Your adviser doesn't have to be a junior Bernie Madoff to cost you a fortune. All she has to do is put her interests ahead of yours.
Which is exactly what many people calling themselves financial advisers do. Most aren't held to what's known as a "fiduciary standard," where they're required to put their clients' interests first. Instead, they only have to meet the much lower "suitability standard," which means the advisers have to "reasonably believe" that their recommendations are suitable. They're allowed to recommend one investment over another if it pays a higher commission or if it happens to be the product their companies are pushing that week.
Protect yourself; the government won't
The result can be clients trapped in high-cost and sometimes high-risk investments with big exit fees or other hidden traps. Even less egregious violations of your trust can leave you with poorly performing investments and a much smaller nest egg than you might have achieved with an adviser who acts in good faith.
Federal regulators -- the Securities and Exchange Commission and the Department of Labor -- are investigating whether to expand the number of advisers who will be held to the higher fiduciary standard. Unless and until they act, though, here are potential signs your adviser may be working against your best interests.
1. There isn't a "CFP" or "RIA" after her name
Certified Financial Planners and Registered Investment Advisers who provide planning services to clients are both held to a fiduciary standard. So are Certified Public Accountants. The CPA personal financial planning credential and the PFS, or Personal Financial Specialist, are similar to the CFP. Both credentials require extensive study of comprehensive financial planning.
Applicants must pass rigorous tests and have experience providing advice before they can get the credentials.
2. He's pitching products rather than asking questions
A good adviser should know a lot about you: how much debt you have, how you feel about risk, how much you have saved and when you plan to retire. A bad adviser is too busy painting a glowing picture of the investments he's trying to sell to bother asking questions.
3. You're not sure how she gets paid
One persistent misconception is that "fee-based" is the same as "fee-only." It's not. Fee-only advisers are compensated only by the fees clients pay them. Fee-based advisers may accept commissions or other compensation from the companies whose products they recommend. However they get paid, advisers should be clear about all sources of compensation.
4. He won't promise in writing to put your interests first
You should ask advisers for a written pledge promising to act as a fiduciary, to disclose potential conflicts of interest and to tell you how they are compensated. Such a pledge is a contractual commitment, so your adviser likely won't sign it if his primary allegiance is to himself or his company.