Is my financial planner making me enough money?

(Money Magazine) -- How do I know if my financial planner is making me the most money possible? -- Jorge, Billerica, Mass.

Well, I suppose you could look at how your investments have performed over the past year and compare that to what others investments have returned.

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Ultimate Guide to Retirement

• Getting started
• 401(k)s & company plans
• Investing
• Annuities
• IRAs
• Self-employment plans
• Pensions and benefit plans
• Social Security
• Insurance
• Estate planning
• Living in retirement
• Getting help

So, for example, if your financial planner had you invested in a mix of 60% stocks and 40% bonds, your portfolio would have gained about 16% over the past 12 months.

By then going to Morningstar's Category Returns section and scanning the one-year results, you would see that you would have earned a lot more had all your money been in precious metals funds (up more than 40% on average) or real estate or energy funds (both up more than 30%).

But what would that tell you? That your planner is doing a lousy job investing your money? Or that he's some sort of slouch who's just not trying hard enough to earn you top returns?

No. All it would tell you that your planner isn't very good at predicting which investments are going to be sitting at the top of the charts at some point in the future. Which should hardly be a revelation since no investor, pro or novice, has a crystal ball when it comes to predicting investment performance.

That's not to say that you should let your planner completely off the hook when it comes to setting an investing strategy.

But if you're looking to gauge whether a financial planner is actually helping you improve your financial well-being, investment performance is only one factor you should be looking at, and even then making "the most money possible" isn't the right standard.

So how, then, should you assess whether your planner is doing a good job? Here are three questions that can help you arrive at an answer.

Question #1: Has the planner helped you define goals and set a path toward achieving them?

Although many people think that sifting through tons of investments to identify tomorrow's top performers is job one for financial advisors, I contend that talking with you about what you would like to achieve financially and then laying out a sensible plan for reaching your goals is actually more important.

After all, investing isn't an end in itself. It's a means to an end and it should be consistent with a larger overall financial plan.

So, for example, if you're getting into the later stages of your career and making sure you're on track to a secure retirement is a major issue, a planner can not only help you assess whether you're putting away enough in 401(k)s and other retirement accounts, but also broach topics like whether you need to trim your debt and when you might begin taking Social Security.

If, on the other hand, you're just starting out, you and your planner might talk about such issues as paying off college debt, accumulating a down payment for a home, how you should be investing in your 401(k) and to what extent you should be saving outside your workplace plans, whether it's to start an emergency fund, take advantage of a traditional or Roth IRA or even fund taxable accounts.

Chances are you won't have the financial wherewithal to do all these things at once, so a good planner can help you prioritize your goals. Just as important, your planner should also help you monitor your progress toward each goal and, if necessary, help you make adjustments if you're slipping behind.

Question #2: Are the investments your planner is recommending appropriate and the returns competitive given your goals and risk tolerance?

If your planner is making investment recommendations, you do want to hold him accountable for them. But just looking at raw return isn't the right way to do that. Rather, the first thing you need to consider is whether the investing strategy the planner is recommending makes sense given what you're trying to achieve.

For example, if you're closing in on retirement and looking to draw regular income from your savings, your portfolio should likely be invested relatively conservatively.

So if your planner has you in a portfolio that's chock-a-block with stocks and brimming with highly volatile small-cap and emerging market funds, that should raise a red flag, even if you're racking up splendid returns. Granted, choosing the right mix of stocks and bonds is a personal and subjective matter.

The right blend can vary from person to person for any number of reasons. A retiree with an old-fashioned check-a-month company pension can generally afford to invest more aggressively than a retiree relying solely on a 401(k).

And, of course, some people are simply more comfortable taking on investing risk than others. Which is why it's important to have the planner demonstrate to you why he's chosen a particular investing strategy for you and what, exactly, it's designed to achieve.

Once you're okay with the overall strategy, then you can start assessing investment performance. The key is using the appropriate benchmark. Last year, for example, U.S. stocks returned about 17%.

But if your portfolio is divided equally between stocks and bonds, then 17% isn't the right gauge to determine whether your investments are keeping up. Rather, you want to know how your portfolio's performance compared versus a 50-50 mix of stocks and bonds (which returned just under 12% last year given a 6.4% gain for the broad bond market).

Ideally, the planner should already be doing this for you -- that is, comparing the performance of your portfolio to a comparable benchmark.

But if your planner isn't doing that -- or you want to do some checking on your own -- you can create a customized benchmark yourself by going to Morningstar.com and putting together a mix of index funds or ETFs of different asset classes that match (or at least come close) to the make-up of your portfolio.

Question #3: How much are you paying in fees and is that amount reasonable?

The first thing you want to know is how much you're actually shelling out in fees. Getting to the right figure will depend on how your planner is compensated and what type of investments you own.

If you deal with a fee-only planner, for example, you'll likely pay a percentage of assets under management for the planner's advice. But you'll also pay underlying fees for the investments the planner recommends, such as mutual funds or ETFs.

In other cases, a planner may get sales commission based on the amount you invest in the recommended investments, and also receive a portion of any annual fee the investment itself levies.

The point, though, is that you want to know how much you are paying in total fees upfront and on a year-to-year basis, wherever the revenue from fees goes.

A planner should be more than willing to give you a breakdown of all fees in writing. Once you know how much you're paying, you can decide whether you're getting your money's worth.

Again, this is a subjective issue. But among the standards you can apply are what you would have to pay another planner for comparable investments and services and whether you believe you would you be able to generate similar or better results on your own and keep the money that would have gone to the planner in your own pocket (although you've got to be realistic about your planning and investing abilities).

What's clear, though, is that that the more you pay in fees, the longer it will take to reach your goals, and the greater the drag on investment performance.

For more on planner costs as well as some guidelines for choosing a planner, you can check out the Getting Help section of our Ultimate Guide To Retirement.

If you'd like to check with other planners to see how their fees stack up vs. your planner's, you can get the names of planners in your area by going to the Financial Planning Association's Find a Planner tool.

Bottom line: I applaud your instinct to hold your planner accountable for his advice, but your "making the most money possible" standard is unrealistic and far too narrow.

So try out the three questions I've suggested here instead. Yes, they require more thought and effort than simply scanning returns. But they'll give you the broader perspective you need to truly evaluate your planner's performance.