In the past I’ve called Dave Ramsey out for his fictitious advisor titles, his bad math and for the fact that it’s possible he would’ve been better off buying the permanent insurance he hates so much, not for the rate of return, but due to the fact that he’s continued to carry life insurance past the financially relevant time determined by HIS definitions and assumptions.
I’ve called for Dave to be regulated and to be held accountable. And, of course, regulation is a very hot topic these days. While there has been much debate on how the proposed Department of Labor (DOL) Conflict of Interest rule would change those already regulated, no one seems to have discussed how the proposed rule may regulate those who currently fall under no regulatory supervision.
This column’s purpose isn’t to support or oppose the rule, but rather to illustrate, with specific rule citations and examples from The Dave Ramsey Show, how I believe this rule would define Dave as an advisor and thus how he would be regulated as a fiduciary.
To get started, here are a few main points that would make this regulatory oversight possible.
1. The proposed rule expands the term “advisor” to encompass a wider group of advice-givers. An “advisor can be an individual or entity who can be, among other things, a representative of a registered investment advisor, a bank or similar financial institution, an insurance company, or a broker-dealer.”
A few things to note: First, the implicit foundation of this rule is to regulate “advisors” (investment advice-givers) as fiduciaries if they have the potential to receive a financial benefit. Second, the definition of advisor now includes “among other things” which immensely increases the spectrum of advisor(s).
Under this new definition, Mr. Ramsey potentially qualifies to be regulated as a fiduciary. He gives both individualized advice to his callers AND is indirectly compensated from this advice in not just one, not just two, but at least three ways: by the sales of his books, columns and apps; by the sale of advertisements; and by the sales of leads to his Endorsed Local Providers (ELPs). People pay Dave, through all three of these sources, based on the perceived level of knowledge Dave demonstrates while giving specific individualized advice to his callers.
2. The proposed rule modifies/eliminates the current five-part test to better clarify and define who is held to a fiduciary responsibility. More specifically the elimination of the “on a regular basis” and “pursuant to a mutual agreement” clauses should diminish the “evasion of fiduciary” responsibility from those who should be held as such.
The regular basis clause of the test is inconsistent with the intent of the rule. There are major financial decisions that only require the use of an advisor on a singular basis. (For a case study, see my previous column.)
3. The proposed rule eliminates the pursuant to a mutual agreement. When a caller asks for Dave Ramsey’s advice, aren’t they asking Dave to listen to their situation? Aren’t they asking questions to see how their situation may be different from others? Do they assume — other than when they ask a permanent life insurance question — that they’re getting individualized advice? I think so.
Moreover, should each caller have to enter into a written mutual agreement, or be read a two-minute disclosure, to make this assumption? Do people really read disclosures, or listen to them intently? This is a big piece of the proposed DOL rule. People DON’T read disclosures like they should and therefore we can’t fix everything by putting an * at the bottom of each page.
4. The proposed rule updates the fiduciary cloak to cover participant-directed investments. When the Employee Retirement Income Security Act of 1974 (ERISA) was passed, the 401(k) did not exist and IRAs had only been newly created. ERISA’s initial intent, among other things, was to lessen conflicts of interest, unnecessary fees or costs, and unsuitable recommendations by individuals or entities that the investor is likely to believe is acting or should be acting in the investor’s best interest.
Dave’s advice in action
OK, enough citations of the rule. We can come back to them if you wish. But now, it’s time for the good stuff. Here are a handful of recent examples from The Dave Ramsey Show that help demonstrate that the advice Dave gives should be subject to a fiduciary standard.
September 2nd, 2015. A $200,000-income 60-year-old calls in to The Dave Ramsey Show and wants to know if she should use $75,000 of her and her spouse’s $100,000 in retirement funds to pay off debts. The interest rates on these debts are all under 5 percent. Dave advises the caller to take it and pay off debt ONLY if they are not going to use debt again. Then aggressively save.
Seriously, Dave? This couple has $200,000 of income. You think the reason they CAN’T save is because they have $75k of debt against 200k of annual income? What about asking what toys they’re spending money on or how much they spend on vacations or where, exactly, all this money is going to?
Dave says he doesn’t care about the interest rates. He says the payments are holding them down.
That’s fundamentally not true. Stupid spending is holding them down! A real planner would have them cash flow these debts so they can feel the pain and gratitude of accomplishing something they should easily be able to do.
September 15th, 2015. Dave tells a caller to always roll out of a 401(k) into an IRA. The IRA company will do all the work and send in the paperwork, he says.
Wrong! Most 401(k)s require their own paperwork. And, what about the differences between a 401(k) and an IRA?
- The lower age of withdrawal eligibility?
- The potentially lower fees?
- The potential tax advantages of employer-given stock within a 401(k)?
- The increased bankruptcy protection of 401(k) dollars?
These things don’t matter, apparently. And we wonder why new regulations like the proposed DOL rule exist. Was Dave acting as a fiduciary here? What are his ELP referral fees worth if he never suggests anyone visit these ELPs?
What’s one of the biggest prospecting markets? If you said prospects looking to manage 401(k) plans from previous employers, you’re right. Many people don’t know what to do with these plans. Offering advice in this area is a great lead source for Dave’s ELPs. How many listeners out there might be in the same situation as that caller? It’s easy to imagine the potential financial implications of this advice.
September 17th, 2015. Just in case you thought Dave made a simple error when advising his September 15th caller, on this show he tells a female caller who just lost her job to roll over her 401(k) into an IRA. She was thinking about cashing out to pay off debts, but Dave tells her she’d have to pull $20k to get $13k. And how does Dave suggest she avoid this? Roll over her account, of course. How to do a rollover? “Go see my ELP.” I wonder how that’d look as a bumper sticker campaign?
September 23rd, 2015. Dave says there’s an unearned income tax credit. He makes a big deal about how it’s called “unearned income.” The truth, of course, is that it’s not called “unearned,” it’s called “earned.” Dave doesn’t even know what this tax credit is called. He goes on to talk about how 48 percent of the population doesn’t pay any federal tax. Hmm. Is Dave helping people with facts and math, or just stirring up emotions?