Free lunches just 1 thing to avoid when seeking investment advice
Whom can you trust for money advice?
It's a fundamental yet complicated question that's getting attention recently with publication of a controversial new book, “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.”
Author Helaine Olen, a freelance journalist, takes issue with the notion that some money gurus espouse: if only people became financially literate and tried harder to manage their money, they would be on a sure path to wealth and security.
Olen said she supports learning more about finance and managing money responsibly. But the “pull yourself up by your bootstraps” mantra ignores important realities for many Americans in recent years, she said. Those realities include stagnant wages and rocketing costs for health care, housing and education. And life's financial devastations, such as overwhelming medical bills, divorce and unemployment, can strike people regardless of their dollars-and-cents aptitude.
In her book, Olen goes on to attack not only the financial services industry, but media money gurus, such as Suze Orman, Dave Ramsey, David Bach, Robert Kiyosaki and Jim Cramer, saying they offer questionable advice and have conflicts of interest.
We'll sidestep the industry- and guru-bashing — I think the book was fascinating reading but sometimes overly harsh — to offer advice.
There's no single way to discern good money advice from bad, which is a reason to get money-smart yourself, said Eric Tyson, author of the popular “Personal Finance for Dummies” and one of the few money advice-givers that Olen praises.
Here is some food for thought:
• Products. If a specific product is attached to the advice, beware. “That is a huge red flag,” Olen said. That goes for people in the financial industry who push certain investments that give them fat commissions and money celebrities who give advice that matches products they sell.
Olen distinguishes between them and financial writers and journalists who make money writing, but not on companion products.
• Follow the money. Especially with financial advisers, know exactly how yours is being paid. “All things being equal, you're probably better off with somebody who's selling their time on an hourly basis,” Tyson said. “There are brokers or advisers who sell products who do well by their clients, and there are people who charge a percentage of assets under management who help their clients too. But both of those arrangements create inevitable conflicts of interest, which are largely eliminated if you're just writing the person a check for how many hours they spend with you.”
The complicating part is that some commissioned advisers are good.
• Consider the motivation. Beware of someone who claims to be telling an audience a financial secret. Ask yourself why someone would waste time writing a book or giving a seminar about a get-rich-quick scheme instead of using the time to practice that scheme and get rich himself. Moreover, profitable advantages in the financial world are often slim, and if a guru tells a large audience his secret, that advantage will usually be lost.
• Predictions. Have little tolerance for anybody who says they can predict what will happen with financial markets. Rest assured: If they really knew, they wouldn't be telling you about it.
• Beware of free food. “There's no such thing as a free lunch — or a free dinner,” Olen said. She's referring to investment seminar meals that consumers are invited to by financial pros trying to recruit clients. Often the advisers or brokers will attempt to “scare the daylights out of them,” maybe suggesting they will all outlive their money while presenting a financial product as a solution.
“Don't even attend,” she said. Research has shown our defenses weaken when we're eating, she said.
• High yield? If you're a senior, pay special attention when a salesman uses the term “high yield” when pitching a product, Olen said.
Retirees generally need safer investments, but nowadays those types of investments — certificates of deposit, money market accounts and the like — offer pitifully low interest, making high yield sound enticing. Unfortunately, there's no such thing — at least, that's safe.
• Easy money. “Where people get into trouble is when they believe it's really easy, or they can get rich quickly without much effort,” Tyson said, adding that the best long-term returns are in the neighborhood of 9 to 10 percent. “People who claim to have a system that produces returns substantially above that should set off alarms,” he said.
• Consider the medium. Olen used to say that if the financial advice came in the newspaper, it was probably free of many conflicts found in the financial world. That's because most newspapers have strict ethics policies for their writers. That's still largely true of staffers, but some papers run columns by outside writers who might have personal agendas.
Television is a convenient and enticing medium, but often superficial when it comes to finance topics. As for the Internet, there are some excellent finance bloggers, but most blogs do not have the same editorial oversight that professional publications have.
• Disclosure. Noting possible conflicts is a good sign. “People in the clear will often tell you they're in the clear,” Olen said.
For the record, the writer of this column for the past nine years wrote two personal finance books and published an audio learning program. Besides this reference, he does not mention those in his column and sells no companion products. He reports the books and audio program to his newspaper employer annually in a routine ethics disclosure.