Financial adviser's motives, expertise, methods crucial to managing your wealth

good article if you're looking to find a financial adviser.
http://http://www.washingtonpost.com/wp-dyn/content/article/2010/05/29/AR2010052900289.html

Financial adviser's motives, expertise, methods crucial to managing your wealth
By Bob Frick
Sunday, May 30, 2010; G03
Why do so many of us who seek advice about money shy away from asking the hard questions of financial advisers? Maybe because money is such a taboo subject -- after all, survey after survey finds that given a choice to discuss sex or money, more of us feel comfortable with pillow talk.
But understanding your financial adviser's motives, expertise and methods is crucial to managing your wealth and will certainly help you sleep better during turbulent financial times.
First check an adviser's qualifications and references. Then ask these key questions:
Do our goals match? If an adviser works solely or partly on commission, you might have a problem. You can never be sure whether the investments the adviser is buying for your portfolio are the best he can find or the ones that generate the largest fees. When an adviser wants to swap a few mutual funds in and a few out, is he doing so to improve your performance or because he needs to score more commissions to make a car payment?
The simplest way to unite your goals with those of your adviser is to pay a fee tied to the size of your portfolio -- say, 1 percent of assets per year. When your portfolio goes up, and only when it goes up, so does your adviser's compensation.
Other methods that avoid conflicts of interest are to pay for advice by the plan, by the hour or by an annual retainer. But those don't provide as much incentive for your adviser as a plan linked to assets.
How much will your services really cost me? Your adviser's fee is only a part of your costs. If your adviser trades securities often, brokerage commissions can add up. And maybe your adviser likes mutual funds or other investments with high annual expenses.
Get an accounting of total annual fees and expenses for the adviser's typical portfolio. A thrifty adviser can find plenty of cheap mutual funds and exchange-traded funds and won't trade often, keeping the annual cost of your portfolio to well below 1 percent of assets (not including the adviser's fee).
How do you measure performance? This is definitely a question to ask upfront. At your annual checkup, your adviser can pull out all kinds of measures to make his performance look better than it really is. Decide what standards you're going to use before turning over a penny. Be sure to ask current and former clients how their portfolios performed.
Here's our suggestion: Your portfolio should do at least as well at the market averages. So the portion of your portfolio in big U.S. companies should at least equal the performance of Standard & Poor's 500. Likewise, the portions in small-company stocks, foreign stocks, bonds and so on should equal or better their market-average doppelganger.
Equaling the averages is a no-brainer; all your adviser has to do is invest in index funds. In fact, many advisers follow just that strategy. At any rate, studies have shown that your mix of assets is far more important in determining performance than the choice of individual funds or securities.
What do you know about me? Many advisers use a "portfolio in a box" approach -- that is, they figure that if you're of a certain age and generate a certain amount of income, you should hold investments X, Y and Z.
But the past decade has taught us that we all come with biases that affect our comfort level with investments and their performance. For example, some of us love risk, while others despise it. Plus, we put different priorities on different goals.
A good adviser will ask you questions to divine your attitudes toward risk, different types of investments, your need for security and your priorities. Many will have you fill out questionnaires on those topics, although advisers should combine the surveys with heart-to-heart discussions.
The payoff for spending time on such discussions is a portfolio that reflects those variables.
Do you time the market? Most advisers who try to time the market won't admit to it, at least not in those words. Timing the market means trying to predict future movements of asset prices and moving money in and out of markets to take advantage of those predictions. Relatively few investors have done so successfully over long periods. If your adviser were one of them, she would probably be running a multibillion-dollar hedge fund.
By asking an adviser about her investment strategy and how it changes with developments in the markets, you'll discover whether she's a closet market timer. Watch out for an adviser who says, for example, that she thought foreign stocks were getting pricey so she shifted clients' money from overseas shares to commodities. Wholesale changes of that sort rarely pay off, and, if they're done poorly, your portfolio could shrink faster than an igloo on Hawaii.
Do you take a holistic approach? You might want your adviser just to manage your money. That's fine. But to really take advantage of a pro's expertise, you want someone who is versed in estate planning, insurance and a host of other areas that work best when orchestrated together. That includes estate planning, life and long-term-care insurance and investing for college.
How can you help me transition to retirement? Making money grow is just half the challenge. A good adviser should lay out a strategy on how you'll reduce risk in your portfolio as you approach retirement age, even if retirement is years away.
The adviser should have a plan for setting up various buckets of funds to meet your retirement income needs, including short-term liquid assets for immediate cash; fixed-interest investments, such as CDs or bond ladders, that you can use to replenish your cash bucket as needed and to shield you from having to sell stocks in a down market; and long-term assets invested for growth in a well-diversified portfolio.
-- Kiplinger's Personal Finance