It's the hardest question to answer in personal finance: Who can you trust (or, as my mother would insist, whom can you trust)? There's a world of self-serving advisers out there, laser-focused on getting a piece of your retirement savings.
I'd say, "Trust no one," but that's not practical when you're trying to manage money to last for life.
The better approach is to understand where your adviser's self-interest lies and ask yourself whether you can work around it. Surprisingly, the biggest hurdle you might have to overcome is your own polite tendency not to contradict what your adviser says. You might even agree to invest in something you suspect is not altogether good. Yet, as studies consistently show, many advisers often will give poor advice in order to earn more for themselves.
For a great example of both of these propositions, take a look at a recent experiment done by Sunita Sah, assistant professor of business ethics at Georgetown University in Washington, D.C.
She set up two lottery choices, one with much better prizes than the other, and divided groups of volunteers into "advisers" and "advisees" (think of the advisees as "clients"). Some advisers were promised a reward if they recommended the poorer choice and the clients followed their advice. Over three-quarters of these advisers did exactly that.
What especially fascinated me about Sah's study is that half of the clients decided to follow the poor advice, despite the fact that it was obviously bad. When the adviser's conflict of interest was specifically disclosed to them in advance, the clients were even more inclined to go along. More than 80 percent of them chose the poorer option, while also reporting that they thought the other choice was more attractive.
Why does this happen? Sah calls it the panhandler effect. Some combination of social pressure, desire to cooperate and awareness that the adviser is asking for a favor (the "panhandle") can lead us to make a decision that's against our own financial interests. Clear disclosure of the conflict of interest — supposedly a boon to consumers — actually works against us, emotionally. We don't want advisers to think we're mistrustful, so we agree, sometimes reluctantly, to what they want.
The lesson from Sah is that you're vulnerable in ways that you hadn't known. Your best defense is to stay away from the kinds of advisers most likely to lead you wrong.