When I was 10 years old, my mom would pick me up from piano practice and on the way home, we’d listen to Dave Ramsey on the radio. His enthusiastic voice was a nice change from the bombastic talk radio I usually heard.
But it was the way he explained how to solve his listeners’ debt problems that really drew me in. I’d hear people say that they owed thousands in credit card debt, medical bills and car loans. No matter how much they owed or how little they made, Dave would always find a way to show them how to solve their problems.
I thought he was a magician, even though I was too old to believe in magic.
The Latest Scandal
The Department of Labor announced recently that it would soon require advisors and brokers to disclose any possible conflicts of interest to their clients including how they are paid.
Too often people get confused and assume that anyone offering them financial advice is acting in their best interest. Only those advisors who have stated that they follow the fiduciary protocol are guaranteed to be acting in a client’s best interest. It's not to say that non-fiduciaries don't always act in their client's best interest, but sometimes when money or commissions are involved, lines become blurred and it can be hard (as a consumer) to know if they are truly acting in the client's best interest.
Ramsey immediately tweeted that this new rule will limit access to advisors, raise the cost of their services, and leave thousands of people without a reputable source of financial advice.
CFP Daniel Wrenne of Wrenne Financial says that Ramsey is against this new rule because it will hurt the advisors that he recommends his listeners use. Ramsey likely gets paid to send leads to these advisors, who operate on commissions instead of fees and do not follow the current fiduciary rules.
Wrenne almost became a Dave Ramsey advisor, but stopped the process when he realized they didn’t want him to act as a fiduciary.
“It’s no surprise he is against the rule,” he said. “It would potentially kill his Endorsed Local Provider business with advisors, which I suspect is a million dollar business.”
Consumers will automatically benefit if everyone is forced to disclose how they’re being paid and when they might have a conflict of interest. The people who lose are those brokers who will have to reveal that they’re not acting in someone’s best interest.
CFP Jason Reiman of GetFinFit said he has worked with “countless individuals and families – mostly military – who have been taken advantage of by so-called advisers” who operate under the same rules that Ramsey’s ones do.
“What's worse is that the same demographic he's saying will be crushed by the rule are the very same I've seen over and over again in situations NOT in their best interests – clearly,” he said.
CFP Mark Struthers said that the problem nowadays with financial planning is that people who primarily sell products and receive a commission can call themselves advisors, the same way that a licensed CFP who follows the fiduciary rule can say he’s a financial advisor.
“If I cannot call myself a lawyer or doctor without training and following rules that are in the client's best interest, the same should be true in this wonderful profession,” Struthers said.
Losing a Legend
Hearing this has lifted the blinds from my eyes. I feel like a little kid who’s met her hero only to find out he’s a charlatan. Even other CFPs I’ve interviewed have said that Ramsey was their first introduction to this industry.
That’s why his latest scandal has hit so close to home for so many of us. My parents had a copy of “Financial Peace” on the bookshelves. I read “The Total Money Makeover” while other kids were reading “The Chronicles of Narnia.” When people ask me how I got into financial planning, I tell them about listening to Dave on the radio.
Don’t get me wrong, I still quote Dave Ramsey to my blog readers. I believe that he’s helped and continues to help millions of people conquer debt. But I wonder if he, like so many of our heroes, has succumb to the temptations of his business.
How do you feel about Dave's recent comments?
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It’s sad that people let money take over their ethics. The more money at stake, the bigger the temptation. I like the new rule. When I started investing, a financial advisor sold me a bunch of expensive mutual funds. It took me a few years to wise up and fired him. The new rule would help a lot of young investors.
I interned at a brokerage where the “advisor” was steering people into high expense/high commission funds. I didn’t know it at first, but it left me with a sour taste in my mouth after I figured it out.
You obviously have too much integrity to have been successful in that business.
I had a similar story as yours when I first started out. I was taken and when I had educated myself I realized I had to do this myself to prevent this in the future. The bogleheads (Vanguard followers) were mentors and an accurate source of financial help/information.
Dave Ramsey totally changed my thinking on finances and debt. Based on what I heard on a radio passing through Kentucky one day many many years ago, I chose to check him out, ordered his book and my wife and I put his program to work and were able to get out of all consumer debt in about two years just prior to retiring from the military. In fact I would buy his Total Money Makeover book in quantities of 10 and give them out as wedding and Christmas Gifts. I still do, though I have since learned that his investing advice is not necessarily as great as his other advice. So, I just caveat the investing portion with the advice to check out Vanguard’s index funds for the investing portion of the steps. I think he does a good work and hope he comes around in the investing arena.
Agreed. And, he just seems to loathe when people say something like, “Dave is great at helping people get out of debt but lacks when it comes to investing advice.”
I’ve heard him give investment advice far too often – in 30 seconds, unregistered, unregulated… Leaving the “client” in some pretty interesting situations…
I can’t help but comment that this story appears to be a half truth.
The DOL ruling requires much more than just a simple disclosure of potential conflicts of interest and compensation practices. It also requires that advisers act as a fiduciary for their clients when it comes to retirement assets. That all sounds well and good on the surface (similar to adopting world peace and eliminating hunger), but the devil is always in the details.
Today’s enforcement environment for advisors forces them to document why an investment is clearly in the best interest of a client above and beyond a suitability test. This added compliance is great, but also raises the cost of providing advice. As a result, advisors will need to make up for this cost somehow and that will most likely result in advisors targeting clients with larger assets. Following this train of thought, clients who are just starting out or with small amounts of savings – the same ones who need financial advice most – will be left out because it becomes too expensive to serve them. This is what Ramsey and other advisors are concerned about.
Don’t get me wrong, I’m not going to defend Ramsey or his business practices and this comment isn’t about doing so, but the issues aren’t quite so simple as how one gets paid.
How much would it cost to advise someone to set up an ongoing plan to purchase a Vanguard Target Date Fund? Not much, and that would be much better advice than most people get from their highly conflicted advisors.
That’s a great example of oversimplifying the situation. While recommending a Vanguard fund is a good place to start, it is very limited advice and a one-size-fits-all approach.
What happens when that same client comes back and wants to invest in something different? How long does the conversation take? What if the client has questions? The cost is not just $’s, it is also the advisor’s time which they could be using with other client’s who are able / willing to pay more. That eventually leads to less & less options for people starting out or with a small amount of savings.
Having lived in the UK, I’ve seen this strategy play out and the result is that the small investor’s options become fewer and fewer as the cost of managing those clients increase. The end result is a market place for small investors with very limited choice and products.
You have raised fair points about some advisor’s character; however, that isn’t what I’m speaking about. My point is that it’s not a simple problem that can be solved with a simple solution.
It seems what you are saying s that if you do what’s in your clients next interest and direct them to low cost solutions, you won’t make enough money to run your business. So you would have to work with higher worth clients. So, charge a fee to these lower net worth clients so you can retain your objectivity
Tom, See my response below to Robert. Thanks!
Matt, I’m curious to know why you think costs will rise? There are free services right now that show you the cheapest funds in a category from a fee perspective. Compliance monitoring companies and services would have this in their pricing since it would be required, and it won’t rise at all because all companies would need to comply. I find the increase cost argument interesting because I just can’t find an area where costs would rise.
Robert, thanks for the question. This is a long post so apologies in advance.
I mentioned some of the issues in my response to George around actual $ costs vs. the time cost it takes to advise a client so I will focus on the compliance cost.
The compliance cost is driven by being able to affirmatively prove that every action you’ve taken or discussed is in the best interest of the client – even if it is the client which suggested it or asked about it. As much as we’d like to believe it is always an easy choice, it’s not always clear cut based on a client’s specific situation.
For example, let’s say a client has their money in a 401(k) account at their employer and wants to roll it over into an IRA for any number of reasons. Within the 401(k), the client has access to institutional share classes which typically carry a lower cost relative to the similar retail version that is available within the IRA managed by the advisor. In this situation, would the rollover be judged to be in the best interest of the client? The answer is it depends. As a result, the advisor needs to protect himself/herself from this and many other such examples where their fiduciary responsibility could be questioned. This increases costs in the form of paperwork, liability insurance, time spent, etc.
Now, you could say that these costs can be incorporated into the advisor’s fee similar to what Tom is suggesting above, but how big does the fee need to be? Would you take the risk of having your fiduciary responsibility questioned by FINRA, the SEC, or the DoL for $1? What about $10? $100? $1,000?
Most likely, it would need to be towards the top end of that range for customized advice specific to that client.
So I’ve said alot above and I appreciate you sticking with me this far, but here’s the rub.
If you have someone who wants to start saving and thinks they can put away $50 / week into an IRA like many new savers start – there’s no way that they can afford $100 – $1,000 to compensate an advisor for their time & risk while the advisor can’t afford to take the risk of advising them for the $1 – $10 they can afford.
Matthew, thank you so much for explaining this so well. Here is a real life example:
When we were young (early 1980s), we could barely afford $10 a week in savings. Over time we were finally able to purchase a fee-based mutual fund for $500. Yes, the fees ate at the return, BUT we could not afford a higher level of investment. We KNEW that would happen going into the deal but thought some investment was better than none.
A few years down the road, the investment had grown, albeit slowly, and we eventually sold it and purchased better funds. The fee based system allowed us to get into the market, and years later our investments are sufficient for maintaining our lifestyle in retirement.
This fiduciary rule will essentially cut off market investments from the average person starting out without large sums of cash. The consequences will be harmful to the very people the rule claims to help.
We are fortunate that we can now open an IRA (no minimum) at TD Ameritrade and access those Vanguard index funds — no need to pay a commissioned salesperson who has an automatic conflict of interest.
Yes this is awesome. Self-directed investing at a discount brokerage is a great way to go.
Thank you for the interesting article.
The conflicts of interest in the financial services industry are so great that it takes rare individual to not become thoroughly corrupted by it. Because they are surrounded by others who do the same thing, they come to feel entitled to fleece their client. I suspect that many are so blind to the inherent conflicts that they would pass a lie detector test on the question of whether they are helping their clients.
The crocodile tears they cry for their clients who will be deprived of their services are not at all convincing. They are most afraid that their clients will find out how much is being siphoned off of their savings and will be justifiably angry.
My employer provides access to a team of certified financial planners for which the company pays and who are not permitted to sell us anything or to recommend specific investments. The one I use worked on the dark side until his conciensce would no longer let him. They stories he tells are truly frightening.
Transparency is needed in this industry. When you turn on the light, the cockroaches scatter.
Dave is on better than the salesmen who prey on investors. His desire for money has overridden his desire to help his clients. He really is not knowledgable about investing. He belongs in the Suze Orman genre, who should stick with teaching at the kindergarten level for folks who don’t know that paying off 18% interest is the same as saving 18%. Or who waste money shopping at convenience stores instead of super markets.
I learned my initial financial information through Suze Orman. Her information excited me into doing my own research and becoming an educated investor. It took me several unsuccessful dealings with “financial advisors” to realize that no one cares about my future like I care! It is too bad that the general public are scared into thinking they can’t do this themselves (which they certainly can).
I’m most concerned over communication. Look at the big picture, we have limited financial literacy in this nation. The problem is bigger than some bad actors as sales reps. We need folks that can get out there and educate many to open their minds. As #FinTech begins to reshape the way financial services information is communicated, we should look at how laws will impact progress. In theory, no one will ever need a sales rep in the future with the tremendous amount of information available online, but isn’t true that many will still need a person to help organize and manage the decisions along the way? I think the entire sales process is evolving to where clients say they want the “best deal”, regulators will enforce new and expensive compliance requirements, and folks that need the most help will receive it the least because going through a rep will be too costly. So we are back to square one. I remember back in the 98 when Glass Stegal was repealed, there was a great opportunity to offer the US consumer a square deal on financial services. Instead each Banking, Investment, Mortgage and Insurance unit simply remained intact under a greater umbrella, and retained their high costs, rather than find ways to reduce costs with cross selling and customer loyalty bonus for doing business with all product lines. We are again approaching a special time where a “good” rep should be able recommend the right product suite that uses tech as a cost cutting device, benefitting from removal of unnecessary costs while still retaining profit for the company.
In total, I think Dave Ramsey has been great for his listeners. When it comes to budgeting and paying off debt, he’s rock solid IMO.
When it comes to investing, he and I agree on a few overriding principals – diversify, no individual stocks, no investing through insurance products like annuities. But when it comes to the practical application of these principals, he and I disagree.
I fully recommend Dave for those who need to take control of their money and payoff debt. I don’t for those who have their finances in check, and are building wealth to invest. I won’t speak to his motivation for being against the fiduciary proposal as I have no inside knowledge of his thought process. Regardless of his reasoning, I respectfully disagree with his position.
John