If you can always spot the patsy, you can go read the Rule Breaker now because this column isn't for you. It's for the rest of us.
Here's the bad news first. If you want a reasonable chance of not being fleeced in the financial marketplace, you (that's right, you and you alone) need to educate yourself. The more ambition you have for your investments, the more you need to educate yourself.
For example, if you just want to keep pace with inflation you can leave your money in a savings account or money market fund. That takes a little bit of education, but not a great deal. If you want to match the market, you can simply buy Spiders (AMEX: SPY) or invest in an index fund. To do this you need to know enough to set up an account with a reputable broker and decide which option is best for you, compare expenses among various offerings, and make sure that the fund you pick does indeed mirror the S&P 500.
That's doable for most people, but if you don't want to be the patsy, you can't just walk into Bull Sterns and say "Please put this money in an index fund" without knowing enough to at least specify a no-load fund with an expense ratio below 0.25%. You could end up like Suzy Wide-Eyes did yesterday paying thousands of dollars in expenses while lagging the market.
It's quite conceivable, though, that someone relatively young with the modest ambition of growing his or her savings right along with the U.S. economy can spend a few hours getting educated, set up an account with an automatic deposit feature, and never give another thought to it until he or she retires a millionaire. (It will take 35 years with a return of 12.3% compounded, in a Roth IRA account with a $2000 contribution every year. The S&P 500 has returned a compound annual growth rate of 12.3% over the past 35 years.)
If you want to do better than that, your education really begins. Remember, the education part is necessary only because you want to do better than the market. If market returns are all you are after, lucky you -- it's easy and cheap to match the market.
But if you think you can beat the market by trusting someone else to make investment decisions for you -- you're the patsy.
Your education does not necessarily have to be about stock picking. You can rely on professional help, follow one or all of our model portfolios, or consult Madam Ruth. But if you choose to rely on someone or something else, you must, absolutely must, pick that person, strategy, or portfolio rationally. The fact that the guy at Merrill Sminch remembers your cat's name doesn't qualify.
(If you think people don't make decisions like that, come read my e-mail! If you think you would never be such a patsy, think about how you react to someone who really knows his sports statistics.)
I'm not going to give you a surefire formula for telling if someone is both trustworthy and competent. Anyone selling that formula is working for the gypsy with the gold-capped tooth. All I can do is tell you that you need to be aware of why we trust people (yesterday's column deals with that) and a few general guidelines.
1) Consider yourself for the job first. Most people can learn to manage their investments and beat the market if they are willing to put a bit of time into it.
2) Read. Read The Motley Fool. Read other websites, books, newspapers, etc. When you're ready to pull your hair out, read The Motley Fool again. I didn't say to trust us blindly, but consider what we offer in light of what's out there. When you decide on which source or sources you prefer, dig in, but always with a skeptical mindset.
3) Look for sources of information and advice that don't profit when you lose money.
4) Check out the advisor's past record. (Past performance is no guarantee of future results, etc., etc., ad infinitum, but it's better than a warm handshake.)
4) Learn what the result of bad advice is. Bad advice is advice that has you losing to the market (and you need to know how to find out how the market is doing) over a five-year period. Nothing is going to win every year, but there is no reason to settle for a five-year average that's below the market.
5) If your advisor starts to "smell" wrong, don't get all emotional about looking for a new one. And don't let yourself be intimidated, either. Any advisor who scares you or guilt trips you into staying needs to be dumped fast.
6) If you have been fleeced, learn from your mistakes. Most fleecings are not illegal -- they are simply the result of investor ignorance and/or inattention, or advisor incompetence and/or indifference. If you think your advisor did something illegal or unethical as opposed to slimy and stupid, contact the Securities and Exchange Commission.
Speaking of the SEC, they have an excellent Investor Education and Assistance site that I recommend to anyone who invests or is thinking about investing.
The last bit of advice is to read. I already said that, didn't I? Well, I'll say it a third time. Read.
Fool on and prosper.