Advisors get paid in two basic ways: fees charged for services (usually a percentage of the assets under management--often about 1 percent), and commissions from investment companies for selling products. Some consumer advocates maintain that commission arrangements are an inherent conflict of interest, but many advisors who earn commissions produce excellent results.
Some advisors earn both fees and commissions. The challenge in these cases is to understand when advisors are wearing the commission hat and when they're wearing the fee hat.
Regardless of how an advisor gets paid, you want one who puts your interests first. Fiduciaries have a duty to do just that. A fiduciary is someone whose legal/regulatory status exposes them to significant legal liability and government sanctions if they don't put your financial interests above their own. (All advisors registered with the SEC and comparable state agencies are fiduciaries.) Regardless of an advisor's status, be sure to ask about any scenarios that might pose a conflict of interest.
Also ask about any complaints you found in their backgrounds on the FINRA or SEC sites. These complaints may be insignificant because any client can get miffed. What counts is how the candidate advisor answers your inquiry – the light he or she sheds on the issue.
Screen for hubris. Some advisors are too egotistical to be reliable. A good way look for this is to ask them to discuss a mistake they once made. If they seem irritated or can't come up with an example, disregard the advisor. You want an advisor with some degree of humility.
Pursuing this line of questioning with an advisor is comparable to job interviewer's asking a candidate: What are your weaknesses? This is a classic question for a reason: People lacking humility tend to be over-confident and inflexible.
Of course, Bernard Madoff might have met all of these criteria. But Madoff's epic fraud wouldn't have been possible if clients had questioned his uncanny investment returns. In investing, as in all endeavors, be skeptical of anything that seems too good to be true. Question everything.
Ted Schwartz, a Certified Financial Planner®, is president and chief investment officer of Capstone Investment Financial Group (http://capstoneinvest.net). He advises individual investors and endowments, and serves as the advisor to CIFG Funds. Because Schwartz has a background in psychology and counseling, he brings insights into personal motivation when advising clients on achieving their wealth management goals. Schwartz holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at email@example.com.