January 22, 2013
Olen Explains ‘Pound Foolish’
New York journalist Helaine Olen lit up Twitter last week with her new book, “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.” She has attracted high praise – from The Economist, The New York Times, and others – and a few critics, in the online community and at Business Week: “Financial professionals,” Business Week wrote, “are not responsible for knitting the safety net, though Olen makes it sound as though they are.”
Squared Away asked Olen to explain her thinking behind the book.
Squared Away: Let’s get this out of the way. What do you have against financial planners?
Olen: I don’t have anything against all financial advisers, but a lot of people are selling themselves as experts in things they are not expert in. I believe that their commissions are almost inherently conflicted. I also believe that the minute you start selling things as, “I can protect you. I can do better than…,” you’re getting into dangerous territory, because it’s simply not true.”
Are there situations in which financial planning services are useful?
I would never want anyone to think I don’t believe a good, non-conflicted financial planner or coach isn’t useful. They are, very much so. I think very few of us actually see ourselves honestly, and we could all use an objective eye looking over things like our money and investing strategies at least occasionally. But consumers need to know how their chosen advisers are compensated and if that method of compensation can influence their recommendations and strategies.
You say, “No amount of savvy or money management can fully protect” people from a punishing economy that pummels wages and erodes high-quality employment. Are average individuals blamed for troubles that are larger than they are?
Olen: I absolutely think this sort of sentiment – the idea that we will all be okay if only we learn proper money management – is an excuse to blame people for their troubles. Since the late 1970s, a massive inequality issue has opened up. We have very little class mobility in our country. We know that our net worth plunged by 40 percent in 2007-2010. To turn around and tell people that their issues are all their fault is naïve at best and it’s an outright lie at worst.
Who’s doing the blaming?
Olen: It’s in our social discourse at this point. It’s definitively the financial industry. “It all starts with financial literacy. If we had done that [education] many years in the past,” said a BofA executive at the University of Delaware in 2009, “we wouldn’t be having many of the problems we have today. People would be paying a little more attention” to those bad loans. Who was selling those loans? Countrywide. Who bought Countrywide? BofA.
We also know most bankruptcies are caused by health care expenses, job loss, fractured families. It’s not just about what people spend, despite what we like to think about buying expensive Bugaboo strollers.
So the promise that salvation comes from buying fewer cups of Starbucks is over-sold?
Olen: Yes. Our problem isn’t the five dollars we’re wasting on the latté. Our problem is that our health care costs have gone up exceeding inflation. Under-employment is a massive problem. These are the things that matter.
The Economist said your book demonstrates that “advice given by moneymaking gurus is … based on ridiculously optimistic assumptions about future investment returns.” Are we being sold a myth?
Olen: It’s a total myth. It’s been sold to us for years and years. It’s what the brokerage industry does. We’ve been told they’ve got the secret. The survey data show that 1 percent of us, year after year after year, will beat the market. But people are being told they can do it, because the financial industry makes a lot more money by selling people on the idea – everything from stock brokers to trading mutual funds. There’s a certain amount of common sense that needs to kick in.
If, say, an adviser puts a client’s money into an annuity sold by the adviser’s employer, why would the client think she is getting “free” advice?
Olen: The whole system is really set up to obscure the fact that you’re paying for them. They don’t necessarily need to tell you upfront what this is going to cost. It’s common that people often are not aware, when they go to a brokerage, that they’re paying a commission for what they invest in. More to the point, they don’t realize that their “adviser” – broker is really the better word – is getting more money for pushing certain products over others. There’s no regulatory requirement to tell them. We need regulatory reform. Obviously, there are some good financial planners out there, but most people think they have one of the good ones and it’s not necessarily the truth.
What do you hope your critique will accomplish?
What I was hoping to do was to get us talking about this, because we have a huge issue on our hands with retirement. I came to the conclusion that one thing that the self-help business gets right is that you do need to talk about what’s going on. We haven’t acknowledged it yet, not that much at any rate.
When we do acknowledge it, we’re blaming people. I want to get people to open up and say, “I’m not alone here. I’m not the only one with only $25,000 or $75,000 in my 401k.”
Squared Away will continue to explore this issue in future blog posts.