Pound Wise

Hold Your Wallet
I wasn't fond of Helaine Olen's Salon article on the 401(k) industry. It required too many asterisks. For example, she writes that target-date funds have an average annual expense ratio of 1.08%. Yes, but most target-date investors pay less, because the biggest target-date funds are cheaper than most. She writes that "the 401(k) industry serves a captive audience." Yes, participants cannot choose a different 401(k) provider--but plan sponsors can and do. She writes that Legg Mason's Target Retirement Series of funds costs 1.47% in expenses. Yes, but nobody owns those funds.

In contrast, I quite like her book, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, which I read this past weekend. There were some questionable passages, such as the 401(k) section (the Salon article turned out to be almost entirely a book excerpt). Pound Foolish is not nuanced. However, Olen has been watching the personal-finance business for nearly 20 years now, she is a keen observer, and she has the interest of investors at heart. She also tells great stories. At its best, Pound Foolish is a lot of fun.

The best being when Olen takes on mopes like me--and her. (Although not me specifically; surprisingly, Morningstar receives nary a mention in the book.) As Olen portrays it, her fellow personal-finance writers and investment pundits are a rogues' gallery of smooth talkers who tell an audience what it wants to hear, rather than what it should hear. Suze Orman, Money magazine, CNBC, and of course Jim Cramer are some of her many targets. Are they all that bad? Probably not, aside from Cramer. But her warnings are useful and well-taken. Pundits get paid by the eyeball, not by being right.

(Two of my favorite anecdotes concern Orman and Cramer. A couple of years back, Orman launched an investment newsletter called The Money Navigator that recommended model portfolios. The newsletter quickly attracted 60,000 subscribers. They were told, among other things, to buy the Sector Rotation Fund with a 1.65% expense ratio--which turned out to be run by the guy who wrote the newsletter, since Orman didn't do that job herself. As for Cramer, Olen cites a finance professor who concluded that Cramer's stock picks have been so spectacularly wrong that an investor would have made more money being short them than being long.)

Olen also does well in describing those who sell investments, not pitch for eyeballs. As anybody who has spent time inside the investment industry knows, the best way to separate a prospect from his money is to scare him. Make him worry about outliving his money by informing him that three times more people live to be 100 years old now than did a generation ago. Don't mention that even so, only 0.02% of Americans are currently centenarians. Sell yield, not total return, because yield is what government bonds do; yield looks and feels safe. Pound Foolish gives the flavor of those investment seminars.

There are also a host of amusing but instructive stories about our collective gullibility. Olen recalls the curious case of David Bach, an author who briefly dominated the personal-finance charts a decade back (and who appeared on The Oprah Winfrey Show) by arguing that people could become millionaires merely by forgoing treats like their Starbucks lattes. She also tells the tale of my personal favorite, Harry Dent, who sold books and mutual funds in the 1990s by arguing that the next decade would be a huge bull market because of demographic factors. To believe in that was a triumph of hope over analysis--but many, many did.

One thing Olen may wish to rethink is her contempt for commission-based sales. She regards this as a straightforward issue, that it's "common sense" to prefer "financial advisors … paid by a percentage of fees under management" to those who are paid commissions on the sales of securities. However, her book undermines this stance. If the switch to asset-based fees is a great improvement, then surely investors must fare much better today than they did 20 years ago. Olen does not make that argument, though. Also, she tells of a couple who found an "investment counselor" through church who charges "over 2 percent of assets" per year for his services. That, friends, is not better than buying and holding a load mutual fund.

Pound Foolish is the story of how hope becomes failure. It is the sequel to Joe Nocera's celebratory book of 1994, A Piece of the Action: How the Middle Class Joined the Money Class, which argued for a brave new world wherein the middle class would invest its way to riches, just as the upper class had done before it. In her book, Olen wheels out a chastened Nocera, who no longer is an optimist. Nocera approaches his retirement age with much less money than he expected to have because of "the combined impact of divorce, poor investing decisions, a bad stock market, and an ill-timed home renovation." Pound Foolish is the Piece of the Action for today. It's the perfect book for the post-2008 funk.

Olen wrote the book that her audience wished to read. That's ironic, given her subject matter, but it doesn't invalidate the effort. Pound Foolish is a period piece, yes, but it's an entertaining and useful period piece. It belongs in the investment library.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.