Do you believe that your financial adviser knows more than you do about how to make your money work for you? Do you trust that adviser to be ethical? These are questions investors are asking more than ever, since the losses of the past few years have depleted retirement accounts, and scandals have rocked Wall Street.


Trusting someone to handle your money, either personally or for your business, is a highly emotional decision. But most business owners are not experts in choosing investments or calculating the potential returns on their choices. You wonder how to find an adviser who is honest, knowledgeable and committed to helping you maximize your wealth, since the adviser gets paid whether or not you make money. That seems counterintuitive, since your customers would be unlikely to pay you for substandard electrical work.


Finding a financial adviser is a great relief for the average person who lacks confidence in his or her ability to understand the available products and analyze financial risks. We don’t want to spend our time wading through a prospectus or doing the calculations. Compounding the confusion, a working paper by researchers from the Cleveland Federal Reserve Bank (http://www.usc.edu/dept/chepa/IDApays/publications/do_financial_education.pdf) could not find a definitive link between financial literacy programs and improved consumer decision-making.


Therefore, we turn to the so-called experts to advise us how to invest our hard-earned money. Unfortunately, they don’t necessarily choose more wisely than the average consumer or business owner. University researchers from Michigan State and Notre Dame compared mutual fund managers to “dart-throwing monkeys” whose recommendations failed to produce returns that were superior to the choices of average people.


Of course, there are exceptions. John Bogle, who built Vanguard into the world’s largest mutual fund management firm—with nearly $3 trillion in assets—is known for doing more for individual investors than anyone in business history. Mary Callahan Erdoes, CEO of J.P. Morgan Chase Asset Management, has grown its equity by 30 percent to more than $2.5 trillion. Financial trader Paul Tudor Jones predicted the October 1987 “Black Monday” crash and doubled his clients’ money that year. His track record includes a 23 percent return in 2008, a year known for devastating losses in financial markets, and he has gone nearly three decades without a losing year.


The average investor, though, has no access to these high-profile mavens, and is left to search for a responsible financial adviser like a present-day Diogenes the Cynic, who wandered through the Greek town of Sinope searching for an honest man. Hoping for a Warren Buffet, this investor is just as likely to encounter a Bernie Madoff. What many investors don’t realize is that financial advisers have no legal obligation to act in the best interest of their clients. The wealth adviser or financial consultant is often simply a broker who recommends products based on commissions earned or the policies of the brokerage firm.


Recommending products that may have higher fees and lower returns benefits the financial adviser, but the cost to American families has been estimated at $17 billion per year. University of Chicago and University of Minnesota business professors issued a working paper that revealed 7 percent of financial advisers had been disciplined for misconduct ranging from trading on clients’ accounts without permission to recommending “unsuitable” investments.


At some major firms, the level of misconduct is higher, and repeat offenders are hired under a business model based on attracting high revenue generators and tolerating the risk and cost of their repeated disciplinary violations. Although half of the advisers engaging in misconduct are fired, 44 percent of them are hired by other firms within a year, and they are five times as likely to become repeat offenders.


The extent of this misconduct—and the loophole that allows financial advisers and brokerage firms to place their own profits above the interests of their clients—produced a new regulatory definition of “fiduciary,” issued by the Department of Labor on April 6, 2016. By definition, a fiduciary must prioritize the interest of the client and disclose actual or potential conflicts of interest associated with any products recommended to investors.


Under the 1974 Employee Retirement Income Security Act (ERISA), this change was a response to the shift from employer-sponsored defined-benefit plans to self-managed plans such as 401(k) and IRA accounts. Financial industry associations, investment firms and financial advisers will be scrambling to find their footing and obtain designations such as the Accredited Investment Fiduciary, and there are experts who argue that the Labor Department has actually diluted the quality of the fiduciary definition.


Next month, we’ll explore this subject further and provide more details to help you protect your wealth and find that honest financial adviser.