Ramsey Step 7: Build Wealth and Give

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.Mansion - William Helsen

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]

No Comments

  • By Rob Bennett, April 30, 2009 @ 1:11 pm

    I’m not particularly against brokers, so the fact that Ramsey favors them doesn’t get me all that excited.

    I am not particularly against brokers either. But I agree with Tyson that Ramsey should disclose that he is obtaining fees for recommending brokers.

    My view is that the reader/listerner should be put first.

    When you don’t disclose fees, you’re not putting the reader/listener first. Some readers/listeners wouldn’t care. But some would. So I think this should be disclosed (in a way that makes it known to all).

    I also don’t think that indexing advocates should come on so strong against fees as they often do. Some benefit from talking to a broker. Indexers often come across as holier than thou, suggesting that only they offer “pure” investing advice. I don’t buy it. They’re just using a different form of marketing, in my view.

    Marketing is part of the game. There’s no getting around it and it need not be a bad thing. But I think that there are clean ways to market and less clean ways to market.

    You might indeed not be shocked that Ramsey is getting fees from the brokers, Frank. But I bet that a lot of his readers/listeners would be shocked to learn this. That should be the test. If your readers/listeners would be surprised to hear it, you should be making efforts to be sure they hear it from you.

    Rob

  • By ryan, April 30, 2009 @ 1:52 pm

    OK, this is the first time I completely agree with your Ramsey criticism. The truth is (in my own vain defense for not seeing this before) I’ve only seen Ramsey on TV exactly twice in my life. I’ve never been in any sort of debt problems, so most of what he talks about never really applied to me anyway. I’ve never read his books; I think by reading other PF stuff I’ve gotten the gist of it many times. And arrogantly, I consider myself smarter than Ramsey. Maybe not a better entertainer, but smarter financially. So I’ve never felt like he had anything to offer me, I was just impressed with how many deadbeats he seemed able to convert. If I had ever read his advice about loaded funds, I would have just ignored it.

    Americans love a sinner-redemption story more than anything; I wonder if this is specific to our culture or not. But either way, they love singing “Amazing Grace” and hearing about how someone who failed or sinned so badly turned around. And Ramsey fits the bill as a formerly over-leveraged and subsequently bankrupt real estate tycoon. Maybe this is why he’s like the officially sponsored PF guru of the Christians.

    I, unlike most Americans, happen to give more credit to the people who were never stupid in the first place.

    This seems a little bit like the conflicts of interest Suze Orman brings to the table. She has some sort of sponsorships from Fair Isaac and T.D. Ameritrade. Consequently, she never says credit score on T.V., or quickly corrects herself but always calls it “your FICO score.” When she does recommend specific “discount brokerages” T.D. Ameritrade is always top of the list (and it’s often the first commercial during each break). I never paid attention to whether or not the others are related or are sponsors. I don’t think she ever says Vanguard, although in any other non-conflicted advice, they always seem to warrant a plug, and rightly so, I think.

    Oh well, it’s a tough thing, capitalism.

  • By Dangerman, April 30, 2009 @ 5:16 pm

    “He shuns ETFs and index funds.”

    Inaccurate. Dave has encouraged callers to use a S&P500 index fund in several shows that I’ve listened to. He neither discourages nor actively encourages index funds overall.

    You are right about ETFs though.

  • By Sarah, April 30, 2009 @ 5:47 pm

    I disagree that most of his followers are trying to get out of debt. I’ve spent a lot of time interviewing people taking his class, and a lot of them are in great financial shape but just don’t know a whole lot about where their money is going. A lot of them also tweak his plan to suit their lives and very few of his followers agree with him 100%, which is good news.
    The thing with getting fees is something that some of the participants in FPU wonder about though, and something I think should be disclosed. I don’t think that its a bad practice, but disclosing where your money is coming from, especially if you’re taking some extravagant vacations while people are turning to you wanting help learning how to save, seems like a smart idea to me.

  • By SJ, April 30, 2009 @ 7:01 pm

    “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.”

    People always need and want heroes, even if they’re mostly smoke n’ mirrors.

    Go capitalism, go hax, go w/e…

  • By Eric, April 30, 2009 @ 8:05 pm

    Dave has inspired a lot of good. But as he reminds us everyday on his show, he is in this for the money. He is a for-profit corporation. Nothing wrong with making a living, but when does a person have enough? When does a person fully live out step 7 and give everything above a certain point? Very hard to do in America, since we are used to a certain type of living. My prayer is that American Christians learn to have enough and realize “step 7″ more often, more fully, and more generously.

  • By Manshu, May 1, 2009 @ 5:04 pm

    I was going to say it, but SJ said it first :)

    There is a need for heroes to tell us not so much what to do, but, that it can be done.

  • By Shayne, May 6, 2009 @ 1:57 pm

    Hi Frank,
    I don’t know why people wouldn’t take Dave Ramsey’s advice since he is a Millionaire. I’m pretty positive that you are not a Millionaire so I don’t understand why anyone would take your advice or continue to read what you have to write about Dave. Can’t you think of another subject to talk nonsensical about.

  • By Frank Curmudgeon, May 6, 2009 @ 4:04 pm

    Hi Shayne,
    I keep asking Alex Rodriguez for money advice and he never replies to my emails. I guess we’re all stuck with me and Dave.

  • By Eric, September 25, 2010 @ 10:17 am

    I am no financial expert in the least bit but I do have 2 cents I will share:

    There is nothing wrong with Dave Ramsey for the “average” American. While you all on here may be able to find the flaw in his numbers (and I won’t bet that there aren’t SOME flaws somewhere, after all, NO ONE is perfect) it is the fact that he has put a plan in action for people to follow. Even if individuals only made it through step 3 (Fully-funded emergency fund) and then went their own way, they are in a much better situation than before.

    I find it condescending, after reading this entire blog series, to read the term “Simpleton” being thrown around about the average American. Fact is, many people NEED it to be simple in order to follow it. Not everyone understands the complexities in numbers, especially when involved in investing and debts, etc. If they did, they PROBABLY would not have been in debt to begin with and we’d all be rich.

    Long-story short, referral fees aside, Dave is genuinely a good person looking to help other people and make a living while doing it. He provides a simple plan for people to follow and gives people a means to be accountable for themselves. It works for people all the time. I was actually made aware of Dave by someone who follows him, but not “exactly” (he has credit cards that he uses for groceries/gas and pays off every month). Since I turned to Dave, my wife and I have been more accountable and have been much better with money. Not perfect and even the months we didn’t do a budget we were still better with money than BEFORE we started listening.

    So let’s be real, in-depth financial gurus need not blast simple advice for simple people. People who want complex advice should seek complex PF specialists. The rest of us will keep it simple and if we’re both millionaires at retirement, who cares, we both made it, right?

  • By Wil, March 28, 2011 @ 4:55 pm

    Dave Ramsey runs a company that employs 300 or so people. He doesn’t pay those 300 folks out of his pocket, he pays them through standard business practices like product sales, and advertising.

    Yes ELPs pay a fee. It’s a form of advertising. You neglect that the fifth question down says that ELPs are selected via various criteria and “Old Bob The Financial Advisor” can’t just pay a fee and get endorsed.

  • By Jim, July 13, 2012 @ 4:57 pm

    Examples of BAD advice from Dave:
    1. He recommends growth funds. Growth funds have high risk and historically lower performance than other asset classes, such as value funds.
    2. He recommends loaded funds. I seriously can’t believe this, but it’s true. Loaded funds almost ALWAYS underperform index funds. It’s easy for brokers to play numbers games to convince you otherwise, but there has been a lot of research done in this area that has PROVEN this is true. (Look up Harry Markowitz, Gene Fama, Ken French, to name a few). If you want an advisor, pay a fee like you would for any other professional (accountant, doctor, lawyer, etc.)
    3. Everyone should buy term. Ridiculous. I agree that MOST people should buy term, but to make a blanket statement is flat out irresponsible.

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