Suze Orman Money Matters

Whenever anyone tells me about a financial problem (and this happens several times a day), they invariably get around to what led them to make a certain investment or financial choice in the first place.

I tend to hear one of the following:

• My mother/father/uncle/cousin/aunt told me it was a smart move.

• It's what everyone was talking about at the office.

• It's what my mortgage lender/financial adviser/broker/insurance agent told me to do.

I then ask them, "What did you think about that choice when you made it -- did you feel confident that it was the best thing for you?" Typically, this gets a blank, guilty-looking stare. Because often, the truth is that they didn't give it much thought at all. Instead, they just relied on the advice of someone else.

Get Involved with Your Money

That's their real mistake. Not the actual investment or the choice they made, but the fact that they didn't take full responsibility for figuring out for themselves if the advice was the right advice.

Don't worry, this isn't going to be a blanket condemnation of anyone doling out personal finance advice -- there are plenty of people who do a terrific job of steering people in the right direction. But the real issue is that you have to know enough, and care enough, to put in the time to make sure that the advice you get is in fact best for you. I've said this before: No one will ever care more about your money than you. So that means getting involved, and staying involved, with your money.

Still, I know from experience that plenty of people will never feel completely comfortable handling all their money decisions without some outside help. That's fine, as long as they stick with people who are qualified to do the best job.

Seem obvious? Then why is it that so many people end up losing money by following bad advice?

The Three Es

If you want professional help dealing with your finances, you need to know how to interview potential advisers. Most important, you need to make sure you put any potential hire through the Three E test: Experience, Expenses, and Execution:

Experience: Ideally, an investment adviser should have 10 years of experience. There's a lot to be gained from someone with a lot of experience, especially given that the past 10 years have included a dramatic boom and an equally dramatic bust.

That's a great opportunity when vetting an adviser: Ask them how they did from 1998 to 2000 and then from 2000 to 2003. It would be great if a potential adviser pulled out some client statements from the 2000-2003 downturn -- with all personal information redacted -- so you can see for yourself how the adviser had his or her clients positioned.

Expenses: The first expense you need to know about is how the adviser is compensated. You shouldn't have to ask; a quality adviser will explain his or her fee structure up front.

Personally, I hate the commission setup -- there's just way too much room for a conflict of interest when someone needs to sell you products or trade stocks and funds in your account to make a living. I much prefer when payment is made as a set fee for consulting work (on an hourly basis, say) or, if someone will be managing your money, you agree to a fee that's a percentage of your assets (typically 1 percent or so).

The other crucial expense conversation you need to have revolves around the types of investments the adviser uses. If you're paying 1 percent for someone to manage your money and then another 1.5 percent or more in a mutual fund's expense ratio, that's a combined 2.5 to 3 percent in expenses that'll be deducted from your gross returns.

In a market environment where 8 percent returns are seen as bullish, you're potentially losing 30 percent or so of your returns to cover fees. If you're paying someone 1 percent or more to manage your money, it should be invested in individual stocks. As for mutual funds, there's no reason not to handle them yourself -- it's not too hard to build a diversified long-term portfolio with just a few index funds or ETFs.

That said, if you're more comfortable working with an adviser, at least make sure they favor the lowest-cost funds. If you find out the adviser puts clients in funds with the letter B in the name -- also known as "B shares" -- that's not a good sign. B-share funds have very high expense ratios because part of the fee you pay is in fact a commission for the adviser/broker who sells you that fund. If you're already paying an adviser 1 percent for your agreed fee, why agree to have them make more money off you by selling you B shares? That's an adviser who's not looking out for you.

Execution: If you're hiring someone to manage your money, be very careful: No reputable adviser will ever ask you to write a check directly to him or her. Your money should be directly deposited at the firm -- a brokerage or fund company -- where your money will be invested.

If practical, it's useful to visit an adviser at his or her office, where you can get a good sense of the operation in person. You obviously want to see an organized and professionally run office.

When you meet with a potential adviser, pay close attention to the questions they ask. This can be hugely telling. For example, if you're married or living with someone, and only one of you is present at the meeting with the adviser, the adviser should insist that you reschedule for a time when both of you can be present. If there are joint investments and joint financial decisions to be made, a reputable adviser will insist on interviewing both parties; that's the only way to devise a financial plan that works for both of you.

Even if you think all you need help with is investing, be wary of any adviser who's willing to talk to you just about investing. A good adviser will start by giving you a thorough "workup" to make sure he or she understands your entire financial situation.

Staying Involved

Once you find an adviser you want to work with, please keep my earlier advice in mind: At the end of the day, you have everything riding on your money, so stay involved with it.

That means carefully reviewing your statements and making sure your adviser remains focused on what's best for you.