Can you trust your financial adviser?

@Money June 29, 2012: 11:34 AM ET

(MONEY Magazine) -- How can you know if an adviser really has your best interests at heart? -- Marjorie Hughes, La Grange, Ill.

When you need help with your finances, you want to find a pro who can balance your need for trustworthy advice with his or her need to make a living providing it.

The leading school of thought is that your best shot lies with an adviser who is a fiduciary -- someone legally required to place your interests first. Only registered investment advisers are held to this standard, and that typically includes financial planners who charge a fee. Brokers and advisers who work for commissions must generally assure only that an investment is suitable.

Following the Madoff scandal and the financial crisis, Congress directed the Securities and Exchange Commission to consider applying the fiduciary standard to all advisers. Two years later the SEC is still mulling the issue.

I think it's a mistake to assume that an adviser has your back just because he or she is a fiduciary. "Acting in the best interests of the client" has a reassuring ring, but in real life it can be tough to tell whose interests are paramount.

For example, investing a portion of your nest egg in an immediate annuity can lower your chances of running through your savings, but I've talked to many advisers who are loath to recommend one.

Is that because they believe you're better off in a stock/bond portfolio? Or could they be swayed by the fact that recommending such an annuity slashes the amount you have in stocks and bonds and therefore trims their fees (what's called "annuicide")?

Anyone you work with has biases. Use this vetting process to spot them and then decide whether you still trust the advice.

First, make sure he's clean. Go to sec.gov and choose "Check Out a Broker or Adviser" under Education. You'll find links to the SEC's advisory firm database, FINRA's BrokerCheck website, plus links to state regulators.

Find out what he can sell you. Can an adviser suggest any investments or must he pick from a pre-approved menu (and who wrote it)? What does the adviser recommend most often? If the bulk of his business is one investment -- an insurance product, say -- you may be getting a sales pitch, not advice.

Ask what you'll pay. Get a full breakdown of what's going to the adviser, whether commissions or a fee (1% a year is common), as well as the underlying costs of the investments (0.5% to 1% a year is typical). Are there lower-cost alternatives? If so, what's stopping him from using them?

Tackle conflicts head on. Ask how your interests might run up against the adviser's. If he says he has no conflicts, he's not being forthright or not thinking hard enough. A bad sign either way.  To top of page

Help! We need a makeover
Young dad, $15,000 in credit card debt
Readers' Choice

Carlos Rodriguez is trying to rid himself of $15,000 in credit card debt, while paying his mortgage and saving for his son's college education.

$400,000 portfolio, too many holdings
Readers' Choice

Susan Carson and Laura DeLallo make $225,000 and have half a million in retirement savings, but their sprawling portfolios is proving hard to manage.

Overnight Avg Rate Latest Change Last Week
30 yr fixed4.28%4.41%
15 yr fixed3.30%3.33%
5/1 ARM3.30%3.34%
30 yr refi4.31%4.39%
15 yr refi3.35%3.31%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
CNNMoney Sponsors
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.