Dave Ramsey prefers a commission-based planner?

[BuckyBadger]

I just found Dave Ramsey's website and I was surprised to see the following statement:

Dave prefers a commission-based advisor and funds. Over the lifetime of an investment, a commission-based fund will cost the least.

Does anyone know what the basis of this statement is? All the advice on this board (and my own intuitive preference) is for a planner who is fee-based. Why would Dave recommend commission-based planners??

[Scanner]

I am not sure what he means by commissions.

If he means commissions via loaded funds and annunities, then Dave has officially lost a screw.

If he means a percentage of your portfolio agreement, Dave and I are definitely on the same page adn something I have been saying for years here.

If a planner gets a 1% commission per year on your portfolio let's say. . .and he has 100 clients. . .and let's say he has $10,000,000 in assets he is managing among those clients.

So, he makes 100K per year, wears a suit and tie, feels all important.

So, let's say every client he has is a 50 year old woman with 3 kids who is divorced.

If the suit and tie go to his head and he gets all hotshottey with the money under his watch and takes inappropriate risks, his $10,000,000 he is managing could go down to $5,000,000 overnight.

All of the sudden, he is making $50,000/year.

It also prevents all kinds of trading (another form of commissions) and making a portfolio overly complex and "over-diversified." This "business arrangement" allows simplicity, along with what I think is a fair exchange for work done.

Not much work is needed on a portfolio with 10K in it. Much more I do think is needed with 100K and much more with 1,000,000 in it.

[littleroc02us]

Here is what his website states:

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.

http://a248.e.akamai.net/f/1611/26335/9h/dramsey.download.akamai.com/23572/daveramsey.com/media/pdf/daves_investment_philosophy.pdf

* This is based on the idea that the investor holds out for the long haul.

[disneysteve]

He also says, "These are referred to as loaded funds
(commission) and no-load funds (no
commission). I do not dwell on the
fact of a fund being a load or no-load
fund nearly as much as making sure
that the fund has a long, successful
track record."

So he picks funds based on track record, not on whether or not they have a load and he makes no mention of expense ratios. I would respectfully disagree. I'd much rather invest in a fund with no load and a 10% annual return than a fund with a 5.75% load and a 10% annual return. Plus, I'd rather have a fund with a 0.2% ER than a 1.5% ER regardless of load or return.

[Scanner]

Well, if this is Dave's official position, then he's lost a screw or two and my respect has gone down for him.

There are plenty of good no load funds with a good track record, index or actively managed.

The only possible advantage to loaded funds is they are less volatile as people won't move in and out of them on a dime because of the loads. But people who usually do that anyway use ETF's.

I don't see any advantage of a loaded fund - not 1.

It's a horrible product and the least effective way to use an advisor.

[Robert742]

Unsubstantiated rumor: I've heard mention that Dave R. makes money from fees he charges "recommended" financial services professionals, like life insurance agents.
Maybe recommending front-loaded funds is not the unbiased advice you would expect from Dave R?

But I would agree if you pay a sales load, the front load is the best for long term buy and hold investors. But it is crazy to pay any sales load if you are an index investor.

I don't know a lot about Dave Ramsey, but now I'm curious. Everyone seems to be selling something, even those in the guise of providing unbiased advice. At least Suze Orman sticks to shilling books and Fico kits.

[disneysteve]

Unsubstantiated rumor: I've heard mention that Dave R. makes money from fees he charges "recommended" financial services professionals, like life insurance agents.

I have no doubt. Why else would he recommend them? I don't believe he does it out of the goodness of his heart. He is, after all, a business person, and a very successful one. And yes, he is selling something. He is selling his system, Financial Peace University, a 13-week seminar, and the books and worksheets and other stuff that goes along with it. He even sells a board game now. So no, his advice is not without bias, nor is anyone else's.

[Robert742]

I was relying on third party information Dave R. recommended financial professionals, as well as charging fees to his recommended professionals. What I knew of Dave R. led me to have no interest in learning more about him. Thanks for the information, DS. Now I know everything I need to know about him.

[EconoMutt]

Keep in mind, that you will still pay the mutual funds 12b1 fees even if you use a fee based only advisor.

[littleroc02us]

I was relying on third party information Dave R. recommended financial professionals, as well as charging fees to his recommended professionals. What I knew of Dave R. led me to have no interest in learning more about him. Thanks for the information, DS. Now I know everything I need to know about him.

You don't know anything about him, neither do I except what I know from reading his books and listening to his radio show everyday and pours his heart out to people in need in a biblical way. You don't have to agree with his investing recommendations to have respect for a man.

[disneysteve]

You don't have to agree with his investing recommendations to have respect for a man.

I agree. I like Dave Ramsey. I like Suze Orman. I listen to both of their shows. But I wouldn't take investing advice from either one. That isn't their area of expertise. Dave Ramsey's main focus is helping people get out of debt. Suze Orman's focus is people living within their means. I don't agree with Dave's investment advice. And Suze doesn't really give a whole lot of investment advice. She keeps her own portfolio predominantly in muni bonds plus owning a few homes. She isn't much into stocks and mutual funds but she doesn't need to be. She has more than enough money to live very well on the interest from her bond portfolio.

So anytime you read or listen to one of the financial gurus like Dave Ramsey, Suze Orman, David Bach or any others, make sure you know what their main area of expertise is and focus on that (if it applies to you). Personally, I have no debt except a small mortgage but I still enjoy listening to Dave Ramsey, even though I don't agree with 100% of the advice he gives.

[Robert742]

You don't know anything about him, neither do I except what I know from reading his books and listening to his radio show everyday and pours his heart out to people in need in a biblical way. You don't have to agree with his investing recommendations to have respect for a man.

I'm not condemning Dave R., I don't know enough about the man to say he is not worthy of respect. I'm not quick to judge people, just their financial advice. But I know enough about what he does to know I don't need to follow him.

DS, you wrote an insightful post. A lot of people are drowning in debt, and if Dave Ramsey is helping them get out of debt, more power to him.

Suze does get criticism for what investing advice she gives in her books, as opposed to her personal investment portfolio. But you hit the nail on the head: her goal is wealth preservation, and she does not need stock-like rates of return to have enough money for her retirement. Her listeners are not in the same situation. I don't need Suze's help, either, but I enjoy watching her show.

[thomsoad]

I think the world of Dave Ramsey. Baby Steps 1-3 are absolutely spot on in my humble opinion. That being said ... I do disagree with him on a few points in regards to his steps 4-6.

I agree with limiting 401K to only the match then do a Roth IRA. But differ on his paying off the house ASAP. More is made from investing on average in the 7 years he states it should take to pay off a home.

I dont buy his "if your home was free and clear would take out a mortgage to invest in stox" line. You already have the mortgage so the risk is already there. So makes more sense to invest the extra mortgage payment in the market and if you want to pay the house off with the amount you have after 7 years ... then do that.

[littleroc02us]

I think the world of Dave Ramsey. Baby Steps 1-3 are absolutely spot on in my humble opinion. That being said ... I do disagree with him on a few points in regards to his steps 4-6.

I agree with limiting 401K to only the match then do a Roth IRA. But differ on his paying off the house ASAP. More is made from investing on average in the 7 years he states it should take to pay off a home.

I dont buy his "if your home was free and clear would take out a mortgage to invest in stox" line. You already have the mortgage so the risk is already there. So makes more sense to invest the extra mortgage payment in the market and if you want to pay the house off with the amount you have after 7 years ... then do that.

He states the risk you take in borrowing money against your home and then investing it. You could lose all the money you invest in stocks correct? I think it's happened before, especially on single stock. I'm all for his baby steps. A free an clear mortgage will be a great feeling someday. All the more to invest and give away to charities!

[disneysteve]

You could lose all the money you invest in stocks correct? I think it's happened before, especially on single stock.

It is exceedingly rare to lose 100% of a stock investment. You have to be choosing incredibly speculative issues and then totally ignoring your investment. Companies do go bankrupt but it is rarely sudden and the value rarely goes to zero overnight.

Besides, nobody recommends putting all of your eggs in one basket. Even if you do choose to go with individual stocks rather than mutual funds (which have essentially zero risk of going to zero value due to diversification), you need to spread your money around among numerous stocks so even if one did really poorly, the others would be okay.