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  • Glenn D. Surowiec

What should you look for in an investment advisor?

If you’re reading this, there’s a chance you’re already a client of mine. But other readers are DIY retail investors just looking for some investing insight and answers, and people in that category ask me often: Is it worth signing up with an investment advisor; and if so, what qualities or characteristics makes a good one?

These two questions are actually intertwined with each other. At the end of the day, an advisor or other professional should be able to invest on your behalf in a way you can’t do on your own. If they can do that, the answer is absolutely, yes, it is worth it. And if they possess the right capabilities, they’ll be able to do that. So what are those capabilities? I’d argue there are three foundational qualities you want in an investor:

  • An ability to dedicate their full scope to investing

  • An ability to make dispassionate decisions, and

  • The right skillsets – but probably not the skillsets you’d guess!

Let’s look at each one in turn.

1: Full Scope Dedicated to Investing

The first factor to think about is capacity.

This one is pretty obvious if you think about it. Most retail investors have full-time jobs. If they spend any time on investments, it’s in their personal time. That immediately limits their capacity for reading, exploring, interviewing, reviewing, analyzing, and decision-making.

By comparison, a full-time professional advisor can look at a much wider scope of companies than what the average person can look at, and that's important. This is why many retail investors, even if they do some DIY investment trades on the side, opt to work with some kind of financial advisor. That advisor can spend all day, every day building their experience and expertise in a field that really needs some degree of knowledgeability and mastery if you’re going to achieve consistent success.

In short, if they do this all day, every day, they’re going to have a greater capacity to learn about and respond to market conditions than any DIY, retail investor could hope to.

But while this factor is foundational, it’s not enough by itself to make a good financial or investment advisor. You also need someone who can engage in…

2: Dispassionate Decision-Making

The second issue is all about the emotional side of investing: an ability to weather the emotionality of the situation when making investment decisions.

This probably sounds like a strange quality to look for in an investor, but it’s actually critical. Having investing know-how is one thing; having a high emotional IQ is a completely different skillset, and it’s one that even many professional advisors lack.

To succeed, especially as a value investor, you have to be emotionally able to buy a position, only to have it go against you, feel that anxiety, and continue to do nothing because you know it’s a long-term investment with a sound thesis behind it. The average investor, and a surprising number of credentialed professionals, just can’t do that. There’s this illusion of control that kicks in and makes them think they need to act. Plus, all of us – even the pros – are surrounded by pressures to react to short-term fluctuations. They lose money briefly and then want to get out because they can't accept that they're losing money.

Dalbar, a company that studies investment and financial behaviors, published a study that showed the average investor earned below-average returns during a 20-year period ending in 2019. During that time period, the S&P 500 averaged 6.06% returns a year (rule of thumb: at 6% returns, you investment will double every 12 years). The average equity fund investor earned only average returns of 4.25%.

The reason? Emotionality. In their report, Dalbar writes, “One major reason that investor returns are considerably lower than index returns has been the fact that many investors withdraw their investments during periods of market crises.” In other words, if they’d just left their money in a fund tied to the S&P 500, they’d have done better.

Now think how well they could have done if they’d worked with someone who really knew what they were doing and had emotional fortitude to stick to the right decision even when it was scary or hard.

A good stock owner has got to be willing and able to go up and down. Look at Netflix and Amazon. Over the course of their histories, there have been lots of times they lost 50% in any given period. How many times was the average retail investor able to withstand that 50% drawdown and say, “I'm fine” or even “I'll buy more.” Most people don't act that way. So, they're inclined to do something financially irresponsible, even among the pros.

Unfortunately, this is a tough characteristic to evaluate before you sign up with an advisor. You can ask some questions around their philosophy of investing, but it might take a trial period to see how they handle those fluctuations and their emotional reaction to it. If they are inclined to read and learn a lot about the industries in which they invest, and rather than being hardwired for frequent action, they mostly just make a handful of decision periodically, they’re a good bet.

3: The Right Skillsets

It’s different being a stock picker than a stock owner, and the skills required vary between the two. We talked about being a good stock owner above; you have to be able to resist short-term fluctuations, including those that go against you.

But you also have to be a good stock picker to start with!

Look, it doesn’t take a Ph.D. to find success in investing, but it does require some degree of financial savvy, and our institutions are not built to teach people this kind of life skill. They teach us a lot of skills that are blocking and tackling, but they're not building the bridge.

Financial literacy – or just understanding basic financial concepts – is sorely lacking. Only 4 in 7 Americans are financially literate, according to Walden University. PwC has found that only 24% of millennials are financially literate. Older generations shouldn’t get too cocky, though: the Global Financial Literacy Excellence Center (GFLEC) has found that financial literacy rates are “lowest among those older than 65.”

One of the skills required is discernment.

Part of the rise of so-called “meme stocks” and other viral stocks is because ordinary retail investors are trying to emulate what seemingly more experienced and expert investors advise or do themselves.

The internet only makes this problem worse. Social media can sometimes be useful for learning about investing and gaining access to advice, but it’s not a reliable guide. One study found that when one investor experiences short-term gains, the trade or trading strategy will propagate across social media, but less successfully, so that overall it contributes to “the low success rate of retail traders.” I have no problem with cloning successful tactics! If others are doing A, B and C and are succeeding, then I should do A, B and C. However, parroting investment decisions without an understanding of the underlying thesis is a recipe for bad decision-making. What’s crazy is that even a lot of pros do this. Full-time investment advisors are just as vulnerable to the pressure to “keep up with the Joneses” as anyone else.

All investors, professional or not, need to bring a healthy dose of intellectual honesty to the table. None of us can be experts at everything, and too many people are in a rush to get rich. We have to invest in tune with our personal strengths and weaknesses, and that applies to the professionals as much as to retail investors.

So, when interviewing or assessing a potential financial advisor, ask them if there are areas that they’re not comfortable investing in. None of us can be an expert in all types of investments, in all investing strategies, in all investment vehicles, in all industries. If they’re intellectually honest about their knowledgeability and skill, they’ll be able to answer that question right away.



Glenn D. Surowiec
Registered Investment Advisor
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