An excellent way to identify conflicts of interest is to examine how the advisor is compensated. Here are some simple questions you should ask:
1. How do you get paid?
2. How much do I pay you?
3. Are you a fiduciary?
4. Are you entitled to any compensation, based on our working together, from anyone other than me?
5. Do you receive any extra compensation based on the products you recommend to me or that I purchase?
Note that you should ask each of these questions; they’re not exactly the same. (OK, the last two are basically the same, but it couldn’t hurt to ask twice just to be sure.) For example, compensation for many advisors comes partly in the form of sales-based bonuses or commissions for selling you certain products. After hearing the advisor’s answers to these questions, you’ll have a good idea whether there are likely conflicts of interest as well as how much you will have to pay the advisor and how often (e.g., quarterly or monthly).
Keep in mind that some people are unscrupulous, and some are outright liars. (Even Bernard Madoff was a SEC-registered investment advisor.) But going through these steps helps you minimize the risk of hiring the wrong one.
Also note that some people are both stockbrokers and investment advisor. They can wear two hats, which means you have to be clear on whether the fiduciary standard applies to your account.