Oblivious Investor

Dave Ramsey has helped many people get out of debt. And for that, he’s (rightfully) earned those people’s trust.

After somebody digs his/her way out of debt, the next step is often to start investing. And it’s only natural that people who have come to see Dave as a financial mentor turn to him for investment advice.

That’s unfortunate though, because Dave’s investment advice leaves much to be desired.

Dave Ramsey on Asset Allocation

Ramsey provides the following advice on asset allocation:

“I do not own any bonds and do not suggest them as part of your investment plan.”

He also recommends against CDs, fixed annuities, and REITs. In other words, Dave’s suggesting a portfolio that’s almost 100% stocks, regardless of your age.

He never even mentions the fact that such a portfolio would expose most retired (or soon-to-be-retired) investors to a meaningful risk of running out of money as a result of a poorly timed bear market.

Dave Ramsey on Roth IRAs

In several places on his website, Ramsey makes statements to this effect:

“The best way to start investing is with a Roth IRA.”

There’s no discussion of how to choose between a Roth or traditional IRA. Not even the briefest mention that, for many investors, going the tax-deferred route would be better.

Dave on Financial Advisors

Dave has the following to say about brokers (commission-paid salespeople who sell front-load mutual funds) as opposed to fee-only advisors:

“I do not personally choose fee based planning. (paying 1% to 2.5% annual fees for a brokerage account). With an A share mutual fund, I pay an upfront load of 5% to 6% once. But with a fee based account, also known as a wrap account, you agree to pay a 1% to 2.5% fee every year – forever. As your account grows, the 1% to 2.5% fee will really add up.”

Unfortunately, this is a grossly inaccurate comparison.

First, he ignores the additional ongoing costs of actively managed funds. Typical front-loaded funds (like those Dave recommends) include operating expenses in the range of 0.75-1% per year. In contrast, with a fee-only advisor, you’d have access to index funds and ETFs, which charge in the range of 0.2% per year.

Second, he overstates the cost of a typical fee-only investment advisor. The median fee for registered investment advisors is barely 1%. If you shop around, you can find advisors who charge significantly below that rate.

Dave Ramsey’s Endorsed Local Providers

Many people I’ve spoken with think that Dave’s recommendation of brokers over fee-only investment advisors has more to do with his business model than it does with giving good advice.

If you go to Ramsey’s website, you’ll see that most of his investing articles end with the suggestion to meet with an “Endorsed Local Provider” of investment services. If you fill out the form, your contact info is sent to a broker in your area, and Dave gets a fee for providing that broker with a prospective client.

But why does Dave recommend commission-paid advisors rather than fee-only advisors? Why send people to a broker–where there’s an inherent conflict of interest between the advisor and the client–rather than to an advisor who charges, say, a flat hourly or annual fee?

Best-selling author Eric Tyson puts it this way:

“By referring people to commissioned-based brokers, the referral fees don’t have to be disclosed as they would be with a fee-based advisor. A registered investment advisor would be required to disclose to the client that Ramsey’s company was acting as a solicitor and would have to disclose the fee being paid to Ramsey as the solicitor.”

Why give bad advice?

If I had to guess, I’d say that Ramsey doesn’t find investing to be as interesting or important as the get-out-of-debt side of personal finance. And as a result, he doesn’t spend much time learning about it. And for the record, I don’t think there’s anything inherently wrong with that.

I do think, however, that he does his readers/listeners/followers a disservice by discussing investing without taking the time to learn more about it.