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Pound Foolish: Exposing the Dark Side of the Personal Finance Industry

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Faddish advice, rampant conflicts of interest, and a blame-the-victim mentality are some of the problems personal finance expert Helaine Olen has with her industry.

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At a time when we have more personal finance advice than ever before, why are so many Americans in bad financial shape, and why do we say money is our number one worry in surveys?

Helaine Olen, who has written about personal finance for the New York Times, the Washington Post, and many other publications, wanted answers. So she investigated the world of financial advisors, TV personalities, academics, brokers, and regulators.

What she found was faddish advice, rampant conflicts of interest, and a Horatio Alger narrative that holds individuals completely responsible for their own failings and lets crooks conveniently off the hook.

It's all recounted in Olen's entertaining book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.

She spoke to MintLife's Matthew Amster-Burton about bad investments, free steak, and the limits of preaching personal responsibility.

MintLife: You used to write the Money Makeover series for the Los Angeles Times. I love reading the financial makeover in my local newspaper, but I've always wondered what would happen if you went back and visited these people 10 years later.

What did you find when you did that?

Olen: I found generally that people who were in decent shape remained in decent shape. The people who weren't mostly were not.

That being said, there were a couple of caveats. One is what happened to California real estate. Some of my subjects had bought property, you know, in very high-end areas. Keep in mind that this is a Los Angeles-based feature.

So, my subjects who had bought property in places like West LA before the run-up, and held on and didn't take second mortgages and the like, ultimately did okay.

Some of my people really did suffer serious setbacks. One in particular I'm thinking of was on track to retire a multi-millionaire. Part of this was because he was a pilot for one of the airlines.

MintLife: Right.

Olen: We all know what happened to the airlines after 9/11, and his was one that had gone into bankruptcy. So his salary was cut by 40% and his pension was cut by more than half, and he started investing in real estate to make up the losses.

His original house, i.e., the one in the nice area of Los Angeles that he owned, has continued to do well for him. The stuff he invested in, not so well.

MintLife: Nearly everything written about personal finance-I'm certainly guilty of this myself-is about how if you make the right decisions, you're going to turn out okay.

It's as if the last five years didn't happen, because you still hear exactly the same things over and over.

Olen: I would say almost the last 30 years. It's not a problem that started in 2007.

MintLife: True.

Olen: This is a problem that really begins in the 1970s and early 1980s when two very powerful currents meet each other. One is the start of income stagnation and income inequality, which of course leads to wealth inequality.

And the second is the do-it-yourself system, what academics like to call responsibilization or financialization.

We went from a world where a lot of people had pensions to where almost no one had pensions. And you were supposed to be in charge of this at a time where increasing numbers of factors were going against you.

We just started doing this cheerleading, right? It makes sense for a number of years because of the great bull market of the 20th century, from 1982 to roughly 2000.

So we all think we're geniuses, right?

We're putting money into the stock market and it's going up. And we start to believe this contradiction that our stock gains are both inevitable and they're a result of our own genius.

MintLife: I run into this all the time. I talk to people who say, "I bought Amazon (NASDAQ:AMZN) at just the right time. I can do this, why can't everyone?"

In most cases it's because they're not talking about their losses.

Olen: Right. That's what I would say. Tell me about eToys in 1999.

MintLife: A lot of the book talks about the need for, I guess I would call it, common sense regulation.

And every time I write about something like the dangers of equity indexed annuities, or leveraged ETFs, or even student loan reform, I often hear, "Look, in the right hands these are useful tools, just like a sharp knife is a useful tool. If we regulate them, we're going to damage innovation, damage the economy."

Olen: The first thing you have to understand is we're dealing with thirty years of a powerful ideology that regulation is bad in a free market. Lack of regulation in this area is a disgrace.

Are these useful tools for some people? Absolutely.

Can people get into real trouble with them? Absolutely.

This stuff is sold to people as a way of protecting themselves, when in fact it does no such thing.

It's like giving somebody a sharp knife to butter bread. It's not going to work out well for an awful lot of people. Equity indexed annuities are, for most people, not a great idea.

If they were such a great idea, then why are the commissions so high on selling them?

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