You can easily hire people who claim to be good investment advisers. They hardly ever are. But there are several different kinds of downright lousy investment advisers, and it’s worth learning how to identify them. (See also: Mediocre Advice Is Best for Investing)
I group them into three categories: The delusional, the liar, and the secretly mediocre.
The most common sign of the delusional financial adviser is that they can tell you about all the winning trades they’ve made, but they don’t know the average annual return of their portfolio as a whole.
You’ll find this same trait in a lot of ordinary investors, as well — they’re full of stories of their investing successes. They may also have a few self-deprecating stories of investments that went wrong. But they simply don’t know what their all-in return actually is.
For the ordinary investor, this is no big deal. But for someone selling their investment expertise, not knowing whether their advice beats what you can get following mediocre advice should disqualify them completely.
There is one important subcategory of lousy investment adviser that might not show this sign. I call them the “lucky so far.” They’re usually young with a pretty new track record. Typically, they’re people who have a strong sense that one sector of the market — financial stocks, say, or precious metals — is the right choice for long-term investing. If they happen to get into the investment advising game right when their sector gets hot, they can produce outstanding investment returns, sometimes for a long time. Eventually the market turns against them and they lose a whole lot of their clients’ money.
Of course there are a few legitimately superior investment advisers out there. It’s really impossible to tell one of them from one of the “lucky so far,” except that once they establish a record of shifting from this year’s hot sector into next year’s hot sector for several years in a row, somebody rich will notice and pay up to get their advice. One pretty good indication is that you won’t be able…