Book recommendation: Pound Foolish

I spend a lot of time reading books about various personal finance topics these days, one of the perks of doing a startup in the space.  One of the better ones I’ve come across is Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by freelance journalist Helaine Olen.  It just came out at the end of last year and has been getting a ton of press given the provocative subject matter.  She was even a guest on The Daily Show back on February 20th.

The title is pretty self-explanatory.  This is a book that exposes the seedy underbelly of the personal finance world, with chapters on topics like the rise of Suze Orman and the other personal finance gurus (their advice may fluctuate with the tides but that doesn’t stop people from taking every word as gospel), the myth of the over-priced latte as the source of our financial ruin, and the underhanded sales tactics of the variable annuity industry. There are plenty of juicy tidbits that will make your skin crawl.

However, for me the real value of the book is that it puts the current personal finance industry and our overall financial situation in some historical context.  For example, the industry as we know it has really only come about in the last 30 years as our nation has switched from a pension-based retirement system to a 401k system that puts much more of the onus for long-term planning on us as individuals.  At the same time, rising fixed costs have us living much closer to the edge.  Ms. Olen points out that while housing, healthcare, and education represented 50% of discretionary income for the average family in 1973, by the 2000s it was 75%.  It’s gotten much harder to keep up, let alone get ahead financially.

The one area where I disagree with the author is that while she does a great job of laying out the problems with the personal finance industry and making the point that there are some serious structural issues in this country contributing to our financial woes, she stops short of discussing any solutions.  After reading this book I have a better for sense the limits of what we can do just by improving this industry – government policy still plays an incredibly important role here – but that doesn’t dampen my enthusiasm for my work in any way.  Change has to start somewhere (and it clearly isn’t going to start with Congress!).

So, pick up this book and give it a read.  At the very least it will make you think twice the next time Suze, or Dave Ramsey, or Jim Cramer come on the air!

Why we don’t trust the financial services industry

Here’s a blanket statement: we don’t trust the financial services industry.  I haven’t actually done a randomized poll of our fellow citizens to substantiate this statement, but after the events of the last few years, I don’t think I’m venturing too far out on a limb here.  It’s hard to trust our financial providers when time and time again they make it abundantly clear they don’t have our best interests at heart.

I came across a perfect example of this misalignment of interests a few days ago in an article in New York Times by Susanne Craig and Jessica Silver-Greenberg, Selling the Home Brand: A Look Inside an Elite JPMorgan Unit.  In it they pull back the curtain on the agressive sales tactics used to push JPMorgan products within the Chase Private Client division of the bank’s wealth management unit.  This is a prestigious division that caters to high net worth clients who tend have at least $250,000 in deposits or $500,000 in investments with the bank.  Here are a few choice quotes from the article:

To bolster sales, said the advisers, many of whom spoke on the condition of anonymity because they feared retribution, JPMorgan largely pushes its own bank-branded investments, which include a mix of mutual funds….Some JPMorgan brokers said that the bank did not allow them to disclose the performance of the investment portfolios they marketed until customers bought the products, so prospective clients did not have a clear understanding of what they were buying. JPMorgan says it does provide some performance information to potential clients, but the return figures do not take the fees into account.

This one is really gets to the heart of the matter:

“We were not able to do the right things for our clients,” said Brad Scott, a financial adviser who quit JPMorgan in April 2012 and now works at LPL Financial. Mr. Scott said that an executive told the brokers on a conference call, “You are not a money manager; you are an asset gatherer.” (Emphasis added)

Do you think the clients were made aware of that distinction?  If you read through the article you see that some of the advisers at Chase Private Client resisted these sales methods (often to their detriment), which goes to show that not all financial advisers at big banks and brokerages are bad.  In fact many of them really do want to do right by their clients, but they are fighting an uphill battle when they work at a large public company like JPMorgan that is more concerned about making quarterly sales and profit numbers than it is about the long-term well-being of its customer base.

This kind of blatant disregard for customers is a truly “short-term greedy” approach to the world.  You might think in the long run this strategy could backfire, that eventually customers would savvy up to the fact they’re being taken for a ride and move their business elsewhere.  Unfortunately, this short-term thinking dominates the entire financial services industry right now.  JPMorgan can be pretty sure that as long as they’re not being that much more egregious than the next firm, they won’t lose too many clients, and net-net pushing their own products will result in more profits.  Remember, this article was talking about the high end of the market where the service is supposed to be better; imagine how it is dealing with lower-end providers!

However, just because there’s a logical explanation for this behavior and just because everyone’s doing it doesn’t make it right.  There has to be a better way. If you do right by your customers and align your business with their long-term interests you will end up with a far more successful company than if you put your short-term profit goals at the top of the list.  Operating with your customer’s interests at the forefront builds loyalty and trust, two things that are sorely lacking in financial services today.

So, amidst all this short-term greedy behavior I see opportunity.  For now, those of us who are fighting to bring change to personal finance are pretty small potatoes, nothing more than a mildly annoying fly buzzing around the big bulls of the industry and their massive money-making operations.  But who knows.  Change happens slowly, then all at once.

Why weren’t we taught this stuff?

I’ve been fortunate enough to get a great education.  We had a wonderful public school system all the way through high school in the part of north county San Diego where I grew up.  My parents made it very clear to my brother and me that success at school was a good way to earn their approval, so I worked hard and managed to get into Harvard.  (I think I got more working knowledge out of high school than I did at Harvard where the goal was to “learn how to learn”, but that’s beside the point.)  I eventually got an MBA from Wharton, so I think I checked all the boxes.  Getting a great education has done everything it was supposed to do for me: I learned a ton, I met and interacted with a lot of smart people, and it opened up many doors for me that would not have otherwise been open.

However, as I reflect back on all those years of classes at what are supposedly some of the best learning institutions in this country, I realize I never once had a class on one of the most fundamental skills you need in this world: how to deal with money.  Economics?  Yes.  Accounting?  Check.  Financial theory and the capital asset pricing model (CAPM)?  Yup.  But the basics of how to balance a check book, manage a budget, how credit works, how to think about buying a house, saving for education or retirement, insurance?  Nada.

Knowing what I know now about how important this stuff is and how badly you can be stung by financial missteps, that seems utterly insane!  It’s assumed that either our parents will pass along this knowledge of how the financial world works and how to be responsible with our money, or that we’ll somehow just pick it up.  I think that’s unlikely.  Our parents’ generation has had a rough go of it – in a 2011 Employee Benefit Research Institute survey, 54% of retirees reported having less than $25,000 in total savings and investments (28% reported having less than $1,000!).  It doesn’t do a lot of good to point fingers, but the financial habits that most of my generation grew up watching in the debt-fueled craziness of the 90s and early 2000s were anything but responsible.

Once upon a time there was some sense that part of our education through high school should be in basic life skills, and how to manage your finances certainly falls in that category. Classes like the almost mythical “Home Economics” may seem quaint and old-fashioned at this point; it conjures up images of girls learning how to bake and iron.  But it turns out there was probably some utility to exercises like getting paired up with a member of the opposite sex and pretending to be parents while having to cart around a sack of flour for a week (I think I saw that on an episode of Saved by the Bell or something like that).  Those basic life skills classes have mostly gone the way of the dodo.

I don’t mean to preach on the dismal state of our basic education system here in the US.  We all know it’s in rough shape and there are plenty of people far more qualified to speak on that subject than I am.  However, I do think the lack of basic training in financial skills is one of the big contributors to major financial problems later in life and the overall poor state of personal finances across this country.  I’ll talk more about that in an upcoming post.

Before we all get too depressed, there are at least some out there who are fighting to take things in a different direction when it comes to financial education.  Just outside of DC where I live, the Junior Achievement Finance Park in Fairfax, VA teaches middle schoolers about managing money.  According to a recent Washington Post article, all 8th-graders in the Fairfax County Public Schools now spend 20 hours in class learning about money-related topics and then take a half-day field trip to the Finance Park to put their knowledge to the test by visiting pretend stores and offices and figuring out what they can afford to buy based on the budgets they have put together.

Also here in DC, a startup named EverFi has been building a platform to deliver financial education technology at the K-12, college, and adult levels.  Partnering with Fortune 500 companies and foundations allows them to provide their services to K-12 schools for free, while colleges buy their services directly.  Founded in 2008, they’ve raised over $20 million in venture capital and now work with more than 3,500 schools across the country.

In this day and age, money and financial matters are too important in our lives to leave things up to chance.  As with all things in education, whether it’s languages, math or science, the earlier we can start someone on the path to knowledge the better.  I’m super excited to see efforts like the Finance Park and EverFi that taking on that challenge; these are just two examples and I’m sure there are many more.  Unfortunately, these efforts don’t necessarily help the rest of us who are now past our years of formal education and well on our way to making bad financial decisions (that’s where I’m directing my efforts), but if we can prevent younger generations from making the same mistakes, we’ll all be better off.

On startup ideas

Back in November of last year, Paul Graham, he of Y Combinator fame, wrote a fascinating blog post on coming up with startup ideas.  There has been an immense amount of material generated in the tech blogosphere on this subject, but his essay is probably the best I’ve seen.  Like most of his posts it’s on the long side, but if this is a topic that interests you, I highly recommend taking 15 minutes to read the whole thing (I recognize that’s a lot to ask these days!).

It took me until last week to find 15 uninterrupted minutes to read it myself, but it got me thinking about my own journey to find the idea for my current startup.  Towards the end of 2011 I launched into this process full-time.  This wasn’t exactly my first rodeo and I thought I had a decent sense of how to go about it.  I knew this was a creative process, and therefore it would be hard to put too much structure around it.  However, for the first time I was giving myself the luxury of focusing on it 100% as opposed to relegating it to part-time status, so I figured a conservative timeline would be 6 months to land on the final idea.  Feel free to start laughing at this point.

Fast-forward to the present and I can say my “idea search” was ultimately successful.  I have my vision, I know now that I’m extremely passionate about solving problems in personal finance and making it dead simple to get yourself on the right path financially.  Yet nothing went as planned and it took more than a year to get here.

Where did I go wrong?  Well, let me give you a (brief) overview of the year.

During much of 2012 I worked with two of my close friends, both of whom were also itching to start something.  Over the course of the year we looked at a ton of ideas.  We started with areas we were supposedly passionate about – music, movies, education.  We found lots of problems but couldn’t necessarily come up with good ways to solve them.  We ended up spending several months looking at video games, particularly mobile games.  Was there a way to apply the Moneyball model of data analysis to funding and distributing mobile games (the way Relativity Media has done with movies)?  We got pretty close on some ideas there, but ended up backing away because at the end of the day, we weren’t gamers, and you can’t fake it in that world!  Ultimately, the three of us parted ways towards the end of the summer.  It was the right call and we are all still great friends, but we realized that it just wasn’t working.

Unfortunately, this left me back at square one, and not in the happiest of places.  Months of hard work, and little or nothing to show for it, other than a long list of things I didn’t want to do.  Fortunately, it only took a few weeks for the fog to begin to clear.

We had actually done a month of work on an earlier version of a concept for The Startup back in the spring, but at the time the other two guys weren’t as jazzed about personal finance as a space, and I was happy to focus on other things if that got us closer to founding something.  However, as I went back through that work seeking clarity on my next move, I started seeing it in a new light.  Over the previous six months I had also been going through the steps of trying to find my parents and myself a new set of financial advisors, and though I knew exactly what I was looking for (it only took me 12 years of working in various aspects of finance and investing to finally figure that out!), it was an incredibly difficult and time-consuming process.  All of a sudden the pieces magically started to fall into place as I envisioned an online resource that could cut my six-month search down to a few minutes by giving me the information I wanted to know in a no-BS fashion, and then connecting me to the product, service or advisor I needed right then and there.  That was the start and I was off to the races.

So, given how this search process played out, maybe a more relevant question isn’t, “What went wrong for most of the year?”, but instead, “What went right at the end?”

In retrospect, most of the answers can be found in Paul’s post:

  1. I ended up focusing on a problem I have.  I can personally relate to the pain and frustration of having to deal with things like awful financial advisors, getting life insurance, sorting through taxes, etc. etc. (anyone think their bank is doing a great job for them right now?).  I hate it.  I hate dealing with these big financial services companies almost as much as I hate dealing with Comcast or Verizon Wireless.  But I also know having my financial ducks in a row is important, and I am supremely confident there’s a better way to do it.  More on this in another post.
  2. I know this industry.  I’ve spent most of my career in financial services in one way or another.  Paul talks about being at the leading edge of a field, preferably one that is changing quickly, because it allows you to “live in the future and build what seems interesting”.  Financial services isn’t changing all that quickly yet, and there are a lot of powerful interests that would like to keep the status quo as it is.  However, my generation and the ones that follow – people who grew up with the Internet – will not tolerate opaqueness and hidden fees and awful customer service.  Providing a great customer experience will win the day, things are starting to change around the edges, and I think I can see where the holes are.
  3. It turns out I’m really passionate about this stuff.  I think some people are almost born knowing what they are passionate about (e.g. my brother has been a die-hard marine conservationist since his first trip to Sea World when he was ~3, and he is now the Walker Conservation Fellow at the Georgia Aquarium in Atlanta doing fascinating work on making coral reef conservation and restoration self-sustainable; check out some of his work here), but for others of us it’s more of a process of self-discovery.  With a lot of the industries we looked at this year, I couldn’t really get psyched up to solve the challenges that were immediately apparent.  I could see myself at some point not wanting to get out of bed in the morning to face the next obstacle.  In Paul-speak, I couldn’t turn off the “schlep filter”.  But in my current area of focus, that isn’t the case.  I know exactly how hard it’s going to be, and I can’t wait to dive in head first.  That sense of excitement, probably more than anything else, has made it clear to me that I am finally on the right track.

It’s seems a little bit funny that it took so much effort to just get to the starting point, and now that I’m here I can clearly see the immense amount of work it will take to make this company a reality, but one step at a time.

Step 1: Find your voice

This goes completely against my nature, this blogging stuff.

I am a very private individual.  Despite being an incredibly social person, I’m about as far from a social media power user as one can get.  I log onto Facebook about once a month.  I started a Twitter account about a year ago but I’m only at around 25 tweets.  I actually do get on LinkedIn on a weekly basis, but usually just to read an article.  Like everyone else who has a gmail account I’m on Google+ by default, but has anyone ever actually used it on purpose?  I’ve certainly procrastinated away a few hours on Reddit, but I don’t have an account.  Instagram, Pinterest?  We’ll see what 2013 holds.

It’s not that I’m particularly against any of this stuff, I just prefer to keep my life and my opinions to myself (and those lucky few who get to come in contact with me on a regular basis)!  However, in at least a few areas, that’s going to have to change.

If you’ve ventured over to my About page you’ll know that I’m in the very early stages of building a company to develop online products that will help consumers make the right decisions about their money, with lofty goal of bringing trust back into the world of financial services (it’s so early that we don’t even have a cool name yet; let’s just call it “The Startup” for now).  A good friend and fellow entrepreneur back in San Francisco told me recently, “You’ve clearly got the passion to build this thing, but if you’re going to be doing something that helps consumers, you’ve got to have a voice.”

So here we are.  When it comes to things like doing right by your hard-earned money and the people who depend on you, my work and the work of other entrepreneurs in the startup world, good design – things I am passionate about – I know I have a lot to say.  It’s going to take some doing, and I’m sure there will be some missteps, but it’s time for me to take the first steps towards finding my voice and making it heard.