This is the last in my five part discussion of Dave Ramsey’s Seven Baby Steps. (I kicked it off here, and then discussed Step 2, Step 4, and Step 6.) In this post I will tackle Ramsey’s final step, number 7, in which you are instructed to continue to build wealth using equity mutual funds and real estate and to share your bounty with others.
In some ways this is the least substantive of Ramsey’s steps. It is the “and they lived happily ever after” step, as much a carrot to inspire those working their way through the earlier parts of the program as it is a practical set of instructions. But it does provide an excuse to revisit Ramsey’s investment philosophy.
Ramsey is consistent in his aversion to debt. You might call him Shakespearian. “Neither a borrower nor a lender be.” Once you’ve got your debt paid off, invest your savings in growth stock mutual funds and possibly unlevered real estate. Do not lend it to others and do not invest in bonds or bond funds. I think that foolishly limits your investment options, but there is something appealingly old-school about it.
And Ramsey is old-school in his investing advice in other ways as well. He shuns ETFs and index funds. He defends loaded funds, telling his audience not to worry if buying a fund involves a sales commission.
There are actually several advantages to loaded funds. For example, lower annual maintenance fees are common with loaded funds, which means you can actually save money by getting a loaded fund over a mutual fund that’s not loaded.
In fact, loaded funds do not have lower average expense ratios than no-load funds, nor do they, on average, outperform no-load funds. And why would they? Remember that the fund management company, which gets those annual fees and is responsible for performance, doesn’t see any of that load. It’s a commission paid to the brokerage that sold the fund shares to the investor.
Ramsey’s defense of loads is convenient, because another way in which he is traditional is that he advocates that you buy your mutual funds through a broker. Don’t have one? No problem, Dave will put you in touch with one, through his Endorsed Local Providers program. Just go on his website, enter your information, and a broker will contact you.
There’s a little bit of controversy surrounding the ELP program. How seriously you take that controversy depends on how obvious you think it is that Ramsey is being paid by the broker for the referral. Personally, it would never have occurred to me that he wasn’t, but then I’m like that. Eric Tyson, a fairly reputable personal finance writer, claims to be shocked.
Amongst Tyson’s allegations is that Ramsey’s company discloses the fact that ELPs pay a fee only in a “not easily found” portion of the website. (It didn’t take me long to find it. Click on ELP FAQ on the main Endorsed Local Providers page. It’s the 4th one down.) More seriously, Tyson suggests that Ramsey’s reluctance to reveal that the ELP program is a source of income explains his preference for full service (and full fee) brokers. The applicable regulations are such that brokers do not need to disclose to a client that they have paid a referral fee, while fee-based financial planners do.
I’m not particularly against brokers, so the fact that Ramsey favors them doesn’t get me all that excited. But for the those who see commissions as an inherent conflict of interest, that Ramsey might be telling his audience to use commission-based brokers because he makes more money that way is a big deal. Indeed, if it were true that Ramsey was giving advice that he knew was bad in order to make money from his listeners, it would be quite an outrage. I don’t think that is what is going on.
What I think is that this just isn’t an area of particular concern to Ramsey. His advice on higher level personal finance topics such as investing and taxes is weak and often misinformed because his knowledge in those areas is limited. And for much of his audience, that’s just fine. Ramsey’s core constituency are people trying to get out from under consumer debt and better align their spending with their income. What those folks need is a calm and resolute voice on the radio to inspire them and build their confidence.
Not only do these people not need advice on investing, they don’t need advice at all. Nobody really needs to be told that the path out of debt is to spend less and pay down what is owed. What Ramsey provides is not enlightenment, but reassurance that his listeners can, in fact, get their lives under control. And in that limited way, Ramsey is a good thing.
But he does give out advice, in that authoritative wise-uncle voice, on topics such as investing, about which he should probably just keep quiet. Even if that is immaterial to 90% of his audience, that still leaves 350,000 people who need advice on such things and think, reasonably but incorrectly, that they are getting thoughtful instruction from an informed source. And that is a very bad thing.
[Photo: William Helsen]