If you feel that your super‐smart friend’s recommendation is sufficient due diligence, or you believe everything you hear from a cocksure financial guru, you are bound to wind up being the sucker at the poker table or the conference room table (i.e., a loser with no winnings).

In today’s world of 24/7 online advice, with so many gurus claiming to know which way the market is headed and when the Fed will “taper,” how can you discern who is really the best? This chapter will show you how to avoid being suckered—that is, how to see past the glitz and your own very human tendency to believe false promises.

What’s in this alphabet soup?

There are myriad credentials, so you’d better grasp why some advisors’ cards look like half of the alphabet soup bowl (e.g., CFA, CIMA, CFP, CPWA, CWC, SPWA, etc.). Hint: Not all letters are created equal. Too many initials on a business card may be a red flag. Watch out! Ask what the initials mean and how this person actually earned them.¹

Three credentials, the Certified Financial Planner (CFP), Personal Financial Specialist (PFS), and the Chartered Financial Analyst (CFA), require a rigorous study regime and several exams and employ experience criteria as well. Most importantly, these professionals must adhere to a code of ethics and abide by certain principles or risk losing their designation. In the case of the CFP, there is an annual continuing education requirement.

How to take charge and avoid being a sucker

You do not need to memorize what each set of initials means. Just realize that some are more easily earned than others, and can mean little in terms of how you actually benefit or the expertise of the advisor. The letters after a name are meant to impress you, so don’t be too impressed until you fully understand how relevant and demanding the designation is. It may come as a surprise that there are several things you do not have to do, much less memorize! Then there are those things that you need to avoid doing.

We’ve met the enemy and it’s us!

A real problem is that investors don’t do what’s good for them. Research studies (Thaler et al.²) of individual investors show that over and over again, we buy high and sell low, when ideally, we should be doing just the opposite. But who is courageous enough to buy stocks as they are falling? Isn’t it more comfortable to follow the crowd getting into the market as it’s going up? These same studies from actual brokerage accounts show how overconfident investors are, especially men. While men tend to believe that they don’t need an advisor, women sometimes abdicate, believing they cannot possibly learn all the jargon of markets, managers, and advisors.

Ditto with active versus passive investing. Studies show 80 percent or more of active long‐only money managers underperform the index they are hired to beat—before fees and taxes!³ Yet investors still want to believe they can be the exception, and hire a fund or manager that beats the index.

So why don’t more investors simply place their assets in passive vehicles, like an S&P index fund or exchange‐traded funds (ETFs),⁴ and go off to enjoy the rest of their lives? The answer is as old as human nature. Groucho Marx didn’t want to be a member of any club that would have him. So, too, with many well‐heeled investors. Instead, they prefer to join what they consider to be the exclusive “Smart Money Club.”

Unfortunately, certain consultants (and others advising high‐net‐worth investors) might boast that they can get their clients entry into “closed” managers. When hiring an advisor or a hedge fund, too many investors miss the subtle signals that they may have been fooled—and actually believe that they (and only they!) have been invited in.

You can’t get past that velvet rope

Don’t be lured by the promise of getting into a “closed fund,” or an exclusive circle of investors lucky enough to be “allowed” to invest with a “brilliant” manager who “doesn’t just take just any investor.” You need to accept that there is a caste system in the world of investments that may exclude you.⁵ A few brilliant managers⁶ have been known to close their funds, or prefer huge clients (who give them at least $100 million). Some managers prefer to do what they love—managing money—and may be more profitable by doing so. Not as many money managers really relish client service, much less gathering assets. These dedicated investment pros much prefer looking at their Bloomberg to wining‐and‐dining their clients.⁷ Until you accept this fact of life, you will keep being tempted to look for—or worse, buy your way into—that mythical “Smart Money Club.”⁸

So why not just go passive, index it all, and be done?

Your portfolio is not a few pounds of excess weight, but rather your hard‐earned, precious nest‐egg. This distorts your reasoning. Does anyone who’s trying to protect a most precious treasure feel comfortable with a passive approach, that is, going on autopilot?⁹ Of course not! That sinking sense of just letting go and letting others worry is exactly why index investing is sometimes dismissed. As Charley Ellis observed 40 years ago, “The investment management business . . . is built upon a simple and basic belief: Professional money managers can beat the market.” And as Ellis also pointed out, “That premise appears to be false.”¹⁰

Timing is everything, whether you choose active or passive

In a recent online dialogue, an investor voiced a depressing reality.

[When] you do find active management outperforming the benchmark, it is for short time periods . . . take the Fund, which . . . outperformed over the long term. Who knew the key guy there would hire [a family member], who [then] forced out some great investment talent, and made an impressive series of terrible investments?

Investors who retired in 1999 and placed their retirement monies into passive equity vehicles (the market was booming) finally got back to even 14 years later! The Internet crash of 2000 did major damage to all those who had placed 100 percent of their money into equity at that frothy top of the market.¹¹

Adding insult to injury, the financial media’s 24/7 drumroll keeps you searching for that next fabulous investment. The poker game looks so easy!

Insurance against suckerdom

Hire an advisor who helps you perform asset allocation among stocks, bonds, and other assets. David Swenson, whose returns for the Yale endowment are the envy of many, put it succinctly: “Asset‐allocation decisions play a central role in determining investor results.”¹² If you had heeded that advice, you would have avoided putting 100 percent of your money into equity in 1999. Your advisor also helps you rebalance when your allocation gets out of balance, which helps you avoid the classic mistake of buying more at market tops (think real estate in 2005) and selling at market lows (think March 2009). An advisor can also help you buy individual stocks, if you insist, but most advisors will recommend that you use funds or hire money managers for the bulk of your assets. If you keep a small portion to play with, you won’t lose quite as much when you fall in love with that hot new tech stock or venture capital fund.

Does being an accredited investor make you smarter?

You might think those with the most wealth would be the smartest. The SEC apparently believes this, too, given their regulations, but nothing could be further from the truth. Making a fortune from your software firm calls upon a very different set of skills than managing your own portfolio or selecting funds or money managers. As the SEC views it, being an accredited investor¹³ means you have enough money to know better—and that you are well equipped to perform your own due diligence on an “unregistered” manager or a “special situation” fund that heretofore only the most sophisticated and savvy could access. How exciting! Is this, then, the “Smart Money Club”? No! Being accredited by the SEC does not bestow keener observation powers or wisdom when you pick managers or hedge funds.

Hear that pitch!

Interview many possible advisors as well as money managers. Be open to hearing the pitch because you then become very familiar with what these marketers do and say in order to gain your admiration—and your assets. “Practice makes perfect” should be your motto.

The first time a money manager tells you he “eats his own cooking,” you think, “Wow, I’m impressed. This manager’s money is invested right alongside mine, so that’s terrific!” Several presentations later, however, as more managers say the same thing, you realize that their “cooking” might be awful (read: too risky).

That the chef eats it, too, isn’t necessarily proof that it’s good food!¹⁴ The first time a salesperson tells you he or she is “client‐ centric,” you might be impressed—but the fourth time you hear it, you can be appropriately skeptical and ask exactly what that means.

One investor found a clever way to listen to presentations. Before the meeting, he required the firm to email or send ahead the full presentation book and all appendices. Then, during the face‐to‐face meeting, he insisted that the presenter just talk—without the loooong presentation book. He began by asking: “Tell me how I might benefit from employing you.” Or sometimes even more specifically: “Tell me how do you differ from the five other firms I am interviewing?” Only after that first meeting did this investor ask for references and his friends’ opinions.

A happy ending—you’re no longer the sucker at the table!