By Jonathan Clements

1 June 2006

The Wall Street Journal Europe

(Copyright (c) 2006, Dow Jones & Company, Inc.)

This should be the golden era of financial advice.

In the years ahead, millions of baby boomers will roll out of the work force, looking to generate maximum retirement income. That's a tricky task -- and a good financial adviser could be a great help.

Unfortunately, the investment-advisory business just doesn't inspire confidence. In fact, given a choice between signing on with the typical financial adviser and simply dumping everything into a hodgepodge of Treasury bonds, it's an easy decision: I'd take the Treasuries every time.

Sound a little harsh? Before half of Wall Street sends me hate mail, let me concede two points.

First, financial advisers often write to me, arguing that many investors don't have the savvy and self-discipline needed to manage their own money. So let's agree: Many investors aren't fit to manage their own money.

Second, advisers often write to me, complaining that I dwell too much on the damage done by crooked and mediocre advisers, without noting that there are many fine brokers and financial planners. So let me say it: There are, of course, many fine brokers and planners.

As I see it, there are pervasive problems with the investment-advisory business. Looking for an adviser? You've got to keep these pointers in mind.

-- Many advisers earn their keep by collecting commissions on the investments they sell. That means they have an incentive to get clients to trade and to buy the highest-commission products.

I am not arguing that these advisers are always hell-bent on squeezing the maximum commission out of their clients. But why risk it? Your best bet: Use fee-only advisers, such as those who charge an hourly fee, a percentage of your portfolio's value or a fixed annual retainer.

-- Most advisers have had little formal financial education. For instance, maybe 5% of brokers, financial planners and insurance agents have bothered to become a certified financial planner, or CFP. To ensure your adviser is knowledgeable, stick with CFPs or, alternatively, folks who have qualified to be chartered financial consultants, chartered financial analysts or certified public accountants-personal financial specialists.

-- Many advisers offer investment advice -- and that's it. But there is much more to managing money than picking stocks and mutual funds. You might also want help with your mortgage, college costs, insurance and estate planning. If so, before you sign on with an adviser, make sure the adviser is committed to assisting with these other areas.

-- Most advisers charge too much. Whether you're paying fees or commissions, your adviser's services might be costing you 1% of your portfolio's value each year. Tack on the fees charged by the mutual funds and other investment products you buy, and your total annual tab might be 2% or even 3%.

Result: If your adviser recommends a portfolio that returns 7% a year before costs, you could pocket less than 5% after all fees are paid.