Objective financial advice is hard to find. So many “experts” have hidden agendas and profit motives. Now Dave Ramsey, who championed ‘envelope budgeting’ and ‘biblically based’ common sense personal finance, has fallen down the rabbit hole of conflict of interest.
It’s sad, really. He has been such a positive influence for so many people struggling to master their money problems. But he has caved to a me-first motivation that is moving him away from the righteous path from which he began nearly 25 years ago.
Ramsey advocates “suitability,” not a “best interest” standard
Here’s what’s happening, in a nutshell:
The securities industry, after proving time and time again that it is more self-serving than self-regulated, is facing a Labor Department mandate to move from a “suitability” advice standard for retirement accounts to a “fiduciary” standard. That means financial advisors will be legally bound to serve only in the best interest of their clients.
Many brokers, bankers, insurance agents and other commission-based sales reps are against this higher standard of client care. Under the suitability rule, they can put their own gain, or the profits of their firm, first. We know how well that has worked.
And now, Dave Ramsey says this “Obama rule” will kill the middle class’s ability to access personal advice.
But he forgot to provide full disclosure: the financial advisors and insurance agents he recommends as part of his “Endorsed Local Providers” are all commissioned-based sales people — and pay Ramsey for his client referrals.
— Barry Ritholtz (@ritholtz) February 23, 2016
‘Lack of access to advice’ argument is BS
Sheryl Garrett pioneered fee-only financial advice to the middle class with her Garrett planning network. And her nationwide group of advisors embraces the fiduciary standard.
“There seems to be a very fundamental misunderstanding on this issue. Simply put, brokers, registered representatives and insurance agents are transactionary sales people, and necessary in our current financial marketplace, but investment advisers must be registered with the SEC or their state. So, this ‘lack of access to advice’ argument is BS! The correct statement would be that there will be a lack of salespeople touting products that are good for them and not so good for the client,” Garrett tells Money Cynic.
“Another point that continues to be argued is that commissions are going away and this rule would force everyone into an Assets Under Management (AUM) fee,” Garrett adds. “First, anyone who’s read any of this should know that commissions are not banned. Unreasonable compensation is prohibited — as it should be! Any compensation model could be unreasonable. Fortunately, the DOL provided the flexibility for all fiduciaries to earn a living under any of the common compensation models in place today including commissions, hourly, fixed or asset based fees. You may charge fees for your time, skills and complexity.”
Garrett says investors with modest means typically don’t have much complexity in their financial lives, so paying a fee for service can be a “very fitting way of charging.”
“Thousands of registered advisors are serving this clientele today,” she says. “With the help of fiduciary regulation of advisors, savers will be able to access the type of financial professional they intended all along — a competent, objective advisor who will put their best interest first.”
Ramsey is way off the rails
Even putting the advice model conflict aside, Ramsey has gone way off the rails in his fundamental beliefs regarding investing. In “Dave’s Investment Philosophy,” a three-page synopsis of his “personal philosophy regarding investing,” he discusses load (commission based) versus no-load (commission free) mutual funds.
“Many financial planners sell only loaded funds,” Ramsey says. “If you go for no-load funds, you’ll be picking these funds on your own, which I do not suggest. Generally I recommend choosing A shares (upfront commissions). I personally do not choose fee-based planning — paying 1%-2.5% annual fees for a brokerage account. Many financial planners suggest fee-based accounts but I still choose traditional A share mutual funds.”
Class A share mutual funds pay as much as a 5.75% upfront commission to brokers. That’s outrageous. That’s asking an investor to swallow a nearly 6% loss — before they’re invested in the market. In no way does that serve to benefit the middle-class, “or below,” investor.
And as for paying a 1%-2.5% annual fee for a managed account, today there are many managed accounts that use commission-free index mutual funds or exchange-traded funds, with much lower expenses than your typical A share mutual fund — and charge an annual fee of 0.30%, or less.
Because of his conflict of interest, Ramsey is completely ignoring the reality of today’s modern investment options. The new fiduciary mandate would shut down his self-serving investment scheme.
And that’s why he’s against it.