Which Financial Gurus Are Worth Listening To?

Q: How do you rate the advice of people and companies like Suze Orman (The 9 Steps to Financial Freedom), Terry Savage (The Savage Number), Jim Cramer, Robert Kiyosaki (Rich Dad, Poor Dad), Thomas Stanley (The Millionaire Mind, The Millionaire Next Door), Jane Bryant Quinn? Also, do you recommend any web sites or books which rate the advice and services offered by financial companies and so called gurus?  I'd just like a great place where I can get to the truth.

A: I am often asked for my advice on various gurus. I have already written a lengthy piece summarizing my research on Jim Cramer and economist Nouriel Roubini whose been all over the news this past year as well as a piece on supposed money expert Suze Orman. In this piece, I focus on the advice put forth in the “Rich Dad, Poor Dad” series of books, by Robert Kiyosaki. (I plan to conduct more reviews of various gurus and experts to help you separate the best from the rest.)

Kiyosaki has been a long-term advocate of real estate and has historically bashed investing in stocks and mutual funds. With regards to mutual funds and 401(k)s, in addition to his saying that they are “…way too risky,” Kiyosaki also says, “…those vehicles are only good for about 20 percent of the population, people making $100,000 or more.”

I couldn’t disagree more. In fact, my experience is that mutual funds are tailor made for non-wealthy people who don’t have the assets to properly create a diversified portfolio themselves.

Jonathan Clements, who used to cover investing and personal finance for The Wall Street Journal, and who reviewed Kiyosaki’s book, Why We Want You to be Rich: Two Men - One Message co-written with Donald Trump, agrees.  “His scorn for mutual funds is also a little puzzling. He argues that funds don’t have to accurately disclose expenses, that a bank wouldn’t lend money to buy funds because they’re too risky…and that you can’t do a tax-deferred 1031 exchange from one fund to another, like you can with real estate.”

Clements, succinctly and accurately refutes all of these erroneous assertions by Kiyosaki and Trump. “In truth, funds are far clearer about their expenses than other investments, you can borrow against funds held in a brokerage-firm margin account and investors make tax-deferred exchanges all the time, by trading within their retirement accounts, says Clements.”

Kiyosaki also says that he doesn’t like mutual funds because “…mutual funds have got no insurance from a stock market crash. To me, that's sad, and I am concerned.” The best way to reduce the risk of investing in stocks is to be diversified not only in a variety of stocks but also in other investments that don’t move in tandem with the stock market.

Kiyosaki absurdly claims that he invests with the benefit of insurance when investing in real estate with which, “…my banker requires me to have insurance from catastrophic losses.” This is an unfair comparison since such an insurance policy would cover losses from say a fire but not a decline in market value of the real estate due to overall market conditions. 

In a 2006 article by Kiyosaki, entitled “Why mutual funds are lousy long-term investments,” he says that mutual fund companies keep 80 percent of the return while the investor, who puts up all of the capital and takes all of the risk, only gets 20 percent of the return. (He actually inaccurately attributes this faulty logic to Vanguard founder John Bogle.)

What planet is he living on that he asserts that mutual funds keep 80 percent of investors’ returns? For sure, there are a variety of funds with differing fees. With stock funds, for example, the lowest cost funds measure their expenses in tenths of one percent whereas the most costly funds charge well in excess of one percent.

The typical stock fund charges about one percent per year and returns on average about 10 percent per year over the long-term. Thus, fees take about 10 percent of the return, not 80 percent! If you buy a low cost stock index fund and pay just 0.2 percent per year in fees that would represent only 2 percent of your total returns – again a far cry from 80 percent.

Also, in the article, Kiyosaki says, “The problem with funds is fees. The longer you invest in a mutual fund, the more you pay in fees. I’ve pointed out before that when I buy a piece of real estate or a stock, I pay the sales commission once, but when I purchase a mutual fund, I pay a sales commission for as long as I own the fund.”

Having read a good deal of his writings over time, I know that Kiyosaki is incredibly biased against mutual funds and in favor of real estate investing.

Of course, since a mutual fund is performing an ongoing service (monitoring and making changes to the portfolio) for you in managing your money, you pay for that service in the form of an annual management fee (it’s not a commission). When you purchase a piece of real estate, you pay lots of closing costs. It’s not true that there are no ongoing costs to managing real estate. For example, if you chose to hire a management company, they typically take about 6 percent of the rental income per year as a fee. If you choose to manage the property yourself, you will spend plenty of hours on the necessary tasks. (It’s also worth noting that Kiyosaki was gushing about real estate investing as that market was peaking in recent years.)

If you buy an individual stock, you pay a commission but it’s not fair to say that there’s nothing after that. Stocks require some monitoring and you will need to subscribe to various publications and journals to do a good job of that. 

Real estate expert John T. Reed has a highly detailed review of Kiyosaki's Rich Dad, Poor Dad book and a plethora of links to respected sources which all come to the same conclusion about Kiyosaki's "advice."