Pound Foolish: Exposing the Dark Side of the Personal Finance Industry
Author: Helaine Olen (Portfolio/Penguin Group, 2012)
Reviewed by Theresa Forsman
In the late 1940s, the first years of the Baby Boom, the number of workers covered by a traditional, employer-managed pension was on the rise, reaching two-thirds of all employees by the mid-1980s. Today, as the first Baby Boomers have started to retire, fewer than 20 percent of workers are covered by a company-sponsored pension. When these Boomers were young men and women, back in 1973, the average family spent 50 percent of its after-tax income on housing, health care and education. Today, those three essentials account for 75 percent of the typical family’s after-tax spending. At mid-century, there were no Visas and Mastercards. Today, America has more credit cards than citizens.
The same era that brought us do-it-yourself retirements, shocking price inflation, and instant credit with double-digit interest rates also gave birth to the mutual fund industry, day trading and variable annuities. The personal finance industry, like our personal finances, has undergone a transformation—from the equivalent of a soft-spoken guy in wingtips and a bow tie to a flamboyant blonde with a deep tan and a big voice. E.F. Hutton, meet Suze Orman.
Orman gets her own chapter in Pound Foolish, the new book by freelance journalist Helaine Olen, who for many years researched personal finance while writing the Money Makeover column in the Los Angeles Times. As you could guess from the book’s subtitle—Exposing the Dark Side of the Personal Finance Industry—what Olen has to say about Orman, who just last month was ranked Number 9 on the Forbes list of Most Influential Celebrities for 2013, is not flattering. Olen demonstrates that the influential celebrity’s advice can be bizarre, contradictory, and just plain wrong, which has not stopped Orman from amassing an estimated $35 million net worth from the sales of her books and products, including do-it-yourself will kits and credit-repair kits sold on the shopping channel QVC.
Olen shines her spotlight on other personal finance superstars, including Dave Ramsey, Jim Cramer, David Bach and Robert Kiyosaki, and on other aspects of the industry, including financial media, investment and credit products, financial education and financial therapy, revealing faulty math, big myths, exorbitant hidden fees, poor track records and conflicts of interest.
One of the biggest myths she discusses was created by David Bach, a former Morgan Stanley money manager: the latté factor. Bach, whose latté obsession has since spread to many other advisers, rose to fame 15 years ago when he said you could become a millionaire by skipping the daily cup of fancy coffee. In his first book, “Smart Women Finish Rich,” in 1999, he advised readers not to drop $5 a day at Starbucks. Instead, they should invest that $150 a month in the stock market and watch it grow into $2 million by the time they reached 65. As Olen points out:
“There was only one thing wrong with the latté factor. It wasn’t true. It didn’t work mathematically. It didn’t work in terms of what we were actually spending our money on. …Bach, whether by design or true belief, had concocted a catchy slogan that appealed to our desire for a quick and easy fix, but one that bore little relation to economic reality.”
Ah, economic reality. Now we’re getting to the crux of the problem. No number of skipped lattés, no stock tip, and no amount of financial literacy courses can save you from the bigger forces at work on your bank account, the author says. Those bigger forces—political and economic—are why the median income for families in the 35 to 44 age bracket fell by 14 percent in the first decade of this century, from $63,000 to $53,900; why the income gap in America has widened alarmingly in the last 30 years; why banks and other financial institutions were allowed to trigger the Great Recession.
“It wasn’t until the fall of 2008, when the ongoing recession and housing market collapse combined with the seemingly sudden failure of Lehman Brothers to set off a stock and credit market rout, that many Americans suddenly realized our personal finances were not fully ours to seize. We lost jobs at inopportune times, made ill-advised investments, or suffered health crises that no amount of planning could predict. …No amount of personal initiative and savvy could guarantee anyone an exemption from broader negative economic and social trends.”
Through it all, Olen shows, the personal finance industry rocks on—in the form of brand-name gurus, television and radio shows, magazines, blogs, trade shows, workshops, free dinners for the AARP set—providing advice and products that are often useless and sometimes dangerous. The truth is that most money managers and most stock pickers do not beat a passively managed index fund, she points out, and generally the people on CNBC and Bloomberg and Wall Street Week don’t know any more than you do. That goes for Forbes and Fortune, too, she says, noting that AIG was the first pick in a Fortune magazine 2007 Investor’s Guide article, “10 Stocks to Buy Now.” What these outlets mainly provide is not wisdom, but “noise.”
Olen is all for good financial habits—spend within your means, save plenty, get a good basic education on financial terms and instruments from, say, Personal Finance for Dummies. She has high praise for some advisors, among them Vanguard founder John Bogle, financial author Jane Bryant Quinn and Harvard professor and U.S. Senator Elizabeth Warren.
Amid the noise and confusion, the guilt and fear connected to money management and advice for so many of us, Pound Foolish is a straightforward assessment of the personal finance emperor’s sartorial condition. It is also a grim confirmation that careful budgeting and prudent investing are no match for the broader political and economic forces—from Wall Street to K Street and beyond—weighing on our wallets.
Theresa Forsman is a longtime member of the Ethical Culture Society of Bergen County.