The dark side of personal finance

Olen’s criticisms of the personal finance industry pretty much apply worldwide and certainly in Canada.

12

by Jonathan Chevreau
January 23rd, 2013

Online only.

12

(Photo: CJ Burton/Corbis)
In some two decades of writing about personal finance and reviewing hundreds of books about money, I’ve never seen the kind of publicity being generated by Pound Foolish, an exposé written by veteran freelance Personal Finance writer Helaine Olen.

I’ve now read the book cover to cover and can add to the praise being heaped on it. While the focus is on the U.S. personal finance industry—Olen is based in New York City—the criticisms pretty much apply worldwide and certainly in Canada. Virtually all the major personal finance “gurus” come under fire, including Suze Orman, Jim Cramer and David Bach, to pick the three who are singled out in the front flap.

A who’s who of financial pundits

Plenty more are mentioned, some positively, some not: Robert Kiyosaki of Rich Dad, Poor Dad fame, newsletter ranker Mark Hulbert, the Wall Street Journal’s always excellent Jason Zweig, authors Jean Chatzky and Jane Bryant Quinn, financial writer Chuck Jaffe, commentator Larry Kudlow and many more. There’s even an opening chapter on the woman who arguably created the whole personal finance journalistic sub-genre: Sylvia Porter, who gradually became so wealthy from her punditry that she could no longer relate to the great unwashed (speaking financially.)

Maybe the 99% aren’t to blame for their financial woes

Other reviews have already picked up on Olen’s criticism of the notion—propounded by Bach and  others—that giving up everyday treats like a Starbucks latte can ever lead to financial salvation. Olen sympathizes with the Occupy Wall Street movement, suggesting the real problem with most people’s fragile finances is income inequality. “If so many people were in their situation, maybe the fault was not theirs alone,” she writes. Personal finance tends to be an offshoot of the self-help industry but Olen suggests that by focusing on society rather than individuals, financial problems are politicized: “When we used our voice and spoke up publicly, it became clear that our personal financial woes were, in reality, our collective financial woes.”

Unfortunately, too many personal finance gurus have promulgated the notion that merely by adopting their own good financial habits and balanced investment portfolios, the less financially fortunate could “compensate for stagnant and falling salaries.” Olen suggests this notion may amount to “at worst … a lie.”

Foxes guarding chicken coops

She comes down hard on the financial literacy movement, pointing out the “fox guarding the chicken coop” aspect of attempts by the financial industry to raise financial literacy when so much of the industry actually profits from ignorance. I’ve made similar points myself about Canada’s industry: can the mutual fund industry (which charges fees considerably higher than America’s) really be motivated to tell young investors about the existence of lower cost and more tax-efficient ETFs? Do credit card companies sincerely want young people to understand the power of compound interest working in reverse? As the book notes, the entire financial literacy movement is “largely funded and promoted by the financial services sector.” And, Olen further points out, “an educated consumer is, for many firms, their worst customer. Seventy percent of profits in the credit card industry come from people who do not pay off their bills in full every month.”

Little wonder that many critics are questioning whether financial literacy has lived up to its hype. In my own experience, there’s a large element of “preaching to the converted” and I wonder whether the message is filtering down to those who really need to hear it.

The mirage of retirement

Clearly, the endgame of all personal finance coverage is retirement. Olen devotes chapter four to this under the title Slip Slidin’ Away: The Coming Retirement Train Wreck. The chapter begins with the story of a 62-year-old American woman who for decades did all the “right” things advocated by the personal finance gurus: she stayed in a corporate job for 17 years, put 10% of her salary into her 401(k) pension, saved another 10% beyond that, avoided all credit-card debt and even “eschewed lattes… She did everything right. She was good.”

Then she lost her job around 2008, ran out of unemployment benefits and is considering drawing Social Security benefits much earlier than she had once planned. And she was among the minority that did all the “right” things. By contrast, only one in five American workers over the age of 55 have saved $250,000 or more for retirement. The average account balance of 401(k)s is a mere $75,000, nowhere near the $1 million net worth most of the experts cited by Olen believe is necessary to retire on.

The retirement industry has become a “multi-billion-dollar annual business” that encompasses the mutual fund giants, banks, insurance companies, independent financial advisers, brokers, market researchers, academics and yes, the media, including magazines. The combined entity almost rivals the military-industrial complex: call it perhaps the “retirement-media complex.”

Whatever the term, Olen’s deep research and accessible writing style puts a whole new spin on this mega-industry. It’s well worth reading and heeding.

12 comments on “The dark side of personal finance

  1. Absolutely one can understand why people like her view the "financial literacy movement" as a little like the "fox guarding the chicken coop" but similarly the media profits from appealing to the broadest audience so of course they're going to pander to the 99% (of which I am solidly in the middle of by the way) by telling them that it's the 1%'s fault for all that's wrong in their life?

    I've been in the financial planning industry in Alberta for 3 years. Do you know how many mid to late 20s I've met with that barely made it out of high school are pulling in 6 figure incomes but don't want to save a dime and/or look into disability insurance? But no, according to Chevreau and his ilk, I'm the "evil financial guy" for explaining to them why he might want to open an RRSP or TFSA instead of buying a new quad.

    Reply

  2. During my 32 years in the Canadian financial industry (former banker and senior manager in mortgage lending) Reas many of the books by the authors mentioned in this book. Have always been of the opinion that Canadians need to know difference between biased and unbiased financial advise. Based on this great review I have a new book to add to my reading list.

    Reply

  3. So, the book's message is what? "You can't get ahead, don't bother to listen to anybody, don't bother to cut back expenses, your employer doesn't pay enough, the whole system is broken, and none of it is your fault?"

    I'll remember that next time I see somebody doing a job search or applying for social benefits on their $700 iPhone. Thanks for the advice, Helaine!

    Reply

  4. Scott, from Alberta. Why would you belittle someone with a grade 12 education? Sounds like you're upset because you're not making the same amount.

    You're environment in Alberta is extremely unique to the rest of the world – I also know for a fact that Alberta's Financial Professsionals were the most abusive of unsuitable Investment Leverage – and whether or not you're part of that group, your attitude to these young people and their personal choices may have more to do with why they fail to follow your recommendations. BTW – I've only got a grade 12 education.

    Reply

  5. No, Will, Scott's point is that these people are in fact earning sufficient income to provide properly for their futures, but they choose not to do so, despite his urging to the contrary. They are not victims of the 1% or of the investment-advice machine, but victims of their own wilfull blindness, and they need to take responsibility. For that matter, so do the boomers, many of whom made pretty good money for quite a while, but dribbled it away on granite counter tops, trips to Mexico, fifth wheels, entertainment centres, and SUVs.

    Reply

  6. Guys – have you read the book yet. Olen isn't blaming the 1%. That isn't what her book is about. It is about the financial writers themselves – and questioning the advice they give and how they give it. She isn't telling anyone to give up on savings or investing. She is telling a very compelling story about individuals who people turn to for help – who really aren't helping. I agree with Scott about the wealth in Alberta and that there are a lot of Albertan's blowing an incredible opportunity to save while the going is good – but what does that have to do with this book?

    Reply

  7. Thanks for your review, Jonathan. You prompted me to read the book. I just finished and recommend it too. Pound Foolish raises many tough but important questions that linger.

    Reply

  8. Wow, I know and follow many of the names mentioned in this piece. I'll need to check out her book, especially to see which pundits she actually recommends.

    Reply

  9. I'll remember that next time I see somebody doing a job search or applying for social benefits on their $700 iPhone. Thanks for the advice

    Reply

  10. The book seems to be good in every level. I have recommended it to two of my friends who are into finance and they're interested as well.

    Reply

Leave a comment

Your email address will not be published. Required fields are marked *