In a nutshell, the personal finance industry can be explained with a can of tuna. Or more specifically, a metaphor involving a can of tuna that stand-up comedian Omar Ismail so brilliantly described in a post on Quora.
The gist is this: Imagine for a moment there are two men. They’re both hungry, and above them is a high shelf with a can of tuna on top. Without that tuna, they’ll both starve. However, one of the men is very tall and can easily reach the can of tuna. The other man is short and can’t reach it on his own.
The tall man has a clear advantage in this situation. But should he feel guilty for grabbing the can and feeding himself? No. Does it mean there aren’t also disadvantages to being so tall? Of course not. And it certainly doesn’t mean that the short man can’t also find a way to reach the can. The point is that the tall man inherently faces fewer obstacles to reaching that food that they both need and deserve.
That’s how privilege works. And privilege is a key ingredient to most of today’s personal finance advice. It assumes you have money. If you don’t, well, that’s your fault.
Why? The short answer is because helping the poor isn’t profitable. Those who hawk advice for a living – advisors, self-help gurus, marketers – are simply an extension of the financial industry. They’re often compensated by financial institutions looking to snatch up new, highly qualified customers. And you can’t make money off of someone who doesn’t have any.
Personal Finance Advice And The Culture Of Shame
If you think of the financial industry as a body, the advice side is its arms, reaching out to consumers in hopes of connecting them with a product (and enjoying a cut of the resulting profits). Rather than working to combat wealth inequalities and empowering the consumer, popular personal finance advice often reinforces those disparities while serving up a healthy dose of shame.
Just ask 42-year-old Atlanta resident Jessica, whose name has been changed to protect her privacy. For her, simply staying afloat is a struggle.
She and her husband of 18 years have two children, a 23-year-old college student and a 16-year-old who lives at home. Jessica became disabled in 2012, which forced her to abandon the college degree she was pursuing – but not her student loans, of which she still has roughly $50,000 left to pay off. Between Jessica’s disability income and the salary her husband earns working in the restaurant industry, their household income is about $50,000 per year.
It took two years for Jessica to begin receiving disability benefits. During that time, she and her husband experienced financial hardship and ultimately had to give up their house. Though they had been paying down the mortgage for 12 years, the housing crisis left them with an underwater loan. “We ended up having a foreclosure and that really messed us up,” she said.
At one point, her husband was working two full-time jobs to make ends meet. The 80-hour work schedule eventually took its toll; one day, he fell asleep at the wheel and totaled their car. The family racked up thousands of dollars in credit card debt and had to cash out their 401(k), worth $14,000, which they haven’t been able to rebuild. “We can’t save anything – we’re paycheck to paycheck,” Jessica said. “It all goes to interest and fees. Every time I make a [credit card] payment, I get a notice that I’m reaching my credit limit. It’s very frustrating.”
When Jessica sees financial advice on TV and online, she says, “I just laugh and move on.” She and her husband don’t eat out or buy lattes. They don’t go on shopping sprees. They’ve only ever gone on one vacation as a family, and haven’t been to the dentist in years.
“For people to say, ‘Just do this’ – people who don’t experience it and don’t live it – [they] don’t understand,” she said.
The advice isn’t all bad. After all, there’s nothing wrong with urging people to live within their means, follow a budget or invest wisely. Those are good things. But if you look at the kind of advice that’s out there today, you see very little that acknowledges the systemic reasons behind many people’s financial woes, or provides real solutions for those who have to choose between paying the electricity bill or putting food on the table.
And the belittling and shaming behind a lot of popular advice, Jessica said, makes her feel as if there’s something wrong with her for not being able to accomplish it.
Take Suze Orman, author of 13 best-selling books and host of “The Suze Orman Show,” which aired on CNBC for 13 years. Orman’s brand of self-help leans heavily on scolding people for their financial decisions. She is one of the most widely known personal finance “gurus” who make their living advising everyday Americans on everything from paying off debt to saving for retirement. Yet these gurus aren’t held to any fiduciary standard – they’re working as entertainers, not advisors. At best, their advice is too generic to truly help many people. At worst, it’s rife with conflicts of interest.
Orman’s career, which she began as a financial advisor for Merrill Lynch, has been marked by controversy. She’s been a paid spokesperson for many financial products, including car financing programs offered by General Motors and term life insurance from SelectQuote.
In 2012, she launched her own prepaid debit card, a type of product marketed to the underbanked and notorious for charging superfluous fees. Her Approved Card, which charged a monthly maintenance fee of $3, among a host of other fees depending on how the card was used, was advertised as a tool for consumers who didn’t want the risk of a credit card but needed to build their credit scores. Credit bureau TransUnion had agreed to examine cardholders’ usage, but never factored it into their credit scores. Two years later, the card was discontinued.
Dave Ramsey, another radio personality with several best-selling books to his name, is credited with helping millions of people get out of debt. Ramsey’s advice is heavily based on Christian principles, and delivered in a style best described as Dr. Phil meets Southern preacher.
In addition to promoting his for-profit money management course Financial Peace University, Ramsey’s website also heavily endorses several companies, many of which have nothing to do with financial services (in fact, one is a mattress maker). Visitors can also enter their contact information and be connected with endorsed local providers, or ELPs, who provide investment advice that matches Ramsey’s investment philosophy.
That’s where things get hairy. There’s nothing especially harmful about Ramsey’s budgeting and debt payoff advice, but many of his investment recommendations have raised more than a few eyebrows. Among questionable assertions about stock market performance and how advisors should be paid, he also pushes the idea that investors should have a portfolio consisting of 100 percent stocks – purchased through mutual funds with front-end commissions as high as 5 percent or more.
Ramsey says these funds, known as A Shares, take the guesswork out of investing and are worth the high cost. Interestingly, however, selling these expensive funds is also how his ELPs make money. And though Ramsey doesn’t state how much ELPs pay him to be featured on his site and mentioned during his radio program – which reaches a combined 15 million listeners every week – Time Money spoke with some advisors who said they fork over about $80 per lead.
Priced Out Of Quality Financial Advice
But you don’t have to be a famous radio or television personality to get rich off selling financial advice that may or may not actually benefit your followers. Thousands of people are allowed to do so without having to complete any type of specialized training or ongoing education.
“If you are practicing financial planning and you’re providing investment advice of any kind to your clients, regardless of whether you’re managing their money or not, you are required to file with the SEC as a registered investment advisor or investment advisor representative,” explained John Robinson, founder of Financial Planning Hawaii and co-founder of Nest Egg Guru, a company that creates client-facing software for independent financial advisors. However, he said, the rules that the Securities and Exchange Commission applies to financial planners and registered investment advisors include a few exceptions.
“One of them is if you’re in the business of producing newsletters. If you’re not dealing with clients individually, but you’re just a general newsletter publication, you don’t need to register it as an investment advisor or financial planner,” he said. “There are lots of investment newsletters out there that are reasonably well-known and are pretty, I would say, shady.”
The other exception, according to Robinson, is for those who provide financial planning advice that’s not related to investing, such as people who offer seminars on debt reduction or real estate at a few thousand dollars a pop. In this case, you can call yourself a financial planner but not have to register. This often leads to planners who present themselves as trusted, unbiased professionals but ultimately prey on consumers who can’t afford to consult an actual SEC-registered advisor.
“Our retirement plan is to basically die young.”
“It’s appealing to people who are overleveraged and, honestly, they probably are underserved by the financial planning community as well,” Robinson said.
The big problem here is that the advice of these so-called financial experts is inexpensive or free to access, but it’s ultimately driven by their personal financial interests. Receiving guidance from unbiased financial professionals, who are legally required to put their clients’ best interests first, is often cost prohibitive. And often, their expertise isn’t aligned with what lower-income clients need.
Jessica said she and her husband have actually met with two different financial planners, but could not gain any valuable guidance from the sessions. “They were not telling us how to get out of paycheck-to-paycheck living,” she said, explaining that there seemed to be a total lack of comprehension that her family had no money left over after paying the bills. “I know we are not the only people living paycheck to paycheck,” she said, “but right now, our retirement plan is to basically die young.”
Jessica is right, they’re not the only people in this situation. Not by a long shot. But Robinson said historically, the financial planning industry has been biased against low-income clients due to the revenue model. “Traditionally, our industry has been either primarily commission-based or asset-based. Larger assets under management produce more revenue than clients who have no assets to manage,” he said.
Robinson noted that in today’s financial planning world, asset-based compensation is still the dominant form of compensation, meaning clients are charged a percentage of their portfolio every year. “But there is very definitely a strong trend away from that towards other compensation models, including flat fee planning, hourly planning, and more recently, even subscription-based planning,” Robinson said. (More on that later.)
How Affiliate Marketing Masquerades As Journalism
What’s maybe the most troubling development in the advice side of the personal finance industry is how it has come to leverage the internet in order to produce advertisements that masquerade as journalism.
Affiliate marketing is a form of revenue sharing that involves promoting a certain product or service on your website, and then receiving a commission every time you refer a lead to the business. This is how many bloggers earn a living from their writing, for instance. And though online advertisements must be disclosed, to the unsuspecting consumer, it might seem like the writers of these articles are genuinely recommending these products based solely on their expertise and the product’s actual worth.
The truth is that they’re recommending certain bank accounts or credit cards because those products belong to the institution that was willing to give the blogger a contract. I should know, because this was a major revenue model behind many of the organizations I’ve worked for in the past. And these financial institutions all had similar requirements to maintain a business relationship: Attract high-income consumers with good credit and stable jobs, and grow the number of those leads over time.
It’s not that the products being promoted were bad, but I was often discouraged from writing about anything that didn’t contribute to the bottom line (i.e., financial advice for anyone but the affluent) or could potentially piss off those advertisers (like what I’m writing now).
“The ROI isn’t as good as pushing the Chase Sapphire Preferred over and over again.”
This approach to pseudojournalism is pervasive among personal finance blogs and websites which, with a bit of digging, you’ll often find are owned by marketing companies. One of my colleagues, who wrote for a very well-known and popular personal finance education site for many years, said there was a specific strategy to focus primarily on “optimizers.” These, he explained, were people who were driven to improve their financial lives and had the means to do so easily.
“They didn’t even want us to cover secured cards that we didn’t have affiliate partnerships with, even if they were better for consumers than the ones we had on the site. It was maddening,” he told me.
“There are very few products out there that essentially let these people maintain their dignity while improving their financial lives. And when there are, they don’t get recommended enough because the ROI isn’t as good as pushing the Chase Sapphire Preferred over and over again,” he said.
Pamela Capalad, a certified financial planner and founder of Brunch & Budget financial coaching, said that online marketers and affiliate bloggers are often not much different than the insurance agent who sells you a commissioned product. “They’re giving you this advice, but they’re incentivized to tell you to go with a certain company or buy a certain product. … Ultimately, they’re presenting themselves as an expert and getting compensated by an entity or institution that isn’t unbiased and that doesn’t necessarily have the consumer’s best interest in mind.”
Capalad said it’s tough for accredited financial professionals to differentiate themselves from all the other individuals presenting themselves as financial experts. “I think it muddies the water, and for a lot of consumers, it’s very confusing to know who to trust because it can really look like someone who has a lot of followers on their blog is an expert when really, they have no credentials.” And though that doesn’t necessarily mean the advice is wrong – heck, it could be very sound advice – Capalad pointed out that if you are coached in any way that leads to financial trouble down the line, there is no recourse.
“There’s no way to make you whole if you received advice that ended up losing you money,” she pointed out. “And I think that’s a dangerous thing when you don’t have a third party regulating something as sensitive, personal and vulnerable as someone’s financial life.”
Financial Guidance For The Masses
Unfortunately, crappy financial advice will continue to exist as long as banks are willing to subsidize it and people are willing to pay for it.
Even so, there have been a couple of recent positive shifts in how lower-income Americans are gaining access to financial advice and services.
The first is the explosion of fintech, the branch of new technology designed to improve access to financial services. For example, “robo-advisors” such as Betterment and Wealthfront allow investors to receive automated portfolio management for as little as 0.25 percent annually – a quarter of the standard 1 percent charged by traditional financial planners. And while some argue that robo-advisors don’t offer the same kind of personalized, one-on-one service, many investors find they really don’t need it.
“When I was starting out [as an advisor], the general perception was that you, the financial planner, were the expert and had all the answers,” Robinson said. “Now, clients are much more, to their credit, intuitive and curious. They want to be educated and informed, not just told what to do.” Technology and open access to information, he said, is what’s facilitating the transition.
“I think a lot of the informational asymmetries that used to exist between the financial advisor and their client are disappearing.”
For those who do want comprehensive financial planning that goes beyond simple portfolio management – such as guidance on paying off debt and budgeting for college – changes to the traditional “assets under management” model of revenue for financial planners are making that possible.
“In the last two decades, there’s been a huge shift in our industry away from the traditional big wirehouses to the independent [registered investment advisor] and independent financial planner,” Robinson said. He explained there’s been an exodus of financial advisors who don’t want to be constrained by the business motives of large brokerages such as Merrill Lynch or Morgan Stanley, and prefer to be able to deal individually with their retail clients on a much more objective level.
“So when you’ve got more freedom, more objectivity, those of us in the independent advisor space can pick and choose who we want to work with,” Robinson said. It’s also allowed advisors to decide how they want to be paid, whether that’s hourly, a flat fee or something else entirely.
“It’s hard to represent your clients’ interests when you’re getting paid a commission,” he said. “The move has been towards transparency, fee disclosure and better alignment of your interest with the interest of your client. All of these trends are positive trends. And they’re making financial planning accessible to the masses.”