Dave Ramsey's program "Financial Peace University" came to my church recently. I'm thrilled my church was thinking about the financial health of the church members. I generally like and agree with the majority of the advice Dave Ramsey gives in the field of personal finance and combating debt. Dave has helped hundreds of thousands or even millions of people get serious about debt and excessive spending.
But what I don't like about Dave Ramsey's more popular programs can be boiled down into 3 main points:
1) Dave Ramsey broadcasts general advice to a large swath of people at different points on their financial journeys. Sometimes the general advice (such as don't use credit cards and never finance a vehicle purchase with a loan) is not appropriate given different financial situations.
2) Dave Ramsey charges an excessive amount for a program meant to help people get out of debt. I'm sure the return on investment is great, but in my personal opinion, $129 per kit is excessive for a financial program targeting church members with debt problems. Dave Ramsey could charge much less per kit and still make a healthy profit. It's a great business plan that makes him boatloads of cash, but the fact that he utilizes church's networks and resources to sell his products so that he can be a multi-millionaire sets off red flags and alarm bells with me. Perhaps I'm overly idealistic.
3) My last point, which is what this article is really about, is that Dave Ramsey recommends only actively managed mutual funds for investments. He explicitly does not recommend low-fee exchange traded funds, single stocks, certificates of deposit, bonds, annuities, or real estate investment trusts.
Some of the investments he mentions to avoid make sense. The absolute shocker is that Dave Ramsey explicitly does not recommend passive exchange traded funds or bonds. These are two of the most important types of investments for a properly diversified portfolio. Excluding these assets from your investment toolkit for life is like keeping a tool bag full of hammers. Maybe you ought to consider adding a few other things in there?
What's worse is he pushes actively managed funds as alternatives. He does this despite all of the research (which includes a nobel prize or two) and bets against statements made by some of the greatest investors the world has ever seen.
But don't just take my word for it.
Jim Cramer is the host of a show called Mad Money. He's not an investing genius, per se. More of an investing personality. Jim makes a living broadcasting his individual stock picks to millions of viewers each day. He also runs an actively managed charitable investment fund. Check out what Jim Cramer (who, again, makes his living by actively picking stocks for other people) says about actively managed funds:
What (active funds are) being paid to do is bring in more money from you, from more investors. That's part of the reason why in study after study, year after year, it's shown that the actively managed mutual funds underperform the benchmarks. - Jim Cramer
And then there's Warren Buffet. He also goes by "The Oracle of Omaha", a well-earned moniker for decades' worth of amazing business deals and open market stock picks. Warren Buffett is undoubtedly the most well-regarded and recognizeable names in investing today. Let's see what he thinks about actively managed funds:
When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds. - Warren Buffet
There are many other big investing names such as Jack Bogle out there who have worked to spread the word about the power of the amazing and yet unassuming low fee index fund.
So Why Does Dave Ramsey Back High-Fee Active Mutual Funds?
It might have something to do with the fact that Dave Ramsey collects a decent chunk of change referring listeners to his SmartVestor program, which is chock-full of advisors that invest heavily in high fee mutual funds. These advisors pay on the order of $400 to $900 per month to be on Dave's hallowed list. And why not? Association with conservative Christian Dave Ramsey has created an incredible amount of leads for these advisors and implies they can be trusted. The SmartVestor referral program even created enough of a stir that it was investigated by the Missouri state securities regulators and forced to pay a fine for not properly registering in the state.
Check Out Fee-Only Advising - A Higher Fiduciary Standard
Be careful with whom you trust your money. The person you are trusting to provide financial or investment advice may not be acting in your best interest. A fee-only financial advisor is a great way to go if you are seeking out advisors free of conflicts of interest. These advisors are only paid an agreed upon fee and do not receive commissions from sales of other products. You can find fee-only advisors in your area by using NAPFA's advisor search tool.
Better yet, invest in yourself and sign up for my class to learn what it takes to manage your own investments. Even if you still feel like you need a financial advisor, my class also teaches questions you can ask financial advisors to ensure they are acting in your best interest.
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