Here’s the situation: the general public is really lousy at investing. Please, no emails from those of you who average double-digit returns by writing covered calls and buying puts or leveraging real estate. I am talking about the average investor.

Listen, I am not trying to be condescending. Investing is difficult even if you are a professional. Why? Humans are hardwired to be poor investors.

Fear and greed often get the best of us. We watch for and overreact to negative news. By the way, that overreaction served us well for millennia. When our ancestors heard there was a lion on the savanna, running away kept them from becoming dinner. Today, that sort of fear-inspired self-preservation can drive people to panic and sell at market lows. Then, when markets boom, greed kicks in, and we all decide to day-trade or speculate on real estate. It seems our very nature prevents us from following the most basic rule of investing: buy low and sell high.

Skeptical? Here is the evidence: Dalbar, an independent market-research organization, annually produces a detailed study of individual investor performance. The 2012 report revealed that investors in U.S. stock mutual funds earned an average annualized return of 4.25 percent over the last 20 years, compared to the Standard & Poor’s 500 Stock Index, which generated an 8.21 percent return.

The challenge is the general public doesn’t understand what to look for in a financial adviser to help. Most people think that the key is finding an Old Testament prophet who predicts every market move. During the credit crisis of 2008, a very bright hedge-fund manager by the name of John Paulson knew men who had been involved in creating and selling what would become worthless securities. Paulson made huge bets against these securities and made billions. His funds generated double-digit returns for investors while the Standard & Poor’s 500 fell 37 percent. Fast-forward to 2011 and three of Paulson’s funds were down 52 percent, 36 percent, and 18 percent, against a 2 percent gain for the Standard & Poor’s 500. Lesson: everyone is human and fallible, capable of a bad bet.

What is a better route for those who don’t have the first idea of how to find help? Morningstar, a reputable investment firm, recently engaged in an in-depth study that measures how investment advisers can add return to investment portfolios. The Morningstar report indicates that investors can earn an additional 1.82 percent every year—which, compounded over a lifetime of investing, could yield almost 30 percent more income for a retiree—if they make good decisions in five important areas of financial planning. 

Asset allocation: how your money is invested in broad asset classes such as stocks, bonds, and real estate. Investors should strive for diversification and ask questions about the return and risk of these various asset classes. I recently met a retired couple whose broker had placed half their money into Master Limited Partnerships, which invest in energy. These MLPs have had a tremendous historical track record, but if energy markets falter or a fund cannot execute its strategy, the portfolio could be in for a volatile ride.

Withdrawal strategies: involve not only how much money you can withdraw from your portfolio but also from which assets and in what order. One withdrawal strategy would be to set up limits on the amount of money you take out of your portfolio based upon values. For example, you have $1 million and are taking $40,000 annually from your portfolio (a 4 percent withdrawal rate). If your portfolio drops to $800,000, you are now taking out 5 percent from your portfolio every year (a 25 percent increase). You could institute a guardrail, which would reduce your spending by 10 percent (to $36,000) until your portfolio recovers.

Tax efficiency: certain mutual-fund managers continually sell securities, creating capital gains for the investor; other funds pay hefty amounts of taxable dividends. If feasible, you could put these tax-inefficient investments in your IRAs and keep funds that hold stocks for long periods in taxable accounts. Additionally, for some, deferring income from their IRAs or retirement plans until they are older and possibly in a lower tax bracket can make good sense.

Product allocation: selecting a specific investment product—such as a mutual fund, ETF, or separate account manager versus guaranteed income products—is a critical part of return. Too many people look only at past performance without asking about the outlook for future returns. I see this in retirement programs where everyone picks U.S. small stock funds because recent performance has been the best. The stocks are expensive. No one has picked the international funds because they have lagged, but they are much better valued and most likely will be outperformers in the future.

Liability-driven investing: doing so with a plan toward a specific goal such as producing a certain amount of income during retirement or creating enough money for a major purchase. Your third-grader will start college in 10 years, so you purchase a 10-year zero coupon bond that matures in an amount equal to projected college costs.

Those are the five key areas that Morningstar identified. Next, of course, is finding an adviser who can guide you through the decision-making process. A good place to start is the list you’ll find on page 113. These are all Certified Financial Planners who were chosen by their peers, and advertising is never a consideration. No matter how you begin your search, here are points to consider.

Credentials: the most esteemed designations include the Chartered Financial Analyst (CFA), which denotes someone who is most likely very involved in the investment aspect of the profession; the Certified Financial Planner (CFP), which involves investment work as well as other financial areas (estate, tax, and insurance planning); and the Certified Investment Management Analyst (CIMA), which, like the CFP, engages in multiple financial areas. All of these designations require challenging exams. In the cases of the CFP and CIMA, there are continuing education and work requirements. Some advisers also hold designations in allied professions such as a CPA or JD.

Custody: the custodian is the organization that will hold your assets and should be well-known and easily researched. Schwab, Fidelity, and Morgan Stanley are examples of custodians. Never write a check to an individual adviser (which proved so costly for investors in the Bernie Madoff Ponzi scheme) and make sure investment statements originate from a third party and clearly detail individual securities, ticker symbols, and balances.

Experience: investment cycles can last five years or more. With this in mind, you would be well served to hire an experienced adviser with at least 10 years in practice. Also, ask the adviser about his or her daily duties. If you are seeking investment advice but your adviser spends the majority of the day dealing with estate-planning issues or insurance, then that adviser may not be the best match.

Compensation: some advisers make a commission, and others work on a fee basis, while others are compensated by both. You may be fine with either method, but know that the criticism of commission-based advisers is that they may be more interested in the commission rather than the best interests of the client. The other most prevalent form of compensation is a fee based on assets under management, which can also pose a conflict. Suppose you pay a fee to the adviser, then they pay the underlying investment managers. The adviser might be tempted to keep more of the fee by engaging a cheaper but less-accomplished manager. A more conflict-free approach would be for the adviser to disclose his or her fee and the fee paid to the underlying managers.

Other costs: in addition to any fees or commissions paid directly to your adviser, you also will pay fees to purchase securities or to hire investment managers recommended by your financial adviser. These investments could be index mutual funds or ETFs that buy a basket of predetermined securities or active managers who pick individual bonds and stocks. They all have a cost, and you should understand this cost. Investment fees reduce performance, so lower-cost investments have an edge on higher-cost managers who invest in the same manner. Ask the adviser what your costs would be in total, with their fees and the investment fees. If you see total fees at 2 percent or above, you should also see a compelling performance record.

Background checks: the Securities and Exchange Commission provides a valuable resource for conducting due diligence on Registered Investment Advisers. Anyone can go to sec.gov and view an ADV. This document will review the advisory firm’s services, assets under management, number of years the firm has been in business, and whether it has been subject to disciplinary action.

References: ask friends and colleagues about their own adviser. Then request three to five additional references from the adviser, preferably clients who are similar to your demographic profile and net worth. Incompetent advisers may struggle to provide this many solid references. 

Written contract: an adviser’s entire offering should be well-documented within a written contract and should outline the entire scope of the relationship. What type of investments will be purchased? How much risk are you willing to tolerate? Are other services being offered, such as tax and estate planning, and at what frequency? Compensation also should be clearly disclosed in the contract. If you are not comfortable with the provisions of the agreement, then search for another adviser.

In summary, you should understand that a successful relationship with a financial adviser involves much more than the selection of investments. Planning issues involving varied areas of expertise, such as tax planning, retirement planning, and estate planning, also play crucial roles in your long-term financial well-being. Finding an adviser who has a clear and systematic process in these key areas will improve your rate of return and mitigate the adviser’s cost. Understanding the eight areas above will also guide you in finding a firm that can best help you in reaching your personal financial goals.