Save like Dave Ramsey...just don't invest like him (pg. 2)

  @Money October 17, 2013: 3:34 PM ET

"Do you have the heart of a teacher?"

After I typed my contact details into the form on Ramsey's website, it was Scott Smiler who picked up the phone and gave me a ring. Smiler is a lawyer at Gallet Dreyer & Berkey in Manhattan, whose main practice is real estate law. He's also a financial adviser who makes extra money investing the funds of Ramsey fans -- at least those who live in New York.

Smiler pays to be an ELP. He wouldn't say what that fee is, but MONEY spoke to other advisers advertising their ELP status who said that it was roughly $80 per lead. There's no way to know the money this generates overall for Ramsey. ("We use the fees to fund the large staff and technology required to operate the ELP program," says Ramsey's website.) It does appear that the ELP force is expanding; two providers said more ELPs had been added to their area in recent years.

When we first spoke on the phone, Smiler told me that "for Dave's audience, as a courtesy" he would charge nothing for his time and no percentage of total assets under management. Instead, he would be paid on commission, by selling A shares of mutual funds -- the ones with the high front-end loads. Later, Smiler acknowledged that he extends this courtesy to pretty much all his clients, nearly all of whom come through Ramsey.

"Dave Ramsey is, for lack of a better word, a referral source for me," said Smiler, who knew I was working on a story about Ramsey. He explained that ELPs have certain philosophies and techniques in common -- what Smiler called a framework. They believe in the importance of building up an emergency fund, for instance, in meeting face to face, and generally in the Dave Ramsey worldview, which means, for example, mutual funds rather than individual stocks.

That said, Ramsey doesn't seem to push a specific investment plan on ELPs. Other advisers told MONEY that Ramsey expects them to earn high scores in an online customer rating system and that they had to clear an extensive phone interview with a Ramsey staffer before joining. One, John Colegrove of Georgia, remembers being asked if he had "the heart of a teacher."

There are differences that come with serving people mainly referred through Ramsey. One is that clients tend to be religious Christians. Smiler told me that once, talking to a new client on the phone, she flat-out asked him what his religion was. He said he was Jewish. There was a pause, and then they kept on talking. Smiler says he keeps his approach strictly secular.

He adds one other thing: He never turns anybody away. "Start with $25 a month," he says. "I never turn down anyone." Ramsey's site says that ELPs must "be willing to serve every level of investor."

Related: Basics of mutual fund investing

So how was the advice? Smiler recommended I invest in American Funds' target-date fund, which carried an upfront 5.75% load. That means for every $100 I gave him, only $94.25 would actually be invested on my behalf. Again, that load is how Smiler gets paid for his time. By suggesting a target-date fund, which mixes bonds and stocks and would shift to bonds as I age, Smiler is somewhat at odds with Ramsey's all-stock investment philosophy -- and just as well.

Smiler also knew that I was currently invested exclusively in low-cost index investments, and to his credit he didn't even attempt to ask me to move those investments over to him. Doing so would not only involve my paying thousands of dollars in upfront commissions, but also give me an entirely unnecessary tax liability.

Smiler's pitch was that I'd invest my new money through him, and in return he'd tell me how to put it to work in a more tax-efficient manner. That's arguably a fair trade if you're uninitiated in the ins and outs of Roth IRAs. And if you are someone who wants the hand-holding by a financial adviser, you could do worse than one who recommends American, a generally well-regarded fund family.

Salespeople and wealth managers

But Carl Richards, for one, has seen a lot of advisers selling mutual funds with loads. He says that in general he has not been impressed: "Every time I go down this rabbit hole, I end up with guys who would be selling shoes if they weren't in this business."

Richards comes from the rival world of planners and advisers who charge flat fees or a percentage of assets instead of commissions. The idea is that there's no incentive for them to sell anything except the funds they think will perform best over time. But Richards says that the kind of service a good adviser should provide is also very personal -- and personal services don't easily scale. Richards, for example, is director of investor education for BAM Alliance, a network of "wealth managers" whose typical client invests between $500,000 and $1 million. Investors just starting out tend to get left behind.

Ramsey's ELP program, by contrast, has a waiting list for providers -- which means that it expands to fill demand. If you're a small investor with only a few hundred or a couple of thousand dollars to invest and you ask to be introduced to an ELP, you will get a meeting, and someone to talk you through the process.

So you might say that Ramsey stands for democratizing investing -- except for the fact that in 2013 do-it-yourself investing has never been easier or less expensive.

"The benefit of an adviser is it gets you over the hurdle of getting started," says Tadas Viskanta of the Abnormal Returns investing blog. "But there are otherwise very few barriers for small investors."

Exchange-traded funds that track broad indexes cost almost nothing, and with three of them most people could get all the diversification they need. Or you could call a no-load fund company directly and ask to buy a single target-date fund matched to your age, nabbing a fairly complete investment plan with very little effort or cost.

Ramsey could use his platform to explain to listeners how these simple tools work. Instead, he advocates only load mutual funds while pushing return assumptions that recall the age of irrational exuberance. What's unclear is why. Sincere belief? Business interests? Desire to convince debtors of the upside to changing their ways? All of the above?

"I've gotten more people out of debt than anyone in the history of America," he tells listeners, and even some of his harshest critics will concede he's done a lot of good. But if you've gotten through the baby steps of conquering debt and starting to save, you'd be wise to graduate to better advice on investing.

An earlier version of this story misstated the length of Dave Ramsey's Financial Peace University course. It was shortened from 13 weeks to nine last year. To top of page

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