By Mark Miller

(This is the first of four excerpts from Mark Miller's new book, "The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living " from Bloomberg Press/John Wiley and Sons, June, 2010).

"The nature of any human being, certainly anyone on Wall Street, is 'the better deal you give the customer, the worse deal it is for you.'" --Bernard Madoff, convicted Wall Street swindler

Remember the Bo Diddley song "Who Do You Love?" When it comes to financial advice, a better question might be, "Who do you trust?" Bernie Madoff's victims certainly wish they'd thought harder about that question, and the general cloud of scandal hanging over Wall Street these days reinforces the need to work with trustworthy--and competent--financial advisers.

At the same time, as boomers confront the challenge of retirement planning, increasing numbers of us see that we need advice--lots of it! Even before the economic crash, the knowledge gap about retirement was large, and the need for smart planning has only become more acute in hard times. Do-it-yourself planning certainly is an option, but a little help from a professional adviser can be well worth the time and money.

The rationale for hiring an adviser is simple: Money spent now could make a big difference in helping you achieve a secure, happy future retirement lasting two decades or more.

The field of financial-planning services is growing quickly, and finding the right person is a big challenge. Almost anyone can hang out a shingle and dispense advice; planners may have any number of certifications or titles attached to their names, but none are required. So let's break down the various types of advisory services that are available and talk about how to interview and select an adviser.

There really are only two types of financial advisers: those who--by law--work for clients and those who really don't. The legal litmus test is fiduciary duty, which means that the adviser is obligated to put the best interest of the client ahead of all else.

Stockbrokers and broker-dealer representatives are not fiduciaries.

Neither are financial products salespeople working at banks or insurance companies. They are self-regulated by the Financial Industry Regulatory Authority (FINRA), an industry-sponsored group. FINRA's regulations require its members and their representatives to recommend investments that are "suitable" for clients--a definition with holes big enough to drive a truck through. "I've tried to find a definition, and the best I can find is 'reasonable,'" says Sheryl Garrett, founder of a network of fee-only advisers that bears her name. Garrett also is the author of the "Personal Finance Workbook for Dummies" (John Wiley & Sons, 2007), which contains an excellent chapter on hiring advisers. "But the investment only has to be reasonable at the moment it is made--not next week or next year. And the definition doesn't cover where the money that's being invested came from. I've seen situations where advisers talked clients into taking money out of a safe, government-insured defined benefit pension and putting it into a risky variable annuity. That can fall within the definition of reasonable."

None of which is to say that you can't get perfectly sound advice from a non-fiduciary adviser. Just be mindful of the possibility of divided loyalty and conflict of interest.

Advisers who have fiduciary responsibility to you as a client are registered investment advisers (RIAs) (the one exception being in California, where brokers also have fiduciary responsibility, although many advisers and consumers aren't aware of this). These advisers usually are independent or work for small firms, and they're regulated by the Securities and Exchange Commission (SEC) or by state authorities. They're held to a fiduciary standard of care that says they must put the best interest of clients first--not their own commissions and fees, and not the sales objectives of an employer.

Many people don't understand--or don't care--about the difference.

The current structure of the financial services industry has also tended to blur the lines, with the emergence of financial superstores that offer both advisory and portfolio-management services through different divisions.

Compensation is another major dividing line. Planners are typically paid in one of three ways: commission and fees, salary plus bonus, or fee only.

-- Commission and fees.

This is the most common approach and usually is referred to as fee-based. The adviser receives a fee for developing a plan but also receives commissions for selling insurance or investment products.

-- Salary plus bonus.

Discount brokerage firms and banks will compensate employees with a base salary plus incentive pay for bringing in new clients' accounts. Advisers may also get higher bonuses by recommending or selling certain products over other options.

-- Fee only.

Typically, these advisers aren't registered reps for any financial services company. Usually, they are self-employed RIAs or work for a firm of independent planners. You pay all the fees, but the planner has no bias toward any one product or solution. You'll find fee-only advisers working in three ways: hourly, through a flat fee, and by retainer.

While we're on the subject of writing checks, the only ones you should write directly to an adviser are those that cover fees. Investment checks should always be written to a third-party custodian, typically a big financial-services firm such as Fidelity Investments or Charles Schwab. Third-party custodians provide an important check and balance against potential fraud; Bernie Madoff's investors would be much better off today if they hadn't written checks directly to Madoff's in-house broker-dealer operation.

NEXT WEEK: How working longer helps build retirement security.

Available at Amazon.com

The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living

 

Personal Finance - How to Hire a Financial Adviser (Part 1 of 4)

© Mark Miller