Pound Foolish

Helaine Olen’s book Pound Foolish should be required reading for everyone interested in personal finance and money management. The personal finance industry that most of us are familiar with markets itself as an understanding and helpful guide in improving the financial well being of clients and customers. Olen takes issue with this and deconstructs many of the popular channels through which we receive advice. In the process of doing so she shows the industry is often conflicted, unrealistic, deceptive and in some cases just plain wrong. Her work is not a political rant in any sense, but rather a deeply researched and well thought out examination of the financial services industry. After reflecting on my own experiences (see this and this) I found myself in agreement with a majority of what Olen was preaching. A large portion of the industry is indeed incredibly shady.

Throughout the book Olen dives into the backgrounds and work of many prominent personal finance gurus including Suze Orman, Dave Ramsey, Robert Kiyosaki, David Bach, and even reserves a few pages for an obligatory critique of one Jim Cramer. As some might suspect their histories are awash with tales of hipocrisy and conflicts of interest that make Gordon Gecko look like a saint. The real story with most of these individuals is that they didn’t earn their money by living below their means, saving and investing prudently, but rather by selling products and services that we’re told will save and/or empower us. They’re more salesman than missionary, telling us what we want to hear and not what we need to hear. They do not have a fiduciary responsibility, although it certainly comes off that way.

These individuals are just the beginning. What I absolutely loved about this book was that it provided research and substance to the feelings of skepticism I have for the industries marketing efforts. Those get rich quick stock trading strategies and road shows that promise high returns with low risk don’t actually work. Surprise! Real estate investment seminars, like Kiyosaki’s Rich Dad, Poor Dad series, spend little time discussing actionable investment strategies and instead focus on getting customers to enroll in the next, more advanced (and expensive) course. Surprise again! Those free dinners hosted by financial services firms turn out to be highly engineered marketing sessions that use the latest in behavioral finance to recruit clients. You get the idea. The fact that many of these “businesses” are scams or fail to act in the best interest of the client/customer seems obvious. The sad part is that they are in business, and apparently making money. Thus it would appear that there are enough naïve folks out there to make the effort worthwhile.

One thing I wasn’t expecting was her caution of the financial literacy movement. I’m a big fan of education and empowering others with actionable knowledge. However, consider the fact that the financial literacy movement is sponsored and led by the very institutions that have the most to gain from an ignorant client base (banks, credit card companies, insurance companies, etc.). Some critics have claimed that these efforts by the industry are, in effect, Trojan horses meant to create brand awareness and generate brand loyalty. Others suggest that financial literacy programs are a ploy to satisfy legislators and stave off consumer protection laws that would actually help.

These critics are pointing to an uncomfortable truth you don’t have to be an expert in financial literacy to understand. If the financial services industry were truly interested in promoting financial literacy, they would offer up products that are easy to understand. [1a]

Exposing the financial services industry and the hucksters it is populated by is only the groundwork. The effort put forth by the industry implies that our financial problems are caused by a lack of knowledge. Olen contends that our problems are actually the result of a much broader social justice issue. Her major message is one of declining economic conditions for a large swath of the American population. Real wage growth has gone nowhere for decades while fixed costs (housing, healthcare and education) have continued to increase. As a consequence we’ve turned to debt to finance our lives. It’s easy to tell people to simply save more and invest rationally. The real problem is that a large percentage of the population simply cannot save due to insufficient income. The message is very much that of growing inequality between the haves and the have-nots that we hear repeatedly. The decline in personal economic conditions combined with a somewhat predatory financial services industry is a one-two combination that knocks most individuals out.

…to speak about our money solely in a personal sense is to miss the nature of the problem. We needed to discuss our money collectively because our financial lives were not falling apart one by one. We were–and are–going down together, but most of us just didn’t realize it. [1b]

Olen concludes with a call-to-action to discuss our financial situation as a collective. Economically speaking we’re all in this together whether we like it or not. One person’s spending is another person’s income. What impacts one will inherently impact another. We need to take a difficult step in openly sharing our financial realities and finding solutions that are beneficial to everyone. In the meantime we live in the here and now. Let’s take a moment to learn from the mistakes of others to improve ourselves. Here’s my conclusions:

  1. If it sounds too good to be true, it is
  2. Nothing is free
  3. Where conflicts of interest are allowed to exist, they will exist

The truth hurts. A lot.

1. Olen, Helaine. Pound Foolish. Penguin Group LLC. New York, NY. 2012.
(a) p. 217
(b) p. 233

NOTES – Pound Foolish.pdf

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Tax Efficiency In Action (Lawrence Hamtil)