(MONEY Magazine) – A generation ago, few middle-class Americans saw any need for financial planning. Life insurance, bank savings accounts and secure jobs with dependable retirement benefits were enough for most people. But since then, as Americans have grown far more affluent and as their financial options have multiplied, a new class of professionals has emerged. Experts estimate that the number of advisers who call themselves financial planners has exploded + from a negligible few in the 1960s to 250,000 or more today. Yet despite this boom, there is still a disturbing shortage of advisers Americans can turn to with confidence. Sadly, all too many clients have found that the promise of financial planning -- that you can hand over your finances to a caring professional who will put your interests first -- is made to be broken. Citing statistics regulators estimate that planners cause clients to lose at least $600 million every two years. In some cases, these clients are victims of outright fraud. Far more often, though, people suffer because of planners' sloppiness, lack of training, or conflicts of interest. For example, the Martins, shown at left, missed out on as much as $50,000 of investment income after a financial planner put them into high-commission products unsuitable for their circumstances (for more on their case, see the profile at right). And don't count on federal and state regulators riding to your rescue. They lack the resources to protect the average small investor from bad advice, fraud and abuse. In August and September, MONEY discussed these problems with representatives of the three major financial planning organizations. They all noted that professional standards have improved greatly over the past decade and said their organizations have been working hard to raise standards further. Even regulators recognize the change. ''There's no reason not to believe that the vast majority of planners today are honest and capable,'' says Marianne Smythe, director of the Securities and Exchange Commission's Investment Management Division. One reason for the industry's improvement: The collapse of tax shelters in the late 1980s drove out many greedy practitioners by making it far more difficult to earn big commissions. Still, would-be clients have reason to be wary. To take the measure of a cross section of the industry, in September MONEY interviewed 32 of the practitioners listed under ''Financial Planners'' in the Santa Rosa, Calif. (pop. 115,673) Yellow Pages. In the phone survey, our reporters, who identified themselves as being with MONEY, asked eight questions about professional practices and 12 questions designed to test knowledge. Here are some of the highlights: -- None of the planners answered all 12 knowledge questions correctly. More than half of them got at least one-third of the answers wrong. -- Nearly one-third could not state within four percentage points the historical long-term return paid by common stocks (10%) -- a crucial statistic for someone who provides advice on combining various investments to achieve long-term goals. -- And more than two-thirds said they earned some or all of their income from commissions on the products they sell -- an arrangement that creates conflicts of interest. To be sure, the profession has its outright crooks and con artists. In July, for example, John Pomerenke, 24, a Mesa, Ariz. financial planner, pleaded guilty to operating a Ponzi scheme from 1988 to 1991 that had bilked some 200 Phoenix-area investors out of $5.2 million. Pomerenke had promised naive clients incredible returns of 4% to 7% a month (60% to 125% a year) from investments in commodities futures and stocks. In fact, he used their money to pay off earlier investors, charter jets to the Cayman Islands and Australia and purchase a Jaguar, a Range Rover, two homes and a $100,000 swimming pool. Pomerenke, who is awaiting sentencing, could get as much as 10 years in prison. His lawyer declined to comment on the case. The more common danger, however, comes from well-meaning planners who are poorly trained or otherwise not up to the job. ''My bet is that competence issues cost consumers more money than fraud,'' says Ellyn Brown, a former securities commissioner of Maryland and the acting executive director of the North American Securities Administrators Association. In some states, it's easier to qualify as a planner than to get a driver's license. ''You could be running a doughnut shop on Monday and call yourself a financial planner on Tuesday,'' says Massachusetts Consumer Protection Chief Robert Sherman. Thirty-eight of the 50 states require investment advisers to pass a licensing exam, but these tests typically measure knowledge of securities law, not investment savvy. However, advisers who sell securities as well as recommend them are required by federal law to pass an exam on basic investment theory or to be affiliated with someone who has passed the exam. In fact, many stockbrokers as well as insurance agents have taken to calling themselves ''financial planners'' or something similar. One reason is good marketing: Such titles inspire confidence in clients. Those pros who are true financial planners, however, do a lot more than just sell. A good planner provides advice on everything from insurance and investments to taxation, money management and retirement planning. Such a + planner will review your total financial picture and suggest a strategy tailored to your resources, goals and attitudes toward risk. He or she will also help you implement the plan and update it periodically. ''The actual selection of investments is probably planners' weakest area,'' says John Markese, president of the American Association of Individual Investors. ''But I also hear a lot of dissatisfaction when it comes to tax advice, complicated estate-planning questions and IRA rollovers.'' A case in point: Raymond Oddi, 64, a former chief financial officer for Baxter Travenol Laboratories, was urged by a Chicago planner from Ayco Corp., a national financial planning organization, to take a lump-sum payment from his company's profit-sharing plan when he retired in 1986, rather than roll over the money into an IRA. Oddi questioned the planner's tax and investment projections. But the planner stuck to her advice, and Oddi took the lump sum. When he discovered later that the IRA option would eventually have saved his estate as much as $2 million, he sued Ayco. Last year, the court awarded Oddi $576,000 in damages, court costs and interest. Clients with smaller amounts of money can suffer losses that are equally harmful but that aren't large enough to make legal action feasible. ''Losses of $5,000, $10,000 or $20,000 are very serious for the people involved, but they're not enough to bring a lawsuit,'' says Robert Plaze, assistant director for disclosure and adviser regulation at the SEC. Aside from incompetent advice, clients often face conflicts of interest that stem from the way the vast majority of planners earn their compensation. They make their money by two basic methods. Fee-only planners charge a flat price, typically $1,500 to $5,000, or a $75 to $200 hourly rate. Commission-based planners, on the other hand, are paid fees built into the prices of the products they sell. Most planners, though, combine both approaches: They take a small up-front fee -- say, anywhere from $200 to $1,000 -- and then collect commissions when they sell you products that they have recommended. Not surprisingly, the risk of getting questionable advice is greatest when planners depend heavily on commissions to make their money. ''It's very difficult for people to be unbiased and detached when they have incentives to sell you products,'' says the SEC's Plaze. For example, a 1988 SEC survey found that of 69 planner firms that sold securities, only about half offered - U.S. Government issues, some of the safest investments, while 81% sold real estate limited partnerships, a major source of small investor losses in the 1980s. In part, that may be because many investors need advice in choosing something as complex as a partnership, but there is another explanation as well: ''If you put $100,000 in Treasury bonds, your adviser will get a $50 commission,'' notes Mary Calhoun, a securities arbitration consultant in Watertown, Mass. ''But if you buy $100,000 worth of limited partnerships, your adviser will get an $8,000 commission.'' The lure of commissions can also lead some planners to recommend unnecessary transactions. For example, one North Carolina couple, who asked not to be identified, were urged by a planner to refinance their home in 1986 and boost their mortgage from $17,000 to $90,000, even though that forced them to pay nearly three percentage points more in interest and $3,000 in closing costs. The planner then convinced the couple to put the money raised by the refinancing, along with proceeds from the sale of five conservative stocks -- about $81,500 in all -- into four mutual funds with sales charges of 4.75% to 8% and four limited partnerships with 10% commissions built in. One partnership has since filed for bankruptcy; the other three aren't paying any dividends. The cost of this advice: a $400 fee plus $5,872 in commissions. Although partnerships proved to be lousy investments in the 1980s, a recent survey by the trade journal Financial Services Week found that nearly a third of the planners polled continue to sell or recommend them. And experts say that some new products could present similar risks today. Chief among them: collateralized mortgage obligations (CMOs), complex bond-like securities that are being peddled as alternatives to safe bank certificates of deposit. Because CMOs are backed by mortgages, their payouts are uncertain. ''If interest rates drop and mortgages are refinanced, CMO investors could lose a lot of money,'' says Atlanta securities attorney Boyd Page. You might think that government regulation would provide protection against bad planners -- but you would be wrong. Denice Capitani can tell you just how toothless the government watchdogs often are. Capitani, 33, and her husband William, 34, the owners of a wallpaper and painting business in Unionville, Conn., consulted a planner from North Atlantic Planning in Farmington, Conn. in 1988 for advice on investing a $30,000 inheritance. ''We told him we wanted something that was very secure,'' says Capitani. ''He suggested rare coins, which he said were fully insured and would appreciate 60% in five years.'' To be safe, Capitani called the Connecticut Department of Banking, which regulates investment advisers in her state. ''They told me to proceed with caution,'' she recalls. What Capitani wasn't told was that North Atlantic president Thomas George had been denied a license to become an investment adviser in Connecticut two years earlier because he didn't have any securities training or experience. A spokesman for the department says there is no record of the conversation with Capitani. Today, the coins purchased by Capitani and at least 80 other North Atlantic customers are worth a third or less of their original investments. In 1989, George was ordered by the Department of Banking to stop selling securities without a license, and he was indicted in April 1991 in New York for defrauding consumers out of $64 million through rare-coin and condominium investments. In his defense, he says: ''Nobody forced them to buy the coins. They knew the risks.'' Beyond the licensing exams in 38 states, you can't be sure of government oversight. Most planners are required to register with the SEC, but ''all it takes is a one-time fee of $150, a disclosure form, and no recent criminal record,'' says the SEC's Smythe. ''Crooks can print up business cards saying they've registered with the SEC and then steal. If they're little enough, we're not going to know until after the money's been stolen.'' The SEC doesn't have nearly the resources needed to police the growing ranks of planners. With the equivalent of only 46 full-time inspectors, on average the agency can review the more than 17,500 planner firms and other investment advisers registered with it just once every 30 years (see the chart on page 138). And plenty of planners escape even that scrutiny. A 1992 survey by the International Association for Financial Planning found that 47% of those surveyed were not registered with the SEC. Many planners erroneously believe that they don't have to take the step if they don't sell securities but only recommend them. (Federal law does exempt some professionals who do planning as a sideline and those who don't recommend or sell securities.) The story is much the same at the state level. Alabama, for example, has one full-time examiner to monitor its more than 1,200 registered investment advisers and brokerage firms. That's not unusual: Of the 46 states that responded to a U.S. Government Accounting Office survey in 1989, 21 plus the District of Columbia do not routinely inspect investment advisers. Worse yet, the District of Columbia and seven states -- Arizona, Colorado, Iowa, Massachusetts, Ohio, Vermont and Wyoming -- don't have any financial planner regulation at all. ''We can suspend brokerage licenses right and left, but there's nothing to prevent these people from turning around and becoming financial planners,'' says Victor Rodarte, chief deputy director for the Arizona Securities Division. Although they can then no longer legally sell securities, they can provide investment advice. There may be some relief in sight, in the form of investment adviser legislation now being debated by Congress. Both the Senate and the House versions of the bill would raise registration fees to pay for more oversight. But neither version would cover accountants, lawyers and others who do planning as a sideline. Moreover, the additional funds that would be raised aren't likely to be enough to pay for all the scrutiny that's needed. So no matter what happens to the legislation, you must choose a planner with care. With money-market funds and certificates of deposit yielding as little as 3%, a burgeoning crop of customers is turning to planners in pursuit of safe, higher-paying alternatives. If you are among the searchers, here's how to be a smart client: Interview at least three planners before signing a contract or making any investments. Some planners will give you a free consultation. The box on page 140 contains 10 questions you should ask. Although you can never be sure that the answers you receive are completely candid, just asking will let the planner know you intend to be fully involved in crucial decisions. Check out your planner with the regulators. Call your state securities commission and ask whether 1) your planner is licensed, 2) any complaints have been filed and 3) the planner has a disciplinary record. Also call the SEC at 202-272-7450 to find out whether the planner is a federally registered investment adviser. In addition, the SEC can tell you of any federal disciplinary actions. Don't invest in anything you don't understand. You'll do better sticking to simple investments such as stocks, bonds and mutual funds and avoiding limited partnerships, CMOs and any other complicated products. Warns arbitration consultant Mary Calhoun: ''Complexity itself is a risk.'' Beware of conflicts of interest. When your planner makes a recommendation, ask what he or she will get in commissions and other incentives. Insist on getting all information in writing. Have your planner back up any verbal claims about an investment by giving you a prospectus, audited financial statements, and his or her own signed statement of advice. Remain vigilant. ''It's important to look beyond the trust relationship with an adviser,'' says New Mexico securities commissioner Nancy Smith. ''What usually happens is that consumers let their guard down. That's when they get ripped off.''

BOX:

Well-meaning planners who are poorly trained or otherwise not up to the job are a more common danger than outright fraud.

Many stock brokers and insurance agents are now calling themselves financial consultants.

CHART: NOT AVAILABLE CREDIT: Source: Securities and Exchange Commission CAPTION: WHO'S WATCHING THE PLANNERS? Since 1980, the number of financial planning and in vestment advisory firms registered with the Se curities and Exchange Commission has more than tripled to 17,500. Unfortunately, the number of government regulators paid to keep an eye on those planners and advis ers has increased far more slowly. For example, the ranks of SEC inspectors have risen only 28% -- from the equiva lent of 36 full-time examiners in 1980 to 46 in 1991. The SEC visited only 574 investment advisory companies last year -- mostly big money man agers, not the small outfits most likely to serve typical investors. At that rate, the average advi sory firm could expect to see an SEC inspector only once every 30 years.