Field Work

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.

5 Responses to Olen Explains ‘Pound Foolish’

  1. Chuck Miller says:

    Olen says: I believe that their commissions are almost inherently conflicted.

    That may not be true, however logical it seems.

    J. Michael Collins, Econ Prof and Director of the Center for Financial Security at Univ. of Wisconsin wrote in a 2010 paper:

    Several conclusions about transactional agents can be drawn. First, it is clear that financial planners and advisors are compensated from a variety of sources including fees, commissions, salaries, and retainers. Second, at least in theory, financial advisors who earn commissions appear to have an incentive to sell products that will garner the highest commissions, and their compensation is rarely if ever tied to the long-term success of their advice. Thus, several organizations explicitly advocate fee-based pricing, since this form of pricing appears to best align clients’ interests with agents’ own financial incentives.

    However, little empirical evidence in this area exists, and what evidence does exist suggests that concerns about commission-based pricing may be overstated.

    It may not be HOW advisors are paid, it’s WHO the advisors are and what they believe is in the long-term best interests of clients that matter.

  2. Catherine says:

    I was so excited to see the title, and enjoyed reading the first few paragraphs; but the author’s credibility fell apart as she kept answering questions. Seems she is letting her personal opinions get in the way of an objective study of the industry. Does the industry need to be rationalized? Absolutely. Are people too stupid to save for retirement or know that brokers are getting paid. I don’t think so. As long as consumers demand snake oil, there will be snake oil salesmen. Do your homework!

  3. Michael Waggoner says:

    Ms. Olen has made an excellent critique of the financial services industry. Reform is desperately needed, and the Dodd Frank law may make it happen.

    As a practical matter, however, one must ask what to do in this far-from-perfect world which is unlikely promptly to be significantly improved? The answer, I believe, is to save 15-20% of one’s income in low-cost broadly-diversified index funds, starting with one’s first pay check, in good times (this is easy) and bad (hard to do, but often the best time to buy stocks). Leave the money invested, don’t try to time the markets, don’t borrow it or withdraw it, and work as long as one is able.

    It is possible to thrive honestly in an imperfect world.

  4. I don’t think that commissions are the problem, it’s a lack of a fiduciary responsibility. If you want to sell consumers a product, sign on saying that you believe that you’re acting solely in their best interest, and not in your financial interest. Disclose your compensation in full and the conflicts you have, and let consumers decide.

    The real issue here so far is that this has all been designed to be obscured to clients, and that’s ridiculous.

  5. Garret Virchick says:

    Thanks for this post Kim. As a Boston Public School teacher and a member of our Union’s negotiating team, we have raised the issue of “financial advisers” who hang out in the teachers rooms. They employ dubious methods such as asking teachers to update their beneficiary and then proceed to try and sell teachers their “advice” for their 403b). We have requested that the superintendent inform principals of this practice and were told that a directive would be sent out banning these salesmen from teachers rooms. Of course last week, there was a knock on the door of my classroom with someone there asking if I wanted to talk about my retirement planning!!!!