Earlier this year, the stock market fell to a 12-year low, losing 54 percent of its peak value and taking a vast chunk of ordinary Americans’ wealth with it.

In the wake of such big losses, many investors are looking for someone to hold accountable. That has placed financial advisers under the microscope.

“From what I’ve seen from industry surveys and things like that, a very high percentage of people are re-evaluating their adviser,” says David Loeper, chairman and CEO of Wealthcare Capital Management in Richmond, Va., and author of “Stop the Investing Rip-Off.”

How do you determine whether your adviser has your best interests at heart? By asking questions and doing your homework, says Kristin Kaepplein, director of the Office of Investor Education and Advocacy at the Securities and Exchange Commission.

“Even when you are delegating management of your assets, that doesn’t mean you don’t have to do your due diligence, especially on an ongoing basis,” Kaepplein says.

The following are five signs your adviser may be a dud — and, by contrast, five qualities the best financial advisers share.

Qualities of bad advisers
  1. Losses that exceed standard benchmarks.
  2. Selling products instead of sound advice.
  3. Maximizing risk regardless of goals.
  4. Linking past performance to future results.
  5. Failure to maintain basic investment safety standards.

1. Losses that exceed standard benchmarks

One way to identify mismanagement is to compare your losses with those experienced by others with similar goals and time horizons, Loeper says.

For example, Loeper recommends that workers planning to retire within the next eight years keep a mix of 45 percent stocks and 55 percent bonds. Such a portfolio would have resulted in a mere 12 percent loss last year, he says.

“If you’re within 10 years of retirement and you lost more than 12 percent, somebody was making needless gambles with your money, and that’s a warning sign I would look for,” he says.

2. Selling products instead of sound advice

A lot of advisers are just glorified salesmen paid by commissions based on the type of investments they sell, says Certified Financial Planner Steve Pomeranz, who also hosts the radio show “On the Money” on National Public Radio affiliate WXEL-FM in West Palm Beach, Fla.

If an adviser begins a conversation with a sales pitch for a specific product, it’s time to look for somebody new.

“It’s like you go and see your doctor, and he says, ‘I think you’re going to be good for chemo,'” Pomeranz says. “Well, wait a minute, doctor, you haven’t even talked to me yet. You haven’t done any tests. How do you know?”

Loeper agrees that many advisers who are paid on commission have a financial incentive to steer clients into inappropriate investments. Fortunately, the financial crisis has given people a “dose of reality” about how much they should trust advisers, he says.

“It’s not like the pendulum has swung completely to people being overly skeptical. People are just becoming as skeptical as they should have been,” says Loeper. “There’s not a sales pitch out there that’s used on math by the financial services-peddling industry that hasn’t fallen apart.

“Most advisers will ask you what your tolerance for risk is, and they will proceed to position you in a portfolio that will ultimately experience that risk, regardless of whether it’s necessary or not.”

Such an approach embraces pie-in-the-sky dreams of wealth somewhere down the road rather than focusing on the client’s long-term goals, such as retirement age and desired monthly income, Loeper says.

“That means that they’re not evaluating whether accepting that amount of risk makes sense for what you’re trying to achieve,” he says.

4. Linking past performance to future results

We’ve all seen the disclaimers at the bottom of the TV screen during mutual fund commercials about the dangers of linking past performance to future results. Still, some advisers try to judge investments — and sell them to you — based on last year’s returns.

“If (past performance) is not indicative, then why would I look at it?” Loeper says. “A track record is really only useful to you if you have a time machine, and I haven’t met anyone who has one yet.”

5. Failure to maintain basic investment safety standards

Advisers who push products that don’t meet common-sense safety standards probably aren’t looking out for your best interests, Pomeranz says.

Avoid complicated investments or “anything you have trouble understanding as an investor,” he says. “If the prospectus is more than a quarter-inch thick, watch out.”

Qualities of good advisers
  1. Identify investing purpose and goals.
  2. Make sure goals drive investment choices.
  3. Discuss risk and minimize it.
  4. Offer objective advice, avoid conflicts of interest.
  5. Provide good value for fees charged.

What should you do if you suspect an adviser may be a lemon? Pomeranz recommends getting a second opinion.

“You might want to take your portfolio to an independent financial planner who charges by the hour and ask them to do an analysis of the portfolio,” he says. “Not necessarily someone who’s trying to get your money — someone who will just do this as a third party for a fee.”

If the adviser finds your portfolio is really out of whack, it’s probably time to look elsewhere. During your search, look for these qualities that are common to good financial advisers:

1. Identify investing purpose and goals

A good adviser sits with clients and identifies goals. Pomeranz starts by asking clients how much income they want investments to generate.

“I ask them, ‘What do we need out of this portfolio? What do we want this portfolio to provide us? What’s the purpose of it?'” he says.

Loeper emphasizes the need to consider all goals — retirement age, savings rate, retirement income and risk — equally and independently.

“It’s not really to define clear objectives,” Loeper says. “It’s to find a range of ideal and acceptable objectives and then discuss what priorities you have as far as what you’d be willing to spend in one objective to buy another that you value more.”

2. Make sure goals drive investment choices

Pomeranz says many inferior advisers are interested in simply maximizing returns — and their fees — above everything else.

By contrast, a good adviser develops a long-range plan that keeps the client’s goals front and center, he says.

“A real financial adviser looks at everything and looks at the goals first,” Pomeranz says. “Who says you have to be in the stock market? Now maybe you do and maybe you don’t, but has anybody asked you the question? I think that’s the point.”

3. Discuss risk and minimize it

A good adviser envisions worst-case scenarios and uses real numbers to better gauge how much risk a client truly is wiling to accept, Pomeranz says.

He cites the example of a hypothetical client with a $1 million portfolio made up of 50 percent stocks and 50 percent bonds and fixed-income investments. The client lost 20 percent of its total value in the past year due to stock losses in the U.S. and international markets.

“So now you’re down to $800,000, and really, the market’s down 40 percent. How much farther is it going to go?” he says. “Well, let’s say it goes down another 20 percent. And you’ve got 50 percent of your money in stocks right now. Well, you’re going to go down another 10 percent, which is another $80,000.

“How do you feel about that?”

Once a client’s risk tolerance level has been established, a good adviser works on minimizing such risks, Pomeranz and Loeper say.

Pomeranz has three minimum requirements for what makes a safe and sound investment: liquidity, transparency and a reasonable or low cost.

“That automatically eliminates hedge funds because they’re not liquid, not transparent and they’re extremely expensive,” he says. “So there’s a way to avoid big problems right away.”

4. Offer objective advice, avoid conflicts of interest

A good financial adviser recommends products that best fit a client’s needs.

Clients who work with a fee-only financial planner increase the odds they will receive unbiased advice, Pomeranz says. Many brokers and financial advisers now feature what are known as “wrap accounts,” which charge a flat monthly fee instead of relying on commissions for remuneration.

Pomeranz practices what he preaches. His firm, Steven L. Pomeranz Financial Management, offers fee-only financial planning in Boca Raton, Fla.

5. Provide good value for fees charged

Regardless of how a financial adviser is compensated, investors should demand a lot of personal attention and a portfolio tailored to their specific needs, Pomeranz says.

“You’re getting full implementation of something that’s totally customized to your needs, not some cookie-cutter thing,” Pomeranz says. “And then you’re getting regular meetings to discuss how your investments are doing relative to the market and if there’s been any changes in the client’s lifestyle — anything that we need to know about in order to make sure that the portfolio still matches what we thought it did.

“The whole process is a relationship, rather than just some kind of a product-focused answer, or product-focused solution.”

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