The 5 Biggest Red Flags of Financial Advising

0:00Plenty 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 are informing them of your intentions. 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.

0:44Quick 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.

1:23Welcome 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.

2:02advisors, 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.

2:41And 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 asks 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.

3:17Okay, 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.

4:09That's a real service. I provided it for years. Some of my best work as an advisor was essentially professional hand-holding. 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.

5:15Let 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.

6:09No 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.

6:49Gardner. 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.

7:34It'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.

8:10The 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.

8:55And 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-built 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.

9:34I feel like I'm the only one who's seeing this, and I don't get how people continue to try to justify this model. So what should you do instead? Well, like any other service in the entire world, choose an advisor who charges a flat annual fee. Now, that in and of themselves doesn't make anybody competent, knowledgeable, or special, but it at least makes it appear as if they're working around the economic structure of the rest of the world. And listen carefully here, because the industry has booby-trapped even that type of vocabulary. Flat fee is not the same as fee only. Fee only just means the advisor doesn't take commissions, which is good, genuinely, but fee only advisors usually still charge the AUM percentage.

10:23Flat fee means what flat fee means everywhere else in the economy. A fixed price for a defined service. A few thousand dollars for a comprehensive plan, an hourly rate for a specific project, a retainer that doesn't inflate just because the market went up, which again was the market's doing and not theirs. I can't stand when someone says my advisor did great because my portfolio grew. That's not necessarily your advisor. That's how market growth works. And if an advisor earns most of their money from commissions or from 12B1 fees, which are marketing fees baked invisibly into certain mutual funds that they're going to try to sell you, then riddle me this.

11:09How could that person possibly be acting in your best interest? They are certainly acting in someone's best interest, and that someone might have their name on the office door. This episode is brought to you by Factor. The best part of my job is getting into a flow state. I'll be in the middle of writing something and the sentences are finally arriving in the right order. But then, at some point, my body informs me that it is indeed lunchtime. And that's the thing that breaks it. Not the writing, not even the distraction, just the slow realization that there's nothing in the fridge, and the only path forward involves a parking lot, a cart with a bad wheel, and 45 minutes I will never get back.

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12:41That's code TylerG50off at factormeals.com. This episode is brought to you by Element. A few weeks back, I had a wonderful, impromptu reunion with a group of my college friends. We met up for a weekend of reminiscing, and knowing that we'd have some late nights, early mornings, and lots of outdoor adventures, I brought along a massive Ziploc bag of Element packets to see what my friends thought. By the second morning, it had become a shared community resource. People were drinking it after a hard night out, which was the fairly obvious use, but then it kept going. Mid-morning, before the afternoon trek, after the afternoon trek.

13:19One guy had one at what I would describe as cocktail hour in place of the cocktail hour, which at a college reunion is a genuinely radical act. And that's the thing I'd want you to know about it. This isn't just a workout product you use once and put away. I drink it twice a day, after my morning swim, and then the caffeinated lemonade iced tea after the long walk with the dogs. It works at any hour because the reason you tend to feel foggy or headachy or flat is usually not that you need more water. It's that you need what's supposed to be in the water. Element is a zero-sugar electrolyte drink mix.

13:53No sugar, no artificial colors, none of the dodgy ingredients in the sports drinks you grew up with. And if you don't like it, they'll refund you. No questions. Get a free eight-count sample pack of Element's most popular flavors with any purchase at drinkelement.com slash Tyler. That's drinkelement.com slash Tyler. Red flag number two, their answer to this one simple question. When you're hiring an advisor, I want you to interview several. This is dating. It's not an arranged marriage. And I'm continually amazed by people who will read 40 reviews before choosing a taco place and then hire the first advisor their coworker mentions.

14:36On every one of these first dates, I want you to ask the same question. What would you do with$100 ,000 of my money? You're not asking this in a cynical way, but in a real information gathering way. You know, as if this person was going to all of a sudden be responsible for managing, I don't know, your entire net worth. And the answer to this question sorts the entire profession into three bins. Bin one, they say they'll invest you in low-cost index funds. Good start. This person has read the research, knows they can't and won't beat the market on a consistent basis net fees, but don't stop there because now comes the follow-up that I still think kind of matters.

15:20If the plan is to put you 90 % in VOO and 10 % in a money market, what are you paying for? You can buy VOO yourself in four minutes, three of which will be spent resetting your brokerage password because you last logged in during a different presidential administration. A good advisor's answer keeps going past the portfolio. Tax loss harvesting, Roth conversion windows, estate document help, insurance gaps that you might be missing, talking you out of the beach condo your brother-in-law swears as a can't miss. The portfolio should be the boring part of the relationship. If the portfolio is the relationship, you're overpaying for that drop-down menu again, and we've covered my feelings about said menu.

16:06Bin number two, they say forget index funds, we have better funds, and they are actively managed mutual funds. Now you're actually paying twice, 1 % to the advisor and another percent or so inside the funds themselves. And I don't need to go into yet again for the billionth podcast, how few advisors actually beat the market. My concern with these funds isn't whether they beat the market. It's how egregious the fees are. And many of them are proprietary, meaning if you were to change advisors down the road, it is much more sticky and difficult to get out of these funds. and that's part of the point.

16:49Bin number three. They say they'll pick individual stocks and beat the market. My friends, this person is in la-la land and most likely falls asleep each night to old Wall Street movies. If you want the most honest 30 seconds ever filmed about stock picking, go watch the McConaughey lunch scene in The Wolf of Wall Street, the one where the veteran broker explains to the rookie that nobody, and he means nobody, knows where a stock is going. Everyone remembers the chest thumping. Nobody remembers that the actual content of the speech is roughly the academic consensus with a couple martinis added in.

17:29And a pro tip while you're interviewing one from behind the curtain, look at the letters after the name. A CFP and a CFA, those represent years of genuine study and continuing obligations. What should absolutely not impress you as a Series 7, 65, or 66 in and of itself, those aren't credentials, they're licensing exams. I passed one after studying for about four hours, and I'm not exaggerating for the joke, which pains me because I like exaggerating for the joke. Those licenses legally qualify a person to sell things, and if you'd hand your net worth to a 16-year-old because they just passed their first driver's test, be my guest.

18:09But just know that it's primarily a law exam and has little to nothing to do with actual finance. Red flag number three, they've never been punched in the face by a market. Mike Tyson famously said that everyone has a plan until they get punched in the face. And every advisor in America has a beautifully laminated risk tolerance questionnaire until their clients are down 30 % in five weeks and the phone will not stop ringing. Here's the math I need you to hear on this one. If your advisor started their career after, let's just say 2009, they've spent the majority of their professional life inside one of the greatest bull markets in recorded history.

18:53The one major interruption, the 2020 crash, was over so fast, I'm barely going to count that as experience. It lasted about as long as our collective commitment to Zoom happy hours. Down 34%, back to even in months. And everyone who simply did nothing looked like a genius by August. That's not a market education. That's a lucky birthday on your advisor's part. So why does this matter so much? Because of what you're actually buying. Remember, the research says the biggest slice of advisor value is behavioral. It's the person who stops you from selling everything when genuinely we all are running terrified for the hills.

19:36There's a famous and depressing body of research on what's called the behavior gap, which is the difference between what funds return and what fund investors actually earn. This is really fascinating. And no surprise, investors themselves earn reliably less than the fund, sometimes shockingly less, because they buy after the good years and sell after the bad ones. Closing that gap can absolutely be an advisor's real job just to keep you tracking the market. And I want the person doing that job to have done it before live, not only when it was real, but when the pain was real. Not in a simulation, not in a textbook or a questionnaire, but in 2008, when the financial system itself was being called into question and clients were asking in complete seriousness whether they should be buying gold coins and burying them.

20:32If we reach the buried coin stage of the crisis, the coins will not be the binding constraint on your happiness. So ask the war story questions. Where were you in 2008? What did you tell clients? What did you get wrong? And I'd love it if you listened for humility because nobody got everything right. And anyone who claims they did is either lying or was in middle school at the time. And both answers are disqualifying for different reasons. You're not looking for someone who predicted it. you're looking for someone who stood in it, kept their clients seated, and came out with scar tissues and a story about what they could do better.

21:12Scar tissue is the only credential the market can issue directly. Red flag number four, they won't say the F word, fiduciary. A fiduciary is legally required to put your interests ahead of their own. Full stop. If two funds are functionally identical, but one pays the advisor more, a fiduciary must recommend the cheaper one. It's the standard you would assume applies to everyone handling other people's retirement money in the same way you'd assume your surgeon isn't paid per unnecessary incision. Unfortunately, it does not apply to everyone, not even close. Most of the sales side of the industry operates under something called Regulation Best Interest, or Reg BI, which arrived in 2020 and which sounds nearly identical to fiduciary, and the industry will be delighted to tell you how close it is.

22:05It is not even close. It's a meaningfully weaker standard, built on disclosures nobody reads, and a generous tolerance for the word suitable. Suitable. That's a word you want from your tailor, not from the person holding your retirement. The industry chose a name that sounds like fiduciary for the same reason knock off handbags say gucky with three c's the extra c is doing exactly as much work as the extra disclosure so here's your move and i want you to do this in writing email is fine you're going to ask them are you a fiduciary 100 of the time with all of my accounts anything other than an unqualified yes should be a no because and this is the fun part.

22:51Some advisors are situational fiduciaries. Fiduciary while planning, salesperson while selling. Sometimes within the same meeting, sometimes within the same sentence. That's a referee who's impartial except during the fourth quarter, and you may have noticed that the fourth quarter is when the game is usually decided. But now, the man behind the curtain, because I refuse to hand you a magic word and let you think the spell always works. A legal duty to do the right thing does not guarantee a person does the right thing. Exhibit A, now and forever, Bernie Madoff. I know he was a terrible actor, but he was a registered investment advisor, respected beyond question, former chairman of NASDAQ, which when you sit with it is a bit like discovering the head of the FDA was selling expired meat out of a van.

23:37$50 billion in fake wealth gone. And the mechanism was insultingly, almost offensively simple. He held the money himself. He printed his own statements, beautiful statements by all accounts, steady returns year after year in every market, which decades of finance research will tell you is not a sign of genius, but a sign of fiction, because real returns are lumpy and only invented ones are smooth. And he was on paper a fiduciary the entire time. So the follow-up question matters as much as the F word itself. Where's my money actually being held. The correct answer and the only answer is a third-party custodian.

24:18Schwab, Fidelity, Pershing, the account is in your name. The statements come from the custodian, not the advisor. You have your own login, which I'd encourage you to use occasionally, if only to keep your password fresh, under that structure. The advisor can trade the account, but cannot leave with it, which is the entire point. If anyone ever asks you to write checks payable to their firm, or the only statements you receive are the ones they produce, that is not an advisory relationship. That is an audition for the documentary we will all eventually want to watch, but you do not want to be a part of.

24:55This week's episode is brought to you by FACET. If you pay an advisor 1 % of your assets, it's worth appreciating that the fee can move for reasons that might have nothing to do with the advice. Three things to consider. Number one, your mother passes away and you inherit$800 ,000. Your advisor's bill might go up$8 ,000 for a year in which the added value was a sympathy card. Number two, the market goes up 20%. Their fee can go up 20%. You might have a silent partner who put in no capital, took no risk, and still gets a slice. Huh. Number three, you hand over$500 ,000 and it sits in cash for a few months.

25:29Not invested, but you might be billed as if it were. None of this makes your advisor a bad person, not even close. I know many outstanding advisors who do exceptional work, but I'll always question a model that charges on the size of your assets rather than the work performed. FACET works differently. No percentage of assets, no commissions, just a team of dedicated CFP professionals who will help you figure out what you want your money to say about your life. Head to facet.com slash Tyler to book your intro call today and find out what the future of financial planning actually looks like. I'm not a member of FACET.

26:01I have an incentive to endorse FACET as I have an ongoing fee-based contract for cash compensation, as well as a percentage of equity in FACET based on this endorsement. FACET is an SEC-registered investment advisor. All opinions are my own and not a guarantee of a similar outcome. This episode is brought to you by Copilot Money. Here's a test I apply to everything I download on my phone. Not, is it good, but is it still on my phone in six months? And almost nothing passes. I have a graveyard of apps I downloaded with real enthusiasm and abandoned in 11 days. The meditation one, the habit tracker, the language app whose owl I think is still angry with me.

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27:16It's the only personal finance app to win an Apple Editor's Choice Award and holds a 4.8 star rating for more than 30 ,000 reviews. 30 ,000 people downloaded it and they didn't delete it, which is the single hardest thing to accomplish in this category. Go to try.copilot.money.tyler and use code TYLER2. It's Tyler and the number 2 for two free months. That's try.copilot.money.tyler using code TYLER2. Red flag number 5. Pressure, promises, and countdown clocks. I can get you 12 % with no downside. This strategy has never lost money. The opportunity to invest in this fund closes Friday. day. Here's a simple rule.

28:00And if you take one sentence from this episode, please take this one. In investing, real advisors speak in ranges and probabilities, which can be very unsatisfying at times, but it's true. Salespeople speak in guarantees and deadlines, and markets do not have deadlines. The S &P 500 will still be there next week. It has, to date, never once packed up and left. The only thing genuinely expiring on Friday is your advisor's commission window and possibly their monthly quota. And watch for the product pivot, because guaranteed is almost always an insurance product pretending to be an investment product.