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Morning Feature – Pound Foolish, Part I: The Price of Financial Advice

January 3, 2013

Morning Feature

Morning Feature – Pound Foolish, Part I: The Price of Financial Advice

Seneca is quoted as saying “Advice is worth what you pay for it.” Maybe so, but financial advice is often only worth its price … to the advisor. (More)

Pound Foolish, Part I: The Price of Financial Advice

This week Morning Feature considers Helaine Olen’s new book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry. Today we consider the history of personal financial advisors, and how their advice is too often worthwhile only for them. Tomorrow we’ll see how the demise of pensions and the rise of the 401(k) created a profitable and powerful industry that resists even basic consumer protections. Saturday we’ll conclude with why education and self-discipline are not enough to ensure financial security.

Helaine Olen is a journalist who wrote and later edited the “Money Makeover” series at the Los Angeles Times. She writes the “Where Life Meets Money” blog at Forbes, and her work has been published in the New York Times, Wall Street Journal, Washington Post, The Atlantic, BusinessWeek, and several online news sites.

“From aid to ideology”

In 1996, Helaine Olen was asked to write for the Los Angeles Times‘ new “Money Makeover” series. She knew nothing about personal finance, but the job paid and seemed easy enough. Interview a volunteer – a former college athlete turned pharmaceutical account executive, a Hollywood producer’s son who wanted to make it on his own, a gay couple who owned a restaurant – match them up with one or more financial advisors, and write about their goals, strategies, and decisions. Hoping to understand what the advisors were talking about, she bought a copy of Personal Finance for Dummies. Soon she was the series’ lead writer and then its editor. “In just a few months,” she writes, “I’d gone from money novice to personal finance expert.”

She wasn’t really an expert, and she knew that. But it was a seller’s market for journalists who could write about personal finance. More and more businesses were shifting from defined benefit pensions to 401(k) accounts. The stock market was soaring, as soon would the real estate market. Cable news channels were spawning financial news spinoffs, targeting not just market professionals but individuals who were flocking to online trading sites.

Olen’s real expertise was in interviewing people, getting them to open up and share their hopes and dreams and fears as well as their financial records. As the series and her reputation grew, she began to realize that while the basics were simple – she still recommends Personal Finance for Dummies – beyond those basics the advice varied widely. She began to suspect that, as William Goldman said about Hollywood, “Nobody knows anything.” As she writes:

In this environment, personal finance went from aide to ideology, with practitioners certain that if we could teach people the right skills, they would get it right. It was presented as empowering, an almost surefire way to avoid economic catastrophe. That many of these people and organizations were recommending contradictory things, or had a financial interest in promoting certain ways of behaving, was brushed under the rug. Surely we could figure it out!

“These readers aren’t greedy or dumb”

For decades, the doyenne of personal finance was Sylvia Porter. Porter began her column in the 1930s, and her early work focused on the needs of ordinary families. She criticized governments and institutions that made it harder for people to escape the depths of the Great Depression, and offered sound advice for those who had even a few extra dollars to save.

Yet as Porter’s fame grew, she grew more distant from her original audience. In the postwar years she became more scold than supporter, more likely to fault those who fell through the cracks than the financial architects who left those cracks in place. The economy was booming, after all, and it truly seemed as if anyone who worked hard and saved wisely could achieve financial security.

Especially if they were Sylvia Porter. By the 1970s, she would appear on TV and say that individuals could avoid inflation by buying cheaper products … just as she had given up veal for chicken. A young Tom Brokaw reminded Porter that most of the viewers had never been able to afford veal at all.

By then Porter had competition in the person of Jane Bryant Quinn, whose passion as a consumer financial reporter briefly got her fired from Newsweek. The magazine soon hired her back and Quinn’s column became a fixture, her doorway to television appearances, books, and the lecture circuit. Yet she never had the singular stature of Porter. That was no longer possible amidst the cacophony of financial gurus scrambling for audiences’ attention … and their money.

Quinn’s columns included many laughably wrong predictions, which Olen presents as more a testament to the inherent difficulty of economic forecasting than any personal weakness. And she was eerily prescient in 1998:

We’re panting after stock pickers, photogenic mutual fund managers, and billionaires. People are getting hurt by some of the money celebrities we push, but we won’t know how much until the stock market folds…. These readers aren’t greedy or dumb – which is how they’ll be pictured when the music stops. They believe the stuff we are telling them.

“To lead a morally righteous life.”

The reigning queen of personal finance may be Suze Orman, whose oeuvre includes books, television shows, and even her own Approved debit card. Orman’s career began with and retains an almost missionary zeal, calling on readers and viewers to believe in their own wealth and chastising failure as evidence of insufficient fervor. In that respect, if in few others, Orman is much like Dave Ramsey, who tells radio listeners and seminar audiences that the solution to crushing debt is not bankruptcy but “to lead a morally righteous life.”

It’s good advice, at least for Orman, Ramsey, and their ilk. Orman says her net worth $25-35 million, although Olen notes that Orman has been giving that same response for so long that Orman’s actual worth is now far higher. Her brand grossed $17 million in 2009 alone – in the depths of the Great Recession – according to MarketData Enterprises. That figure did not include her CNBC program. Ramsey is similarly wealthy.

Yet the advice they sell may not be as worthwhile for the buyers. Chuck Jaffe of MarketWatch rated Orman’s Approved Card “Stupid Investment of the Week,” while Consumerist called it “The Cream of the Crap.” Other debit cards had significantly lower costs, and did not promise to fix your credit score, as Orman’s original marketing had … at the same time her website noted that “use of the Approved Card will not and cannot improve or fix a credit score or rating.”

And if you do ignore Ramsey’s advice and go for bankruptcy, well, there’s the Dave Ramsey’s Debtor Education program, which Olen notes is “approved as one of the many education classes the bankrupt are legally required to take before the courts will discharge their case.”

“The bladder won’t stand for it.”

The irony, Olen continues, is that such classes probably do more to debunk Ramsey and other financial gurus than to improve debtors’ money management skills:

When University of California, Irvine bankruptcy expert and popular blog Credit Slips contributor Katherine Porter and Ohio University sociologist Deborah Thorne compared surveys of those who had turned to the courts to get out from under, both before and after the imposition of the education mandate, they discovered that those who had taken a class had indeed learned something: they were significantly less likely to believe financial education could have helped them avoid bankruptcy than those who had filed before the mandatory session was implemented. Learning the basics about money, it seemed, persuaded them not of their need to give up their morning coffee from Starbucks, but, instead, convinced them of how financially hopeless their situations truly were.

The mention of Starbucks derives from what financial guru David Bach calls The Latte Factor. Your morning jolt could cost you $2 million over your lifetime, Bach told and still tells anyone who will listen. Well sure, if you also buy a biscotti for a total of $5 per day, and round the annual $1825 total up to $2000 … and find a magical lifetime 10% annual compounding return investment.

Meanwhile, back in Realworldia….

Telling people to skip their morning espresso has made David Bach rich, but actually skipping your coffee probably won’t make much difference in your life. As Porter told Olen, “You can’t latte your way to bankruptcy. The bladder won’t stand for it.”

+++++

Happy Thursday!

  • winterbanyan

    Damn, I love this. I’ve got to read this book! This is an eye-opener and you’ve only begun to tell us about it. It sounds like a great thing for everyone to read.

    Right now I’m giving it Five Stars! And heading to B&N to get my copy.

    • NCrissieB

      Pound Foolish is well worth reading, winterbanyan. Olen notes at one point that, during the 2008 collapse, she and her husband had to trim their household budget. They managed to pare away about $50 per month in extraneous expenses – she doesn’t say if that included Starbucks – and not a month later were informed that their health insurance premiums were going up by $100 per month.

      “Here we were pinching pennies,” she wrote, “and dollars were walking out the door.”

      She goes beyond that singular experience to cite data that show a typical median family spends 75% of their annual income on basic necessities – housing, food, utilities, clothing, health care – up from 50% a generation ago. The problem, Olen concludes, is not lattes or smartphones … but stagnant median incomes and rising prices for basic necessities.

      Good morning! ::hugggggs::

      • winterbanyan

        Amen to that. I don’t have a smartphone, I don’t go to Starbucks, and heck, I may go out for dinner a few times a year. If that. More than 75% of my income goes to basic necessities, and health care has become a huge one over the last two years…with 2.5 years left to go until Medicare.

        If somebody can afford a latte on the way to work… go for it, I say. In many cases that $4 drink is one of the few pleasures left. Wow, are we wasteful.

  • addisnana

    more likely to fault those who fell through the cracks than the financial architects who left those cracks in place

    The complexity of our financial systems is staggering. Some of the lobbyists who represent big money have designed systems so that the average person cannot find all the cracks. Full disclosure here, I have a son who is a Certified Financial Planner. That is a rigorous test and includes ethics. I trust him to be doing the best thing for his clients. That said, I think that finding someone to trust to help you manage even retirement accounts (think 401K rollovers) is hard. I also think there are limits to the notion of educating the public. I’d much prefer that the professionals that we hire to help us be regulated and audited. The Suze Orman’s and Dave Ramsey’s of the world are not educators in my mind. They are celebrities with a schtick.

    I also think it is a screwy thing to try and link morality with money. The rich are neither more virtuous nor more crooked than average working people. I could go off on the “prosperity gospel” as flimsy moral reasoning.

    • NCrissieB

      She goes into some depth about retirement accounts, as we’ll discuss tomorrow. As we’ll see, until the Dodd-Frank Act took effect, 401(k) funds did not have to disclose even their annual fees … and a 1% difference in annual fees is huge over a worker’s lifetime.

      As for linking money and morality, I agree. Olen writes about a couple who mortgaged their house to start a business. The business failed, as many do, leaving them upside down on their mortgage after the 2008 collapse. Their lawyer advised them to declare bankruptcy to clear their other debts, so they could at least afford their mortgage payments. Instead the couple took Dave Ramsey’s advice, because “We borrowed the money and took a risk and we failed and now we should have to pay it back.”

      That sounds very virtuous, until Olen cites evidence from bankruptcy courts showing that many people could have discharged much less in bankruptcy … if they had filed sooner rather than getting deeper in debt trying to find a way out of an impossible situation.

      Good morning! ::hugggggs::

  • Gardener

    Emerging from the right womb seems to be overlooked as a means to financial independence.

    • NCrissieB

      By financial gurus, yes. By Helaine Olen … not so much. More on that later this week. :)

      Good afternoon! ::hugggggs::