At a time when we have more personal finance advice than ever before, why are so many Americans in bad financial shape, and why do we say money is our number one worry in surveys?
Helaine Olen, who has written about personal finance for the New York Times, the Washington Post, and many other publications, wanted answers. So she investigated the world of financial advisors, TV personalities, academics, brokers, and regulators.
What she found was faddish advice, rampant conflicts of interest, and a Horatio Alger narrative that holds individuals completely responsible for their own failings and lets crooks conveniently off the hook.
It’s all recounted in Olen’s entertaining book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.\
She spoke to MintLife’s Matthew Amster-Burton about bad investments, free steak, and the limits of preaching personal responsibility.
MintLife: You used to write the Money Makeover series for the Los Angeles Times. I love reading the financial makeover in my local newspaper, but I’ve always wondered what would happen if you went back and visited these people 10 years later.
What did you find when you did that?
Olen: I found generally that people who were in decent shape remained in decent shape. The people who weren’t mostly were not.
That being said, there were a couple of caveats. One, is what happened to California real estate. Some of my subjects had bought property, you know, in very high end areas. Keep in mind that this is a Los Angeles based feature.
So, my subjects who had bought property in places like West LA before the run-up, and held on and didn’t take second mortgages and the like, ultimately did okay.
Some of my people really did suffer serious setbacks. One in particular I’m thinking of was on track to retire a multi-millionaire. Part of this was because he was a pilot for one of the airlines.
Olen: We all know what happened to the airlines after 9/11, and his was one that had gone into bankruptcy. So his salary was cut by 40% and his pension was cut by more than half, and he started investing in real estate to make up the losses.
His original house, i.e., the one in the nice area of Los Angeles that he owned, has continued to do well for him. The stuff he invested in, not so well.
MintLife: Nearly everything written about personal finance—I’m certainly guilty of this myself—is about how if you make the right decisions, you’re going to turn out okay.
It’s as if the last five years didn’t happen, because you still hear exactly the same things over and over.
Olen: I would say almost the last 30 years. It’s not a problem that started in 2007.
Olen: This is a problem that really begins in the 1970s and early 1980s when two very powerful currents meet each other. One is the start of income stagnation and income inequality, which of course leads to wealth inequality.
And the second is the do-it-yourself system, what academics like to call responsibilization or financialization.
We went from a world where a lot of people had pensions to where almost no one had pensions. And you were supposed to be in charge of this at a time where increasing numbers of factors were going against you.
We just started doing this cheerleading, right? It makes sense for a number of years because of the Great Bull Market of the 20th century, from 1982 to roughly 2000.
So we all think we’re geniuses, right?
We’re putting money into the stock market and it’s going up. And we start to believe this contradiction that our stock gains are both inevitable and they’re a result of our own genius.
MintLife: I run into this all the time. I talk to people who say, “I bought Amazon at just the right time. I can do this, why can’t everyone?”
In most cases it’s because they’re not talking about their losses.
Olen: Right. That’s what I would say. Tell me about eToys in 1999.
MintLife: A lot of the book talks about the need for, I guess I would call it, common sense regulation.
And every time I write about something like the dangers of equity indexed annuities, or leveraged ETF’s, or even student loan reform, I often hear, “Look, in the right hands these are useful tools, just like a sharp knife is a useful tool. If we regulate them, we’re going to damage innovation, damage the economy.”
Olen: The first thing you have to understand is we’re dealing with thirty years of a powerful ideology that regulation is bad in a free market. Lack of regulation in this area is a disgrace.
Are these useful tools for some people? Absolutely.
Can people get into real trouble with them? Absolutely.
This stuff is sold to people as a way of protecting themselves, when in fact it does no such thing.
It’s like giving somebody a sharp knife to butter bread. It’s not going to work out well for an awful lot of people. Equity indexed annuities are, for most people, not a great idea.
If they were such a great idea, then why are the commissions so high on selling them?
MintLife: So let’s talk about these steakhouse dinners, because I’ve been to one myself. Tell me what you found when you went to one of these free dinners for seniors.
Olen: These things have a very definite formula. First, they appeal on a hot-button issue, retirement, social security, or estate planning if you’re in a wealthy area.
Second, they scare the living daylights out of people. So, “Seniors, afraid of outliving your retirement?” “Seniors, Social Security: will it be there for you?” “Seniors, don’t let the government get their mitts on your children’s inheritance.”
Third, is presenting your problem as the solution. And I have never been to one of these where the product was not presented as the solution.
MintLife: Right. So when I read that part, I patted myself on the back and said, you know, I’ve written about this, I’ve warned people about these kind of dangerous investments and said, look, just invest steadily every month in stock and bond index funds, and you’ll probably be fine.
But in the book you explain why that’s problematic advice too. Why?
Olen: Well, it’s the best advice out there, by the way, so let me stress that.
MintLife: Thank you.
Olen: The problem is, it’s still not a guarantee. And by the way, that’s where these people move in on this stuff. Because hey, they know it’s not a guarantee, and they hold out the siren’s song of, “You can get better returns with me.”
You know, “Index funds go down with the market. But I can protect you.” But the fact is, you know, we don’t know how this works, really, over hugely long-term periods.
You know, 80 years, it sounds like a lot, right? But it really isn’t, on one level. There’s a lot of survivor bias in there.
If you could go to Europe in 1913, you could look at the previous 99 years and say, “You know, we’ve not had a continent-wide war in 99 years. That’s a record for Europe. What are the odds, right?”
That being said, it’s still probably the best advice anybody can give you, because what we do know for sure is that roughly one percent of us have the ability to beat the markets year in and year out.
The chances are the advisor who can do that is not coming to you, because unless your last name is Gates or Buffett, why on earth would they, right?
MintLife: So let’s put me on the couch one last time. Something that really hit home for me in the book is you said something like, “Personal finance writers believe that if people would just listen carefully to our advice, everything would be fine.”
MintLife: I’m certainly guilty of feeling that way. I was just reading this new survey on Americans and their assets, and in my state, one-third of people have almost no savings.
And my gut feeling was to say, “Hey, I need to write more columns. I need to tell people about Roth IRA day and America Saves Week, and these other things that I get press releases for, and if people would just listen to my advice, they would figure it out.”
What’s wrong with this impulse, and what could I be doing better?
Olen: I have a completely different take. I see a survey that says forty-plus percent of people are living paycheck to paycheck to paycheck, right? I don’t say, “God, what a load of f-ups.” I think, “God, we really can’t get by, can we?”
You’ve got to turn it on its head here. The national savings rate was 10% in 1980. We didn’t suddenly go on a bender. You have to ask what happened to us.
And what happened to us was that our salaries stagnated and fell while the cost of the things we couldn’t do without went up at rates well beyond that of inflation for decades as the social safety was being pulled out from underneath us.
Second, you have to understand that, that being said, yes, none of us are perfect. No one is going to live a financially perfect life, including you and me.
Olen: Humans are by nature not perfect. People are not sitting around reading financial advice, usually, until it’s way too late. We keep thinking, “Oh, I’ll write Money Makeover and people will read it, and they’re going to listen to it, right?”
Well, in fact, basically, they like reading about other people’s financial lives and feeling, okay, this is a comforting thing, this is going to work out.
MintLife: Right, or saying, “I’ve got problems but they’re not as bad as this person’s problems.”
Olen: Yeah, the train wreck phenomenon. That’s not to say you shouldn’t write it. Hey, I’m sure it reaches some people. But to expect that we’re going to come up with this magic formula and make it all work defies everything we’ve ever known about human nature. It’s just not possible.
That’s not to say people shouldn’t save their money. Of course people should save their money. Of course people should live within their means.
But most people are really trying to do their best. And I find this assumption by the personal finance establishment that most people are deliberately not trying to do their best to be kind of offensive.
MintLife: What impact do you think the CFPB will have on the problems you identified in the book, if any?
Olen: It’s definitely having some impact, but it can’t have enough, because we need the help of the SEC and other regulatory authorities. The CFPB is not going after retirement accounts and that sort of thing at all. That’s the Department of Labor.
Are they having an impact? Absolutely.
They’re trying to clean up the mortgage debacle, and clarifying what people are getting themselves into and not allowing stuff to be marketed is huge. If you don’t think it’s huge, ask yourself why the financial services industry is fighting back so hard.
But the CFPB can’t do it alone. They can make changes in credit cards, and they can make changes in mortgages, and I’m thrilled and happy and want them to keep going.
But we have to know—and I think this is where people get lost—that they simply aren’t in it alone. They don’t regulate investments and there’s other authorities here that need to be tended to.
Everybody sees the CFPB as this massive panacea, and I think in the ideal world it would be.
MintLife: Well, we had the SEC and we had the CFTC and we had regulations A, B, and C, and none of it worked. We had the worst financial crisis of our lifetime. Now we say, “Hey, we’ve got this new agency that was not stained by that. Now we can really fix everything.”
And that ignores the fact that its mandate is limited, and it exists in the real world with all of these other agencies, and all of these powerful opponents.
Olen: And as we know, it has hugely powerful opponents.
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.