I've written about Dave Ramsey before on this site, including this article about how his Baby Steps are too rigid and this one about some of the things I think he gets wrong. He appropriately receives a great deal of criticism from the investing blog community about his investing advice, including that he sends people to commissioned mutual fund salesmen for investing advice, encourages 100% stock portfolios, and believes actively managed mutual funds are superior to index funds. However, in response to this criticism, rather than softening his tone, he seems to be doubling down on his bad advice while lashing out at his well-intentioned critics. A rant from the first hour of his September 18th show starting at 10:45 and going for about 9 minutes is a good example.
The Call
A caller, Neil, calls in noting that he has been reading some of what Bogle has written and is curious about why Dave advocates he pay 5.75% loads to a mutual fund salesman. Here are some quotes from the rant along with my comments.
Jack and I don't agree about a lot of things…and I really don't agree with some of those people who take some of his stuff to extremes. The stance he has made is that you should only buy no-loads and that you should only buy S&P index funds. There is plenty of mathematical evidence to counter that….I get so wired up about Bogle and those guys because they cause people to get paralysis by analysis.
In case you can't read between the lines, “those people who take his stuff to extremes” are the Bogleheads, including me. Jack is right that you should always buy no-loads and Dave is wrong that Jack's stance is that you should only buy S&P index funds. In fact, Jack's favorite fund is the Total Stock Market fund, not the 500 Index Fund. And if we're going to talk about “mathematical evidence,” the evidence is quite clear about the superiority of the passive investing approach.
Dave On Active Management
It really doesn't take a rocket scientist to find a mutual fund that outperforms the S&P….You should be selecting funds that over time outperform the S&P….I find evidence contrary to this idea that you should be a passive investor and just buy index funds.
Please share the evidence Dave, because when you really look at it objectively, the evidence is overwhelming in demonstrating the superiority of the passive investing approach, especially when the alternative is choosing a loaded, high expense ratio, actively managed mutual fund expected to beat an appropriate index fund over the long term.
Speaking Out of Both Sides of His Mouth
I do buy some index funds, some no-load index funds, but not in my retirement account.
Okay Dave, which is it? You (or your commissioned broker) can pick funds that outperform index funds or you can't. If you can, then why settle for the measly market return? If you can't, then why have any actively managed funds? His “retirement account” comment suggests he feels he can do it in a tax-protected environment (where it is admittedly slightly more likely) but not in a taxable one. The truth is it is unlikely, although not impossible, to pick a single actively managed fund that will outperform its index over the long run, and even more difficult to pick a bunch of them.
Defending Loads and Commissioned Salesmen
5 and 3/4 is a standard brokerage fee on a standard mutual fund that has commission on it, that is a loaded fund. And so why does Dave Ramsey, that knows a lot about this stuff, personally use and pay 5 and 3/4 percent to a mutual fund broker. That's a good question.
Yes, yes it is Dave. There are two options, and neither of them makes you look good. Either you've got a conflict of interest or you're ignorant on the subject. Let's see which one you pick.
Looks like he's going for the ignorant argument. I've got news for you Dave. Brokers don't spend their time looking at mutual funds. They spend most of their time prospecting for clients and selling them products they shouldn't buy. And 2 hours a year is way more time than you need to spend looking at them once you realize the futility of the exercise (i.e. divining which will outperform its index in the next year.)I don't look at mutual funds 24 hours a day, 7 days a week. I look at mutual funds probably 2 hours to 5 hours a year….[My broker] bathes in this stuff every day. He eats, lives, and breathes this stuff every day so when I go to select some funds, I don't have to go through 8,000 funds, I can go to an expert and he throws 3 or 4 funds on the table I can choose from….I talk them through with him, I pick one and I go. It saves me time.
And so the individual funds, I am not an expert on.
You've got that right. Not sure why that would cause you to lash out at those who are the real experts on them though.
I don't need a [broker] to hold my hand in market volatility, but most people do.
Perhaps one of the best reasons to hire an advisor is to help you avoid bad behavior. But if that's not an issue for you, the only reason you're hiring one is to pick winning funds, a futile exercise. Seems dumb to give up 6% (and that's just the initial load, and doesn't count the ongoing higher expenses, taxes, and underperformance of that loaded fund) of your eventual nest egg to me.
It's not you, it's just that we get hammered by Bogleites and all these other people that are out there…I get insulted frankly. The insult is that the only reason Dave Ramsey endorses this stuff is because of his ELPs. No Darling, the only reason there are ELPs is because I endorse this stuff. But you're questioning my integrity then. Like I'm a sell-out or something. Not you Neil, but these people that are hammering me. And so I'm a little sensitive about it these days. I'm a little bit fired up about it.
Well Dave, it's one or the other. Either you're a sell-out or you're ignorant on the subject. But what you aren't, is right. The reason you're getting hammered by people without a conflict of interest on the subject is because you're wrong. You're recommending bad products sold by bad advisors. Quit doing that and you'll get a lot less flak. You should have built an army of ELPs that works on an hourly rate and recommends the best products for your listeners.
Stock Market Returns
I'm very comfortable with my knowledge base of the history of the stock market…[The stock market has] always made really good returns, from 11 to 12% and I can generally beat 12% on a portfolio just by selecting well.
Why he feels a need to exaggerate the data by using average returns instead of annualized returns is beyond me. The data is very clear. Our best database starts in 1926. From 1926 to 2014, the US stock market averaged 12.14% and the annualized return was 10.14%. If you go back to 1871, those drop to 10.77% and 9.11%. While we're on the subject, I hate how he never adjusts for inflation when he does calculations on air and makes listeners think their castles are going to grow to the sky. For example, those stock market numbers, when adjusted for inflation, drop to an annualized return of about 7%. If you're going to rely on historical numbers when doing calculations (and many would argue you should expect less going forward,) that's the one to use. For example, if a listener is making $5,500 Roth IRA contributions for 30 years and thinks he'll get 12%, he assumes he'll end up with $1.5M. Whereas if he only gets 7% real, what he really ends up with is $556K, about a third as much. Kind of an important difference in my view, but apparently not Dave's.
Doesn't Account for Churn
You don't pay 5 and 3/4 percent every year, only when you're putting the money in. So if I put a million dollars in, it's $57,000 dollars. If I leave that there for ten years, then that's less than half a percent a year.
That math stuff is tough, isn't it. Actually, 5.75% divided by ten is 0.575%, or more than half a percent a year. But even if we round it down to “half a percent a year”, what does that really mean? Well, let's say you're investing $50K a year. Instead of getting 8% on it, you get 7.5%. After 10 years, you have $22K (about 3%) less. Incidentally, that's about what you paid as loads over the years. But what Dave doesn't account for here is the churn. You see, that broker only gets paid when you change portfolios. The average equity mutual fund purchaser changes funds every 3.3 years. And you can bet those advised by commissioned salesmen are below average on that statistic. Paying 5 and 3/4 percent every 2 or 3 years really decreases returns by 2-3% a year, not 0.5% a year, with devastating consequences to a portfolio.
To make matters worse, many investors, especially those who work with brokers, seem to become investment collectors. Every year when they go to invest, the broker recommends some funds. Every year, it is a different group of funds based on recent past performance. After a few years, they own 20 or 30 different funds, all of which own the same stocks. I really get the impression listening to Dave that this is what HIS portfolio looks like, without an underlying coherent asset allocation or strategy.
Expenses Don't Matter
I want to throw one more log on this fire. There was a piece of research done by the ASPPA…which demonstrated that [expenses accounted for very little when it comes to retirement success] and return was a small percentage of it. The primary driver, 74%, was….savings rate.
Just because savings rate matters more than anything else (especially in the beginning) is hardly a reason to ignore expenses. In fact, expenses are the best predictor of future returns when it comes to mutual funds.
The Summit of Perla's Ridge, Little Cottonwood Canyon
Dave Doesn't Get That No Loads Aren't C Shares
His guest Chris Hogan, says:
I love the front load option…
And Dave Responds:
A no-load fund actually has an ongoing, higher, maintenance fee than a loaded fund does.
No, it doesn't Dave. That's a C share, another type of loaded mutual fund. In the long run, a C share may be worse than an A (front-loaded) share, but both are inferior to a true no-load mutual fund. Those who are confused by this should read this post.
What Dave Got Right In This Call
All of Dave's advice isn't bad, and in fact, he generally gets the most important things right.
I don't look at the market every day. I don't care what the market did. I'm investing from now until I'm 65 or 75. I'm thinking long term…
I have my thing on autopilot…
There's tons of research that says that if you have someone walking with you that is an investment professional [increases] your tendency to stay in the market in a downturn…and quit trying to time the market
Just invest….Invest, invest, invest. Compound interest doesn't work unless there is something to compound.
I suppose it is entirely possible to retire comfortably while getting advice from a commissioned salesman and buying loaded mutual funds. But why do things the hard way? There are many roads to Dublin, but I'd rather take the highway. Dave needs to acknowledge that recommending commissioned salesmen as advisors is a mistake, that recommending loaded mutual funds is a mistake, and that it is entirely possible for a reasonably informed DIY investor to be successful without an advisor at all. Although many of his listeners are not particularly knowledgeable, it is condescending to recommend a less than ideal approach because it is better than nothing. You've got three hours every night. That is plenty of time to educate people sufficiently that they can just learn to do things the right way. If nothing else, referring people to a few good books (such as those by Bogle) to help them learn about this stuff is never a bad idea.
What do you think? What will it take for Dave to quit giving this terrible advice? What do you think is the likelihood of being financially successful is by getting advice from brokers and buying commissioned products? Comment below!
Bravo!
Thank you for taking this on. You can see him arguing pettily on twitter with leading planners about helping more people in 10 mins than others do in their entire lives:
https://twitter.com/DaveRamsey/statuses/340844718328016896
For somebody who has such a high-profile platform, it’s disappointing to see sheep being led to the slaughter through the advisor recommendation program that Ramsey runs. It’s a tremendous financial conflict of interest for him (can’t say index funds are great, and then send his followers to commissioned salespeople who will advise the opposite!) You have to remember most of the people coming to FPU are working class families who have struggled with money, and who have largely come to the information that Ramsey advocates through their churches. These people can radically change their financial lives if they follow the steps in FPU and for that I think Dave deserves a lot of credit, he has touched a tremendous number of lives.
It’s just truly sad that he fumbles the ball at the 10 yard line with the bad investment advice.
He does help more people in 10 minutes than I will in my whole life… which is why it’s all the more maddening that he hurts more people in the next 10 minutes than I could in my next life. I’ll comfort myself that our net effect will be about equal.
I used to really enjoy his radio show. He has helped several of my acquaintances get out of debt. He employs several hundred people, including a few of my friends. I used to have a lot of respect for him. But, his refusal to acknowledge that his investment advice might have more to do with his mansion and Maserati than with the bests interests of his listeners, with so much evidence to the contrary, turned me off a few years ago. His math, even when technically accurate, is often so disingenuous as to be meaningless. I doubt that many on this board will benefit from this entry, but thanks for trying, Jim.
For a long time I’ve been intrigued by Dave’s approach to getting out of debt, for the record, much of what he’s saying has been around for ages, but he’s turned that part of the story into a successful business. Actually, if one was raised with a good attitude concerning staying out of debt, one could succeed without his advice. He has helped lots of people on how to get out of debt, although most in the financial industry know that the method works best if one attacks the highest interest rate first. Even Dave kind of admits that.
the investment advice is another matter. Though I’m not in complete agreement with Bogle either, simply because passive investment isn’t a good strategy in bear markets, it’s likely closer to the mark than Dave’s poor and conflicted investing advice. I would never recommend anyone listen to that. However, to draw a distinction with the author of this article, one can find reasonably low expense, no load active funds that can beat the market over a long period of time but it takes work and the other thing is that it often means more payouts in the form of capital gains and dividends resulting in higher income taxes in taxable accounts. If one is a DIY investor, the churning also is often minimized.
I disagree that picking winning funds for the long term is a good strategy. I also disagree that putting in more work will somehow make that strategy better. The data is quite strong that this task is extraordinarily difficult. But if you’ve got it figured out, please post the funds that will beat an appropriate index fund right here and we’ll see how you do over the next 5-10 years.
For the sake of argument I’ll give Dave Ramsey a huge benefit of the doubt for a minute and present what I think is the best defense for his recommendations. Many of the people who are showing up at his ELP advisor offices have progressed through the first couple baby steps and are probably coming in with fairly modest sums to invest. Most wouldn’t get in the door with a fee only advisor who will manage the money at 1% a year, so if they want help, this is probably the best deal they can get. Paying $250 on a $5K initial investment is a lot in percentage terms, but pretty cheap in nominal terms for setting up a client with an investment plan. And at least they aren’t being sold cash value life insurance. However, Dave himself uses the example of paying $57K in loads on a million dollar investment which is absolute insanity! All that said, Dave Ramsey is a big business, and his advice is surely influenced by all the money he makes off of his ELP arrangements. He helps a lot of people, but his advice is far from perfect and definitely not for everyone.
That makes it worse really. They would be better off being directed to Vanguard and becoming Bogleheads, or some robo advisor firm even.
Regardless of his financial and investing advice, what really frustrates me about Dave is his macho “I can’t possibly be wrong” attitude. For a guy who espouses religious authority to his advice (and don’t get me wrong, he has helped a lot of people) I would hope he’d show some more humility – some more grace. He’s a disappointing role model, to me.
The problem with people like Dave Ramsey, and ( apologies to any Limbaugh fans) Rush Limbaugh , is that
a) They don’t think anyone listening to them are as smart as they are
b) They are extremely condescending .
Anyone should be able to figure out how to manage their own money and investments , without having to pay and exorbitant fee to do it. In this day and age , where information on just about anything is freely available , there really is no excuse not to become smart about your money and finances .
There are several points to bear in mind :
a) There is no free lunch – everything has a cost associated with it – By educating your self , you can keep these costs to a minimum
b) Everyone has an agenda – ( Some good -some bad -some greedy ) – Someone that sends you to a broker etc raises a red flag – Is he making money on referrals ,kickbacks etc . What does he have to gain by his actions and words.
c) Do your own “Due Diligence” – In other words , take everything with a pinch of salt , until you verify the facts associated with a statement , recommendation etc .
d) And last but not least – If it sounds to good to be true , it’s probably not true – Here again , this goes back to item C .
Regardless of his financial and investing advice, what really frustrates me about Dave is his macho “I can’t possibly be wrong” attitude. For a guy who espouses religious authority to his advice (and don’t get me wrong, he has helped a lot of people) I would hope he’d show some more humility – some more grace. He’s a disappointing role model.
While the blog is certainly a well-written criticism and enjoyable to read, I am not sure anyone who comes to this site would buy into Dave Ramsey’s investment advice anyway. My guess is that, by now, Ramsey knows better but is viewpoint is so well-established that he feels he cannot go back on it.
I think that Ramsey has enough credibility in other areas that a strategic mea culpa on the investment front would serve him well.
GREAT POINT on his credibility! I would also agree.
In this country it’s all about the money
That’s why Americans need to become financially literate
Even if you have an advisor you need some knowledge to understand what they are doing with your hard earned dollars
What kind of annoys me is that a lot of the stuff Dave says on investments (and I recently became addicted to his podcasts…) is so close to being right. There is a huge confusion in this country about the difference between fee only financial planners who act as fiduciaries and financial brokers/salespeople. There is some overlap between the groups, but there are some differences too. And when Dave defends his ELPs who charge big loads and refers to them as “mutual fund brokers” it just adds to this confusion.
Many people CAN benefit from paying for financial advice, from having a relationship with a financial adviser. I am a Certified Financial Planner myself (though I don’t do investment management in my day job), and I know many genuine, reputable planners who provide valuable services and help people build wealth, reduce taxes, and structure estate plans, among other things. It also can be really valuable to have someone to “talk you off the ledge” when the market dips and you want to move it all to cash, or when you read some article and decide you should have 25% of your portfolio in gold.
But when Dave says these things in defense of his ELPs, I can’t help but assume that many of them do not actually create comprehensive financial plans for clients or spend much time working with them to assess their goals and values. They can’t, otherwise they wouldn’t make any money since many folks admittedly have very little to invest when they start out.
Although I don’t know so I guess I shouldn’t assume the worst. Dave apparently has a whole team managing his ELPs and following up on any complaints and making sure they stick to his principals and don’t try to sell crap like annuities and whole life insurance. So I guess that’s something…
I am a fan of Dave in the sense that he is a big advocate for people SAVING and getting out of DEBT. However, I definitely go the other way in terms of his investing methods for the future and any retirement.
For those that simply don’t want to learn and just want to take advice in some form I think the ELPs are their option. It really doesn’t take much effort to realize they are paying these folks salary for years and giving them a nice retirement and there is not additional guarantee or benefit based on the math and just using the general market indexes with out paying all the fees. Commissioned products will easily cost you $100K over a life time, buy if Dave can really get you on board with a high savings rate over the long term you will do ok and his ELPs will do great so everyone wins a little bit. So I guess in a way he deserves credit for helping everyone out, even though I don’t believe it is the best option for his followers.
Personally I go the way of the Bogle strategy for the most part. however, I hold a lot of individual equities mostly for my DGI strategy for cash flow and I do spend more time than the average doing research and watching the markets.
I Love all your articles and this one is another topic that really needs to be brought to the forefront.
Dave Ramsey makes my head hurt. He is a smart guy and must know he is wrong, but has too much invested in his message and infrastructure to quit now. I also think that he only benefits from this controversy.
As crazy as some of the things are he says, his core message is right for his audience and he probably does more good than harm. Investing in loaded mutual funds is better than living paycheck to paycheck with two financed SUVs in the driveway!
Its morally wrong to use your 99% right message to make a bunch of money in a kick back fashion from the very expensive and lucrative 1% wrong side of the message. This is how all con men work, much of what they say is true or close, except the part where they make you more money than they make for themselves.
Like an episode of american greed.
I agree. Medicine is and will continue bringing transparency to the forefront. Why isn’t the financial field?
I personally like how the WCI does it. He tells me the site is for profit, and I read it all the time. We both win.
For Dave Ramsey’s, transparency and honesty about financial research would mean less money for him. Conflicts of interest can affect anyone.
I just really dislike disingenuous people. We all know he has conflicts and this is why he says these things. As far as his other advice that is good, well truth is its not rocket science and there are many many less conflicted and more trustworthy sources for that (like here at WCI). Unfortunately, hes the one with the megaphone.
I just cant trust that kind of person.
Well I don’t follow Dave Ramsey much but I think it’s fairly obvious what is going on – Dave Ramsey is in this business to make money. He is not giving out financial advice as a charity and he is not a fiduciary or public servant. He is promoting himself to sell his books and lectures, his show, to sell advertising, etc.–just take a quick look at his web site. Is it any surprise that he opposes the viewpoints of the Bogleheads, who question the credibility of the financial services industry and its inherent conflicts of interest? He is a part of this industry and it is in his interest to promote the wisdom of “gurus” like himself, such as, those smart people running mutual funds!
Dave had this blogs post/email blast recently.
https://www.daveramsey.com/blog/are-mutual-fund-fees-destroying-my-retirement
His argument on why to go with a loaded fund.
I hate his stance on this stuff. He does help people get out of debt though. Smallest balance first isn’t the best option but for people that need to make traction it makes sense.
Another thing i don’t like is his 12% average. https://www.daveramsey.com/blog/the-12-reality/
Not realistic of actual return over those periods.
Excellent post. I like Ramsey, but I’m tired of him always giving bad investment advice.
I actually met with a ELP about 5 years ago and it got me researching into things. He kept telling me that I couldn’t do a traditional IRA because my income was to high and I kept saying that I’d done it for years, I didn’t have a 401k option at the time. Anyways, have to say that I really enjoy his debt stuff, but investing I take a different route. I prefer his show to some of the other late night or Saturday morning financial advisers that are one the air.
Dave Ramsey doesn’t pay load when he invests in load funds, which I assume to be American Funds. When invests $1 million or more, the load is waived. He may indeed genuinely believe that his investment in those American Funds will beat the market. He wants to play that chance. It’s his money. If he fails, it’s not the end of the world for him, even if we don’t count the revenue from ELPs. Most of his listeners of course aren’t in that position. Don’t follow Dave Ramsey’s strategy if you are not Dave Ramsey!
I’m a physician and my wife is a realtor. She looked into becoming a Dave Ramsey ELP for real estate. She was shocked to find out Ramsey’s take on the commission for selling a house to someone referred by his organization was 30%! Also, she would have to spend $1800 to take a mandatory course to learn what his organization wants her to know. I like what Dave does to help people get out of debt, but also have been put off by his investment advise. Him pushing these ELPs is also a turn off.
I read an article from a mutual fund salesman who said he paid $80 per referral to Dave.
I get concerned when financial advice comes with math errors that seem to be glossed over. I wouldn’t patronize a bank that consistently failed to get the math right (or any investment advisor).
Somewhere I saw where Ramsey’s actually noted his math error. It was in paying off the smallest balance debt first, not the highest interest rate balance first. I recall his statement was it was more important to get the psychological boost from getting rid of one debt than the few dollars saved doing it the more rigorous and mathematically optimal way. I guess I can see his point, assuming people typically seek immediate gratification. This however is not the way to continue when one is investing.
When the math errors persist in claiming Roth IRAs are simply better than Traditional IRA’s because they are tax free (there are reasons for both but to ignore the initial marginal tax rate on Roth contributions is naive), loaded mutual funds, and excessive predictions on investment returns, I rapidly lose my desire for his investment advice.
I guess his mantra “If you will live like no one else, later you can live like no one else” is fine, as long as you realize “you will have to live longer like no one else”, than you would have needed to otherwise.
Thanks for the great article WCI
This makes me so sad. Dave is so helpful in so many other ways but his advice on investing in atrocious! And it would be so easy, like you say, for him to do a good job here. Recommend some good books, talk about a simple no load index portfolio (that his uneducated listeners could easily implement) , and point people to an ELP that works on an hourly rate if the listener still felt like they needed help.
I feel like Dave’s advice is great is your are deeply in debt and doing very stupid things like carrying credit card debt and using a pay day lender. But once you are out of debt and start investing for the future, his advice gets real bad real quick. Sad
Excellent post. Thanks for writing that!
Great Article! This is one that has boggled my mind for quite some time. How can Dave Ramsey offer such great “get out of debt” advice and such awful investment advice? I finally figured out why. I am a fee-only financial planner and volunteered to lead Dave’s courses. I thought I would be the perfect candidate to be one of Dave’s recommended planners (whatever they are called) because of my business structure that truly helps people and doesn’t sell products. I was shocked to learn that Dave only works with commissioned brokers. I am confident he is receiving some of those commissions himself. It is the only possible explanation.
I believe he (his comnpany) gets $80 per referral, not a percentage of the commissions.
I don’t pay enough attention to know the answer:
Has Dave ever revealed his own investment portfolio? If not, challenge him to do so.
Keith
I doubt he will. If he did, his followers could just do what he does, rather than hiring an ELP. He would argue that it is more important that they understand what they are doing and why than exactly what funds they are in.
Maybe Dave should read the 2008 NY Times column by Mark Hilbert, “The Prescient are Few:” before he tells listeners that an adviser will pick a superior mutual fund for them.
http://www.nytimes.com/2008/07/13/business/13stra.html?_r=0
Good read – Thanx for the link – That must be part of the reason so many mutual funds and sites comparing mutual funds are so reluctant to put any info longer than 5-10 yr performance – You have to really dig down to the info you need in order to make an intelligent decision .
This evidence has not dissuaded Mark Hilbert from recently making his own predictions.
Regarding what will it take to get Dave to stop giving his terrible advice, the answer is obvious. Nothing. Because he gets paid when he refers his victims to these companies. The same motivation that compels brokers to sell annuities afflicts Ramsey. Along with his Rush Limbaugh holier than thou attitude, and his religious right propaganda that he is blessed by God, there low income listeners think he is the Messiah. Truly is, he is a pariah. And an ignorant one at that. At least Suzie Orman doesn’t hit you with the religion.