While simplistic and misleading, Helaine Olen’s new book slamming the supposed iniquity of the financial services industry, and the advisors who work in it, is getting some attention. Too bad that the polemical Pound Foolish: Exposing the Dark Side of the Personal Finance Industry offers next to no solutions for the pumped-up menaces it warns about.
The industry Olen depicts is one where moustache-twirling Snidely Whiplashes prey upon honest victims. Yes, there are some villains skulking around the financial scenery – as Bernie Madoff demonstrates so horrifically – but not a lot of them. The book decries sleazy sales practices, such as using investment seminars to scare the elderly into buying fee-laden variable annuities, although this ploy is a relic that’s used less and less nowadays. Olen rightly criticizes the likes of CNBC’s frenetic Jim Cramer and motivational guru Suze Orman. Yet they are easy targets.
The trouble is that, in the book’s overwrought eagerness to paint a bleak picture, Olen concocts a cartoonish world that omits important facts and distorts reality. To the author, Wall Street is a dark and evil place with no redeeming value. Financial advisors are hucksters who make absurd promises they can’t keep. Gullible victims, as innocent as small children and through no fault of their own, easily fall into these fiends’ foul clutches.
The core problem, Olen declares, is that wages stagnated for most Americans, years ago. Plus, the old comfortable supports, like company defined benefit pensions (where you get a fat, guaranteed retirement payout based on years of service), are gone or severely diminished.
Here, Olen, a self-professed Occupy Wall Street sympathizer, stands on firmer ground. Alas, all the author can muster as a prescription is a vague call for government to restore those golden days of yore, in the 1950s and 1960s. Unfortunately, those times are not returning. A wish is not a plan.
A very good way to deal with the economic travails of modern society is to find a skillful financial advisor. Even Olen admits, in a fleeting mention (on page 11), that she is “not arguing that all financial advice is useless.”
No kidding. In fact, advisors are a fine way to set up your finances to give you a better chance (not an iron-clad guarantee) of retiring with adequate resources. Despite what Olen claims, no advisor can legally promise your portfolio will do well. What a good advisor can do is give you solid guidance about how to boost your odds.
An advisor wants to keep your business for decades, so it’s in his or her interest to look out for you and furnish the expertise you may lack. Although you wouldn’t know it from Olen’s treatise, financial advice encompasses far more than investments – notably taxes, estate planning and insurance.
When I was a kid, my father died. Without his insurance policy, my family would have been destitute. An advisor can figure out what size and kind of insurance you need, far better than a one-size-fits-all online calculator can.
What about the crooks, though? When Olen mentions advisors, nothing is positive. The truth is that the Madoffs are a tiny minority. An analysis done by my firm’s financial website, AdviceIQ.com, finds that only 7% of all advisors have a regulatory complaint. That’s far fewer than charges against doctors and lawyers. AdviceIQ vets advisors in our network (they must pay to join) to ensure they have no regulatory infractions, on either the state or federal level. If they have, they can’t be in it. That way, people can better judge who is suited for them.
Despite Olen’s contention, advisors are not only for the wealthy. Lots of advisor firms take on clients who have modest assets and incomes. Advisor Financial Services in Woodstock, Ga., for instance, has many clients with less than $100,000 in assets. The idea, says partner Jeffrey Baumert, is to grow with them.
Other shortcomings of Olen’s book:
Exaggerated problems. Let’s take a look at its condemnation of investment dinners, hosted by brokers eager to sign up prospects for variable annuities. In reality, today advisors largely avoid this tactic, which they see as cheesy. The vast majority gets clients by word of mouth.
Basic math shows, using Olen’s own figures, how small-bore the dinner scheme is. The book says six million people attended the meal pitches over three years. That means two million per year at, say, 50 per session (my estimate). Assuming only one advisor was at these events (likely several attended), that means 40,000 advisors were involved yearly. That is 2% of total advisors, who number around two million (brokers, fee-only advisors, insurance agents and bank trust officers). Hardly an epidemic.
What guarantees? Repeatedly, the book contends that financial types pledge lavish returns on investments, if only John Q. Public signs up. Nonsense. A typical Olen assertion: “Investing is risky and there are no guarantees. This is not something very many people will tell you.” Huh? Especially since Sarbanes-Oxley passed in 2002, advisors are almost paranoid about explaining that a financial plan or transaction is not a guarantee.
Misunderstanding advisors. Olen denigrates the “culture of commissions,” but doesn’t seem to realize that commissions are waning in the advisor world. Time and again, the author displays scant understanding of advisors. When writing about brokers who push their company’s products to generate the fattest commissions, the book neglects to say that they are a shrinking minority.
Olen over-simplifies the advisor realm’s dealings with the fiduciary standard, which requires advisors to act in the best interest of the client – a dictum that fee-only advisors live by. Classically, brokers operate under the less-stringent suitability standard, allowing them to sell investment products that bring them higher income than an alternative that might benefit the client more. Federal regulators are weighing imposing the fiduciary rule on brokers, and Olen notes that this prospect makes them uneasy.
This doesn’t tell us the whole story, however. Increasingly these days, brokerages are shifting to a fiduciary, fee-based system. Half of brokerage revenue now comes from fees. Reasons: That system plays better with the post-financial crisis investing public, and fees are a more dependable revenue source. Olen says that Wall Street house Morgan Stanley, which operates the biggest brokerage operation, stands to lose $300 million if it moves to the fiduciary standard. Guess what? Even without government prodding, it already is making that transition.
Unsupported and incorrect assertions. There are too many of these for comfort. Example: financial literacy instruction, a movement to give kids lessons in personal finance. Indeed, tests show that youngsters who take these classes do not emerge smarter about money than those who don’t. Financial companies are a force behind this education program.
Why has the effort failed? To blame, Olen suggests, is Wall Street’s sabotaging its own educational efforts – the culprits are “the very people who have the most to gain by society’s continued financial ignorance.” The book neglects to furnish proof for this conclusion.
Another example: If the financial industry were truly dedicated to promoting financial literacy, Olen writes, then “they would offer up products that are easy to understand.” Well, they already do. Much of what they offer are mutual funds, whose structure is very simple. Easy-to-read explanations of funds abound online.
The biggest eye-roller is the author’s statement that: “Americans were sold on the idea that good financial habits and a well-balanced investment portfolio could compensate for stagnant and falling salaries.” Really? Where’s the backup for this? As is the case throughout Olen’s book, the answer lies in Olen’s imagination, not in the real world.
Nicholas Stuller is the chief executive of AIQ, the parent of financial website AdviceIQ.