Pound Foolish

by Helaine Olen

I eagerly anticipated reading “Pound Foolish” by former Los Angeles Times financial (Makeover Feature) editor, Helaine Olen. It’s right down my alley–another critique of the personal finance industry’s dirty underwear and how this industry looks out for their best interests over our own. I was in heaven! I love these types of books. More needs to be written.  I listened to her interview on a podcast and loved what she had to say about the financial industry and bought the book right away.

She talked about many of the gurus we all know: David Bach, Robert Kiyosaki, Suze Orman, Dave Ramsey. Olen points out that they say some of the right financial ideas to their followers while subtly encouraging spending and the wrong financial ideas through their endorsements and expensive follow-up classes (e.g., how to buy real estate with no money down, etc).

After all that has happened in the past decade, none of this should surprise us. For us regular folks, it is hard to imagine why for example, Suze Orman, who is worth $30 million, as Olen reports, and yet endorses a credit card company! And Orman started telling people about buying new cars. Why? According to Olen, when you have as big an ego as these gurus have, you only want to get bigger and richer. IMO, we have something that these gurus don’t: we have “enough!” (Quoted in the introduction of John Bogle’s book, “Enough”).

The critique doesn’t stop with the well know gurus. The author brought out the conflicts of interest by the boatload covering the entire financial industry. And there are plenty! Some I had not thought about. She covers many topics such as the financial literacy programs supported by banks. This was new to me. I was wondering how a positive topic as financial literacy programs could be a conflict of interest. The ah-ah came to me instantly: these same banks turn around and offer credit cards to clients with over-the-top credit terms and higher interest rates. Literacy “programs” apparently are paid for by the folks who pay higher interest rates so the risk in offering these positive image programs is borne by the customers whether or not they took a class. Is this is an example of moral hazard or just a response to a regulation that if you serve poor people, a bank must offer literacy programs? Then we wonder why so many of these literacy programs fail—the financial industry uses literacy programs to promote their business! And what is that business? Borrow and spend, of course. Now I get it.  Duh!

Olen believes that the support for student programs, Junior Achievement and Jump$start, provide the brand name introduction of the big banks to teens. As a teacher, I have used both of these programs and have noticed the big bank ads all over their brochures. One solution that I always mentioned to my students is to use your local credit union. (As a side point, I never liked the Stock Market Game as it showed students how to compete and gamble as a game by winning or losing, rather than provide long-term genuine saving and investing strategies. Investing is serious business—not a game at all!)

She also berates the financial information offered on many of the financial media giants 24/7. I loved Olen’s description of Jim Cramer– his frat-boy mentality, his testosterone bloated antics with the back drop of tacky sound effects initiated by huge buttons. What a show! Yet, millions watch that trash–it’s highly rated since 2005. Cramer blew it big time with his support of Bear Sterns. How about his investment advice? Sure, invest in four or five individual companies in different industries and you have diversification!  I KID YOU NOT!

I devoured Olen treatise like a kid with five dollars burning a hole in my pocket when walking around a candy store. However, my sweet tooth turned sour when she dragged in good people–authors that have successfully offered us regular folks objective financial information. For example I could NOT understand why she attacked the good authors of the “Millionaire Next Door” and “The Millionaire Mind” and their motives. She condemned the Millionaire Next Door author’s profile of the American wealthy implying a disservice to readers that all you have to do to become a millionaire is to start your own business. Huh?

I read those books. Both are great—every American should read them. Millionaire Next Door and Millionaire Mind authors reported that the living habits of America’s millionaires are available to all of us who have a modicum of discipline and can rely on our everyday common sense. American millionaires built wealth slowly by living frugally, sending their precious little ones to public schools, paying off debts quickly, saving and investing regularly, driving old cars and trucks for years and dining at home in their dungarees. Even Warren Buffet proudly announced in an interview in Time Magazine that “no Buffett in Omaha has ever attended private schools.” Ben Franklin said two centuries ago “spend less than you earn.”

My husband and I have never owned a business. We worked as public school teachers and yet achieved millionaire status through the good ideas found in the “Millionaire Next Door.” Americans would still be surprised to learn that the average American millionaire is not, and never has been, the limo-chauffeured, tuxedo-wearing, patent superficial, mansion living, martini-guzzling, nitwit inebriate with the Gatsby values and physical attractiveness on their way to the Hamptons.

Along with the idea of reducing spending, she distorted that “latte millionaire idea” offered by David Bach by implying that you don’t save a million by giving up lattes. Of course, any fool knows that and she accurately pointed out Bach’s erroneous statistics. But statistics are beside the point–it’s an attitude of spending that makes the difference. If people spend frivolously on lattes, they will probably spend frivolously on new cars, big houses, private schools from preschool through college, the latest fashion, expensive cosmetics, etc. The latte habit is only a point to look at your daily spending and how maintaining the image of “looking rich” damages your financial status while enduring needless stress of trying to keep up with the Joneses.

I agree with the other reviewers who report that she left out solutions. But that was not the intention of this book! The subtitle is very clear: “Exposing the Dark Side of the Personal Financial Industry.”   I don’t begrudge the author when there are so many negative financial issues that we consumers need to know and address—high costs that are hidden, conflicts of interests, “safe” retirement products that don’t keep up with inflation. I agree with the author’s intentions of “exposing the dark side” 100%.

If you want solutions to address the conflicts of interest of the financial industry, you need to read elsewhere. And there are plenty of books that offer solutions: John Bogle’s books or the books by his followers, Ferri, Swedroe, Roth, Burns, Bernstein and the Bogleheads. John Bogle passive investing strategy and low costs bypass all of the Wall Street shenanigans that Olen accurately points out and learning this simple strategy address financial literacy 100%.

I highly recommend the book with four stars, despite some distortion of the latte idea of reducing spending and attacks on the Millionaire Next Door authors. I have listed it in our list of recommended books. Get your copy today!