According to Helaine Olen, the lion's share of financial advice served up by so-called experts is useless -- or worse. In her must-read new book, "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry," she reveals that to think about money solely in a personal sense causes us to miss the problem. I caught up with Olen to discuss her take on what we're missing, and how to think better and smarter about our financial lives.
Why does America need a book on the personal finance industry? We're messed up about money, right? Don't we need help?
We need help, but not the way we think. In a society where salaries have stagnated and fallen, net worth has plunged, even as the costs of things like healthcare, housing and education have gone up at rates well beyond that of inflation, it’s not surprising most of us have financial problems. But most of us still don’t see that we have a societal problem. Instead, we listen to people and organizations that insist our problem is an individual one. As a result, we gobble up books and television programs that offer us the promise of the magical tip that will allow us to fix all our financial woes. Of course, that’s not really possible. So … enter "Pound Foolish." You can think of it as the anti-personal finance advice personal finance advice book.
What are the biggest factors that have contributed to our current retirement crisis?
There are so many factors contributing to the retirement crisis it is hard to succinctly list them all. But once upon a time, a majority of us at least had the possibility of receiving a pension when we retired. That’s no longer the case. We’re now expected to do this on our own. And, frankly, most of us aren’t capable of this task, and we have 30 years of evidence – that is, the lifespan of the 401(k) – to prove this fact. We do everything wrong we possibly can. We are unable to save enough money and we don’t invest it well. At the same time, we lack the crucial ability to see the future. We don’t really know when we will retire and why that will occur. We don’t know if our investments will pan out. We don’t know how the greater economic environment will either play out or interact with our lives.
I was reporting on this stuff 15 years ago and I can tell you just about no one said anything like, “Oh, by the way, you’ll need more than $200,000 just for medical expenses in retirement.” It’s just unfair to expect people – who are not financial experts – to be able to pull this off. The fact is Social Security and other such schemes were created for a reason. There was no imagined past where people saved up for their old age. As the family farm gave way to urbanization and industrialization, old people had this distressing tendency to end up in workhouses – which were as Dickensian as they sound – if they couldn’t convince a relative to take them in. And many couldn’t. Yes, the rates of intergenerational living were higher than they are now, but it wasn’t all "The Waltons."
How does the industry prey on our fears about our inability to save and plan for the future?
We can’t articulate that for all too many of us our problem is not an inability to manage and invest money effectively; it’s that we’re expected to do more and more with less and less. So we think we are individually messing up, that we lack the financial skills and smarts to get ahead. The financial services industry presents itself as our savior. But by doing that, it has to confirm our cultural bias that we are alone responsible for our financial fates.
You see this dynamic especially in personal finance and investment initiatives aimed at women, which contain an almost odd mix of the language of empowerment and infantalization. They tell us we are women, we are so strong because we do so much more around the home and work than men, but yet we are financial illiterates who have no clue. In fact, both sexes have low financial knowledge. Men have more money than women for the most obvious of reasons: they earn more.
You mention the work of economist Teresa Ghilarducci, "the most dangerous woman in America." Who is afraid of her and why?
It became very clear to me while reporting this book that Teresa Ghilarducci had hit a nerve in the financial services sector that no one else had. The reason, to me, was obvious. Most other people discussing retirement reform schemes (Auto IRAs, Save More Tomorrow and the like) were talking about expanding the role – or at least the bottom line of -- the current dominant players on the retirement scene. I mean the retail brokerages, the 401(k) plan providers, the dominant mutual fund companies and the like. Ghilarducci’s Guaranteed Retirement Accounts calls BS on this model. First, she points out how much money the current retirement is making on what we think is our money. Second, her model would bring new players in, and I mean new, powerful players – state pension funds, institutional investors, and hedge funds – into the game.
Media figures like Suze Orman, David Bach and David Ramsey tell us, "Follow my advice and everything will be OK." Why is this promise a lie?
All of these people are in the business of selling simplistic solutions to complex problems. Should we live below our means? Of course. Is it always possible to do so? No. It’s not easy to live within your means if your means are a $300-a-week unemployment check. As if that were not enough, some of the advice they are purveying is flat-out wrong. Our financial woes are not the result of spending our funds on lattes and other small luxuries, like David Bach says. You can’t choose not to participate in a recession, despite what Dave Ramsey thinks. Personal finance can’t do it all for us.
You write about the financial literacy movement, which, on first glance, looks like a helpful educational crusade. How has it conspired to make us poorer? What does it mean that big banks like Capital One promote it?
Financial literacy classes sure sound good. But students who take the classes don’t seem to retain much of the knowledge. And, when you think about it for a moment, that makes sense. The idea that taking a class on how finance works at the age of 17 can save someone from a predatory 100-page small-print mortgage when they are 40 is just preposterous. Don’t believe me? Tell me how the French and Indian War contributed to the American Revolution. See what I mean? I swear that was taught in your high school history class.
So you need to move on to the next part of the equation. Why is financial literacy being promoted when we know it doesn’t do much at all for consumers? Well, take a look at who is funding it. It’s the banks and the rest of the financial services sector. Now think about it for a moment. Wouldn’t it just be a heck of a lot easier to not offer certain products, or design them in such a way so that they are easily comprehended, than to take on the seemingly hopeless task of teaching a consumer what a structured product is? Of course. So why isn’t this happening? Well, a cynic might say that’s because financial literacy works quite well at what it was really designed to do and that’s head off legislative protection of consumers.
How does the personal finance industry shape our views about government regulation, like rules that protect consumers?
This is a mixed bag. There are many respectable personal finance journalists pushing for greater transparency and more legal protections for consumers. Ron Lieber at the New York Times, for example, was harping on the need for 401(k) fee disclosure for years before it became law. On the other hand, the financial services industry is always pushing the idea that we can do it, and that we can do it alone. How much that’s impacting our views? Hard to know. They keep telling us we can prepare for retirement ourselves, but the survey data shows that 80 percent of us are out-and-out petrified and want some form of pension back. Perhaps the right question to ask is not how the financial services sector shapes our views about government regulation to protect consumers, but how it shapes the views of the legislators whose campaign they contribute to.
Has your research changed your own behavior and attitude toward personal finance?
Yes, but not in the ways that you would think. I don’t spend any less money, but I am more conscious of spending it in ways that are meaningful. Take my Katie, our poodle. She dines on high-quality dog food (not to mention quite a bit of anything that can be begged), but her “bed” in my office is actually a 20-year-old blanket that I’d never put on a bed any longer but has somehow never gotten tossed. I mean, what does she care if she’s not sleeping on an official dog bed from the pet store versus a blanket that no longer has a color? On the other hand, the quality of the food she eats impacts her health and that I care about quite a bit.
What's the best hope for our financial health? Are we completely screwed?
Our best hope for our personal finances is to realize we aren’t in this alone. There is a powerful culture of shame around money in this country, and it is so powerful it actually seems to prevent us from stepping forward, saying things aren’t working out for us financially, and asking not for charity, but for substantive legislation designed to help us all.