Looking for an adviser? You've got to keep these five pointers in mind.
• Many advisers earn their keep by collecting commissions on the investments they sell. That means they have an incentive to get clients to trade and to buy the highest-commission products.
Your best bet: Use fee-only advisers, such as those who charge an hourly fee, a percentage of your portfolio's value or a fixed annual retainer.
• Most advisers have had little formal financial education. For instance, maybe 5% of brokers, financial planners and insurance agents have bothered to become a certified financial planner, or CFP, which has become the basic credential for any half-decent adviser.
To ensure your adviser is knowledgeable, stick with CFPs or, alternatively, folks who have qualified to be chartered financial consultants, chartered financial analysts or certified public accountants-personal financial specialists.
• Advisers don't necessarily act in their clients' best interest. This issue has been brought into sharp relief by the heated debate over the Securities and Exchange Commission's so-called Merrill Lynch rule. Under the rule, fee-based advisers at brokerage firms often aren't considered fiduciaries, meaning they are supposed to recommend products that are best for their clients.
Instead, they are held to a lower "suitability" standard, which means they are only required to recommend products that are a reasonable choice for their customers. To protect yourself, avoid advisers who won't commit to acting as a fiduciary.
• Many advisers offer investment advice -- and that's it. But there is much more to managing money than picking stocks and mutual funds.
You might also want help with your mortgage, college costs, insurance, taxes and estate planning. If so, before you sign on with an adviser, make sure the adviser is committed to assisting you with these other areas.
• Most advisers charge too much, especially when you consider the limited advice they offer. Whether you're paying fees or commissions, your adviser's services might be costing you 1% of your portfolio's value each year. Tack on the fees charged by the mutual funds and other investment products you end up buying, and your total annual tab might be 2% or even 3%.
Result: If your adviser recommends a balanced portfolio of stocks and bonds that returns 7% a year before costs, you could pocket less than 5% after all fees are paid.
That doesn't mean a good adviser couldn't garner you a better rate of return, while also helping you with the full array of financial-planning issues. But is your adviser truly helping your finances? Not sure? Remember, you can always buy Treasurys bonds instead. These days, that will also earn you around 5% -- with a whole lot less hassle.
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