The previous column
, based on a C-SPAN interview of Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, covered Olen’s account of the forces that led to the development of the industry, which she considers to be problematic for the harried investors it seeks to serve.
This column deals with the techniques the industry uses to sell its products and will conclude with an update on a related legislative issue.
The interviewer, Russell Wild of the Saturday Evening Post, asked Olen how a consumer can know how to respond to the blandishments of the industry. Olen responded that the first thing to do is to ask a lot of questions. Then she discussed specific methods the industry uses to break down the defenses of targeted consumers, who tend to be middle-aged or older, whereas the peak of investment prowess tends to occur in the mid-50s.
Olen explained that one of the common techniques the industry uses is to send invitations via snail mail inviting prospects to attend a lunch or dinner at which a pitch will be made for financial products. The pitch is usually based on some “hot button” issue like taxes being increased or pensions being cut.
Olen suggested that this format should be banned, because customers tend to lose sight of the fact that they are at risk. The products offered are likely to be high-cost solutions that when customers realize are not in their interest, they cannot escape without costly penalties.
Customers first need to focus on the fact that there are three ways they could be asked to pay for the services of a financial adviser: 1) a flat fee per hour; 2) a percentage of assets; or 3) a commission. Often, a mutual fund product will carry a sales load, and the customer will not be exposed to products from companies like Vanguard that sell no-load funds. The New York Times has reported that JPMorgan Chase is an example of a company that promotes its own managed funds that have high fees attached. In recent times, the public has been pulling money out of the stock market in all but a few months.
Olen warns that regulatory changes designed to benefit consumers, for example, by disclosing how long it would take them to pay off their credit cards if they make the minimum payment, tend to be ignored.
Another technique Olen warns against is the “money show” held in Orlando, Fla., which features gurus hawking their products to prospects who are eager to escape the drudgery of what she referred to as “crappy consulting gigs.” An example is Oliver Velez, who offers two-day seminars on how to make money day trading and claims that he never loses money.
Olen observed that the financial press legitimizes the industry, citing such media as CNBC and Fortune, which published an article assuring readers that “AIG is no Enron,” whereas in fact, AIG was worse in the sense that it was bailed out by the federal government.
There were house-flipping seminars where prospects were told they could acquire houses for no money down and flip them for big returns. In fact, after the housing bubble burst, many homeowners, whether or not they used exotic vehicles, suffered a 40 percent loss of net worth.
Another guru, David Bach of the Latte Factor, had a deal with Wells Fargo to offer no-money-down deals.
Variable annuities were extremely complex deals carrying huge commissions offered by insurance companies to compete with bank investment products. They were hot until the market turned, and the insurance companies found they were losing money, so they offered to buy them back from customers.
So-called “equity-indexed annuities” carried even higher commissions, and salespeople were offered cruises and other rewards for meeting sales goals. Olen quipped that it turned out that the insurance companies themselves didn’t understand this product.
Other gurus who earned Olen’s disdain were CNBC’s Jim Cramer, ridiculed for screaming and found by a University of Dayton study to be almost a contrary indicator, and Suze Orman, who doesn’t invest in the stock market herself, but, Olen charged, promoted a mutual fund deal that promised amazing results with misstated returns.
Olen did not spare the “financial literacy” movement, which she found doesn’t work and is often sponsored by financial institutions like Bank of America.
Wild concluded the interview by asking again how a customer should achieve a measure of protection, and Olen urged viewers to “ask questions; start talking about this.”
Readers should note that the Dodd-Frank Act calls for regulators to devise a single fiduciary standard that can apply to brokers and investment advisers alike, but this is proving as difficult as many of the other provisions of Dodd-Frank to implement, so that 2 ½ years after enactment, half to two-thirds of the regulations have yet to be issued, and those that are adopted will prove difficult to enforce in the face of determined, sometimes relentless, well-funded industry resistance.
© 2015 Moneynews. All rights reserved.