Dave Ramsey - The Good, the Bad, and the Bluster.
By J.R. Robinson, Financial Planner (August 2024)
At any given time, there are a handful personal finance gurus who have achieved celebrity status. Over my 35 year career in the financial advice business, I have observed that these people tend to share three, common characteristics – (1) they have undeniably charismatic personalities, (2) the source of their personal wealth is primarily the successful distribution of their books, seminars, and/or podcasts rather than from the investment strategies they promote in their content, and (3) they do not have any academic or professional background or experience in personal finance. This begs the question of whether the advice these people are giving to consumers is truly sound or is their cult of personality more akin to P.T. Barnum than Warren Buffet?
Rich Dad, Poor Dad author and self-proclaimed personal finance Guru Robert Kiyosaki has been making headlines over the past couple of years by encouraging consumers to get out of the stock market and to borrow as much money as possible to load up on cryptocurrency. Such hyperbole has zero academic research support and critics have pointed out that Kiyosaki’s primary business recently filed for bankruptcy detracts from his credibility as a purveyor of financial advice. Nonetheless, outrageous statements make for attractive headlines and Kiyosaki remains highly visible if not accountable.
The Ultimate Hypocrite: Robert Kiyosaki and His Company’s Bankruptcy (The College Investor)
Rich Dad, Poor Dad, Bankrupt Dad (Forbes)
For his part, Dave Ramsey has developed his persona over the past 20+ years by serving up generic advice about the wisdom of investing in mutual funds and real estate for wealth building. He has carved out a particular niche as a guru on debt management and budgeting, and he uses “tough love” as his schtick for garnering media attention. His televised radio shows typically involve berating and publicly humiliating callers to who are saddled with debt or who have made unwise financial decisions.
Although Ramsey has styled himself as a mainstream financial planning expert, the advice he gives is often controversial and inconsistent with established financial planning principles. For example, his endorsement of the so-called snow-ball method of debt reduction, which advocates prioritizing the repayment loans with the lowest balances rather than paying down (or refinancing) the highest interest rate debt first, runs contrary to principles of sound financial planning.
Similarly, Ramsey’s persistent advice to investors to load up on actively managed stock mutual funds in both the retirement saving and spending phases, and to expect 12% average annual returns, have been derided as deeply flawed and overly risky. His guidance is viewed as irresponsible in academic research circles. In 2023, two of the financial planning industry’s most prolific and respected researchers, Michael Finke, Ph.D. and David Blanchett, Ph.D, felt compelled to publicly refute Ramsey’s guidance. They noted that Ramsey’s consistent suggestion that investors should expect to earn double digit returns from the stock market returns fails to recognize that the return figures he cites in his commentaries represent arithmetic averages rather than the lower geometric rates of returns earned by real-world investors. They also noted that Ramsey seems oblivious to the existence of sequence of returns risk in retirement (the risk of portfolio depletion due to sharply negative returns in retirement). Ramsey’s response was to dismiss his critics as “supernerds who live in their mothers’ basement with a calculator.”
Supernerds Unite Against Dave Ramsey’s 8% Safe Withdrawal Rate (Think Advisor)
Ramsey’s latest iteration of disastrously bad financial planning advice is his headline-making suggestion that many Americans should “almost always” claim social security early at age 62 to allow their retirement savings more time to grow in the stock market. Part of his reasoning is that the stock market will accrue faster than the roughly 8% per year that Social Security benefits will grow if left untouched. Such early claiming decisions generate 30% lower benefits than waiting until full retirement age (67) and roughly 60% less than if one defers claiming Social Security to age 70. Ramsey argues that deferring receipt of the money is foolish because the breakeven age at which late claiming catches up to early claiming in terms of total benefits received is in the late 70s or early 80s.
Academic researchers (including Finke and Blanchett) often lament that consumers consistently fail to understand longevity risk and their own high probability of living into one’s 80s and 90s. The response to Ramsey’s bizarre guidance from folks who actually are qualified to give financial advice was fast and furious. For example, in another Think Advisor article titled, “Wake up, Dave Ramsey: Your math is flawed,” Michigan-based financial planner Michael Markey takes Ramsey to task by saying, “Ramsey once again hurts his listeners with bad math, which leads to bad advice, and bad advice does hurt people.”
Related Reading –
How Claiming Social Security Early Destroys Client Wealth (Advisor Perspectives)
Why Claiming Social Security at 64 or 67 could be a big mistake (Think Advisor)
8 More Dave Ramsey Myths Debunked (Think Advisor)
A Case Study in Cognitive Dissonance
I confess that I have no love for Dave Ramsey, Robert Kiyosaki, and the rest of their ilk. I find their sermonizing bluster obnoxious and offensive, and Iconcur with Mr. Markey that the financial advice they provide often does more harm than good. In fact, although the sample size is small, in my experience there appears to be an inverse relationship between charisma and financial planning acumen. The bigger the bluster, the worse the advice tends to be. However, my purpose in penning this essay is not to raise awareness that Dave Ramsey gives terrible financial advice. I am not so naïve as to believe that any amount of empirical counter positioning will in any way tarnish his appeal. If outrageous, unsupported hyperbole was truly a reputation-killer, surely Robert Kiyosaki’s star would have faded long ago too.
Instead, I wrote this essay because I am fascinated by the cognitive dissonance phenomenon in personal finance. The larger and more brash and controversial the personality, the larger the cult following. I guess it should not be too surprising because cognitive dissonance is well-known a human condition that rears its head in all aspects of daily life. It is just more visible when we observe charismatic leaders such preachers and politicians maintaining and even growing their followings after being exposed for their hypocrisies and scandal scandals. Similarly, it matters not that Dave Ramsey and Robert Kiyosaki have been exposed for giving awful financial planning advice, consumers still equate their fame with credibility.
Addendum – Cognitive Dissonance in the Financial Planning Research
As a side note, it is worth mentioning that this behavior may also be observable within the financial planning community. In fact, Professors Finke and Blanchette - the two prolific academic researchers who publicly called out Dave Ramsey - have themselves acquired similar “rock star” celebrity status” due in no small part to their charismatic personalities.
Annuities Rock Star – Michael Finke: Why Annuities Make Sense Right Now
Between them, the pair has published more than one hundred peer-reviewed journal papers, which obviously gives them substantially greater credibility than Dave Ramsey.
However, a part of the reason Blanchett and Finke have been given a large megaphone is that they have written a number of papers extolling the virtues of insurance products such as indexed annuities and indexed universal life polices – products that have traditionally aroused the ire of regulatory authorities due to their complex design, opaque commissions, and questionable sales practices.
DOL Fiduciary Rule Could Throw Cold Water on Annuity Sales Boom
The Insurance Industry Really Doesn’t Like the DOL’s Proposed Rule
In an op-ed commentary I posted in 2023, I pointed out that Finke and Blanchett both have unusually cozy financial ties to the insurance industry. Both are paid “Adjunct Professors” at the American College of Financial Services (an insurance industry-managed training organization that, despite its name, confers no accredited undergraduate degrees), their research is often sponsored by insurance companies, and they receive honorariums from speaking at insurance company events and conferences. Blanchette was also recruited away from his research position at Morningstar to work for a major insurance company.
Index Annuities Are Hot Selling Insurance Products – Should You Buy?
My suggestion that there may be even an inkling of bias in the research efforts of Finke and Blanchett brought the wrath of the financial services industry’s equivalent of “Swifties” upon me. It also triggered and indignant response from an offended David Blanchett.
Even though the ties between the researchers and the insurance companies are obviously conflicted and even though the regulatory agencies have been vocal in highlighting the potential harm to investors who may purchase the types of products that Finke and Blanchett are wont to promote, no amount of rational thinking will overcome financial advisors’ hero-worship. In my opinion, Finke’s and Blanchett’s egos and the cult of personality that surrounds them makes them similar to Dave Ramsey.
For the record, I stand by every word in my op-ed commentary.
John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of software maker Nest Egg Guru and the personal finance website NestEggPF.com
