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Sunday, Sep 25, 2022
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Is Dave Ramsey’s investment good for your fortune?

Dave Ramsey may have helped you get out of debt, but should you follow his investment advice? His views on investing have been fueled recently. The professional advisers were not ashamed of their criticism from their claim that the shares return 12% per year in their love for the growth of mutual funds. (Save yourself as Dave Ramsey … just don’t invest like him from Felix Salmon on CNN is just one example.)

One of the most controversial aspects of Dave’s advice is his list of what he calls “approved local suppliers” or “ELP” for short.

Sometimes I get questions from readers about Dave Ramsey and his well-known ELP program. I got this question recently from a podcast listener named Ace. He writes:

If you have time to answer, just listen to your podcast for financial advisors. I’m curious you took Dave Ramsey’s ELP. I like Dave Ramsey and his philosophy, but when it comes to telling people to invest, I feel that it may not be in everyone’s best interest.

From what I understand, these financial managers use mutual funds for front loads. Because someone so big is smart about your money, I can’t believe they’ll approve. But after doing research, I couldn’t find a solid guide to any of his mutual fund websites.

I saw where he thinks that pension savings should be placed in four different types of funds – mostly growth funds. Then he says not to invest more than 15%. The rest should go to your mortgage or savings for a house, college, and more.

Do you have an opinion on the whole ELP? These are people who will teach us the philosophy I approve of, but he should get a cut for advertising for them.

Ace’s question is a good one. Dave Ramsey is a very popular personality who has helped an incredible number of people get out of debt. He has developed a cult trail. After helping people turn to their finances, they will probably listen to him very carefully when it comes to investing advice.

This is at the heart of Ace’s question, which I will address here. First, let’s talk about what these ELPs are, and then you’ll dive into the pros and cons of using ELPs.

What is ELP?

“Supported local vendors” is Dave Ramsey’s term. ELPs cover more than investing. He also recommends local providers for insurance, mortgages, real estate, etc. At the moment, we are only concerned with ELPs related to investing.

According to Dave Ramsey’s website, it’s not easy to become an ELP. The site states that they adhere to a “higher standard of excellence”. High on what the site doesn’t say. The ELP pays a fee to join Dave’s program. Again, according to Dave’s website, the fee is paid “to cover the cost of maintaining the website and hiring, and Dave’s approval is not bought – it’s won.” I could not find a reference on the site on how much the fee is.

Dave’s ELPs have commissioned brokers to sell front-end mutual funds (known as A Shares in Business). This is in line with Dave’s investment philosophy. He believes that you should not invest alone, pay an intermediary based on commissions, and pay 5% or more just because of the privilege of investing in a mutual fund.

Are ELPs worth it?

To understand Dave’s view on the matter, you need to start with his investment philosophy, which he publishes in a very detailed and in-depth PDF document. Here he presents his investment ideas, which include the following:

  1. You don’t have to invest alone
  2. You need to buy A Mutual Fund Shares that come with advance fees
  3. You should use commission-based brokers instead of fee-only consultants

Let’s look at each of them.

Do you have to invest on your own?

The first and most important point of view when working on whether ELP is worth it or is not is that he firmly believes that you should not invest alone. Dave says you no doubt have to pay a professional. What is its reason? He says statistics show that home salon investors are in a hurry to get out of the funds when they start to have poor performance.

I tried to find data to support his request. Conceptually, I can understand why this may be true. (And I warn my readers and listeners about this problem.) But so far I have not found any hard data on this fact.

It is certainly true that many self-service people do what they offer. When the stock market crashed in 2008, many DIY investors sold out in fear. The same goes for investors who hire a professional. I know many people with investment advisers who have done the same thing. The advisor cannot force you to stay in the stock market. They may try to tell you. They can give you the best advice. But at the end of the day, you control your money.

I spoke to real investment advisers who said that in 2008 they had a lot of clients who ran away from the fear of the stock market. Some of these people simply liquidated their accounts and their advisers transferred their shares in cash.

You need to have an asset allocation plan and stick to it, regardless of market conditions. If an advisor or other person allows you to stick to your plan, you are better off with that person than without him. But I don’t agree with Dave that just because you’re an investor in home comfort will automatically make a bad choice when the market is weaker.

Therefore, I do not agree that just because you hire an investment advisor means that you will stick to your decisions. After all, you are the one who has to choose for yourself and your family.

I can tell you from experience that I have been a self-service investor for 25 years and I stick to my plan. I don’t jump when things get rough. And I don’t think I’m an exception to the rule. I talk to a lot of people who do the same thing. After all, I have more confidence in the owners of investors than Dave. From what I understand, even Dave doesn’t invest alone. And he firmly believes that no one else should.

I do not agree that this applies to everyone. If you think you need help sticking to your asset allocation plan, you may need to hire a counselor. But if you can stick to your plan, investing in sanitary ware can be great. And even if you decide to hire an advisor, this does not mean that ELP and commission brokers are the best options.

Do you need to invest in A-shares?

Although Dave believes that you should not invest alone, he recommends specific types of investments – especially stocks that are pre-loaded by A.

In the PDF of his investment philosophy, he talks about why. He says: “In general, I recommend choosing A shares (pre-commission). I do not choose payment planning – paying 1 to 2.5% per annum shares for a brokerage account. Many financial planners offer fee-based accounts, but still, choose traditional shares of mutual funds. “

This is his opinion. Don’t be picky, but I don’t think that mutual fund shares are “traditional”. The avant-garde, for example, has been in business since the 1970s. They are as traditional as they used to be. And they do not sell A-shares.

But if you’re working with the numbers Dave offers, it may be an initial attraction to invest in A-Shares instead of using a fee-based consultant. Of course, you pay 5.75% up, but you don’t pay 1-2.5% every year. So it can be understood that if they leave their money there for six years, they will have broken even.

There are several things in this scenario. To get started, let’s talk about the difference between a taxi-only advisor and a taxi-based consultant.

What is the difference between a fee-only advisor and a fee-based consultant?

A fee-only advisor is someone who is a registered investment advisor. This means that they cannot make commissions on the investments they sell. They cannot be paid by a mutual fund to sell you shares of that fund. It is not allowed. These people have to be paid by you and only you. Why? The rule is to ensure that they have your best interests at heart.

The commission-based broker, on the other hand, is a seller. They are trying to sell you something. They will receive a commission from the mutual fund when they sell it to you.

How about fees?

Isn’t it better to pay 5% up from 1% to 2.5% per year forever? Probably not.

First, commissioned investment agents have a reputation for exchanging a lot of money. Yes, in theory, if you park your money in a Class A mutual fund and you paid 5.75% and left it there for 40 years, you can do better than if you paid 1% each year.

But you need to watch out for these commission-based advisors. They call him breaking the bill. This means changing your investments frequently so that they save you another 5.75% each time you make that change. And here’s the problem. When a commission-based broker calls and recommends you make a change, how will you know if he or she has your best interests at heart or theirs? You will not do it.

Second, it is important to look at the cost ratios and the actual costs of the fixed assets with which they invest their money. In other words, under Fund A, that previous 5.75% is not the only fee you will pay. Most of these funds are actively managed mutual funds with higher cost ratios than the passively managed index of funds from people like Vanguard.

I looked at many of these tools and, of course, you have to look at the specifics. But overall, the cost of these underlying funds will be higher than 1%. So you pay a lot of money just to invest in the fund, but then you pay high rates of return for the fund as you continue to invest in it.

Third, you need to look at the hidden costs of mutual funds that are not caught in the cost ratio. For example, you have to pay the transaction costs that are borne by the fund when buying and selling shares. These costs are not reflected in the fund’s cost ratio. Although all funds bear these costs at a certain level, actively managed funds usually have much higher transaction costs. For actively managed funds, fees that are not included in the cost ratio can be huge. For index funds, hidden costs are quite low – almost non-existent.

Fourth, not all consultants charge 1% to 2.5% with a fee alone. This is the scope I see in Dave’s investment philosophy paper. And while I think 1% is the norm, many advisors and tools charge much less.

For example, I use personal capital. They offer a free online tool that will track all your investments and show you their performance. I use this tool weekly. You can check it out here (affiliate link). I’ve been using this tool for about a year now, and I like it. With your capital you can only hire a consultant who pays a fee, and they charge less than 1%

Another company, Portfolio Solutions, was recently featured here on our podcast. I interviewed Rick Ferry, the founder of Portfolio Solutions. His company pays fees of less than 1% (in fact, they charge only 37 basis points). Again, 1% is the norm, but if you shop, you can do much better than that.

Lastly, you don’t need to hire an investment advisor – whether it’s just for fees or on a commission basis – if you need any help choosing an investment. You have other options, especially with the new technology that is out there online.

Improvement is one example of this. I have mentioned this tool many times. Another option is mutual fund companies such as Vanguard. Vanguard offers free help; you just have to call them. Other large mutual fund companies, such as Schwab and Fidelity, offer the same assistance.

Obviously, you need to look at the details and costs of all these services. But the point is, you don’t have to accept that you have to invest in expensive stocks or hire a 1% advisor just for investment fees. There are many other great opportunities.

So what about the ELP?

You can now guess what I think of Dave Ramsey’s approved local investment suppliers. I would generally avoid them. I just don’t agree with Dave. I just don’t think it’s wise to hire a commission-based consultant to sell you expensive stocks when you’re paying 5.75% up and you’re probably paying more expensive cost ratios.

Having said that, I would like to like a year from those who have used or even talked to Dave Ramsey ELP about investing. 

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