Your advisor needs a free hand to recommend strategies, investments, and purchases without being constrained by the conflicts of interest that come into play if she's compensated when you take her advice. It's possible to get good advice from an advisor regardless of how she is paid, but to avoid conflicts, it's important to understand her compensation structure.

How Do Advisors Earn Their Money?

Financial advisors can be paid through product sale commissions or fees paid by the client. Commissions can be paid when you initially buy a specific financial product, and then “commission trails” can continue to be paid to the advisor as long as you own that product. Brokers often share their commission with the company they work for, and their earnings could be affected by the amount of that company's product they've sold over time. In other words, there could be strong pressure to sell you something you don't need, or that is less effective for your plan than a competing, perhaps lower-paying, product.

Advisors who are paid directly by the client usually base their fee on an hourly rate, an annual retainer, a fee based on the amount the client is investing with them — called an assets under management or AUM fee — or a flat project fee schedule with a menu of prices for each project. Some advisors charge a combination of fees and commissions, with the commission offsetting the fees that are billed to the client.

Danger Signals

There can be conflicts of interest in almost every relationship. Advisors compensated by commission are motivated to suggest products that make them the most money. Advisors who charge based on assets under management are motivated to suggest investing your money through them rather than paying down debt, for example. Advisors who are paid an hourly fee are motivated to pad the hours of work they do. It is important to remember that anyone you hire could have a conflict.

Very few advisors give in to these conflicts, and the ones with professional designations such as CFP and CPA, as well as your attorney, have taken an oath to always put the client's interests ahead of their own. You can further minimize the conflicts in your relationship with your advisor by asking the right questions.

Questions You Should Ask

Every advisor should offer a first meeting or phone call in which you can ask questions and get to know about him before making a commitment to work with him. Some advisors will charge a fee for this meeting, but most won't. After all, they want the chance to check you out, as well, and to decide if you're someone they would like to work with.

Ask about their fees and how they work. If they are fee-paid advisors, are they able to quote an up-front project fee? If they are commissioned advisors, can they describe the various commissions they receive from product sales and how they differ across various offerings and companies? The National Association of Personal Financial Advisors has a questionnaire on their website — www.napfa.org — that you can use as a guide when interviewing an advisor, as well as a form your advisor can use to disclose the commissions he receives.

Monitoring Progress

Part of managing your personal finance team is monitoring progress and measuring success. This includes your own progress toward continuing your financial education and completing the things you've assigned to yourself to implement.

What to Watch For

Having well-managed personal finances means having short-, mid- and long-term financial goals that you're working toward. Your goals — especially your mid- and long-term ones — should include intermediate milestones that let you measure incremental progress. For example, your long-term goal may be to retire in fifteen years. An intermediate milestone might be to increase your 401(k) investing through your employer by 5 percent. At your year-end check-in, make sure that you achieved this milestone.

Your advisors should be communicating with you on a regular basis about the tasks they're performing for you. They should return calls and e-mails promptly and not make you feel as if you're an interruption to their daily work. They should also set clear expectations about what they need from you as part of your work together. If these things aren't happening, you should talk to the advisor. If discussion doesn't fix the problem, it's time to find another advisor.

Online Education

Online financial information and advice should be easy to understand and clearly indicate who is providing the information. Understand how the site is making its money; consider whether its revenue model biases the site's advice and information. Make sure that you don't rely on the advice given on websites unless they are the regulatory sites themselves. You might read an interesting article about a strategy or a rule, but be sure you confirm it by researching it yourself or by checking with your advisor before relying on it. Check the Resources at the back of the book for good sources of online education.

Regulating Agencies

Ask your advisor who her oversight organization is. Lawyers are overseen by their bar association, CPAs by the American Institute of Certified Public Accountants, CFPs by the Certified Financial Planner Board of Standards. Advisors who sell investments for a commission are monitored by the Financial Industry Regulatory Authority; advisors who give investment advice and are paid fees are regulated by their state or the Securities Exchange Commission. Insurance agents are overseen by their state.

Handling Problems with Advisors

If you have a problem with an advisor, contact her first. Many problems are simple misunderstandings, and most advisors will work hard to clear things up. Keep personal notes from your discussions with your advisor and ask her to give you recommendations in writing to minimize possible misunderstandings. If your contact with the advisor doesn't clear up the problem, it's time to contact the agency that oversees her.