Choosing a financial planner: 5 red flags

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With the New Year and our finances top of mind, some friends have been recently asking me for ways to find a good financial planner. I, personally, don't have a planner (yet), but encourage people who don't know where to start to first consider speaking with an impartial, fee-based financial advisor via independent groups like the Garrett Planning Network or the National Association of Personal Financial Advisors.

Of course, you may also choose to work directly with a financial planner employed at a brokerage such as USAA, Vanguard, Citibank, etc. Perhaps begin by asking your friends and family for their recommendations. The difference is that these planners may work on commission, which may create a conflict of interest in their investment recommendations. When interviewing potential planners, definitely ask how they get compensated, whether it's through a salary, commissions, fees based on assets managed, an hourly fee or a flat fee.

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Compensation details aren't always readily available. In fact, Consumer Reports researchers recently put the nation's biggest brokerages to the test and found that few advisers volunteered information on how they were getting paid. If that's the case in your first meeting, take this as a big red flag. CR gives four more red flags to watch out for when searching for a financial planner, based on their investigation of more than a dozen brokerages:

Variable annuity pitch

Even if you are approaching retirement, be cautious if a planner pitches variable annuities in your first meeting. This happened to one undercover CR researcher in her mid-50s. While annuities offer guaranteed income to pre-retirees, they carry major fees, larger than many other types of investments. Recommending a variable annuity to a client requires a lot of analysis and isn't first-meeting material, a CR judge concluded.

Focus on proprietary funds

While the store brand is fine when buying cereal or laundry detergent, it's not necessarily the best quality when it comes to investments. Yet, researchers found that some financial advisors recommended funds mainly from their own investment firm. It's no surprise why, but if there's a lot of insistence that you stick with the house's funds - despite asking about alternatives - consider that a red flag.

Target-date fund recommendation

I'm a big fan of target-date funds, so I was curious as to why CR considered this a potential red flag. Their reasoning is that, while target-date funds are good options for investors who want more control over their investments with little hassle, a recent CR lab study of more than 150 target-date funds found many carrying high expenses, which weighed down on fund performance. Ask your adviser to disclose all costs and alternatives.

Silence on fiduciary duty

An adviser's fiduciary duty is an obligation to act in the best interest of you, the client. Yet, in CR's test, none of the branch-office and phone advisers at the brokerages and banks disclosed this. (Note, if you're working with a "broker" he or she need only make "suitable" recommendations since brokers work under different standards, but when in doubt, always ask the adviser to provide his or her credentials.)

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    Farnoosh Torabi is a personal finance journalist and commentator. She is the author of the new book Psych Yourself Rich, Get the Mindset and Discipline You Need to Build Your Financial Life. Follow her at www.farnoosh.tv and on Twitter at @farnoosh.

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