By Kraig Strom
As I’ve explained before in this column, I am not a fan of financial entertainers: those media figures who lure otherwise intelligent Americans into following their patented “financial health” programs at conferences, on TV or the radio by representing themselves as financial advisors, whether or not they have any of the appropriate licensing and credentials.
For wealth planners like myself, financial entertainers are more than just a nuisance; they’re a threat to the financial security of the clients we serve, and not because of anything they’re doing right. It’s actually what they’re doing wrong that has hurt us – specifically, their proclivity for misleading people into improper investment strategies and unrealistic expectations. When it’s our word against theirs, financial entertainers often win the loyalty of people who are new to investing because they are the ones offering the path of least resistance – a path that will almost always leave new and experienced investors disappointed.
Here’s an example: Dave Ramsey, obviously a prominent financial entertainer and a great motivational speaker, claims that people can expect a 12 percent annual return on their mutual fund investments. As those of us who are licensed financial planners know, that is a terrible guideline; people should expect a much more realistic return of seven to eight percent. How does Dave Ramsey arrive at his calculation? In the most simplistic way possible. It’s based on the principle that the average annual return of the stock market since 1926 has been “very near” 12 percent annually when adjusted for inflation. That’s what Dave Ramsey has based his entire rate of return claim on, and it’s misleading thousands (if not millions) of people. What’s worse, those people are so motivated by Dave’s message that they go out and consult with a financial planner to get started on investing – and then, are disappointed with that financial planner for not guaranteeing them the same pie-in-the-sky figure. As you can guess, those people typically walk away without starting a portfolio. They’ve lost out, and so has the financial planner. Thanks, Dave Ramsey!
Here is what makes his 12 percent rate of return misleading. The average annual rate of return of the stock market is actually at 11.6 percent; it is not, nor has it ever been, advisable to just “round up” to 12 percent. Those .4 percentage points actually do make a difference. Plus, there’s the matter of fees, inflation and sequence investing. The reason a good wealth planner will tell clients to expect a 7 OR 8 percent long term return is that he knows that will be the return once all factors are considered. Dave Ramsey isn’t including the applicable fees and expenses in his figure, and it’s what makes his entire claim flawed and disingenuous – that, and the fact that Dave’s principle doesn’t take into account the reality that most people invest in increments.
Regardless, because he’s a great motivator and a likeable guy, people believe Dave Ramsey and decide that he knows better than any financial advisor who tells them his method is wrong. As I said, they often decide not to invest at all once they realize they have been misled – and that is how Dave Ramsey is hurting the average investor. Whether you’re a successful business owner or a prudent citizen who wants to start amassing wealth, you need to know that financial entertainers offer good general advice but cannot possibly help people build a comprehensive plan for building wealth or retirement. Are they motivating? You bet. Are they likeable? Absolutely. But they need to stick to motivating and entertaining, and let licensed financial planners do the advising.
Kraig Strom, CFP®, ChFC® is a Certified Financial Planner® at Team Financial Partners in Corona. He can be reached at 877-297-5851, or at www.PersonalPensionFormulation.com.