What's Wrong With Personal Finance?

It is not easy if you have dedicated most of a journalism career to writing about money to read "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry."

This new book by New York journalist Helaine Olen surveys all that she believes is wrong with the financial advice industry.

Olen concedes that quality advice is valuable, but she says it has its limitations, and too much of it isn't quality. "To say that personal finance can do it all for you is delusional at best, and a lie at worst," she told me by phone.

"The personal finance industrial complex continues to prosper," she writes in her book, "but real people find themselves continuing to struggle with "stagnant salaries, income inequality and a society that offered a shorter and thinner safety net with each passing year." Retirement plans are lost to market downturns and bad advice, homes are lost to bad mortgage deals and family finances suffer from job losses, burdensome student loans and more.

Olen doesn't fault the financial writers of the mainstream media (a point that I found comforting), though she sometimes portrays us as cockeyed optimists, persisting in offering financial advice, year after year, even though there is scant evidence that it does any good.

At least, she says, financial journalists aren't taking payola to push products. "We can't accept a cup of coffee without being accused of conflict of interest," she told me. Olen had been a personal finance columnist for the Los Angeles Times.

She says no personal finance or investment scheme can fully protect people from downward spirals or plain bad luck. "For that we need family, friends and, finally, the government, the ... enforcer of everything from the rule of law to insurer of last resort."

Olen hasn't turned over much in the way of shocking new scandals, but she has done an excellent job of putting together a well-written, well-reasoned thesis that is unsettling for anyone looking for help managing money.

So what's the problem? Here's a starter list, as well as a few pointers for all the sitting ducks.

-- It is 'blame the victim." In her main argument, Olen faults famous scolds like Suze Orman for making people feel guilty when they can't manage their money. Orman got rich by selling products, not by economizing on her morning coffee, says Olen. "Her money wasn't earned by investment savvy or astute savings strategies but by convincing many of us that we were so helpless we needed the help of her books and product lines."

Olen contends that not everyone is instinctively good at money management, and that people often fall into trouble, not because they are inept or greedy, but because they have health problems, lose their jobs and the like. "I wanted people to stop blaming themselves," she said.

-- It is conflicted. Far too many experts are compensated when they sell products, especially annuities and other insurance products, says Olen. Agents, brokers and advisers who sit in the bank lobbies all often get paid when they get investors to buy a particular product, so of course they think the product most remunerative for them is best for you.

Even a lot of the supposedly-independent academic research is funded by the big financial firms that sell the products the academics research. For example, she writes of the prestigious University of Pennsylvania Wharton School of Business publishing a retirement investing paper that was underwritten by an annuity-selling life insurance company.

The takeaway? Use independent advisers who are only paid by their clients, and be aware that even they may have some conflicts - steering clients who pay as a percentage of assets away from using those assets to pay off loans, for example. Don't believe all the studies you read about, and Olen's key advice: Don't go to "free" lunch seminars. "If I were a dictator I would ban them."

Advice can be math challenged. Another well-publicized financial writer, David Bach, became known around the turn of the century for "the latte factor" - his contention that simply skipping the morning cup of Starbucks could net a saver an extra $2 million for retirement. The real amount? Somewhere between $50,000 and $175,000, according to a host of other estimates that Olen quotes.

It is way too optimistic. Personal finance writers put forth the idea that anyone can start a business and profit; that investing in the stock market year in and year out will always be a money-earning strategy and that the real estate wave would always reward. To be sure, there were people writing of stock bubbles in 2000 and housing bubbles in 2007, but maybe not enough. Bring your own cynicism to all that you hear.

There are many other problems. Financial firms target women, whom they perceive as easy marks; everyone relies on "financial literacy" to cure financial problems when even people who know what to do can't always manage to do it.

Read the whole book - read it and weep, as the saying goes. Then start with a clean slate and move on. Giving Olen the last word: "The first thing I'm recommending is that we be honest about where we are. It is dishonest to say that we can teach everyone to be excellent investors, that bad things don't happen to good savers, and that good intentions are all we need," she said. "Let's go on from there."