Can you trust your finacial advisor? Hehe's how three families found financial advisors to help secure their wealth. (Family Finances).

FOR YEARS, ATTORNEY MICHAEL D. PEGUES LOOKED FOR A financial advisor he could trust--with little success. "The people I met might have asked me questions," says Pegues, 40, "but they didn't really listen. They all wanted to sell me life insurance right away without regard to the total retirement plan."

Two years ago, Pegues, a Dallas resident, hooked up with Kevin E. Davis C.F.P., a financial planner with Consolidated Financial Services. "We both write columns for a Website, and we met at a dinner sponsored by the site," Pegues recalls. "Kevin followed up a few times, asking how I was doing. I knew he had helped the parents of a colleague at my former law firm, so I decided to meet with him even though I was pretty skeptical about financial advisors in general."

In this season of discontented investors, Pegues, an equity shareholder at Munsch, Hardt, Copf & Harr P.C. law firm, reports he is more than satisfied with Kevin's advice. "I have had some losses, but they could have been a lot worse considering what's been happening in the stock market," he says. "Now, I don't make a move without consulting Kevin."

FINDING THE RIGHT ADVICE

Indeed, with the stock market far below its peak levels of early 2000, many investors are seeking the guidance of brokers, financial planners, and money managers. There have been, however, far too many reports of incompetence and corruption among such professionals. Many suspect that the internal sales quotas or high commissions they can earn at their clients' expense motivate some brokers and planners. Nevertheless, there are honest financial advisors you can trust--if you take the time to find them.

For Pegues, the decision to work with Kevin stemmed from a refreshingly different approach. "Kevin asked me a lot about my family situation," says Pegues, "and he asked to sit down with my wife, Sonya, too. The other advisors just wanted to talk with me because I'm now the only breadwinner, but Sonya has a finance degree and had a successful career before she decided to stay home with our children. She knows more about these matters, so I was glad that Kevin wanted to include her in our planning."

After some initial fact-finding with the couple, "I determined that Michael and Sonya were relatively conservative investors who were more interested in meeting their goals than in trying for the highest possible returns," says Kevin. "Therefore, I recommended a balanced portfolio with two-thirds in stocks and one-third in bonds. In the past two years, the bonds have helped to offset a down move in stocks." The Pegues' portfolio is down 7.6% for the year, as of July 31, while the Standard & Poor's 500 index was off 21.05% over the same period.

Moreover, Kevin recommended that the couple's stocks be mainly held in a mix of mutual funds. "With mutual funds," he says, "you're depending on the company's research staff to help you pick good companies while avoiding trouble spots such as Enron. In particular, the American Funds group has a good record in this area."

KNOW WHEN TO FOLD `EM

On the other hand, some investors will prefer to invest in individual stocks rather than funds. "Again," says Kevin, "diversification is vital. You're less exposed to problems at any one company if it makes up a small portion of your portfolio. Even so, you should read a company's annual report and do other research before you invest. After you invest, be prepared to sell the stock if it drops by more than 10%. You might not like a 10% loss, but that beats taking a much larger loss if bad news about the company continues."

Taking a big loss on a stock is bad enough. When that stock makes up most of your portfolio, such a sell-off can be tragic. "About 80% of my portfolio was held in my company's stock in 2000," recalls Hillis Davis, 39, a manager at United Technologies Carrier Corp. in Atlanta. "I feel goal about my company's future, but a lot of Enron employees felt good about their company, too. When Enron came crashing down, I realized the risk of having too much of your net worth in one stock."

By the time Enron made the head-lines, Hillis had already reduced his dependence on his company's stock "In the spring of 2001, we had begun working with a financial planner, Vicki Brackens, after a friend referred her," he says. "One of the first things she did was get me to lighten up on my company stock and reinvest in a diversified portfolio."

Hillis admits that he had some initial doubts about working with a financial planner until he discovered Brackens, who represents MetLife Securities in Syracuse, New York. "I was afraid she would just try to sell me life insurance," he says, "but I soon found out that that wasn't the case.

She asked many questions about our wants and needs and came up with a complete financial plan that ranged from investments to debt reduction."

The Davis' plan includes more life insurance, too. "We really needed more," says Hillis' wife, Suzanne, 39, a communications manager at United Technologies, "especially since last year, when I had triplets, bringing our total children to four. But Vicki has also urged us to create 529 college plans for our children, and helped us coordinate our 401(k) investments so we have a broad asset mix without duplication." The Davis' portfolio is down about 10% for the year that they've been working with Brackens, a performance that beats the returns of many other investors.

MAKING YOUR DECISION

As you choose among financial advisors, it's important to remember that a big part of what you are paying for is the treatment you receive from your advisor. For example, Shawn Washington, 39, a CPA in Riverside, California, searched for a planner who had great attention to detail and a personalized approach. He also used the most proven method to find a trustworthy advisor--a glowing referral from a satisfied client.

He recalls, "When I worked for a large company, my employer recommended a financial planner, but there were 400 employees, so I was just a number to this planner. Once a year, he'd send out a checklist in the mail. It was very impersonal."

In a search for someone better, Washington followed a client's referral to Reginald Jackson C.F.P., a local financial planner in Redlands, California. "From the start, Reggie showed more of an interest [in my personal finances]," says Washington. "He walked me through the planning process, determined my risk tolerance, and provided a road map for my entire family."

Washington's family, it turned out, was not especially eager to take risks. "Reggie has recommended a number of mutual funds," says Washington. "They're more diversified so we don't take as much of a hit if one company runs into trouble."

Washington began working with Jackson in 1998, near the peak of the tech-stock boom. "Even back then," Washington says, "Reggie did not advise placing a large portion of our investments in tech stocks. Instead, he suggested a mix of stock funds and bond funds, including some international funds. That asset allocation has generated gains for us, despite the recent bear market. Now, when tax preparation clients ask me for investment advice, I send them to Reggie."

When searching for a trusted advisor, keep these points in mind:

* Know which type of professional you really want. Certified financial planners (C.F.P.) advise clients on personal finance matters and are certified by the Certified Financial Planner Board (www.cfp-board.org).

Chartered financial analysts (CFA) have at least five years experience and are required to pass three examinations, proving they know sound investment-management techniques. CFAs are certified by the Association for Investment Management and Research (www.aimr.com).

Brokers buy and sell securities for others. They are licensed by the Securities and Exchange Commission or other state regulatory agencies. These professionals charge a fee or receive commissions from their clients. Make sure you choose the proper professional for your needs.

* A good advisor finds the facts first. "If someone's advice is always to buy something, that's a warning sign," says Brackens. Instead of tossing a sales pitch with the first ball, many advisors have prospective clients fill out a brief questionnaire about their financial and personal situation before the first meeting.

"That saves time for both of us, and allows me to collect the data," says Jackson. "My job is to help clients prioritize their financial issues and tackle them individually, starting at the top of the list. One of my new clients wants to buy a house, so we're starting there, discussing his options, and spending less time on his investment portfolio."

* Do a background check. Prospective clients should ask questions of advisors, too. "Find out how long they've been doing this," says Jackson. "Maturity and experience can be very helpful, especially in the climate we're now experiencing."

Kevin Davis advises investors to meet with more than one person before picking a financial advisor. "Ask about his or her background," he says. "A person who has worked in insurance, for example, might have a different perspective than someone who has been in accounting. Make sure you're comfortable with the advisor's personality if you're going to have a successful long-term relationship."

* Put performance into perspective. Brackens warns against judging a financial professional solely by past investment performance. "Be wary of an advisor who starts by telling you about investment results," she says. "Someone may have had great returns in 1999, for example, but that might have been because of taking too many risks, with investments skewed toward hot sectors. Those types of portfolios were the ones hurt the most in the bear market that followed. An advisor who believes in asset allocation may not have great one-year results, but he or she will have outstanding long-term results."

* Talk money. "You should always ask how an advisor will get paid," says Brackens. "Fees that are too low may be just as dangerous as fees that are too high. An advisor has to get paid, so low fees may mean that the advisor's compensation will be driven by selling you things you don't need."

* Have realistic expectations. Inquire about an advisor's investment philosophy to see if it meshes with yours. "Ask what kinds of returns you can expect" says Brackens, "and don't believe an advisor who tells you that you'll earn 20% per year. Historical returns are about 10% to 12% per year in stocks and less in bonds, so the investment goals should reflect that."

STAY WITH IT

If you can find a trusted advisor, you might be more likely to stick with stocks, which should be to your eventual advantage.

Calling himself a "short-term and long-term planner," Jackson says that advisors should keep in touch with clients, helping them stay on course--provided that the course has been well set. And, he adds, "Clients need to cooperate with their advisors, too. One of my clients saw her assets go from $50,000 to $75,000 and then back down to $58,000. In her mind, she's `lost' $17,000, even though she's still ahead for our entire engagement. However, if she had returned my calls during the period her assets were sliding, we might have been able to hold down those losses."

A trusted advisor may be able to minimize losses and keep an investment strategy on track by providing support and perspective. Brackens notes that investing is very emotional, as people tend to want to pour money in at a market top, when stocks are most expensive, and to bail out at a market bottom, when stocks are cheap. "An advisor's job is to help keep those emotions in check," she says. "Your advisor should be standing at the edge of the cliff to keep you from jumping off."

What to Ask Your Advisor (Before You Make Your Choice)

When you're checking out financial advisors, here's a checklist of questions to ask, courtesy of the Securities and Exchange Commission (SEC):

* What experience do you have, especially with people in my circumstance?

* Where did you go to school?

* What is your recent employment history?

* What licenses do you hold?

* Are you registered with the SEC, a state, or the National Association of Securities Dealers (NASD)?

* What products and services do you offer?

* Can you only recommend a limited number of products or services to me? If so, why?

* How are you paid for your services?

* What is your usual hourly rate, flat fee, or commission?

* Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?

* Will you send me a copy of both parts of your Form ADV? *

* Are the firm, the clearing firm, and any other related companies that will do business with me members of Securities Investor Protection Corp. (SIPC)? ([dagger])

* This question is for registered investment advisors who must file Form ADV to register with the SEC or their state. The form contains information about an investment advisor and business operations, as well as disclosure about any disciplinary events involving the advisor and key personnel.

([dagger]) A clearing firm is a larger brokerage firm that handles trades for smaller brokers. The Securities Investor Protection Corp. is a private, nonprofit corporation that insures up to $500,000 worth of securities and cash in an individual customer's accounts at member brokerage firms. SIPC insurance protects you against the failure of those firms but won't cover your losses from market declines or fraud.

Broker Scams to Avoid

You made the commitment to work with a broker or financial advisor. Here's how to avoid being scammed:

* Licensed broker gives "hot stock tips" or pressures you into a "can't miss" opportunity. There are no "cant miss" investments. If your broker wants to rush you into something, beware. This may signal a "pump-and-dump" scheme, where scam artists create false excitement about a stock to get investors to buy and hold--driving the price up--then sell, leaving investors with shares of a worthless company. Don't ever feel like you will miss an opportunity to invest. Good investments are always available.

* Broker or advisor does not provide information about investments he suggests. If your broker doesn't respond to your request for more information about a suggested investment, or is reluctant to explain suggestions, he or she may be out to gain a commission. Avoid being steered toward investments that are not appropriate for your needs or may even be fraudulent. Failure to disclose information about investments is illegal. Make it a point to understand what you are investing in.

* Broker or advisor purchases securities or adjusts assets without consulting you first. While you may appreciate a proactive advisor, if he or she buys large blocks of securities without your approval, there may be another agenda. Moving your assets around unnecessarily could cost you high fees and commissions.

* Unlicensed individuals, such as independent insurance agents, selling securities. If an insurance agent offers to manage your stock portfolio, make sure he or she is licensed to sell securities. In many states, insurance agents, lured by high commissions, sell high-risk investments. Verify that an agent is registered to sell securities by calling your state securities regulator (usually the state attorney general). If the agent is not registered, don't buy.

For more information about broker scams and securities fraud, check out the following Websites: The U.S. Securities and Exchange Commission (www.sec.gov), The North American Securities

Administration Association (www.nasaa.org), FraudBureau.com (www.fraudbureau.com), and StockPatrol.com (www.stockpatrol.com).