"Pound Foolish: Exposing the Dark Side of the Personal Finance Industry" by Helaine Olen - #LockdownReadingList
"Pound Foolish: Exposing the Dark Side of the Personal Finance Industry" by Helaine Olen - #LockdownReadingList
Summary: This book does a great job of fulfilling the promise of its subtitle.
Until recently, most American's investment activity involved saving cash and paying into their permanent life insurance policies that promised a guaranteed death benefit passed to their heirs. The concept of retirement is rooted in a social engineering experiment from Europe that decided to force the elderly out of the workforce by paying them a pension. This philosophy made its way into New Deal-era American society via Social Security and employer-provided pensions. But in the mid-twentieth century a number of events converged to drastically shift the system: the dynamics of the investment world changed when the U.S. officially severed the dollar from the gold standard and the stock market began to expand; IRS interpretations of the tax laws changed to accommodate a new investment vehicle called the 401(k), which began a slow (and unexpected) transfer of investment risk from employers managing pensions (defined benefit plans) to employees managing their own funds (defined contribution plans); the financial world exploded with a variety of service offerings and investment strategies, and with it came complexity--and conflicts of interests.
Olen dives deeply into the world of personal finance, covering the emergence of everyman and everywoman gurus of homegrown financial "wisdom": Dave Ramsey and Suze Orman--whose folksy, by-your-boootstraps advice changed and contradicted itself over the years, often in line with their new corporate sponsors and the inevitable conflicts of interest that came with them. Authors wrote books arguing that middle class families can become millionaires by retirement if they simply give up and save the cost of a latte every day. It turns out that even professional stock brokers often don't beat the markets, so it's absurd to think that the average (and amateur) middle class investor can do any better. Too many financial professionals make their money not in the market, but on commissions selling financial products that may not be in the best interests of their customers. Not that any of this is illegal, mind you.
Stock market investment tools and advice gurus aren't the only hucksters in Olen's sights. There's an entire cottage industry of seminars--about real estate, life insurance annuities, and general financial knowledge--that often uses fear tactics to separate senior citizens from their money, or encourages middle class investors to use credit card debt to fund ("leverage") investment on real estate to get triple-digit returns with no risk or management headache. Robert Kiyosaki's Rich Dad media empire takes center stage here.
Olen also discusses the emergence of "financial literacy" projects, attempts to educate anyone--including elementary and high school kids--about healthy habits for budgeting, managing money, and understanding investment products. The irony here is that most of these projects are funded by the very financial institutions that are neck deep in selling crap products to the masses and participated in the irresponsible practices that contributed to the financial crisis of 2008. According to Olen, the research shows that financial literacy education really doesn't do much--other than provide positive PR and political cover to the big banks and credit card companies (etc.) who fund it.
There's an entire chapter about investment campaigns targeted toward women that rely on sexism and stereotypes. There was way too much focus on the so-called (and debunked) "gender pay gap," which was annoying. But my main disappointment with the book was that it finished without proposing any useful solutions. Other than a brief discussion of extremely complicated and expensive annuities, Olen appears to be unaware of the resurgence permanent life insurance contracts are making, and she only briefly mentions that until the stock market revolution took off most American families utilized whole life insurance as a significant leg of their stool of long-term planning. In this era of massive and unexpected market swings, I suspect a lot of readers would be interested to hear about a vehicle that has liquidity, creditor protection, guaranteed minimum returns (competitive with market returns once taxes and fees are taken into account), complete protection against capital loss AND loss of gains once realized, tax-deferred (often tax-free) growth, and a tax free death benefit distributed to heirs, all backed by the most safe and secure tranche of the financial sector. But alas, no mention. Instead, she half-heartedly blames income inequality and broad economic trends. Perhaps I've been subtly trained by the modus operandi of the very world Olen is criticizing--lay out the problem with cataclysmic rhetoric and then bait the audience with the "perfect solution," usually a commission-heavy product--but I expected a bit more substance from her about what we should DO about all the shenanigans she just spent 200 pages describing. But again, I may be expecting more from the book than the title promises.
Quibbles aside, what this book does, it does well. And it's well worth reading, if only to deflate the bubble of irrational optimism for "easy wealth" that we all--including myself--seem so willing to believe in.