It's hard to put a price on good financial advice. Accurate, objective, timely guidance can make you thousands of dollars and prevent costly mistakes.

Among other sources, you could get that advice from some sort of financial advisor. We here at The Motley Fool make it our mission to highlight the poor job Wall Street as a whole does for its customers. I was once a full-service broker, and I can tell you that the big-name brokerages do little to teach their "advisors" how to give good advice. Most of the training is about how to make a sale.

Each month in my Rule Your Retirement newsletter, I interview some of the best and brightest in the financial-planning world. One such person is money manager Rick Ferri, CEO of Portfolio Solutions and author of All About Asset Allocation. Here's what he told me about a conversation he had with the president of his former firm:

He said, 'Look, let me explain to you what we do here.' I knew what he was going to say. He didn't have to; it certainly wasn't to the benefit of the clients. It was to the benefit of the firm. That was the bottom line.

Yet I can also tell you that I have worked with and met many knowledgeable and ethical advisors. They do exist, and they can be worth their weight in oil. You just have to dig deep to find them.

Start by seeing what customers are saying. Last year, J.D. Power & Associates released a survey of clients at 20 full-service brokers. The top three for overall customer satisfaction were Edward Jones, Raymond James (NYSE:RJF), and Wachovia's (NYSE:WB) A.G. Edwards. A bit farther down the list were Vanguard, Merrill Lynch (NYSE:MER), and Citigroup's (NYSE:C) Smith Barney, coming in slightly above the industry average. Wall Street heavyweight Morgan Stanley (NYSE:MS) ranked a below-average 13th place.

Once you've lined up a few candidates, you'll want to ask them some questions to make sure they know what they're talking about. That's what this article is about. Any advisor who can't satisfactorily answer these five questions isn't worth your time or money.

1. Can you explain your practice of asset location?
This question will elicit a blank stare from many advisors. Perhaps they'll ask, "Do you mean asset allocation?" To which you'll reply, "No, I mean asset location" -- which investments should go in tax-advantaged accounts like IRAs, and which should stay in taxable accounts.

This is a crucial decision, one that can add 15% or more to your after-tax wealth (according to research done by economists Robert Dammon, Chester Spatt, and Harold Zhang). Some investments have built-in tax advantages, which are nullified if those investments are placed in tax-deferred accounts. For example, qualified dividends are taxed at no higher a rate than 15%. However, if those dividends are withdrawn from a traditional IRA, they'll be taxed as ordinary income -- as high as 35%. Make sure your advisor knows all the tax consequences of placing different investments in different accounts.

2. What percentage of assets can I withdraw from my portfolio in retirement?
If you plan to retire in your 60s and your advisor responds with a recommended withdrawal rate higher than 5%, strongly consider heading for the door. Numerous studies have shown that the withdrawal rate that would have survived any 30-year period over the past 130 or so years is just around 4%. It's a very safe withdrawal rate, so some will argue that 5% is manageable if you can alter your lifestyle based on market conditions. But anything higher is taking on a big risk that you'll outlive your money.

3. When should I begin receiving Social Security benefits?
There's no one right answer to this question -- you just want to make sure your advisor knows the rules. You have a "full retirement age" (FRA), the age at which you'll receive your full Social Security benefit. For example, the FRA for people born in 1941 is 65 and eight months. The FRA gradually moves up to age 67 for people born in 1960 or later. You can begin receiving Social Security before then -- as early as age 62 -- but then your benefit will be reduced permanently. And if you take the benefit early, but continue working, you'll have to give back $1 in benefits for every $2 earned from work above an exempted amount ($12,960 in 2007).

This should be a pretty easy one for an advisor to answer. If your advisor can't give you a convincing explanation, you know you haven't found the advisor for you.

4. To whom should I leave my IRA -- my spouse, my kids, or my estate?
Here's a crucial aspect of estate planning that you (and your advisor) must remember: The beneficiary form you fill out for your investment accounts and insurance policies trumps your will. Did you name your ex-spouse as the beneficiary on your life insurance policy, but state in your will that your current spouse gets that money? Guess who will get it when you join that Great Golf Resort in the Sky? That's right -- the ex-spouse.

This is an even more important point when it comes to IRAs. If you don't leave it to anyone -- or just leave it to your estate -- it may have to be liquidated soon. However, if you do right by the beneficiary form, your heirs can keep that tax-advantaged growth going for years and years. The exact solution varies by individual, but generally, you should make your spouse the primary beneficiary, with your kids as contingent beneficiaries. If your advisor has a different recommendation, make sure there's a good reason for it.

A couple of bonus IRA questions for your advisor:

  • "I'm not yet 59 1/2, yet I might need to take money out of my Roth IRA. Can I do that without paying taxes and penalties?" The answer: Yes, as long as you take out the contributions. The earnings may be subject to taxes and penalties.
  • "What should I do if I inherit an IRA?" The answer: Do not try to put it in your own name. Rather, keep it in the decedent's name, but for your benefit -- something like "Charles Dickens, deceased, IRA for the benefit of Charles Dickens, Jr., as beneficiary."

5. Are you going to ask me about my debt?
Any good financial plan begins with a discussion of how much someone owes. Any financial advisor who doesn't bring up debt at some point isn't looking at the whole picture. Of course, if the advisor gets paid via commission, he or she has no incentive to ask about this -- more money stands to be made if you invest your extra cash with him or her, rather than pay off debt.

Now, some debt is OK -- for example, many good advisors recommend that people never pay off their mortgage. There are solid reasons for that (as well as reasons to pay it off). But high-interest credit card debt should always be paid down first -- and any advisor who doesn't ask about debt isn't doing a thorough job.

Keep your advisor accountable
The best defense against exploitation is knowledge -- even if you work with an advisor, you have to know enough to know whether the advisor knows what he or she is doing. We provide such knowledge in our Rule Your Retirement planning service -- including the answers to these five questions and much more. Plus, starting this week, we're beginning an eight-lesson online seminar called "How to Plan the Perfect Retirement." The course is free to all Rule Your Retirement members, so reserve your seat by subscribing today.

This article was first published on June 9, 2006 as "The Advisor Competency Quiz." It has been updated.

Robert Brokamp would like to thank all the mutual fund companies who provided free lunch back in his broker days in hopes that he would sell their mutual funds. The Motley Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.