People who know me will tell you that I’m a big Dave Ramsey fan. He’s done a fantastic job of helping people take control of the biggest financial problem plaguing this country: debt.
But there’s one area of his program that I don’t like: His thoughts on Investing. As I write this, I just finished his Financial Peace University. I’ve read his books numerous times but never actually took the class. It’s been a great experience but people have asked numerous times about his Endorsed Local Provider or ELP program.
How it Works
At some point in your debt-free journey you will be at a point where you can invest. The problem is that you probably don’t know enough about financial markets to know how to do it.
You know financial advisers exist but you don’t know a good one from a bad one and you certainly don’t understand the fiduciary verses the suitability standard. If you’re honest, you might be a little intimidated by the whole thing.
Ramsey recognized that and set out to help. He created the ELP program—Financial advisers all over the country that “have a heart of a teacher.” (There are realtors, Insurance agents, and more in the program as well but we’ll focus on financial advisers for now.)
According to the ELP website, these professionals are screened by the Ramsey team and will undergo ongoing screening to make sure they’re providing outstanding service.
ELPs also pay to be a part of the program although the website doesn’t say how much. You can find articles of ex-ELPs that say they were paying a monthly fee of more than $100.
Now, before I continue, there are a lot of people who say that Ramsey shouldn’t charge ELPs because it’s a conflict of interest. Companies in every business pay for the opportunity to put their business in front of potential customers. The financial industry is no different. As long as he’s disclosing the arrangement, I don’t see that as an issue.
What’s Wrong with The Program?
The idea isn’t bad but the model has problems. First, in my personal experience talking to people, I still haven’t talked to anybody who was happy with their experience with an ELP.
One person said that they didn’t seem to be very knowledgeable while others said that they didn’t get a return phone call when they reached out. Others have said that once they learned more about the industry, they found better ways to gain larger returns while paying less fees. I’ve not investigated these claims but if you’re a word-of-mouth person, I can say with confidence that I’ve not heard great things.
Second, ELP advisers are supposed to put you into a certain type of mutual fund that may come with high fees. ELPs are also commission-based rather than fee-only advisers. Fee-only advisers charge you an ongoing fee. Ramsey believes that you’ll pay less with a commission-based adviser but there’s plenty of holes to poke in that theory.
To my knowledge, he’s never provided evidence of that fact and in all of my reading, I’ve not found anything that says commission-based advisors are a better deal for long term gains. (Because that would be very hard to measure.)
This discussion is coming in a later article but there are outstanding people that charge commission and shady people who are fee-only advisors. It’s not about the people—it’s about the model. Salespeople are paid on commission—people providing an ongoing service charge fees. I want an ongoing service for my family and anybody I care about. That’s where I’ll leave it for now.
Another problem I have is the clientele. Warning—I’m going to get controversial for a minute. Ramsey’s core audience are people overloaded in debt and not in the high wage earning category. The financial advising industry doesn’t love these customers because they generally don’t have a lot of money to invest and because of fixed costs in the financial industry, low balance clients cost more to manage than the high net worth crowd.
Some have argued that advisers willing to pay Ramsey a lot of money for what are usually not the highest balance customers might not be the best advisers the industry has to offer. I’m sure there are many exceptions to that rule but knowing what I know about the industry, the argument makes more sense than you might think.
Finally, remember that Ramsey’s goal is to get you out of debt because NOT paying interest on all of your debt is quite an impressive investment on its own. Once you get to a point where you’re out of debt, he’s done his job and can hand you off to investment pros who can take you through the complexities of portfolio management—he just wants to get a cut of that referral.
What Should You Do?
There is one investment that outperforms every other investment type. You don’t have to sophisticated to use it and you don’t need the help of a financial professional—yourself. You are the best investment you can make. Paying off debt will put thousands of dollars back into your pocket each year.
Start by paying off all debt. Ramsey says to pay off your house as well but you can start investing once all of your debt is gone. (If you have a 401(k), contribute to that now.)
Once you’re at a place where you’re ready to invest, seek out somebody to help you. A fee-only financial adviser is a great choice. Ask me—I can help you find one that you like.
Have a question about anything in your financial life? Click below to ask me. I respond to all questions.