BOB GARFIELD: Turns out you need money to survive, but maybe you don't earn enough of it to do so worry-free, much less be sure you’re provided for in your retirement years. The consequence is a lot of anxiety, confusion and often a lot of very poor decision-making. But none of us is in this quandary alone. A vast and voracious personal finance industry has evolved with promises to put our financial houses in order. This includes a whole genre of personal finance media, Jim Cramer, Suze Orman and the rest. But much of this industry, says Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, is built on a fundamental lie.
HELAINE OLEN: Right. For more than 30 years, our incomes have stagnated and fallen, our net worth fell 40% between 2007 and 2010, alone. In the current run-up on the Dow, the vast majority of the gains went to the top 1%, followed by the top 10% of the population. And, at the same time, there’s this whole vast industry out there that’s saying, we have the secret, we can tell you what to do, and you're going to get ahead. I always say personal finance can help you, but it can't save you.
BOB GARFIELD: Now, there are certain principles of personal finance advice that are unimpeachable, right? Save, if you can. If you invest in the stock market, do so at the same rate over time, and let the laws of market averaging take hold. Let’s see, what else? If you’re going to buy a mutual fund, get a no-load fund. Don’t pay a management fee. Is there anything wrong with dispensing that kind of advice?
HELAINE OLEN: Not really, though there's two different things that go wrong. First, a lot of people aren't dispensing that kind of advice. There are people on the radio every day trying to tell you why load funds are a good idea. Dave Ramsey, one of the big gurus out there, is one that did that this week, actually.
The other part is the idea that the stock market’s going to do well for us over time is to forget the line that’s on every prospectus out there, which is, “Past performance is no guarantee of future returns.” In the 1990s, people were telling us quite routinely to expect 10 to 12% average annual returns. Japan's stock market, for example, hasn't gone much of anywhere for more than two decades now.
BOB GARFIELD: What about the big brand-name personal finance gurus? I’m talking about Suze Orman, for example. She’s not on your Christmas card list.
HELAINE OLEN: I don't believe so. Suze Orman is basically quite conflicted. She's, for instance, marketing her own prepaid debit card. She, at one point, was saying to people that she had hoped it would be used it for future credit score references. But when you went to her website, there was a huge disclaimer saying that usage of the card would not be used to determine one's credit score.
BOB GARFIELD: Because it wasn't a credit card, it was essentially a prepaid debit card.
HELAINE OLEN: Indeed, which is a very different beast. Probably, however, the person whose advice is really just out there is a guy named Robert Kiyosaki. Kiyosaki was one of the big gurus of the past decade, this whole idea that you don't need school smarts to get ahead, you need to learn how to increase your cash flow.
ANNOUNCER: Now, bestselling author and financial expert Robert Kiyosaki, shows you the secrets to generating a lifetime of passive income, through real estate investment.
[SOUND UP & UNDER]
HELAINE OLEN: And one of the ways to increase your cash flow was to buy houses with no money down and flip them and, you know, move on to the next house. People who had bought houses following Kiyosaki, for instance, some of them had taken advances on credit cards to come up with the down payment. We all know what happened. The housing market began to leak air and then crashed altogether, and people lost an awful lot of money.
BOB GARFIELD: And yet, he's still out there hustling.
HELAINE OLEN: Kiyosaki gets that people don't want to cut back, that they need to increase their cash flow. So he's telling you, it's okay to aspire to this great life of luxury, I’m gonna show you the way to make more money. He gets at something that many other personal finance gurus don't. Suze Orman, on her show, told people they can't afford to have second children, as though this was a consumer item. Dave Ramsey or David Bach, who is the man who came up with “the latte factor,” they’re telling you to cut back and cut back and cut back.
BOB GARFIELD: Tell me about the latte factor because this is simply phenomenal.
HELAINE OLEN: The latte factor starts in the mid-1990s, and his idea is if you give up your five-dollar-a-day latte and you put that money in an account where it will grow at 12% average annual returns, you will retire with between one and two million dollars –
- over the next 30 to 40 years.
BOB GARFIELD: Okay, I’ve got several questions about that, Helaine.
HELAINE OLEN: Okay – okay.
BOB GARFIELD: First, where does a latte cost five dollars? Secondly, where do you get a 10% rate of return? It doesn’t sound right to me.
HELAINE OLEN: It does not sound right, and especially was not right in 1999, when lattes were closer to two dollars. And he was also assuming you went and did it every single day - Christmas, Thanksgiving, the whole thing.
DAVID BACH: I just created a Latte Factor iPhone application because in the old days I’d tell people, take out a pad of paper and write down your latte factor as you go throughout your day. Well, now those of you who are super hip and high tech, and it seems like it’s everybody….
HELAINE OLEN: He then assumes a 10 to 12% average annual return in the markets, which, you know, even in the days of the Internet bubble, not a lot of people were saying was going to happen. He then forgets to add in inflation and taxes. So when more reputable people take a look at this number, you end up with somewhere between 150,000 and 175,000. Well, that’s certainly a nice chunk of change. We’re not talking retiring a multi-millionaire. But he went on to a great career with this. He went on Oprah, he’s trademarked the term “the latte factor.” It is still out there to this day, constantly, as I think you know.
BOB GARFIELD: Now, you reserve a special circle in hell for CNBC and for Jim Cramer, the stock tout, in particular. Why?
HELAINE OLEN: I think they are selling a false dream. Less than 1% of us, year-in, year-out, will be able to beat the markets. And in this group, I would include the vast majority of professional money managers, least of all is Jim Cramer.
JIM CRAMER: - exports. But Bernanke gets it. The Fed is staying stock market-friendly. He’s staying the course. I am urging you to do the same! Mad Money will be right back.
HELAINE OLEN: When people look at his record, the best thing you could actually do is the second he says to buy something is to immediately short it or bet against it. And, in part, that might be his stock-picking abilities, but there's also one other thing going on. He yells out, “Buy IBM,” a lot of other people are about to go buy it and, as a result, it’s gonna run up. And that has nothing to do with the quality of their business. And so, what happens is over a period of a couple of weeks it runs up and then it runs back down. So this is definitively not the way to get your stock-picking advice.
BOB GARFIELD: One of your beefs is that the insecurities of Americans are being exploited, sometimes for big bucks. But it’s not just adults, it’s – children?
HELAINE OLEN: That's right. The financial literacy movement, which really starts in the 1990s and picks up steam after 2008 and is very explicitly marketed as a way of saying, well, we don't need legislation to protect people because, really, they should learn how to do this themselves.
And I just need to say that financial literacy broke my heart, the idea that we can teach children from ages three and up the basics of finance, the basics of budgeting, and this will allow them to be savvy personal finance consumers when they grow up, we have absolutely no evidence that this works, whatsoever. And the groups paying for this, for the most part, are the financial services industry. You have to ask why because, of course, is it really more effective to try to teach people how to interpret a mortgage with “gotcha” terms that they won't see for another 20 years, or is it more effective to simply pass legislation so that they never see that “gotcha” mortgage because it's illegal?
BOB GARFIELD: Sesame Street?
HELAINE OLEN: It was so sad. Elmo did a financial literacy series where he was learning to save his money. He wanted - I think it was a five-dollar toy. When you looked at the literature, it also had the bank's name emblazoned on it, which was PNC. We know that children who see brands like Visa, as early as 18 months, will remember the name and favor it decades out. Some of the people behind these programs have admitted that they are doing it, in part, to get their brand in front of schoolchildren and in front of their parents who might see the literature their children are bringing home.
BOB GARFIELD: Ah, so it’s sort of the Ronald McDonald-ization of financial services.
HELAINE OLEN: Right. It's like McDonald's teaching, you know, the food pyramid at school. I mean, it's not bad to learn the food pyramid but you're seeing McDonald's name all over it, right?
BOB GARFIELD: Helaine, thank you so much.
HELAINE OLEN: Oh, thank you.
BOB GARFIELD: Helaine Olen is the author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.
That's it for this week's show. On the Media was produced by Jamie York, Alex Goldman, PJ Vogt, Sarah Abdurrahman and Chris Neary. We had more help from Khrista Rypl, Ravenna Koenig and Alex Hall. And the show was edited this week by Senior Producer Katya Rogers and me. Our technical director is Jennifer Munson. Our engineer this week was Rick Kwan.
Jim Schachter is WNYC’s Vice President for News. On the Media is produced by WNYC and distributed by NPR. Brooke Gladstone will be back next week. I’m Bob Garfield.