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Although I obviously enjoy thinking about personal finance, I understand that many people do not, and, whether from a lack of interest, time, or knowledge, they may seek help from a financial adviser. A lot of Legal Times readers do exactly that. According to the newspaper’s 2005 subscriber survey, 37 percent of our readers use a broker, 30 percent use a financial planner, 25 percent use a private banker, and 10 percent use some other investment adviser. (Respondents were allowed to pick more than one answer.) Those of you who outsource your financial planning need to know if you’re getting good advice. Is your adviser truly looking out for your best interests? Or are your savings being invested with an eye to the adviser’s profit? The answer could make a big difference in your ultimate wealth. Heed the warning signs that you may be getting bad advice. Any one of these signs is not necessarily grounds to immediately replace your adviser, and some of you may be happy with an adviser who does all the things described. (If so, that adviser probably is quite happy with you, too.) But if your adviser routinely engages in behaviors from this list, be careful. You may not be getting the treatment that you deserve. HARD SELLS The key distinction between good and bad advisers is between those who are trying to provide unbiased advice tailored to your situation and those who are essentially in the business of selling financial products that you may or may not need. It’s the difference between a lawyer and a car salesman. How do you tell them apart? By looking for substance: Watch out for unrealistic promises. The annual return for large U.S. stocks has historically averaged about 11 percent. A balanced portfolio with an adequate portion of bonds might, on average, return about 8 percent or 9 percent a year. If an adviser is promising vastly higher returns with little risk, be skeptical. By looking at style: Anything that feels like a sales pitch is a warning sign. Some advisers have more training in sales techniques than in modern portfolio theory. You might hear an adviser attempting to find out your emotional concerns about your money, then simply parroting them back to you with products that will supposedly address them. Years ago, before I got into financial planning as seriously, I went out to Tysons Corner, Va., for an introductory meeting with a large financial advisory company. While I did so mostly for the experience, I had one specific question about asset allocation, and if it had been impressively answered, I might have become one of the company’s clients. Instead, the planner seemed fuzzy about what asset allocation meant and what issues it entailed, and she spent much of her time trying to sell me disability insurance, which my law firm already provided. When that failed, she, somewhat bizarrely, started talking about the inflation rate of postage stamps. And at the end of the meeting, she forgot that I was a lawyer and tried to sell me basic legal services. HOT TIPS Some people might have the misperception that a good adviser calls frequently with tips on what stocks to buy and sell. In fact, that’s a warning sign. The likelihood of any stock tip being worthwhile, especially by the time it makes its way down the investment world’s food chain to you, is minuscule. (Think about it: If the stock were really about to take off, why didn’t the broker buy it for himself instead of sending the idea to everyone in his Rolodex?) And a stock portfolio built on what are, at best, individual hunches — and at worst, the broker’s sales targets — is fundamentally haphazard and likely to be unbalanced. Moreover, be suspicious of anyone who claims to be able to time the market by knowing when to buy or sell a particular stock. Again, if your broker could time stock sales, he would be running a hedge fund for multimillionaires, not handling your comparatively modest account. Besides, the evidence against reliable market timing is very strong. COMMISSIONS And that brings me to an adviser’s sales commissions, the root of all sorts of financial evils. If you get the compensation structure right, you’re probably not going to get fleeced, but if your adviser has financial incentives contrary to your own, you’re inviting exploitation. One key indicator of perverse incentives at work are which mutual funds are recommended. Funds with front-end sales loads (essentially, commissions that are paid out of your initial investment, often around 5 percent) are a bad sign. So are so-called Class B fund shares, which don’t have a front-end load but charge higher fees elsewhere. One wisecrack goes that the “B” stands for “broker,” the person who really benefits. Many consumers are learning to disdain mutual fund loads, partly because honest financial journalists (yay!) keep bashing these sales fees. So some companies are switching away from loads and imposing or raising so-called 12b-1 fees — and then returning most of that money to the advisers. But whatever they call it, money spent on fees is money not invested in your future. Meanwhile, other companies (Vanguard Group, Fidelity Investments, and T. Rowe Price, among others) offer good funds without these fees. Such low-fee funds are better for investors, though not as lucrative for advisers. Bottom line: If your adviser is pitching funds with either sales loads or 12b-1 fees, be suspicious. CASH COWS Finally, certain financial products have too often been aggressively hawked mainly because of the profits to the adviser. Though these products can have their uses under particular circumstances, it’s a warning sign if any of them are being strongly pushed at you. One such product is known as whole life insurance. This combines an insurance policy with an investment fund: You pay a lot more, and the insurance company invests the extra. The cheaper alternative is term life insurance, which is only an insurance policy. The standard advice in choosing between the two is “Buy term and invest the difference,” so if your adviser does not at least mention this possibility, you may be dealing with a salesperson. Also, be careful with deferred-variable annuities. These vehicles allow money to be invested with tax-free growth until retirement, though at the cost of (you guessed it) high fees and post-retirement payouts that are taxed as ordinary income rather than as capital gains. (Tax rates on capital gains are lower.) Now, variable annuities as a retirement savings device might have uses if (1) you have maxed out your 401(k) and individual retirement account contributions for the year, (2) you have additional retirement savings producing ordinary income that you wish to shelter, and (3) you find a relatively low-cost annuity option. But if you’re not in this situation, and especially if the adviser pushes variable annuities as a primary investing tool, be careful. And run the other way if the adviser wants to put a variable annuity in an account that’s already tax-sheltered, such as an IRA. There’s no reason to pay more for the same tax benefit. Good financial advisers are out there. In a future column, I’ll discuss how to find them. But if you have fallen into bad hands, your escape begins by recognizing that you have a problem.
Robert L. Rogers, associate opinion editor at Legal Times , writes the Legal Tender column on personal finance. E-mail Rob with comments or suggestions for future columns.

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