The 5 Biggest Red Flags of Financial Advising

Your Money Guide on the Side

Host Tyler Gardner breaks down the five most critical red flags to watch for when hiring a financial advisor. He critiques the industry-stan

Key takeaways

• The AUM model can cost investors up to 25% of their ending wealth over a 30-year retirement due to compounding fees.
• A high-quality advisor should focus on behavioral coaching, tax planning, and estate coordination rather than just portfolio selection.

Main topics

• Financial Advisor Red Flags
• AUM vs. Flat Fee Models

Notable quotes

This is your money. Not theirs. Yours.

Conclusion

By focusing on flat fees, fiduciary commitment, and third-party custod

Transcript preview

Speaker 1 (0:00) Plenty of advisors are skilled at making you feel like you're requesting a hall pass from the person in charge of your own life. Say it with me. This is your money. Not theirs. Yours. You're not asking permission to leave. You're informing them of your intentions. Speaker 1 (0:19) Hello, friends. This is Tyler Gardner welcoming you to another episode of your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be. Speaker 1 (0:44) Quick note before we start, September's pre-order bonus for my book Real Wealth is something I've wanted myself for years and never been able to find. So I created it. It's called the Real Wealth Money Calendar. 12 months, five action items per month, all on one page. Because most people I know already know what to do. They just don't necessarily know when and they don't have accountability. So this is your 2027 on one page. 60 moves in the month you actually need to make them. Pre-order Real Wealth at tylergardner.com slash book. Let me know you did, and your money calendar will be in your inbox in early October. Welcome back, my friends, to the show where we talk about money like actual humans with lives to live. Not like people who alphabetize their tax documents for fun, but hey, never judging those of you who do because, well, that might be what I do for fun. I'm your host. Tyler, and today we're going somewhere that I've been circling for months. And for those of you who follow the short form videos, you know I touch on this about every two weeks or so, just as a gentle reminder. And I get this question a lot. We're talking about how to choose and how to vet and what to be terrified of when it comes to financial advisors. Specifically, the five red flags that should send you sprinting. in the other direction. Whether you're thinking about hiring an advisor or you already have one, and something in your gut has been clearing its throat daily trying to get your attention. And fair warning right up front, red flag number one describes the majority of the industry, not the fringe, not the bad apples, the standard operating model. So if you have an advisor, today might be uncomfortable. And if you are an advisor, and I know some of you listen. Today might be very uncomfortable, but my guess is you know where I'm going with this, and I'd invite you to sit with the discomfort the same way I sit with my dog when there's thunder. Patiently, with snacks, and always truly reflecting on whether or not there's a better way forward and a way to solve this problem. Before we get into it, familiar ask, if this show has ever saved you money, made you understand something about money, or simply made your commute a little less terrible, would you take 30 seconds and consider leaving a review on Apple or Spotify? It is genuinely the single best way to help other people find the show, it costs you nothing, and I appreciate it more than you know. Okay, one more thing before we get into the red flags, because I always want to be fair. This is not an episode called never hire a financial advisor and they're all evil. A good advisor can be genuinely worth it. Tax planning across decades, estate coordination so your family isn't untangling accounts while grieving, and the big one, the one nobody puts on the brochure, simply being a trusted additional voice in your life. for all things financial. Vanguard has published research suggesting that good advisors can add meaningful value, and the majority of it comes not from investment selection, but from behavioral coaching, which is a polite way of saying the most valuable thing an advisor does is prevent you from being you at your worst moment. That's a real service. I provided it for years. Some of my best work as an advisor was essentially professional handholding. And I say that with zero shame, because the hands needed holding, and the portfolio performance usually benefited from it. So the question is never, are advisors worth it? The question is, is this advisor worth it? And that's what the five flags are for. So let's get into it. Red flag. Number one, they charge you a percentage of your assets. This is the traditional AUM model, assets under management. It's the industry standard, and that is precisely the problem I have. Roughly 1 % of your portfolio, every single year, forever, regardless of performance, regardless of effort. regardless of whether they did anything at all that year beyond sending you a fruit basket at Christmas that was paid for out of your own 1 % fee. Let me tell you what I know from the inside. It is not twice as hard to manage $2 million as it is to manage $1 million. Same portfolio, same software, same textbook allocation. often literally the exact same model run by the same computer. But the client with $2 million pays twice as much for the identical service. Advisors who use this model continue to sell you the idea that as you get more money, your life is supposed to get somehow more complicated. A. Nonsense. And B. Nonsense. If there's one thing I drive home in my book more than anything else, it is the importance of appreciating that textbook gold standard allocation is identical whether you have a dollar or a billion dollars. No academic in the history of portfolio theory and portfolio management has ever suggested that because you have more, somehow it needs to be more complex. There is no reason for that. And the estate stuff? That's what an attorney is for, not your financial advisor who is just going to say they're adding value by giving you the phone number of a local attorney. I mean, I'd like to really be real about this model. Imagine if you're in a grocery store and it worked the same way. You walk in for a dozen eggs, and the cashier asks to see your bank statement first. Ah, I see you've done quite well for yourself this year, Mr. Gardner. that'll actually be $11. Same eggs, same carton. You just have more assets now, so the eggs all of a sudden cost more? You would riot. You'd write a Yelp review so long it would need chapter breaks. And that the entire wealth management industry runs on egg pricing. And we've all just agreed not to notice and to say, well, I guess they're incentivized to really perform well so they make more money. Here's the reality. they're going to make more money just because the market goes up. They didn't make the market go up. So each year that the market goes up, guess what they've done? They've linked their own compensation structure to simply watching the market go up and not needing to do anything. It's brilliant. Evil brilliant, but brilliant. Now, The industry has another rebuttal ready, and it's called breakpoints. Maybe you pay 1 % on the first million, but ooh, surprise, you're a special customer and you don't have to pay anything but 0.8 % above that. You get a nice discount. And I want you to hear breakpoints for what they are. It's a discount on a pricing model that shouldn't exist in the first place. It's the grocery store throwing in a 13th egg for free. Thank you so much for the egg after I just paid twice as much as the person behind me. Now, here's the part that should genuinely bother you beyond that, the compounding effect. That 1 % doesn't just cost you 1%. It costs you 1 % plus everything that 1 % would have earned for the rest of your life. Run the math. Over a 30-year retirement portfolio and an annual 1 % fee can consume somewhere in the neighborhood of a quarter of your ending wealth compared to the same portfolio without it. A quarter. Jack Bogle called this the tyranny of compounding costs, and he spent 50 years yelling about it, and the industry spent 50 years hoping he'd get tired and or fired. He did not get tired. He did occasionally get fired. But good news, that's what led to his founding of Vanguard and the creation of the first index fund. And now I've picked up the yelling, only slightly more calmly, from the woods of Vermont. Oh. And finally, my favorite absurdity, the one where I start to feel like I'm really taking crazy pills. Most big-name wealth management firms don't manage the wealth anymore. The actual investing is outsourced to model portfolios and software. Your advisor, the one charging a percentage of your life savings, is selecting a pre-bill allocation from a drop-down menu that they were handed by another firm. I've watched it happen. The drop-down menu does not have your kids' names memorized. The drop-down menu is not worth $20,000 a year. I feel like