By Tadas Viskanta
At present, the major stock market averages are hitting new all-time highs. So from outward appearances it would seem that many middle class Americans would be benefiting from this recovery from the financial crisis. Unfortunately you would be wrong. Currently the smallest percentage of Americans since 1999 are invested at all in the stock market. If anything, the rebound in the stock market only highlights the cracks in the personal finances of Americans that were exposed by the housing bust and subsequent financial crisis.
The booming stock market aside, there is a growing realization that the retirement system that we have put in place is not working. When Larry Fink the head of the world's largest asset manager, Blackrock Inc., comes out in favor of additional mandatory savings and takes to task the asset management industry for selling products as opposed to solutions, you have to think that there is something afoot.
That hope is difficult to find in the recently published, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen.* The book is well worth a look as Olen takes to task pretty much the entire personal finance industry. Industry is in fact a good word to use because it highlights the fact that everyone providing the American public with financial advice is in some real way profiting from that advice. In short, caveat emptor.
That means you need to take everything you hear from the personal finance industry with a big grain of salt. While much of what personal finance gurus say is either wrong or exaggerated, there is still a great benefit to learning manage your own finances. As Olen writes:
To be clear, I'm not arguing that all financial advice is useless. Understand and controlling our own money is among the most empowering activities we can undertake.
There are plenty of villains in Olen's book and few (if any) heroes. A certain class of personal finance gurus come under scrutiny by Olen. After chronicling the rise of personal finance as a legitimate news topic Olen goes on to profile and take to task a slew of big name gurus. These include in no particular order Suze Orman, Dave Ramsey, Robert Kiyosaki, Jean Chatzy and Jim Cramer. Not surprisingly a quick peek at the top-selling personal finance books on Amazon will see a heavy dose of these names.
Olen chronicles these personal finance stars because by understanding their rise we can better understand the sorry state of personal finance. Many of these personal finance personalities base their advice on their own colorful back stories. The problem is that oftentimes the lessons learned from these narratives are either wrong or contradictory but that does not prevent them from selling you their confident advice in increasingly aggressive (and expensive) ways.
Although these personal finance gurus are illustrative of the problems facing the personal finance industry. Olen notes that America's institutions are failing consumers as well. At a time when middle class American incomes were stagnating we increasingly asked these Americans to be more responsible for their own financial futures. The steady decline of the defined benefit pension plan left Americans dealing with a mix of IRAs and 401(k) plans to fund their retirements. The financial crisis of 2007-09 showed the fragility of this system.
Nor according to Olen is the financial services industry trying to do much to solve these problems in any meaningful way. While spending money to promote financial literacy it is still the case that the financial services industry is built on fees and commissions. Whether it be the high fees charged to 401(k) participants or the high commissions paid when Americans purchase the many flavors of variable annuities it is a sad fact that most Americans don't understand what they are paying for.
Echoing Fink, if we were truly interested in helping Americans we would devise financial products that were cheap, transparent, simple and free of the ill-effects of leverage. While there have been some steps in that direction including the rise of ETF and index investments, in general, it is still the case that the financial services industry make money on our ignorance or inattention. It is not for nothing that few (if any) Americans have ever read their mortgage documents, or insurance contracts or mutual fund prospectuses in their entirety.
Olen covers a number of other topics including the financial media, especially CNBC. She examines the ways in which women are not well served by the financial services industry. Olen spends a chapter on the housing bubble and its outgrowth from middle class Americans to try and catch up financially during a period of income stagnation. She also tackles the topic of financial literacy and whether we can truly ever educate the American public about the nuances of personal finances.
Olen's message, as stated in the book's title, a dark one. Stock market gains aside there is little to be optimistic about when it comes to the state of personal finance industry. One of Olen's key takeaways is that government needs to provide the average investor with a better set of retirement saving solutions. A recent study comparing America's retirement saving regime to other countries shows us lagging badly behind. In a recent post I echoed this challenge that Olen emphasizes in her book:
The challenge is that Baby Boomers who have seen the entire financial landscape change before their eyes are now reaching retirement age seemingly unprepared for it. While many in this demographic will suffer the consequences, it is also society at-large that will also have to come to terms with these self-induced problems. It would be naive to think that the financial service industry or its overseers in Washington will willingly push for much in the way of constructive change. In the end it may be the case that our financial goals are simply too ambitious and that we need to lower our sights. What is clear is that we as a society have failed and are continuing to fail the average saver.
In my book I note how investing is an adult responsibility we all face whether we want to or not. Until there are wholesale changes in the way Americans financial lives are structured we are still largely on our own when it comes to our personal finance. The best we can do is try to become more knowledgeable about our finances and put into action clear, simple plans to reach our goals. Maybe we should pay attention to Kareem Abdul-Jabbar in Esquire when he talks about one of the things he wished he had known when he was 30:
Become financially literate. “Dude, where’s my money?” is the rallying cry of many ex-athletes who wonder what happened to all the big bucks they earned. Some suffer from unwise investments or crazy spending, and others from not paying close attention...Hey, Kareem at 30: learn about finances and stay on top of where your money is at all times. As the saying goes, “Trust, but verify.”
*The author checked Olen's book out, like a Luddite, from his local library.
The saddest thing about this epic stock market rally. (Money Game)
Larry Fink's radical retirement recommendation. (Term Sheet)
Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen (Amazon)
Helaine Olen on the financial industry. (Big Picture)
How they do it elsewhere. (NYTimes)
Life Lessons with Kareem Abdul-Jabbar - Kareem on What He Wished He'd Known at 30 (Esquire)
Tadas Viskanta is the founder and Editor of Abnormal Returns. Tadas is a private investor with over 20 years of experience in the financial markets. He is the co-author of over a dozen investment-related papers that have appeared in publications like the Financial Analysts Journal, Journal of Portfolio Management among others. Tadas is also the author of the well-recived book: Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere which culls lessons learned from his time blogging.