Monday, July 6, 2015

Pound Foolish

In her book, Pound Foolish, Helaine Olen fulfills her promise of her sub-title Exposing the Dark Side of the Personal Finance Industry. It’s important to approach all big financial decisions carefully, and Olen shows us what awaits the unwary.

Olen takes well-aimed shots at big names such as Jim Cramer and Robert Kiyosaki. She says Suze Orman “has gone from selling subpar pancakes to peddling financial platitudes.” But the book isn’t just a set of amusing quotes. Olen digs into how these people make money and how their words are at odds with their actions.

The author covers the many problems with the financial advice industry. One of the more profitable financial products for advisors to sell is the variable annuity. On the subject of mandating a fiduciary standard, one former branch chief for the SEC said “if you need to act in the customers’ best interest, you can’t sell this crap.”

The most interesting part of the book in my estimation was the detailed reporting on the financial seminar industry. In some cases free meals are used for “scaring and pressuring the mostly elderly audience with half-truths and distortions” to “pressure them into high-commission products.” Other seminars appeal to financial desperation and greed to sell a series of progressively more expensive real estate “courses.”

There are professionally run organizations that offer slickly packaged services to help financial salespeople increase sales through seminars. These services include a designation such as being one of “America’s Top Planners.” In one case, a financial planner got such a designation for his dachshund.

Other seminars are devoted to “teaching” how to trade stocks, options, and currencies for profit. Olen paints a picture of the financially desperate and gullible attending such seminars and paying for more advanced courses.

One criticism I found puzzling was Olen’s portrayal of the book, The Millionaire Next Door, as a how-to guide for getting rich. I saw this book as a search for the rich to try to sell them goods and services. In any case, there are many other examples of books saying we should emulate rich people. This is generally a bad idea because so many people get rich by taking big chances and getting lucky. What we don’t see is the much larger number of people who took big chances and got wiped out.

Olen casts doubt on the conventional wisdom of owning stocks because “During the thirty-year period between 1981 and 2011, in the United States bonds beat stocks by almost a full percentage point.” This is actually a pretty slim margin considering that interest rates were in free fall during that time. The future is always cloudy, but a longer view of history tells us that stocks are expected to beat bonds most of the time.

I have to agree with Olen when it comes to teaching financial literacy: “when it comes to money, the vast majority of us are nuts. Bonkers. Batshit crazy. We are natural born fuckups. We engage in so many self-defeating behaviors it’s impossible to list them all.” “No amount of financial literacy will ever do as much good as straightforward government regulation designed to protect consumers.”

Many efforts to teach financial literacy have been infiltrated by financial organizations that have an interest in having people remain financially illiterate. For many people, financial problems come not from poor spending habits but from low pay and difficulty getting enough paid work hours. But I think there is still value in teaching financial concepts to the masses as long as we pursue regulations at the same time.

Olen says that “the latte is a lie,” meaning that our financial problems don’t come from small indulgences. But this is too simple. There are many factors that go into how people get into financial trouble and small frequent indulgences are one of them. Others are houses and cars. Root causes include poorly-regulated predatory lending by banks, ignorant consumers, and low pay.

I don’t see the point in denying that many people spend foolishly because it is obviously true. What we can say is that the better path to fixing the problem is through regulations rather than trying to change the habits of the masses.


  1. Those who criticize Olen's book are often in the camp that says, "no one cares more about your finances than you do," and that calling for government regulation is just an excuse to stay ignorant while looking for a handout from the nanny state.

    There's a busy stretch of highway near our city with a particularly deadly intersection. It seems that when north-bound semi-trucks turn left, and southbound traffic also wants to turn left, the southbound vehicles have a hard time seeing the opposing traffic coming straight at them and that has caused a great many accidents and deaths.

    The solution, after years of fatalities, is that Alberta Transportation proposed a roundabout that will slow traffic to 70 km/h. They said similar one lane traffic circles in the province have proved successful, reducing more than 90 percent of collision related fatalities, an 80 percent reduction in injuries and bringing the total number of crashes down by 40 percent.

    Critics of the plan claim this is a waste of money, that drivers should just pay closer attention and take greater care as they enter the intersection. But that's not a solution - there's obviously a danger at this particular intersection that drivers aren't aware of, and only government intervention is going to improve the situation and save lives in the process.

    1. @Robb: It seems obvious to me that there is good regulation and bad regulation. Doing something about an obviously dangerous intersection is good regulation. Preventing financial institutions from deliberately misleading people seems like an opportunity for good regulation as well.

    2. That's an interesting example/analogy, Robb. I suggested to my eight-year-old daughter that I should invent a car periscope to see if anyone is approaching the intersection from the opposing direction when turning left. Until this invention becomes commonplace (or more likely a self-driving feature like radar detection of oncoming traffic), I agree with the roundabout idea, or a long left-turn signal followed by a red light for the left lane.

  2. While I agree that the financial industry is mostly working at earn money managing client's money, this book sounds cynical to me. I have read many of the books Helaine criticise but they mostly helped me!

    Getting rich is a long and borring process for average Joe. The homemade lattes, brown bagging lunches, Craiglist shopping, RRSP contributions, index investing, throwing windfalls over the mortage pricipal, driving a used car, DIY...all that stuff is irrevelant for Helaine? It's just the way our family got "rich" over 20 years.

    Lets face the numbers, our NW is 10x more than people around us with the same familial income and our debt is 5x less. We deserve more respect for what we did through the years dont you think?

    To me, she sounds just being another member of the financial industry. Asking for regulation may be a good idea but does not solve any problems in the day to day life.

    Thanks Michael for reviewing this for us!

    1. @Le Barbu: I'm guessing that Olen thinks regulation is more effective than financial education. I agree with that. But I think there's room for improvement in many areas, including cutting down on lattes.

    2. @Michael, my turn to be cynic. Does she know that riches and influents people lurks around politicians and makes sure the new rules are good for them in a certain way? Anyway, the way I get wealthier is getting knowledge about the existing rules and do my best to achieve my goals by myself. But, thats just me ;-)