Pound Foolish: Everything That’s Wrong With The Personal Finance Industry

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In a sea of new books, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry managed to catch my eye. What personal finance geek wouldn’t want to read a snarky book that promises to bash Suze Orman, Robert Kiyosaki, David Bach, Jim Cramer, and Dave Ramsey? Does that count as Schadenfreude?

The problem with personal finance magazine writers and newspaper columnists. To start, the author, Helaine Olen admits that most personal finance columnists (including herself) start out knowing nothing about personal finance and are usually just freelance writers looking for any job. New York Times columnist and financial planner Carl Richards bought a house with a negative-amortization loan (not just interest-only, the loan balance actually increases each month…) and recently did a “strategic default” (walked away from his mortgage) after the home value dropped. Another NYT columnist Joe Nocera recently admitted that at 60 years old, he’s nowhere near retirement… his most recent move was to take out money from his 401(k) to remodel his house. I think this is actually an important lesson – the vanilla advice in the media is often just rehashed from elsewhere.

The problem with our money gurus. Personal finance itself is very simple. Spend less, earn more, invest for the long-term. It’s also boring. Therefore, you need people with charisma, salesmanship, and usually a gimmick to draw people in. Suze Orman is new-agey “people first, then money”. Kiyosaki and his fictional Rich Dad is “buy assets, not liabilities”. Bach is “automatic savings + latte factor”. Ramsey is “pay cash, debt is evil”. The book investigates and unearths the skeletons and inconsistencies of each of these gurus. The most important point to remember is that these people got rich by selling you books on how to be rich, not by actually getting rich themselves first! Dave Ramsey declared bankruptcy before becoming a money guru, even though now he tells people to not be a deadbeat and pay their bills.

What about us? Essentially, Olen comes to the conclusion that the average investor is stupid with money. With pensions disappearing, we can’t handle the responsibility of saving and investing for own retirement. It may surprise you that I agree with this, at least partly. That’s the only explanation for the tiny personal savings rate, people buying in-house loaded mutual funds, the existence of equity-indexed annuities with fat surrender fees, and the popularity of daytrading and FOREX accounts. I honestly fear for the huge chunk of people that will rely primarily on Social Security in their later years. But then again, Olen reminds you that it’s mostly not your fault. Middle class incomes aren’t growing very fast. TVs may be cheaper, but housing and education are not. Then there are layoffs, divorce, medical issues, the financial crisis, etc.

Recap and final thoughts. I felt this book did a solid job of looking under the surface of the personal finance industry. Olen is a skilled writer and definitely did her research, even though we are only presented with the “dark” side and not the whole picture. Even a PF geek like myself learned a few things, like the beginnings of personal finance and Sylvia Porter.

My primary criticism of this book is that the overall conclusion is that our financial troubles are outside of our control. The gurus are bad. Even if they were good, personal finance education doesn’t work anyway. Costs keep rising. The only answer given is a vague call for more government intervention. Olen says that she didn’t propose any detailed solutions because they are “as likely to be enacted by our politicians as my dog is to wake up as a cat tomorrow morning”. WELL, EXACTLY! If I were supreme dictator, I’d require anyone calling themselves a “financial advisor” or “financial planner” to be subject to the fiduciary standard. But I’m not. Comparing myself to a middle-class family in the 1950s gives me exactly zero extra dollars today. Complaining about politicians? Also zero dollars.

The personal finance industry is no different from exercise videos, diet cookbooks, or even religious teachings. We all strive to be better than we are today. Most importantly, I still believe that on an personal level there is a lot of room to make an impact. If we don’t take control, who will? I’m certainly not waiting around for my dog to wake up as a cat.

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  1. I think you and she are right that people in the U.S. are just irresponsible with money. They don’t save or invest enough for the future, and as a result, most of the population isn’t going to have enough to retire on. They’ll undoubtedly clamor for the government to help, and the government will intervene by supporting them financially. In order to pay for it, the government will have to raise taxes on those who *do* have money, which will be us, the people who scrimped and saved as we worked hard for years, learning all we could about personal finance, and depriving ourselves of luxuries so that we could prudently invest more for the future. So, the carefree, financially irresponsible people will be fine; the government will just force us to support them in the future.

  2. Nice review. You might be flattered to know you are the only “personal finance guru” I regularly read.

  3. Good points. I work with some very smart people. Very few of them have any idea how to invest. One guy is going on his 3rd investment advisor. He just doesn’t understand that matching the markets (index funds) at low costs is better than paying a guy fees to try to pick the right funds.

    IMHO – the only people who need expensive financial advisors are the very rich who need advise on things like taxes and how to deal with large concentrations of wealth in employer stock.

  4. Nice write-up Jonathan! I recently made the mistake of thinking I was going to wake up as a financial advisor (cat) after being a dog for so long. However, as I started to dig more into it, as well as testing, I learned maybe it wasn’t such a good choice after all.

  5. I just came to post almost exactly what Jennifer did.

    I frequently feel pf blogs and at a larger level PF guru personalities rehash the same crap to get blog hits and linkbacks and endorsements or to sell books etc.

    I love your blog and the research you do and your commitment to details and the fact that you have good income and remain diligent. most pf blogs are the same ol’ “I’m chronicling my adventures in getting out of 50k in debt and learning what an IRA is while trying to make money with a blog to help with that.”

    Your blog is excellent. It’s the only PF blog I still subscribe to and read regularly. If its analytical nature ever went away or changed I’d be terribly sad.

    Just wanted to give you kudos as I feel like this book probably echoes a lot of how I feel about the “PF world” but your blog squarely rests above the fray in my mind.

    so shines a good deed in a weary world…

  6. I actually worked at Fannie Mae for a couple years during the whole Mortgage Crisis. My job was to help back-test the subprime credit models, and I was surrounded by some of the best mathimiticians and statitians in the world. These were literal geniuses in their field, however, I was amazed at how bad these people were at investing. One loaded 80% of his savings into Fannie Mae stock and lost it all. If these people couldn’t make it, what hope was there for the rest of us? After all this, I realized I needed some Personal Finance education.

    Like you said, it’s not that difficult to figure out, but you have to put the time in to learn it. I think these “self help” books of personal finance are an OK place to start, but you need to take them with a grain of salt. I consider it a victory if the only thing a person does after reading one of these books is make a budget and stick to it. At least they’re on the right track.

  7. Those PF gurus have a place in society. I do think they help some people start to even think about saving money, paying off debt, and investing. But they can only take any one person so far before their message become irrelevant.

    I echo what others said about your blog and its analysis. Always helpful to those of us striving to do more than just “snowball.”

  8. This is a great review. Just bought the book. Some of the points remind me of another book I’m reading, The Behavior Gap. One point made is that financial advice, however well intended, may or may not work for a specific individual. Every situation is different. Rules of thumb might be a good starting point, but they are nothing more. It drives me crazy when a Dave Ramsey fan insists that you must save exactly $1,000, then pay off all of your debt, then max the 401(k). Can that approach work? Sure, but so can a thousand other approaches.

  9. What I recommend instead is to read the quarterly letters of smart investment managers that you respect; berkshire, vontobel, baupost etc. Unlike the “personal finance gurus” they do real investing for a living, put their money where their mouth is and have a track record to prove it.

  10. Jonathan,

    Do you know Todd Tresidder of FinancialMentor.com? After reading this blog for about four years and getting to know your personal finance philosophy, you and Todd seem like a great fit. You have a ton of original thoughts in this article and all your others, but the overlap (in my mind) between you and Todd is striking. If you’re not familiar with him yet I suggest you check him out. I recently had Todd on my podcast and his personal finance mindset wasn’t just a breath of fresh air…it was an arctic blast!

    I’d love to see the two of you collaborate on something in the future.

  11. Its not that Black&White. Gurus DO inspire you – thats what they suppose to do. They show and describe the METHOD or the WAY. You only need take your ass out of the chair and apply it, but of course not stupidly – involving creativity. I don’t care who have written Bible (those 4 were not perfect either).

    And putting responsibility to government – is one of the worst thing to do. We can’t say that person is more stupid than government, because government is driven by persons so in the end it is much more stupid. Letting things to government takes responsibility from you, but same time takes freedom and ability to choose and differentiate. In the very end it is communism.

  12. So now she is going to get rich selling a book too.

  13. I think there is little acknowledgement in the personal finance industry of the differences between people, especially when it comes to spending and risk aversion. Like the article in time magazine based on the behavior studies tell:

    “tightwads experience more emotional pain when making a purchase than spendthrifts do, which discourages them from spending more — or sometimes even making the purchase at all. They also may experience more anticipatory pain — an awareness that they won’t regret the purchase just today, but when they wake up tomorrow too. A healthy frugality can come from such an awareness, but there’s danger in taking it too far; that way lies true Scrooge-hood. Of course, there are countervailing dangers in going too far in the opposite direction — in being insufficiently sensitive to the pain of a purchase; that way lies the poorhouse.
    Read more: http://healthland.time.com/2010/11/18/its-true-we-shop-till-it-hurts/#ixzz2KKfurfNP

    But there is an assumption from personal finance industry that people behave rational, at least if only they knew what is “rational”. But as more and more studies show, people are emotional being, often, if not usually, irrational, or at least “predictably irrational”. And so the challenge is how to predict the irrational behavior, and circumvent or at least ameliorate it.

  14. @Andrew – One idea that I find interesting is how Australia does retirement accounts with mandatory contributions for everyone:


    @Jennifer – Thanks for the kind words! I need the boost in my sleep-deprived condition. 🙂

    @Brad Ford – I also know many, many smart people who have no idea what index funds are and don’t understand how their money is invested.

    @Justin InACents – I’m not sure I understand – did you want to become a financial planner?

    @Bobby – I’m glad you like my analytical style. I think my longevity and lack of boredom has come as a direct result from being true to myself and not trying to be everything to everyone. From day one, I’ve said that I don’t want to be a guru.

  15. @P-Money – I agree, the basics are all out there, the hard part is applying it your own life and then taking it another step. I found it discouraging that journalists who wrote article after article about saving and investing topics for 30 years, didn’t even follow their own advice.

    @Candice – Thanks, I agree that the gurus do have their place. I mean, who made them gurus? We did. They are inspirational to many.

    @Andrew – Agreed. I’d add the GMO letters from Jeremy Grantham. I also like reading some stuff from Jeff Gundlach and Longleaf Partners.

    @Joel – No, but I’ll definitely check it out.

  16. I think PF gurus do make you think, which is the first step towards a plan. We started with motley fool, because we didn’t know where to go or who to trust. Over time you realize who gives good info and who are the posers. Our financial plan is basically from 2 books and a couple of dependable URLs. I still follow some tier 2 blogs because there is always a nugget of information that tweaks our plan. Most people haven’t formed a financial plan and want a simple answer. The answer is simple, live below your means, allocation, diversification and low expenses. Time will take care of the rest.

  17. Sorry, my humor gets lost in translation sometimes. 🙂

    Yes, for the past six months I had been working on making a drastic career change (i.e. becoming a financial planner/advisor), leaving behind a good paying career. I want a new challenge; however, I had some concerns and decided to veer away from that path. The major thing was they wanted me to stop blogging, which I could not give up.

  18. Ignoring any potential morality play, the move by Carl Richards buying the house with a negative-amortization loan would seem to be great financial advice. Take advantage of the banks for being so dumb. He should be heralded for his foresite and making this move, it shouldn’t be considered a “problem”.

  19. I went back to the amazon product page for this book, and there is an interesting bullet point under its description:

    “Disciplined investing will make you rich: Gurus also love to show how steady investing can turn modest savings into a huge nest egg at retirement. But these calculations assume a healthy market and a lifetime without any setbacks—two conditions that have no connection to the real world.”

    See, that’s why I don’t think discipline, in terms of holding the stock through lows and highs is by itself enough. Personally, in addition to buying into index funds to the widest possible markets using the fewest ETFs (VTI; VEU; SPY & TIP) I decided I am going to institute an automatic sellout of all my ETFs once their value dropped 5% from their highs (using a rolling STOP-LIMIT function)

    Then once a quarter I am going to buy using the available cash balance in my portfolio (from cash transfer and any automatic sell-outs) the same ETFs in equal proportions. And since that’s a retirement account, I am not concerned about any tax implications from short-term selling. And since Option House charges under $4 a trade, I am not concerned about spending $16 a quarter to buy 4 ETFs (and perhaps another $16 to automatically sell them if market takes a dive)

    But the main point is that, while it’s foolish to buy high and sell low, it’s at least equally foolish to see stock taking a big dive, to lose 1/3 or even half of its value, and just standby thinking that in the long run it will recover. This may be true, but, as John Maynard Keynes quipped “In the long run we are all dead.”

  20. @Jonathan: I suppose Australia’s system is better than the alternative (the scenario I outlined in my first post), but I certainly wouldn’t want the government telling me how much I have to save and how I can and can’t invest it. Would I rather have them tell me what to do than take it from me? Of course. But those are both bad options. I think a lot of people underestimate the likelihood of (what would effectively be) government confiscation of assets, simply because it hasn’t happened to us yet. (For many of us, it happened to our parents or grandparents, but we typically think that it would never happen to *us*, living in a “free” country.) For example, many people assume that any money they put into a Roth IRA is safe from taxes forever. I hope that’s true, but let’s not be naive: http://articles.businessinsider.com/2011-05-13/home/30028941_1_pension-funds-levy-roth-iras

  21. @InACents – They really said that you couldn’t blog? Who did, Ameriprise/Morgan Stanley/Edward Jones? Because lots of financial planners have blogs.

    @Kevin – Perhaps the asymmetrical bet may have been good odds-wise, but I’d be more impressed if he actually made some money in this process. I’m sure in the end he was negative.

    But back to the main point, which is that these writers didn’t follow their own advice. Have you ever seen an article titled “Buy more house than you can afford, follow the herd, and then walk away later.” I’ve yet to see a magazine writer actually reach early retirement themselves, where they don’t have to work to support their current lifestyles.

    @Serge – Good luck. 🙂

    @Andrew – Shrug, like I said, I try to only worry about what I can control.

  22. On thing any people don’t understand risk and reward. In a bull market, they only see upside and over invest in bubble investments like tech and e commerce. In bear markets, they pile out of the market seeking safety (after the damage is done). As a result, they end up buying high, selling low, and missing most of the recovery.

  23. I did pay off a $50000 mortgage balance on a rental house in 2006 before things got bad and now I live in a no-mortgaged house. I wouldn’t have done that without a Dave Ramsey class. His message appeals to alot of people with no hope.

    There was a Frontline show on 401(k)s which showed only those high income folks do well when retirement becomes a reality vs. the dying defined benefit retirement. After that I borrowed from my 401(k) to buy an investment and when I sold it 2 years later for a profit I didn’t immediately pay it back as the market was way down. Put it into another investment.

    Times are hard for most people. Lots of hard working high flyers in my city are busted. All my lenders aren’t lending and moved to some country branch bank. Saving what you have is all that’s left for awhile.

  24. I’m reading the book right now. I generally agree with your review. People like Orman and Ramsey need to be bashed at every opportunity.

    Where Olan falls apart for me is her reliance on the standard left wing attitude that people are helpless in the face of life’s crises. Oh, woo am I.

  25. I love your site, but I can’t help but notice the irony of having a negative point in your post about how these other PF advisors get you to buy their book, while simultaneously touting another book.

    Of course the tactic to utilize to sell books after that argument would be to sell a book about how the other guys got you to buy their books. Sneaky! 😉

    I may have to write a book about how this guy got folks to buy books about not buying books from other people. Genius!

  26. Excellent review. It sounds interesting, but I wouldn’t like how she thinks it is out of our control. I hate when people think and talk like that, because it simply isn’t true, so thanks for sharing your review. 🙂

  27. @Ryan – I’m not saying selling books is bad; I love books. I’m saying selling a book on “How to be XXX” when you’ve never actually done “XXX” on your own is silly. Imagine a book on How to Build a House from someone who doesn’t know how to pull out a nail. Olen isn’t writing about how to get rich, it’s more of a expose-type of book like Fast Food Nation.

  28. @Jonathan – Thanks for the review. I agree with your conclusion, realizing we’re in control of our destiny financial or otherwise is key. I like your goal of doing so many book reviews this year. Would you consider adding a read/skip recommendation to your reviews?

    Also, the author was on book tv and the interview is still available.

  29. @Keith – Thanks, but I’m reticent to do that… everyone is looking for different things. Instead, I try to just include enough information about the book so that you can make your own educated decision. All the books so far this year were enjoyable to some extent and I’m glad I read them, although the current one I’m finishing up would probably be rated a “skip”.

  30. @ Jonathan, fair enough, I see your point! Thanks for the great blog man, always a good read 🙂

  31. @Devi: I’m reading the book right now. I generally agree with your review. People like Orman and Ramsey need to be bashed at every opportunity.

    What a nice attitude. Because you have a different approach, they deserve to be “bashed”?

    There are many kinds of people and personalities out there–not everybody is just like you! IMHO, it’s one of the great tragedies of the modern era that despite the wonderful nature of the Internet in letting people find many different voices, that people basically still just clique up and cast aspersions on people who are different from themselves.

  32. @Ryan – Thanks for reading! 🙂

    To clarify my review, the book basically digs up all the little skeletons in the closets of these gurus and points out all the inconsistencies and/or shifts in their messaging. To be honest, I knew about most of them but it’s definitely all put together in this book. An example is David Bach’s “get rich with real estate” pitch in 2006:


  33. Jonathan: Yes to clarify, several different firms I talked with stated we would not be allowed to run our site due to the financial involvement and relationships. If I went on my own, or even with some more local firms, I could still do the site, but it’s all under a lot more scrutiny. This was one of many concerns that stopped us from moving forward.

  34. Wow, this blog was one of my earliest Personal Finance reads… I probably have comments going back to 2006.

    Congrats @Jonathan for keeping it going this long!

    Funny thing is, I stopped reading a lot of PF stuff a few years back once I had cycled through all of the “popular” books. I realized that they were basically lying through their teeth (just as Olen has).

    I honestly just came back to the blog because I heard an interview with The Economist and this page came up when looking for the book.

    I am honestly on the fence about even reading the book, because it sounds like an exercise in finding holes in Swiss cheese. But I’m far less dire about the whole personal finance world in general.

    I still firmly believe that people can achieve their personal finance goals, but I’m pretty convinced that most people don’t actually have “goals” per se, which is really their first road block.

    @Andrew: if there is a role for government in this whole mess, it should be the simplification of financial instruments.

    “Forced savings” definitely raises some serious questions, but there are lots of other low-hanging fruit available. For example, the government could standardize the credit card contract. They could make it a one or two page document that could be understood by a fifth grader. And then they could make that the “credit card contract”. You & I would be free to find a CC that did not follow the contract. But doing so would immediately raise red flags because it would remind me that the company was trying to get away with something.

    Frankly, we could easily standardize such contracts for basically every major loan (home, auto, school). And then simplify the educational process for average people. It won’t stop people from doing stupid things, but it will put best practices first and help guide them into making decisions they can understand.

  35. @Gates I am in the middle of reading this book, and it is actually quite engaging, in the style of Barbara Ehrenreich (a continuation on its theme in “Bright-Sided: How Positive Thinking Is Undermining America”)

    By “Forced saving” you probably refer to the Ghilarducci plan (described in the book) involving mandatory participation in a government-run savings plan to which each worker and their employer would supplement their Social Security pension by contributing 2.5 percent each of her or his salary. The plan would be administered by the Social Security Administration, but would be separate from Social Security records. In turn, a refundable tax credit of $600 would go to each participant, regardless of his contributions. The account would have a guaranteed interest rate equal to the government’s official inflation rate plus three percent.

    So with the $600 refund, it will be a net benefit for those who earn less than 24K a year (household that earn less than 48K a year)

    Now, personally what I like about 401-K and IRAs is ability to liquidate them if push comes to shove (albeit at a steep penalty). However if the social security age is going to be raised to 70, it would be nice to have some guaranteed income stream coming at 59 years (as presumably this plan would) if someone has to cut down his work at 59.

    Anyway I am intrigued now to read Ghilarducci’s book “When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them” to find out more details about it

  36. I imagine that many would be better off financially if they just didn’t buy the guru books. But that doesn’t mean that the message of Ramsey and Co is flawed or bad. The readers refuse to follow the complete advice. “Ramsey wants me to cook dinner everynight and get rid of cable. I will follow him but still eat out and spend $200 on cable each month. But besides that, I’m completely onboard with Ramsey.”

    Like many that have contributed to 401ks over 20 years, I have a fair amount in the stock market now, but I don’t count on much of a return. The 401k concept is to fund it and forget it, which is exactly what professional investors want from the 401k investors: it benefits them not you. You also hear about long term returns on the stock market but they fail to tell you that its basically flat over the past 15 years. We’re in an upswing right now but recent history says that will change.

    To me, 401ks are great for the tax benefit and it kinda forces me to save. I hope for a small return and pray to not lose anything. But I don’t count on a 5+% return over my life.

    Im also very lucky that I work for an organization that still provides pensions to new employees. I’ve looked at moving jobs but the pension is a good benefit that few others offer. No, I don’t work for the govt. 🙂

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