POUND FOOLISH POUND FOOLISH Exposing the Dark Side of the Personal Finance Industry HELAINE OLEN PORTFOLIO / PENGUIN PORTFOLIO / PENGUIN Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, U.S.A. Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario, Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd, 80 Strand, London WC2R 0RL, England Penguin Ireland, 25 St. Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd) Penguin Group (Australia), 707 Collins Street, Melbourne, Victoria 3008 Australia (a division of Pearson Australia Group Pty Ltd) Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi—110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, Auckland 0632, New Zealand (a division of Pearson New Zealand Ltd) Penguin Books, Rosebank Office Park, 181 Jan Smuts Avenue, Parktown North 2193, South Africa Penguin China, B7 Jaiming Center, 27 East Third Ring Road North, Chaoyang District, Beijing 100020, China Penguin Books Ltd, Registered Offices: 80 Strand, London WC2R 0RL, England First published in 2012 by Portfolio / Penguin, a member of Penguin Group (USA) Inc. Copyright © Helaine Olen, 2012 All rights reserved Library of Congress Cataloging-in-Publication Data Olen, Helaine. Pound foolish : exposing the dark side of the personal finance industry / Helaine Olen. p. cm. Includes bibliographical references and index. ISBN: 978-1-101-57530-7 1. Financial planners—United States. 2. Investment advisors—United States. 3. Finance, Personal— United States. 4. Financial services industry—United States. I. Title. HG179.5.O44 2013 332.02400973—dc23 2012035385 No part of this book may be reproduced, scanned, or distributed in any printed or electronic form without permission. Please do not participate in or encourage piracy of copyrighted materials in violation of the author’s rights. Purchase only authorized editions. While the author has made every effort to provide accurate telephone numbers and Internet addresses at the time of publication, neither the publisher nor the author assumes any responsibility for errors, or for changes that occur after publication. Further, publisher does not have any control over and does not assume any responsibility for author or third-party Web sites or their content. For all those who participated in Money Makeover “How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” ERNEST HEMINGWAY, THE SUN ALSO RISES All humanity is here. There’s Greed, there’s Fear, Joy, Faith, Hope… and the greatest of these…is Money. LUCY PREBBLE, ENRON CONTENTS TITLE PAGE COPYRIGHT DEDICATION EPIGRAPH INTRODUCTION CHAPTER ONE WHAT HATH SYLVIA WROUGHT? CHAPTER TWO THE TAO OF SUZE CHAPTER THREE THE LATTE IS A LIE CHAPTER FOUR SLIP SLIDIN’ AWAY CHAPTER FIVE THE ROAD TO PAS TINA CHAPTER SIX I’VE GOT THE HORSE RIGHT HERE CHAPTER SEVEN AN EMPIRE OF HER OWN CHAPTER EIGHT WHO WANTS TO BE A REAL ESTATE MILLIONAIRE? CHAPTER NINE ELMO IS B(r)OUGHT TO YOU BY THE LETTER P CONCLUSION WE NEED TO TALK ABOUT OUR MONEY ACKNOWLEDGMENTS NOTES INDEX INTRODUCTION JUST BEFORE CHRISTMAS 1996, I received a call from an acquaintance asking me if I would like to try writing for the Los Angeles Times’s recently established Money Makeover series. I was thirty years old and all I knew about personal finance was that writing about it paid more than the lifestyle features and breaking news coverage I’d been doing. So I accepted the gig eagerly. I figured I would write one sample, the editors would realize I had no idea what I was doing, there would be an uncomfortable confrontation, and they would issue me a check for double my usual fee and send me on my way. The premise of Money Makeover was similar to other makeovers, but instead of providing fashion or beauty suggestions we fixed our candidates up with financial experts. My role was to do everything from determining the issues to be discussed to documenting the interactions between all the parties. So when I spoke with my first subject, a former college basketball player turned pharmaceutical account executive, I let the financial planner assigned to the case take the lead. I frantically jotted down terms and phrases, words I would look up in my just-purchased copy of Personal Finance for Dummies later that day. I decided I had to do something to justify my bill, so, lacking the knowledge to challenge the planner, or even know if I should be challenging the planner, I began to relentlessly quiz my subject on money: How much money do you have? How much do you want? What do you want to do with it? Do you want to travel? Have children? Do you want to work at your current job forever or change careers? Can you afford to change careers? Do you think you will have enough money for retirement? Are you even thinking about retirement? I handed the piece in and waited for the furious phone call from the edit desk. After all, I had just recommended my subject consider purchasing something called a variable annuity, even though I had no idea what that was. But when the call came, I didn’t get fired. I received another assignment. Maybe, I thought, I got lucky. I thought for sure I’d be caught out on the next Makeover, a Hollywood producer’s son who didn’t want us to mention the name of his father because he wanted to see if he could make it on his own (the answer was…maybe), or the one after that, a gay couple who owned a restaurant in Mammoth Lakes that was taking over their lives. But that one resulted in a commendation letter from the Southern California ACLU—according to the president of the organization, I was the first reporter to simply present a gay couple in the pages of the Los Angeles Times without making a fuss over their status except to say it gave them some unique financial issues. There was another makeover, and another, and another. Pretty soon I was a lead writer, and more or less responsible for coordinating the feature. In just a few months, I’d gone from money novice to personal finance expert. I should pause to say I am not the only personal finance writer to get her start this way. Demand for journalists who could write about personal finance began to outpace supply in the 1990s as newspapers upped their coverage of this formerly ignored subject. “I was ignorant,” wrote an anonymous Fortune writer about his or her time recommending investments for an Internet publication in a 1999 piece titled “Confessions of a Former Mutual Funds Reporter.” “My only personal experience had been bumbling into a load fund until a colleague steered me to an S&P 500 index fund. I worried I’d misdirect readers, but I was assured that in personal finance journalism it doesn’t matter if the advice turns out to be right, as long as it’s logical.” There are any number of things you can take from my story and others like it. The first is about money and what it means to us. When you write about people and money, you write about much more than dollars and cents. You write about their lives. When we talk about money, we tell people where we have been and where we hope to be. My editors understood that they could more easily teach me the difference between an annuity and an average annual return than find another reporter who had the ability to get people to open up about a subject that most of us will barely discuss with our loved ones, never mind the general public. The second takeaway was that much about the handling of money wasn’t that hard to understand. Terms and concepts that sounded mysterious were really quite basic. It was easy to learn the difference between a defined benefit and a defined contribution plan, or a load versus a no-load mutual fund, or a growth versus value style of investing. Common sense ruled. If it was complicated and hard to comprehend, chances were you shouldn’t invest in it. Financial advisers who were paid by a percentage of fees under management or by the hour really did seem to do a better job than those whose compensation depended on convincing their clients to buy or sell financial products. People who couldn’t— for whatever reasons—live below their means generally found themselves in financial trouble sooner or later. Insurance was invented for a reason. Many of us could save ourselves a hell of a lot of trouble by simply picking up a copy of