It’s the sort of thing people ask friends and acquaintances. Recently at the gym I happened to overhear a conversation that began with this question. Unfortunately, I was on my way into the shower and didn’t get to hear the answer. It’s an intriguing question. What is a “good investment guy” anyway? At some point, you may want to find some investment guidance, too. What should you be looking for?

First, let’s just dispense with the assumption that it will be an “investment guy.” While it’s true that less than 20% of financial advisors are women, gender isn’t part of what constitutes a “good investment person.”

Do they have skill or are they just lucky?
Among the many measures of how good someone is perceived to be at what they are doing – managing investments – an obvious one is how much money they have made for their clients in the markets. But is this skill – or luck? Even large pension fund managers and their consultants are challenged by this question. And aren’t we all looking for someone (that “good investment person”) who knows how to “make money” in the markets? But what does this really mean?

It mostly boils down to whether a manager can outperform a specific benchmark, the S&P 500, for example. The S&P is an index of 500 of the largest companies on the U.S. stock exchanges. It is not “managed,” but is just a set list of stocks representative of returns on large company stocks. There is a longstanding debate as to the ability of “active” managers to beat a “passive” index, such as the S&P. Mounting evidence suggests that there is no consistent data to support the greater success of managers versus an unmanaged basket of stocks.

To summarize, in judging how “good” (at making money) the investment person is: 1. The manager must have a track record long enough to statistically suggest skill (which is difficult!) 2. The manager must beat the benchmark after deducting his (or her) fees. 3. The average person probably doesn’t need someone who can beat the S&P 500 or any other benchmark. For more on this topic see Why Isn’t My Portfolio Keeping Up With The S&P 500?

Possible Criteria
What are some other criteria for assessing a “good investment person?” Certainly experience, education, “smarts,” and a certain pedigree contribute to credibility. But it may be more important that the person knows you, understands your goals and what you need your investment assets to do for you. How might your values come into play? Do you want investments directed toward some social good, or away from those businesses that don’t align with your beliefs? How much risk can you take to reach your goals? Does your advisor have a sense of this?

The Value of Education
One of the ways an advisor can serve you best is by educating you about his or her process. Investing does involve risk; becoming informed about the level of investment returns over the long term can be helpful in preparing you for those times when stocks decline – sometimes precipitously. Having someone who has experienced these types of markets and can help keep you calm (and sticking to your investment plan) is valuable.

In conclusion, it can be hard to tell whether an investment person’s history of success is due to skill or perhaps a streak of luck. Every year, there are lists of the top-performing mutual fund managers. People will typically jump on the bandwagon of a manager on a “hot” streak, often to be disappointed shortly thereafter as the manager’s performance goes south.

Apparent success at making money for clients is just one factor. Look for someone with appropriate credentials (CFP, Certified Financial Planner, and/or CFA, Chartered Financial Analyst, are two excellent ones.) Find an advisor willing to get to know you; your needs, wants, and values. He/she can help you assess your ability to assume risk, estimate the kind of returns you’ll need to reach your investment goals, and construct an appropriate portfolio of investments. If you have trust in this person, and know that he or she will be there for you with education and a steadying hand, you will have found your “good investment person.”