of conflicts!), but also cites research by Lauren Willis which suggests that despite its noble intentions, financial literacy simply doesn't appear to be delivering any real, measurable results, and that it's either "at best a doomed crusade, and at worst a cynical ploy by financial institutions to head off legislative protections that might actually help consumers." Given this harsh criticism of financial literacy efforts, the implied recommendation is instead more along the lines of Teresa Ghilarducci's proposals for a mandatory, government-run program savings program to supplement Social Security, and perhaps a general increase in our social safety nets to go along with it. For those who manage to accumulate enough wealth to exceed these thresholds, financial planners will remain available to help with that additional, more "discretionary" wealth.
While many (or even most?) financial planners will likely bristle at such government-paternalistic solutions, Olen nonetheless raises the troubling but valid question of whether we financial planners don't quite have as many of the solutions to offer as we'd like to think, and that despite what we imply "good financial habits and a well-balanced investment portfolio [may not] compensate for stagnant and falling salaries." Perhaps our difficulty bringing financial planning to the masses is less about our business model woes and more about the fact that what the average American needs may extend beyond "just" getting better financial advice? That doesn't undermine the entire principle of financial planning and the benefits that it can provide, but it does recognize that perhaps the scope of financial planning is a bit narrower than we make it out to be, and that perhaps there really is a minimum below which financial planning advice isn't relevant.
In the meantime, if you're curious to get some perspective on the points that Olen makes - and a glimpse of how dark many corners of the personal finance industry really are - get a copy of "Pound Foolish" for yourself. And if you want some fresh perspective on why it can be so difficult for even a well-intentioned average American to get ahead, I highly recommend Barbara Ehrenreich's "Nickel and Dimed" as well.
Tom Gartner says
Great article Michael. I too enjoyed the book (audible.com version). It also helped the client who told me about it better understand the nature of our relationship under the RIA structure. I’ve ordered some copies to give out to clients along with “Backstage Wall Street” and “The 401k Conspiracy”.
Dr Mary Gresham says
I read this book with great interest. I think that she has a great point about the over reliance on financial literacy to solve society’s problems, especially the problems of the working poor. She misses an opportunity to advocate for greater transparency and regulation on behalf of the many consumers who still do not understand “fiduciary.”
She misses the point of the value of the “both and” approach. Yes, the US has low levels of financial literacy AND it also has a problem with the increasing disparity of wealth and falling out of the middle class.Both issues need to be addressed. I must say I was a bit offended by her take on financial therapy…..it will not by itself solve poverty but it does make a true difference when applied appropriately.
Leisa Brown Aiken says
Michael, thanks for the great summary of topics in this book and for articulating reaction to it and the thoughts it provoked.
Though I didn’t particularly like her writing style, I felt a mix of frustration and agreement that traditional financial planning techniques and strategies are necessary but often not sufficient for most individuals and families households in the U.S. to have sufficient resources in retirement or to transfer many we bear individually in our economy.
Regarding financial literacy, I’ve seen personally and there is a lot of behavioral finance evidence that knowing is not sufficient for doing. Overcoming the cognitive biases most of us are prone to requires knowledge, persistent effort and time and the consumer finance landscape is fraught with complex products, tax rules, etc.
An important discussion that I wish more planners were courageous enough to engage and grapple with. Our clients are also citizens, and so are we, so this is within all of our scope to contemplate. Thanks for a thorough and thoughtful review. This is still timely, 3 years later.
Michael Kitces says
Thanks for the kind words Kate! 🙂
Indeed this is a bit of a fuzzy line, but one that I think remains important!