I have been hearing a lot about Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, by Helaine Olen. Without having read the book, it sounded like a muckraking survey of the ways that the financial services industry fleeces individuals. Commentators in the financial services industry have been broadly critical of the book. Larry Swedroe, a well-known advisor and journalist concludes that “problems are well exposed, but investors are left in the dark about how to deal with those issues. This book has many positive aspects, but in the end, it comes up short of helpful.” Morningstar’s John Rekenthaler comes to a similar conclusion in his review, suggesting that the book is entertaining and worth reading, but is somewhat biased in terms of telling Olen’s audience what they want to hear. The reviews and controversy inspired me to read the book myself, and it is a fairly quick and enjoyable read for those interested in the issue.
The first major theme of the book is that the financial gurus who make their money from their TV and radio shows, books, and seminars are basically shysters. When she profiles the personal finance gurus such as Dave Ramsey, Suze Orman, or Robert Kiyosaki, the basic themes are the same. These people create a cult of personality and have enthusiastic followers, even though they dispense ‘financial pornography’ that suggests that the average person can become rich if they simply pay for the seminars, watch the shows, or buy the books. These people are selling some combination of pop psychology and lottery tickets. This section of the book is entertaining and well-written.
The second major theme of the book is that self-directed retirement plans, such as 401(k)’s, are essentially a scam perpetrated on average investors by the massive financial services firms. The fees are too high, and the products made available to a 401(k) investor are poorly designed. This is one part of the book that I find rather muddled. The fact that there are bad investment funds, including offerings in retirement plans, does not mean that the idea of self-directed plans is innately flawed. I doubt that anyone will disagree that the surveys confirming very low balances in 401(k) plans demonstrate that people are saving far too little for retirement. And, the evidence available suggests that individual participants in these plans tend to make bad choices about where to invest their money among the choices made available to them by the plans. They chase performance and ignore fees and often choose terribly expensive funds that end up converting too much of the returns from stock and bond investments made by those funds into profits for fund management firms rather than a more comfortable retirement for investors. All that said, the flaw is not the existence of 401(k) plans but in how they are used.
To read Olen’s book, one might conclude that the entire retirement savings complex should be scrapped. This is, indeed, exactly what Olen believes should be done. The solution, she suggests, is an approach to retirement savings proposed by Theresa Ghilarducci, a professor and longtime critic of the current generation of self-directed retirement plans. This new model is a government-run retirement plan that is low-cost and guarantees participants a return that is 3% per year above the rate of inflation. Participants would be required to contribute at least 5% of their pay per year to this plan. The problem, of course, is that guaranteeing investor returns at inflation plus 3% in a retirement account will be an expensive undertaking and someone will have to pay for this. Ultimately, whether or not you like the idea, it is an idealization that seems very unlikely to occur. By ending the discussion of retirement savings on this note, readers who are looking for ways to do better now are left hanging.
The book devotes an entire chapter to the third theme, the mistakes and errors that people make in their real estate purchase decisions. Just as with stocks and bonds, people get suckered into the idea that they can make a quick killing in real estate—and get rich quick. There are the inevitable sad stories of individual families who have made catastrophically bad real estate decisions that have wrecked their financial lives. The punch line: buying a house is unlikely to make you a real estate mogul, whether it’s your primary residence or a rental property. I am not sure exactly who this is supposed to be earth-shattering news to. To ultimately blame all of the real estate bubble on insidious forces who led people astray ignores the fact that many people rushed in, unprompted, and gambled. Is someone who buys an expensive home with nothing down, takes out equity to support their consumer decisions, and ultimately loses it all when the market turns a victim?
The largest problem with this book is that it discounts any argument that people can learn to effectively manage their money and make good financial decisions for themselves. There are certainly shysters who claim they can teach you to become wealthy with no money down. It is also true that many people are making bad—even catastrophic—financial decisions on their own. These points do not change the reality that there is plenty that individuals can do that will make them far more likely to succeed financially. I know plenty of people who have valuable knowledge and experience and whose expertise can assist people in making better decisions. Some of these people are advisors, some are writers, and some are individual investors. Helpfully pointing out how the average person can access such people would have made the book much more satisfying.
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