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Book review: Pound Foolish

(Money Watch) Helaine Olen's book, "Pound Foolish," an expose of the personal finance industry, has much to recommend it. Problems are well exposed, but investors are left in the dark about how to deal with those issues. This book has many positive aspects, but in the end, it comes up short of helpful.

The positives

Olen does a good job of exposing the dark side of the financial services industry, most of which (specifically, most banks and insurance companies) has the goal of sheering investors like sheep -- selling them products that have high expenses and generate large commissions. Even worse, the complexity of many of these products (such as variable annuities and index-linked products) makes it extremely difficult for investors to even understand the nature of the risks and the impact of the costs on expected returns.

Olen shows how such personal finance personalities, such as Suze Orman and Dave Ramsey, who have cult-like followings, offer advice that is often conflicting. While both have done a great job of marketing themselves, their financial/investment advice leaves much to be desired.

Olen also does a good job of exposing how the industry uses the field of psychology to exploit the many behavioral mistakes many of us are prone to make. Some of her best work is on those "free dinner" seminars. She exposes the aggressive sales tactics employed to get people to buy products which should never be bought and would never be recommended by any advisor who was held to a fiduciary standard of care (which requires them to provide advice that is solely in their client's interests). Anyone going to those dinners and buying those products will eventually find out that dinner was the most expensive one they ever had.

Olen also discusses the lobbying efforts the industry makes to prevent legislation and regulations that would ban the practices that enrich the industry.

The shortcomings

My problems with the book go beyond Olen's lack of knowledge of finance. The book is filled with numerous errors, which one might overlook if not for the other problems. The biggest issue isn't that Olen is basically dismissive of the "latte factor," as she ignores the problem of the bad spending/savings habits of many Americans. The biggest problem is that Olen doesn't offer solutions for investors.

This is especially troublesome because the solutions are well known and easy to implement. For example, while Olen rants about the problems with the suitability standard of care that the brokerage and insurance industries are held to, she fails to note that you don't need to have the SEC mandate a fiduciary standard of care. Instead, investors can simply demand that any advisor they work with provide the fiduciary standard. If an advisor won't provide it, refuse to work with them. Another simple solution is to avoid working with any advisor who gets paid from the sale of products (they receive commissions) instead of solely from fees paid by the investor. Investors can also require an advisor to show that they themselves are investing in exactly the same vehicles they are recommending. If they won't show you that, refuse to work with them. And finally, she could have simply recommended that investors use only low-cost, passively managed funds (such as index funds and ETFs based on indexes). That's the same advice Warren Buffett offers to investors.

While Olen notes that much of investing is complex, there are simple common sense strategies that all investors can follow. 

Image courtesy of Flickr user Horia Varlan

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