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Your adviser doesn't need to be a Bernie Madoff-style sociopath to cost you dearly. Ignorance, self-interest and delusions of investing competence can leave you paying above-average expenses for below-average results.

As Madoff showed, determined crooks can circumvent almost any amount of regulation. Yet there are plenty of perfectly legal ways for people to be taken advantage of by those who profess to help them.

Here are some things your adviser may say -- and some that he or she won't -- that should put you on your guard:

1. 'I won't promise to put your interests first'

You don't have to be able to spell the word "fiduciary" to understand the concept. It means the person advising you is sworn to put your interests ahead of his or her own. Lawyers, CPAs and registered investment advisers have a fiduciary duty to their clients by law. Many other advisers, however, do not. They're typically held to the lower standard of "suitability," which means they're not supposed to recommend an investment product that's clearly unsuitable for your situation. They can still try to talk you into something that's more profitable for them than sensible for you, though.


If your adviser is holding herself out as a fiduciary, she should be willing to put that promise in writing. If she refuses to take on that role, you don't necessarily have to fire her -- you just need to understand that her advice could be tainted by self-interest, and proceed cautiously.

(Many advisers believe the U.S. Securities and Exchange Commission will propose that all financial-advice givers be held to a fiduciary standard. So stay tuned.)

2. 'I won't talk about how I'm paid'

Financial advisers typically get paid one of three ways: by commissions on the investment products they sell, by a combination of commissions and fees they charge you (known as "fee-based") or solely by the fees they charge you ("fee-only").

Liz Weston

Liz Weston


Each method can have its advantages and drawbacks. You don't have to pay as much out of pocket to advisers who earn commissions, although the amount you invest may be reduced by the "loads" charged for the investments, and there is a built-in conflict of interest, since the adviser may favor products that pay higher commissions. Fee-only advice is free of that particular conflict, although it can be expensive.

Your adviser should be upfront and absolutely clear about how he's compensated. If he's obscure about this issue or tries to pretend his advice is free, beware. Somebody's paying, and it will almost certainly be you.

3. 'I don't know much about financial planning'

Pretty much anyone can call herself a financial planner, whether or not she's had any training in the field. Her only training may be what her company tells her about how to sell various investment products.

If you want someone with extensive, comprehensive training, look for one of these designations:

  • CFP, which stands for certified financial planner and is the premier designation in the financial-planning industry.
  • CPA-PFS, the comprehensive financial-planning designation (personal financial specialist) for CPAs.
  • ChFC, or chartered financial consultant, a financial-planning designation granted by the American College, which specializes in educating people who work in securities, banks and insurance.

4. 'I pretend risk and reward aren't related'

The scariest of all financial advisers are the ones who promise high returns with little or no risk. That's not possible in the real world, so you're dealing with someone who's deluded, a dunce or a scam artist.


Here's the reality: Even the "safest" investments contain some risk. With Treasurys and FDIC-insured bank accounts, considered the safest investments anywhere, you typically don't receive enough of a return to offset inflation, so your buying power is eroded over time. Investments that pay more than insured bank accounts and U.S. government debt involve taking other risks, such as the risk you'll lose principal or that you won't be able to access your money when you need it. Another hazard: an investment that promises "safe" returns may depend on the solvency of the company that created it, or may charge high fees, or both.

Most of us need to take some risk to meet our financial goals. For example, we need the inflation-beating returns of the stock market if we hope to retire someday. We should educate ourselves to understand those risks and take them in rational ways. Believing we can make some kind of end run around the risk-reward continuum will just set us up to be conned.

5. 'I guarantee market-beating returns'

Few people can consistently outperform the market. That's why Warren Buffett is so famous -- because he has. Other investors who try often wind up underperforming market benchmarks. Their active trading strategies rack up fees that aren't offset by superior returns.

Any adviser whose strategy involves active trading -- as contrasted with a passive approach that just tries to match the market -- should make it clear that there are no guarantees he'll succeed. Even a strategy that's worked for an extended period can suddenly go cold or underperform in different market conditions.

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You should run away from anyone who pretends otherwise. Other advisers to avoid include those who:

  • Pretend there are "secrets" to investing or "strategies only the wealthy know."
  • Pressure you to invest without giving you time to investigate what you're investing in.
  • Want you to invest in any scheme that requires you to recruit other investors. That's known as a Ponzi scheme, and it's illegal, not to mention a disaster for most people who participate.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.