Hey, middle class! Did you know that popular financial advisor Dave Ramsey is trying to rob you?
Okay, that’s an exaggeration. Sort of. At the very least, he doesn’t have your best interests in mind.
If you’re into the Twitter personal finance scene (and who isn’t?) you probably saw the greatest Twitter beef since Kanye versus Wiz Khalifa a few weeks back – Dave Ramsey versus...well, a lot of other people. Ramsey dropped this bombshell:
This Obama rule will kill the Middle Class and below ability to access personal advice. https://t.co/Eym2Jq5CUP
-- Dave Ramsey (@DaveRamsey) February 22, 2016
Kill the middle class’s ability to access personal finance advice? #ThanksObama.
But on the other side of the argument are people saying that Ramsey is just looking out for himself, and what Ramsey (and others) fear will happen actually won’t.
So what’s the thing that either will or will not completely cripple our middle class?
It’s the fiduciary rule, and the consequences could be real – but not bad for the average investor.
What the heck is the fiduciary rule?
Lawyers and doctors are held to a fiduciary standard – they have to do what’s in the best interest of their clients. Some (and that’s a key word, but we’ll get to it) retirement advisors are held to a fiduciary standard, but not everyone in the finance space is.
Remember the recession that started in 2008? Sure you do, because it sucked for almost everyone. It was also a great example of financial institutions not doing what was in the best interest of their clients. Seems like everyone would want to avoid another one of those, right?
You’d think, and holding everyone to a fiduciary standard would help, but a lot of financial advisors would rather stick to a suitability standard.
A suitability standard sounds nice, right? We like things to be suitable. The word doesn’t have a negative connotation. But all it really means is that their advice has to be appropriate for the saver’s "investing objectives, time horizon and experience" – regardless of any conflict of interests on the part of the advisor. Those conflicts of interest usually come in the form of commissions the advisor gets for directing people toward certain funds.
Confused? Let’s roleplay:
Fiduciary standard: "Hi Potential Retiree, X and Y funds are mostly the same – they both will help you reach your retirement goals – but you should invest in X because the fees are lower, so it’s better for you."
Suitability standard: "Hi Potential Retiree, X and Y funds are mostly the same – they both will help you reach your retirement goals – but you should invest in Y (oh and also the fees are higher and I get a commission from it but whatevs)."
Think of the suitability standard like the C+ grade of financial advice: technically passable, but your parents would be really disappointed because you could be doing a lot better.
So the government wants a fiduciary rule put in place to hold all retirement advisors to a fiduciary standard. According to a report compiled by the Council of Economic Advisers, avoiding what they call "conflicted investment advice" will keep $17 billion dollars a year from being shifted from savers to advisors who are focused on their own bottom lines.
It’s a no-brainer, so surely someone is trying to twist it into something bad for people saving for retirement, right? Of course. After all, you saw Dave Ramsey’s tweet.
Registered investment advisors (RIAs) are registered with the Securities and Exchange Commission, usually work with wealthy clients, and charge fees that are either fixed or based on the funds they’re managing. They’re held to a fiduciary standard. A broker dealer "facilitates investment transactions" and "can act as advisors to help you decide which investments to purchase, and which to sell," usually work on commission, and act under a suitability standard.
And that’s sort of the crux to this whole disagreement.
A lot of people in the financial world argue that commissions are what make financial advice accessible to "the Middle Class and below," as Dave Ramsey put it in his tweet. They take a cut of transactions made. The alternative is for everyone to use fees like RIAs do, which means either high upfront costs for flat fees or a large amount of money invested for fees based on the size of the funds managed. Either way, it’s prohibitive to those of us who are non-wealthy, and advisors would only take on rich clients anyway.
Of course, there’s a third option that opponents of the fiduciary rule don’t bring up much.
Just act in the best interest of your clients. If a business model exists by intentionally misleading people on what to do with their money, does it even deserve to stick around?
Why Dave Ramsey hates you
Okay, so back to Dave Ramsey.
The fiduciary rule will make sure that financial advisors have to have your best interests at heart when they give you advice. Ramsey thinks it will hurt the middle class. What he doesn’t tell you, though, is that it’ll probably hurt him, too.
You can’t help but wonder if that’s what he’s more concerned about.
You see, if you head on over to Ramsey’s site, you’ll see a section dedicated to Endorsed Local Professionals (ELPs). They have the Dave Ramsey seal of approval, which means he recommends them to listeners of his show – and the ELPs pay him for the referrals.
This isn’t a bad thing in and of itself. An ELP might give great financial advice, and Ramsey might legitimately endorse them. But those ELPs who work on commission likely aren’t in support of the fiduciary rule, and if they go under, so does a major income stream for Ramsey. And that’s the problem of a system that works under a suitability standard instead of a fiduciary standard: you don’t know for sure whose team your advisor is on.
And that’s what most of the Twitter back-and-forth has been about: Ramsey gives out good advice most of the time, but he’s also the kingpin sitting on top of an army of ELPs. More than one person has broken out the Upton Sinclair gem, "It is difficult to get a man to understand something when his salary depends upon his not understanding it." Nothing like a classic Sinclair zinger.
Ramsey doesn’t just think the fiduciary rule is bad. He thinks it’s unnecessary:
You already know. Most advisers already do act in the best interest of the client. You insult an entire industry. https://t.co/JiAHbLGcXU
-- Dave Ramsey (@DaveRamsey) February 22, 2016
Which sort of raises the question...why not just have it in place, then? By Ramsey’s own admission it won’t affect most advisors, because most advisors are already acting under a fiduciary standard. The fiduciary rule would just protect people from those who don’t.
But Dave Ramsey seems more interested in protecting his ELPs.
So will the fiduciary rule kill retirement advising for the middle class? Doubtful. And even if some advisors want to close their doors to people without six figures to invest, there are still options out there. Use GuideVine to find the perfect advisor. Use a robo-advisor like TradeKing (until robo-advisor A.I. evolves to the point where it doesn’t have the best interests of humanity in mind, of course).
People like Dave Ramsey are using scare tactics because they’re the ones who are actually scared – that you’ll take your money and go elsewhere.