This article was first published in the Globe and Mail on July 13, 2024. It is being republished with permission.

by Tom Bradley

For many investors, managing their portfolio is just one of those things in life where they rely on an expert or specialist to take care of things. As for computer setup, auto repair, plumbing and insurance, if it’s Greek to you, then you’re totally dependent on someone else.

The late Glorianne Stromberg, a securities lawyer and investor advocate, referred to it as the “knowledge gap.” She said that “there are those who know and those who don’t. All the advantages go to people who know.”

When you’re going to cede power to someone who knows, the problem always is how to be sure they’re an expert and not an imitator.

Author Shane Parrish provides a great framework for this in his book, Clear Thinking: Turning Ordinary Moments into Extraordinary Results. His list provides a unique lens from which to assess where an investment adviser falls on the expert versus imitator spectrum.

Imitators can’t answer questions at a deeper level. I always recommend that people ask lots of questions when meeting with their adviser. Taking them off script reveals how much they know about a topic. A question makes it immediately clear if you’re getting a canned sales pitch instead of advice.

The best questions are the ones that pop into your head. They may include, “How will this fit into my portfolio?” or “What will it replace?” If it’s a product, “What does it cost and what are the risk/reward tradeoffs?” (there are no silver bullets in finance).

Remember, you’re the boss. The adviser is working for you. It’s never a dumb question if you don’t understand what’s being said or how something works.

Imitators can’t adapt their vocabulary. Like most industries, investing has a lot of jargon and acronyms. Again, don’t be afraid to ask what they stand for. And if you keep hearing the same hooks repeatedly, it’s time to be suspicious. There’s a grain of truth to old adages such as: you’ll never regret taking a profit; the trend is your friend; and the smart money is doing it. But an expert they don’t make.

Imitators get frustrated when you say you don’t understand. They can only change the words around and repeat what they said before. Experts react the opposite way. When I ask my tax accountant a question, he leans in and gives me a detailed answer. He’s keen to talk about what he knows.

If your adviser can’t explain something such that you understand it, then don’t invest in the product or strategy they’re recommending.

Imitators have a perfect record. You’ve no doubt heard this before. The adviser sold before the financial crisis and got back in at the lows. They got out of REITs before interest rates went up and shifted into large cap technology. In other words, they’re either the best investor that’s ever lived, or an imitator who isn’t grounded in reality. If it seems too good to be true, it is.

Experts, on the other hand, will tell you all the ways they’ve failed because it’s not “if” some strategies fail, but “when.” Investing is about managing through mistakes and learning from them.

Imitators don’t know the limits of their expertise. The investment industry is particularly prone to this. There are a lot of smart, type-A personalities who come across as knowledgeable about anything you want to talk about. Their expertise and track record in one area miraculously gets transferred to others where they don’t have the same knowledge. For instance, it’s common to see successful stock pickers delving into macroeconomic issues, and economists portraying themselves as market strategists.

It’s not always easy to determine what’s real and imitation, even with Mr. Parrish’s checklist. There are other warning flags, however, that I’ve written about previously. The person across the table is an imitator if they have a definitive explanation for why the market is up/down, if they claim to have a method for getting out of the market before a dip and back in at the right time, or if they’re basing investment recommendations on next year’s economic forecast. These are warning flags because the claims are impossible to live up to.

And if they don’t ask questions and fully understand your situation, they’re most assuredly a salesperson disguised as an investment professional. In other words, not someone you want to trust in an area you know little about.