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Know how your financial planner is getting compensated

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A study from the White House by the Council of Economic Advisers, published in February, estimated that financial advisers who have conflicts of interest cause $17 billion in losses every year to Americans, many of them in working and middle-class families.

And that's just for those who are using IRAs to save for retirement.

Part of the problem is that there's no governmental regulatory body that polices all financial planners. Investment advisers and brokers who sell bonds, stocks, and other financial products must be registered with the Securities and Exchange Commission or in some cases with state regulators. There's no such oversight for financial planners, who help clients with retirement planning, estate planning, saving for college, and other matters.

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Certified Financial Planner Board of Standards, a nonprofit that certifies and oversees financial planners, will investigate complaints it receives or violations of professional standards that the organization uncovers itself.

Consumer Reports recommends using financial planners who have the CFP designation. That indicates that they have passed a comprehensive certification examination provided by the board, have at least three years of financial-planning experience, and are committed to continuing education in financial concerns.

It's also important to make sure you understand how the financial planner you select is compensated. Some CFPs are fee-only, a term for those who charge clients a fixed rate for their services and don't earn commissions or bonuses when recommending financial products. Some are paid by commission or a combination of fees and commission. The CFP Board requires only that planners make it clear to clients how they're compensated.

Consumer Reports recommends fee-only advisers because they offer the most protection from inherent conflicts of interest. They charge a flat fee, an hourly rate, or a percentage of assets under management, usually about 1 percent.

To start your search for a fee-only adviser, Consumer Reports suggests going to the following websites:

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CFP Board (letsmakeaplan.org). You'll find a directory of financial advisers who hold the CFP designation along with information on how they're compensated. You can also find out whether an adviser is in good standing and whether the CFP Board has ever brought a disciplinary action against him or her.

National Association of Personal Financial Advisors (napfa.org). Members of this professional group, many of whom are CFPs, adhere to a strict fee-only standard. They can't accept compensation in any form from any source other than their clients. For those who advise on investments, NAPFA reviews a form they must file with the SEC ensuring that they haven't started to accept commissions and are still fee-only advisers.

Garrett Planning Network (garrettplanningnetwork.com). This national network of financial advisers includes only fee-only planners who charge by the hour. They're especially good at helping clients with smaller projects, such as determining how much life insurance they need or whether it makes sense to refinance a mortgage. Most of the organization's members are CFPs.

Of course, just because an adviser is listed with one of those networks is no guarantee of honesty. It's your responsibility to have ongoing discussions with the one you choose about fees and how they're calculated.

For more information, check out ConsumerReports.org/cro/richplanner.