Should you invest in DFA funds?

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Rick Ferri
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Should you invest in DFA funds?

Post by Rick Ferri »

Boglehead Allan Roth's new article is sure to create a fire-fight as he explores this question, starting with mediocre Morningstar ratings:

Should you invest in DFA funds?

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chaz
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Re: Should you invest in DFA funds?

Post by chaz »

I'll stay with Vanguard.
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Taylor Larimore
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Re: Should you invest in DFA funds?

Post by Taylor Larimore »

Hi Allan/Rick:

Thank you for this interesting and seemingly unbiased article. I look forward to Part 2 in the series.

Best wishes.
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Re: Should you invest in DFA funds?

Post by livesoft »

I use a set of DFA funds as a benchmark against my personal portfolio. I believe I am using a fair benchmark in terms that my portfolio and the DFA portfolio have similar (a) US/foreign/bond percentages, (b) M* 9-box style grid numbers, and (c) Average market cap. My conclusion is that such a DFA benchmark is not impossible to best.
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Re: Should you invest in DFA funds?

Post by bschultheis »

I'm confused.

When taking into account Morningstar's opinion, are we supposed to rely on their star ratings?

Or, now that Morningstar says that star ratings are irrelevant because backward looking, and they have now gone to bronze, silver and gold ratings, should we use those instead?

Fortunately, for 99.99999 (did I say 9) percent of investors, whether they use DFA or Vanguard or iShares is far down the list on whether or not they will achieve their financial goals.

Whether they create a reasonable financial plan that focuses on saving and spending, revisit that plan, and stick with that plan in up and down markets, is high on the list.

Incidently, the Dec. issue of Fortune talks about the flow of money out of Bill Miller's fund, and how average investor captured only a fraction of funds return, buying high and selling low. The interesting thing about this is that in the article Don Phillips says Vanguard 500 investors acted the same during peek to trough of 1999 -2002 period.

To quote Phillips. . . "Indexing is just a lower-cost way of producing a bad investor experience."

I couldn't agree more.
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Re: Should you invest in DFA funds?

Post by ilmartello »

I look forward to the day when dfa funds are not only sold through advisers.
I wonder if that is in the pipeline . Is anyone on the "inside""
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Re: Should you invest in DFA funds?

Post by 1210sda »

If DFA is so wonderful, shouldn't they make their funds available to the investing public ?

Why would they deprive me of all this "Three Factor" and "tilt" benefit ?

1210
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Re: Should you invest in DFA funds?

Post by nisiprius »

To the extent that DFA funds are index-y, and I think they're supposed to be index-y at heart, I'd expect them to get three stars.

To the extent that I understand the DFA selling proposition, it is not that any DFA fund is intrinsically better at what it does, in the sense of more return or more risk-adjusted return, than (say) a Vanguard fund. The claim is that DFA funds are more sharply focussed on the asset classes they represent--and provide representatives of more, and narrower asset classes--and thus provide a purer palette from which slice-and-dice artists can mix their colors. Thus, it is possible that DFA funds could be no better than Vanguard's, yet also possible that a multi-asset artist could paint a better picture with them. That's the claim that needs to be assessed.

The only thing I know is that I don't have a large enough portfolio to justify hiring an advisor--and, while DFA has a convincing rationale for why they only work through advisors, I would still worry about the possibility of becoming dazzled by their air of exclusivity.
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Re: Should you invest in DFA funds?

Post by ScottW »

Bill isn't the only one who's confused. I'm not even sure what this article is trying to say.

We're taught that Morningstar performance ratings are at best useless and at worst destructive because they encourage people to rely too heavily on past performance and churn their portfolios, hopping from one hot fund to the next. Yet this article uses them as the foundation for deciding whether one fund company is better than another.

Furthermore, DFA is a specialty shop that tilts to small and value, while Vanguard favors a blended, cap-weighted approach. You cannot compare the two companies directly without providing context. Allan could have written an article comparing tilting versus non-tilting, or he could have compared DFA individual funds to their respective categories. For example, if DFA is the "expert" on small and value, have they delivered relative to other small and value funds? I'm going to an extreme here to prove a point, but what Alan did is similar to comparing a company that only offers international funds to only that is strictly domestic, and then asking which fund company is better, based solely on Morningstar's ever-changing past performance metrics. It tells you nothing.

Should you invest in DFA? Beats me--and unless you knew what you were trying to accomplish (something this article doesn't address) I have no idea how you could answer that question either. It's like the guy who starts worrying about which funds he should invest in before he's even figured out what his portfolio should look like.

There's been quite a bit of debate over the past few years over DFA versus Vanguard (admittedly less so after small-value hit a rough patch), and Allan had an opportunity to write an article with some real meat to it. Instead we got what I perceive to be a fluff piece based on relatively useless metrics.
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Re: Should you invest in DFA funds?

Post by Rick Ferri »

1210sda wrote:If DFA is so wonderful, shouldn't they make their funds available to the investing public ?
Why would they deprive me of all this "Three Factor" and "tilt" benefit ?

1210
They don't. Small-cap value investing is available from multiple fund companies including several ETFs. What's different is how each of the funds define value and size. It's all about the factors. Is DFA's method better? No. Is it worse? No. There are many roads to Dublin.

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Re: Should you invest in DFA funds?

Post by Grt2bOutdoors »

1210sda wrote:If DFA is so wonderful, shouldn't they make their funds available to the investing public ?

Why would they deprive me of all this "Three Factor" and "tilt" benefit ?

1210
They are not interested in "hot" money. They want investors, not speculators. Hot money drives up the cost of managing the funds.
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Re: Should you invest in DFA funds?

Post by wjo »

1210sda wrote:If DFA is so wonderful, shouldn't they make their funds available to the investing public ?

Why would they deprive me of all this "Three Factor" and "tilt" benefit ?

1210
No, you can almost duplicate all the value and small tilts that DFA has with various ETFs from multiple providers. To the extent that DFA can sell through advisors it both reduces their costs and also may help limit inflows and outflows that retail funds are subject to.

That said, some DFA funds are available in retirement programs.
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Re: Should you invest in DFA funds?

Post by ftobin »

GRT2BOUTDOORS wrote:They are not interested in "hot" money. They want investors, not speculators. Hot money drives up the cost of managing the funds.
I still haven't figured out why an ETF wouldn't be appropriate for what they do. Since they are passively managed, they shouldn't need to trade for the fund itself much, reducing concerns about front-running the ETF.
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Re: Should you invest in DFA funds?

Post by bob90245 »

bschultheis wrote:Fortunately, for 99.99999 (did I say 9) percent of investors, whether they use DFA or Vanguard or iShares is far down the list on whether or not they will achieve their financial goals.

Whether they create a reasonable financial plan that focuses on saving and spending, revisit that plan, and stick with that plan in up and down markets, is high on the list.

Incidently, the Dec. issue of Fortune talks about the flow of money out of Bill Miller's fund, and how average investor captured only a fraction of funds return, buying high and selling low. The interesting thing about this is that in the article Don Phillips says Vanguard 500 investors acted the same during peek to trough of 1999 -2002 period.

To quote Phillips. . . "Indexing is just a lower-cost way of producing a bad investor experience."

I couldn't agree more.
It would be interesting to view the data on how clients using DFA advisors performed during the same bear market periods. In other words, did having a DFA advisor mitigate a bad investor experience?

From reading Bill Bernstein's "Manifesto", he seems to think only a very small minority of individuals are capable of avoiding a bad investor experience.
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Re: Should you invest in DFA funds?

Post by bschultheis »

Interesting thread (Or maybe I am just bored because it is dumping snow in Seattle).

As Nisiprius said, DFA isn't better or worse than Vanguard, just different.

I have been working closely with DFA (and Vanguard) for over a decade. I have never heard anyone from DFA (or Vanguard) say they are better than the other.

Just different.

One of the reasons DFA continues to work exclusively through the advisors channel is because they recognize the enormous value good advisors bring to investors who are tempted to do the wrong thing at the wrong time, as I pointed out in Don Phillips comments.

Tell me that all those Vanguard investors who invested in the 500 fund and bought and sold at the wrong times couldn't have benefited from the steady wisdom of an advisor.

Although many perceive Vanguard as a "do it yourself" shop, the higher-ups at Vanguard think differently. Vanguard is putting forth "enormous" resources to accentuate their offerings through the advisory channel because they recognize the same thing DFA does. Good advisors are incredibly valuable to the vast majority of investors, even those who invest at Vanguard. (OK, you can start slamming me now)
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Re: Should you invest in DFA funds?

Post by ScottW »

ftobin wrote:I still haven't figured out why an ETF wouldn't be appropriate for what they do. Since they are passively managed, they shouldn't need to trade for the fund itself much, reducing concerns about front-running the ETF.
I've seen a few requests for DFA to create ETF versions of its funds--mostly from Rick--but I do not see how this would work for their style of funds. Even if we ignore the fact that Vanguard holds a patent for such ETFs and would require a licensing fee (if they wish to license the patent at all), adding a "free-for-all" ETF seems like it would adversely affect the day to day management of some of their funds.

As I understand it, DFA employs a number of tactics to improve returns and limit expenses: block trading, patient trading, momentum screens, and the ability to close a fund or limit inflows if it gets too big. I am not an expert on ETFs, but I believe all these would go flying out the window if an ETF class were to be added. Rapid trading could also, I believe, limit the percentage of qualified dividends that a fund throws off if securities were held for too short a period of time. They control the trading and inflows for the mutual funds. They would lose control of the ETFs.

On the positive side, it would probably reduce capital gains, and an ETF structure should work fine for their larger cap funds (perhaps including Vector). I'm not convinced it would be a good idea for the types of funds that people seem to want the most--after all, no one is clamoring to get into DFA to invest in their large cap, low-value Core funds, are they?
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Re: Should you invest in DFA funds?

Post by wjo »

bschultheis wrote: Although many perceive Vanguard as a "do it yourself" shop, the higher-ups at Vanguard think differently. Vanguard is putting forth "enormous" resources to accentuate their offerings through the advisory channel because they recognize the same thing DFA does. Good advisors are incredibly valuable to the vast majority of investors, even those who invest at Vanguard. (OK, you can start slamming me now)
Hmmm...enormous resources? I would think most advisors are already cognizant of Vanguard offerings? It seems a bigger problem is that most investors don't have a large enough portfolio to make an advisor worthwhile? Perhaps an electronic expert offering stay the course would be helpful (not that most folks wouldn't want some personal hand-holding).
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Re: Should you invest in DFA funds?

Post by ftobin »

ScottW wrote:As I understand it, DFA employs a number of tactics to improve returns and limit expenses: block trading, patient trading, momentum screens, and the ability to close a fund or limit inflows if it gets too big. I am not an expert on ETFs, but I believe all these would go flying out the window if an ETF class were to be added. Rapid trading could also, I believe, limit the percentage of qualified dividends that a fund throws off if securities were held for too short a period of time. They control the trading and inflows for the mutual funds. They would lose control of the ETFs.
There are two things to think of with ETFs: trading of the ETF shares, and creation/redemption. Trading of ETF shares would have no effect on the size of the funds or any other effect on the underlying. Creation/redemption would increase the size of the fund, but this isn't bad, as the cost is born by new participants and has no effect on existing holders. Same is true trading costs of inflows/outflows via creation/redemption.

One of the best features of the ETF structure is that liquidity costs are always born by new/leaving participants, not existing ones.
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Re: Should you invest in DFA funds?

Post by 1210sda »

I believe (?) that DFA's Core Equity 1 or Core Equity 2 funds are supposed to be a "one fund" approach for an investors equity portfolio needs.

If this is correct, how can one get as close as you can to either of these two funds using only Vanguard ?

1210
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Re: Should you invest in DFA funds?

Post by bschultheis »

wjo wrote: Hmmm...enormous resources? I would think most advisors are already cognizant of Vanguard offerings? It seems a bigger problem is that most investors don't have a large enough portfolio to make an advisor worthwhile? Perhaps an electronic expert offering stay the course would be helpful (not that most folks wouldn't want some personal hand-holding).
Excellent point. Enough there to start another thread, re smaller portfolios, but I won't.
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Re: Should you invest in DFA funds?

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bschultheis wrote:Good advisors are incredibly valuable to the vast majority of investors, even those who invest at Vanguard. (OK, you can start slamming me now)

Any good academic studies to support this proposition?
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Re: Should you invest in DFA funds?

Post by wjo »

1210sda wrote:I believe (?) that DFA's Core Equity 1 or Core Equity 2 funds are supposed to be a "one fund" approach for an investors equity portfolio needs.

If this is correct, how can one get as close as you can to either of these two funds using only Vanguard ?

1210
Not sure why you'd necessarily limit yourself to Vanguard -- I think there is an ETF called TILT that somewhat mimics the core approach. Using Vanguard, one could start with Total Stock and add Value Index funds (small, mid, large) as you like to achieve what the core offerings have. These would be low cost and relatively tax efficient if held in taxable.
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Re: Should you invest in DFA funds?

Post by bob90245 »

Blue wrote:
bschultheis wrote:Good advisors are incredibly valuable to the vast majority of investors, even those who invest at Vanguard. (OK, you can start slamming me now)
Any good academic studies to support this proposition?
You can look at the many studies coming from the field of Behavioral Finance. Richard Thaler is one prominent researcher that comes to mind. And there is the Fortune article Bill cited referencing Bill Miller's fund.
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Re: Should you invest in DFA funds?

Post by Rick Ferri »

Blue wrote:
bschultheis wrote:Good advisors are incredibly valuable to the vast majority of investors, even those who invest at Vanguard. (OK, you can start slamming me now)
Any good academic studies to support this proposition?
There won't be hard evidence on this because it depends greatly on the quality of the advisor.

It's harder for a 16 year old to get a drivers license than for a person to become an investment advisor. At least the 16 year old has to show proficiency in driving. Remember, all you need to do is pass a Series 7 brokerage exam to sell products on commission or Series 65 exam to collect fees as a fee-only advisor. And, people can flunk the tests a dozen times before passing. There is no limit to the number of times you can take the exams as long as you pay the fee each time.

So, the important word in Bill's comment is "good". Now, how many people know the different between a good advisor and bad one? Not many. And it certainly doesn't help to ask the advisor, or to go to a self-promotion type service that advisors pay for such as NAPFA.

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Re: Should you invest in DFA funds?

Post by carolinaman »

Jack Bogle discussed the size and value premium owing to small cap and value in his book "Don't Count On It" and concluded there was no premium. Of course, he may not be unbiased either but he presented an interesting case.

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Re: Should you invest in DFA funds?

Post by Blue »

bob90245 wrote:
Blue wrote:
bschultheis wrote:Good advisors are incredibly valuable to the vast majority of investors, even those who invest at Vanguard. (OK, you can start slamming me now)
Any good academic studies to support this proposition?
You can look at the many studies coming from the field of Behavioral Finance. Richard Thaler is one prominent researcher that comes to mind. And there is the Fortune article Bill cited referencing Bill Miller's fund.
I am familiar with studies showing investors doing themselves a disservice and under-performing mutual fund and index returns, but this is not the same as showing "good advisors are incredibly valuable?"
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Re: Should you invest in DFA funds?

Post by bob90245 »

Blue wrote:I am familiar with studies showing investors doing themselves a disservice and under-performing mutual fund and index returns, but this is not the same as showing "good advisors are incredibly valuable?"
I admit your particular point is subjective and hard to quantify. I am going on the assumption that a good advisor has done all the necessary work up front so the client is more likely to be within his unique need, ability and willingness to take stock market risk.

That is an important but not sufficient step for the individual to avoid a bad investor experience. The necessary condition is that when markets turn scary, the advisor will be there to provide discipline to prevent the client from making mistakes. And one of those common mistakes made is when individual sells after a severe market drop.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
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Re: Should you invest in DFA funds?

Post by psteinx »

bschultheis wrote:Good advisors are incredibly valuable to the vast majority of investors, even those who invest at Vanguard.
While much might depend on how one might define the terms "good", "incredibly valuable" and so on in relation to the above statement, by my own definitions, I consider the claim doubtful.

But regardless, the more relevant issue is how much value a TYPICAL advisor might add or subtract to a TYPICAL investor who uses such an advisor, relative to the alternative (DIY, probably).

Of course, even if we had good analysis of approximately how, say, the median advisor using investor fares with the median advisor, and an alternate case of how similarly situated investors fare without an advisor, we would still only be looking at the median, vs. the marginal investor (i.e. would investor well being be improved if somewhat more or fewer investors - i.e. those at the margin, used an advisor)?

And there's lots of other permutations of this question we could ask.

I don't expect super-solid evidence on this issue, one way or the other. But I do think it is interesting and appropriate to frame the question well.
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Re: Should you invest in DFA funds?

Post by larryswedroe »

Just a brief comment relative to the why DFA does not take retail clients
It is not only the "hot money" issue which increases costs for the remaining investors and imposes tax inefficiencies but this is especially a big problem in the less liquid smaller stocks DFA tends to own---retail money tends to panic and sell in bear markets and that means funds must sell into illiquid markets, driving up market impact costs. This really hit some funds in 2008 for example.

Also DFA has something like $250b in aum and just a few hundred people, no need to man 800 numbers, etc. Makes it much less expensive to run and much easier to run the organization. This is also personal issue for the people that own it.

BTW-four of the last five years the value premium has been negative, and you would expect funds with higher loadings to have performed poorly relative to "peers"-so that should not be a surprise. Small premium was positive on other hand for most of those years.

I would also add that higher loadings allow one to hold less equity risk in first place, which would LOWER portfolio volatility. That was not accounted for.
finally the core funds add value by reducing turnover in portfolio, reducing need to rebalance which also improves tax efficiency

Of course there are other funds as well that add tilts, and the literature seems to be coming down that multi screens for value seem to be better than single BTM screen. In fact I believe CRSP may be moving to that.

I hope above helpful
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Re: Should you invest in DFA funds?

Post by Rick Ferri »

I agree in general with Larry's remarks. However, I believe when we see Allan's follow up article that the evidence will be pretty clear that advisors are among the worst performance chasers of any group of investors. I have not seen his article, but that's what I'm expecting the evidence to show.

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Re: Should you invest in DFA funds?

Post by psteinx »

Here is a quick scenario and some questions for the advisors and their supporters out there:

Let's say that you have a relatively high income individual with above average intelligence. A college professor or an engineer or a small business owner or whatever.

They're somewhere in the 25 to 35ish age and have dabbled in various savings vehicles, had some ups and downs, and are now getting more serious about both savings rate and appropriate savings/investment vehicles.

They're not financially illiterate or incompetent, but they're not the type who is willing to spend many hours reading the Bogleheads forum or reading 6 different books on investing.

i.e. I would consider this person a near-ideal case for help from a GOOD advisor. But also, a candidate to perhaps get mediocre results from an average or worse advisor (depending, I suppose, on how we feel about the results developed by the average or even the 25th percentile advisor).

===

Question 1:
How does a person like this TYPICALLY find and start using an advisor?

Question 2:
If the typical results lead to an average or perhaps below average advisor, what steps would this person need to take to locate a GOOD advisor?

Question 3:
How would this person know what those steps are and distinguish good steps from other financial noise out there?
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Re: Should you invest in DFA funds?

Post by Christine_NM »

Seems to me I read that advisers were big sellers in 2008. Let's face it, every category of transactor was selling, otherwise the plunges don't happen. The real crime was, no advisers were touting stocks in March 2009.

My take on DFA is, which is responsible for any success they may have, their investing model or their cherry-picked clientele? If both, that's like telling everyone to go on a filet-mignon diet for their health. The idea may be good but it doesn't scale well.
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Re: Should you invest in DFA funds?

Post by AndroAsc »

Not an extremely well written article in my opinion.

Firstly, too much emphasis on Morningstar ratings and treating it like a fact. Has anyone done any analysis at all to determine if the Morningstar rating methodology might be flawed/biased?

Secondly, as an index fund, it is expected to perform at the average level (3 star). With SV tilting, maybe DFA funds will hit 4 star (but only if those years include the time period where SV tilting resulted in higher returns). So why is there the implicit assumption that DFA funds should be 5-star? And somewhere in the article, it mentioned that Morningstar ratings have taking SV tilting into account (whatever that means), so why is it so surprising that after this normalization DFA funds would get anything but 3 stars?

Finally, there was one published paper in some finance journal sometime back. It was a limited analysis (I think about 20 years at the most) of a comparison between DFA vs Vanguard funds. The bottomline conclusion was that even with the extra ER of DFA funds, and even comparable apples-to-apples as much as possible (i.e. DFA vs Vanguard value-tilted funds), there is still a marginal outperformance of DFA over Vanguard funds. Now whether that outperformance is statistically significant, was not that clear...

See this for more details: http://public.econ.duke.edu/Papers//PDF ... y_2007.pdf

EDIT: I'm not personally advocating DFA funds in anyway. If I were rich enough to invest in DFA funds, I would split my assets 50/50 between DFA and Vanguard.
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Re: Should you invest in DFA funds?

Post by larryswedroe »

psteinx

Here are my suggestions for doing due diligence in searching for an advisory firm. These are the principles the firm should live by.

Choosing a Trusted Advisor
Following are the principles to which we adhere.

The best interest of the client
Our guiding principle is that we will provide investment and wealth management advisory services that are in the client’s best interest.

Fiduciary standard
We provide a fiduciary standard of care—the highest legal duty that we can have with a client.

Fee-only
We are a fee-only investment advisor—avoiding the conflicts and lack of objectivity that commissioned-based compensation can create.

Products: They’re not-for-sale here
We are client-centric—we don’t sell any products, only advice.

Full disclosure
All potential conflicts are fully disclosed.

Use scientific research
Our advice is based on the latest scientific research, not on our opinions.

Practice what you preach
We invest our personal assets, including our profit-sharing plan, based on the same set of investment principles and in the same or comparable securities that we recommend to our clients.

Advisory team for each client
Each client is assigned a team of professionals. Our comprehensive wealth management services are provided by individuals who have the CFP, PFS, or other comparable designation.

Attentive, individualized service
We provide a high level of personal attention. Developing strong personal relationships is central to our ability to provide appropriate advice and service for each client.

Customized, integrated planning
We develop investment and wealth management plans that relate to the whole person—that are integrated into to each individual’s unique strategy and personal situation.

Strategic advice for long-term success
Our advice is goal-oriented. We evaluate each recommendation, not in isolation, but in terms of its impact on the likelihood of success of the overall plan.

I would even ask to see their personal financial statement from custodian to demonstrate they invest as they say, and ask to see how company's retirement plans are invested
I would also check with other professionals in town to get opinions, CPAs, attorneys,etc


I hope you find that helpful

BTW-there are advisors that time the market, their returns are no more likely to be good than individuals IMO. And there are advisors that only rebalance and get their clients to adhere to their plans. But even the best firms have clients that will not rebalance all the time, or even some that panic and sell. So you cannot say anything really generic about advisors.

Larry
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Re: Should you invest in DFA funds?

Post by psteinx »

Larry - thanks for the response. I think I've seen similar (or perhaps the same) advice from you in the past.

FWIW, my questions were not for my own sake. Rather, I'm suggesting that the type of client who might benefit from a good advisor often ends up with an average or mediocre one instead, and that the lack of deep financial knowledge that suggests a need for an advisor leaves these clients in a poor position to separate good from bad.

===

Regarding your specific points: Most seem at least reasonable, but I would suggest that many advisors out there would claim that they meet those criteria, even if they do so poorly at best. "Fee-only" is a pretty clear cut distinction and one that many advisors likely do NOT meet, but not necessarily one that the financially underinformed may fully understand or buy in to. FWIW, there are some not entirely unreasonable arguments for commissioned advisors in some circumstances, too.
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Re: Should you invest in DFA funds?

Post by larryswedroe »

Psteinx
just like anything else you owe it to yourself to get educated so you can do proper due diligence
Not hard to ask for custodial statement for example. Not hard to ask for resumes and read the ADV to see real life experiences
Not hard to ask professionals you respect for their opinions, CPAs and attorneys are good choices in general.
IMO advisors cover a very wide spectrum both in services offered and skill sets and experiences. Just like any other profession. Some provide IMO value way above their fees and some may even subtract value.

Best wishes
Larry
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Re: Should you invest in DFA funds?

Post by Blue »

larryswedroe wrote:Psteinx
just like anything else you owe it to yourself to get educated so you can do proper due diligence
Not hard to ask for custodial statement for example. Not hard to ask for resumes and read the ADV to see real life experiences
Not hard to ask professionals you respect for their opinions, CPAs and attorneys are good choices in general.
IMO advisors cover a very wide spectrum both in services offered and skill sets and experiences. Just like any other profession. Some provide IMO value way above their fees and some may even subtract value.

Best wishes
Larry
Larry, I am really surprised that some smart person somewhere has not risen to the challenge of collecting and studying data on advisors and sharing it (even if anonymously in statistics form).... I am thinking something similar to the great data that you quote in your Alternatives book about private equity, hedge fund returns, etc. For example, I recall from your book that the median hedge fund under-performs for level of risk, the top 10/25% may have persistent out-performance but individual investors can not gain entry anyway. In comparison, an individual investor knows virtually nothing about expected performance of going with advisors vs going it alone?
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Re: Should you invest in DFA funds?

Post by ObliviousInvestor »

bschultheis wrote:Good advisors are incredibly valuable to the vast majority of investors, even those who invest at Vanguard.
I agree. On a related note, I think Vanguard's CFP service is terribly under-utilized. The advice that comes from that $250* investment is:
a) Quite valuable to the typical investor trying to go it on his/her own without a large existing knowledge of the topic, and
b) So, so much better than the (far more expensive) advice that most people get from most advisors.

I've mentioned it a few times on my blog, but I think I should discuss it more often.

*Depending on asset level, the cost could also be $1,000 (at which point I'd argue it probably doesn't make sense to use it yet) or $0 (at which point it's an even better value).
Mike Piper | Roth is a name, not an acronym. If you type ROTH, you're just yelling about retirement accounts.
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Re: Should you invest in DFA funds?

Post by larryswedroe »

Blue
The problem is as I said, IMO it would tell you really nothing as there are all kinds of advisors from market timers to stock pickers to active vs passive and all kinds of quality.

As example, I was once at a conference of advisors where I gave a speech and an issue came up and I asked the group, well over 100 people, what the definition of negative correlation was and not one knew it. The general answer was that when one went up the other went down.

So many advisors I meet don't ask even the right questions to determine the asset allocation, they focus (many anyway) on only one or two areas (like investment horizon), often missing important issues like stability of labor capital and how it correlates to investments in portfolio or NEED to take risk or even what ability one has to adapt plan if the left tail risk shows up. So I don't think any study would even have much meaning

A good test might be if they broke down firms by client turnover and then looked at results. The brokerage firms of course have incredibly high turnover. The good firms I know have turnover rates in VERY LOW single digits.

Best
Larry
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Re: Should you invest in DFA funds?

Post by mountainmoney »

Blue wrote:
bschultheis wrote:Good advisors are incredibly valuable to the vast majority of investors, even those who invest at Vanguard. (OK, you can start slamming me now)

Any good academic studies to support this proposition?
One test might be comparing investor returns to total returns. Just looked at that in connection with DFA US Core Equity 1 (DFEOX) which might be considered their flagship offering. For the past 5 years total return was .22% and investor return was 2.99%. By comparison, for Vanguard Index 500 (VFINX) total return was -.33 and investor return was -.90. For American Funds Growth Fund of America A (AGTHX) total return was -0.59% and investor return was -1.36%
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Re: Should you invest in DFA funds?

Post by A Devout Indexer »

Here are the statistics for $ flows into DFA equity mutual funds and all other equity mutual funds in Q3 and Q4 of 2008 and Q1 of 2009:

Q3 2008
DFA = +$1.1B
Industry = -$69.5B

Q4 2008
DFA = +$300M
Industry = -$94.9B

Q1 2009
DFA = +$600M
Industry = -$34.4B

Source: Morningstar Estimated Net Flows Open End Ex MM and FOF

Clearly, there is very consistent behavior being demonstrated by DFA investors, even during the worst bear market in 80 years. To have positive cash flows into equities (and small/value equities to boot!) during this period is something of a small miracle. Not sure what data Alan is going to produce that proves the contrary? But based on the use of Morningstar star ratings to determine DFA performance, I'm guessing the flawed Morningstar investor returns? Not holding my breath.

edit: to add source of data
Last edited by A Devout Indexer on Wed Jan 18, 2012 5:58 am, edited 3 times in total.
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Re: Should you invest in DFA funds?

Post by bschultheis »

A Devout Indexer wrote:Clearly, there is very consistent behavior being demonstrated by DFA investors, even during the worst bear market in 80 years. To have positive cash flows into equities (and small/value equities to boot!) during this period is something of a small miracle. Not sure what data Alan is going to produce that proves the contrary? But based on the use of Morningstar star ratings to determine DFA performance, I'm guessing the flawed Morningstar investor returns? Not holding my breath.
Looking back over the past 12 years amid bull and bear markets and all the stuff in between, a good advisor who helped a client establish a plan, and then helped them stick with a plan, rebalancing when appropriate based on market movements and life movements, has been invaluable.

However, looking backwards is easy. (It was a perfect storm on the upside for good advisors). What about looking forward? Are clients going to look as favorably on the same good advisor if P/E ratio is at 8 in ten years?
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Re: Should you invest in DFA funds?

Post by psteinx »

What's the source for those mutual fund inflow/outflow numbers?
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Re: Should you invest in DFA funds?

Post by nisiprius »

Rick Ferri wrote:[There won't be hard evidence on this because it depends greatly on the quality of the advisor.
Why shouldn't there be? I believe there's pretty good evidence for the effectiveness of talk therapy--my recollection is that years ago there was hard evidence of benefit from talking to a professional sympathetic listener, though no distinctions could be detected between different schools and methods--and there's been more since then.

This ought to be a topic of academic study, and there ought to be results one way or another. It ought to be easier than many things academics study because there's such a well-defined quantitative way to measure the results. Among credentialed advisors, the average advisor ought to be able to add some measurable value, even if the best add much more than the average, and even if the worst are actually harmful.
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Re: Should you invest in DFA funds?

Post by Blue »

The absence of peer reviewed finance studies on the measurable benefit/detriment of having an advisor has always surprised me as well because DFA seems to be so grounded in the academic finance literature on most other accounts. Almost anything they do it seems as if there are multiple peer reviewed articles in the literature outlining their underlying thinking.

DFA seems to have made a fundamental business/investing decision and takes some criticism for relying almost exclusively on advisors without academic studies to support this decision? It seems counter to their general approach otherwise? Not to be critical because they clearly have a very successful operation.... it just has always surprised me.
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Re: Should you invest in DFA funds?

Post by iceport »

I'm confused with all this talk about DFA funds being cheap. Compared to what? The one DFA fund available to me in a 457 plan is more than 4 times as expensive as the Vanguard equivalent, which is luckily also available.

DFA Real Estate Securities Portfolio - Institutional Class ER = 0.33%
Vanguard® REIT Index Fund - Institutional Shares ER = 0.08%

Are all DFA funds that "cheap"?

--Pete
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Re: Should you invest in DFA funds?

Post by A Devout Indexer »

bschultheis wrote:
A Devout Indexer wrote:Clearly, there is very consistent behavior being demonstrated by DFA investors, even during the worst bear market in 80 years. To have positive cash flows into equities (and small/value equities to boot!) during this period is something of a small miracle. Not sure what data Alan is going to produce that proves the contrary? But based on the use of Morningstar star ratings to determine DFA performance, I'm guessing the flawed Morningstar investor returns? Not holding my breath.
Looking back over the past 12 years amid bull and bear markets and all the stuff in between, a good advisor who helped a client establish a plan, and then helped them stick with a plan, rebalancing when appropriate based on market movements and life movements, has been invaluable.

However, looking backwards is easy. (It was a perfect storm on the upside for good advisors). What about looking forward? Are clients going to look as favorably on the same good advisor if P/E ratio is at 8 in ten years?
Bill, if these investors have stayed the course as the S&P 500 has gone from a P/E of 29 to 12, I'm betting they'll hang in down to 8. That's the thing with higher expected returns: doesn't mean they won't get even higher before they're realized!

PS -- added source to my data above.
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Re: Should you invest in DFA funds?

Post by A Devout Indexer »

petrico wrote:I'm confused with all this talk about DFA funds being cheap. Compared to what? The one DFA fund available to me in a 457 plan is more than 4 times as expensive as the Vanguard equivalent, which is luckily also available.

DFA Real Estate Securities Portfolio - Institutional Class ER = 0.33%
Vanguard® REIT Index Fund - Institutional Shares ER = 0.08%

Are all DFA funds that "cheap"?

--Pete
Expense ratio's aren't the only consideration. There are trading costs, turnover, index tracking, etc. A look at the longest period (15yrs) Morningstar has available produces a 0.3% net of fee advantage for the higher expense ratio fund:

DFREX = +9.2%
VGSNX = +8.9%

Same thing can be seen with other fund companies over the a 10yr period (where 15 isn't available), as BRSIX has an expense ratio of 0.75% and VSCIX has an expense ratio of only 0.08%:

Bridgeway Ultra Small Co Market = +8.1%
Vanguard Small Cap Index Institutional = 6.8%
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Re: Should you invest in DFA funds?

Post by A Devout Indexer »

Blue wrote:The absence of peer reviewed finance studies on the measurable benefit/detriment of having an advisor has always surprised me as well because DFA seems to be so grounded in the academic finance literature on most other accounts. Almost anything they do it seems as if there are multiple peer reviewed articles in the literature outlining their underlying thinking.

DFA seems to have made a fundamental business/investing decision and takes some criticism for relying almost exclusively on advisors without academic studies to support this decision? It seems counter to their general approach otherwise? Not to be critical because they clearly have a very successful operation.... it just has always surprised me.
I am not aware of anyplace outside of this board where it is criticized? It seems to be a model other companies are following. Vanguard has signal shares exclusively for advisors (basically admiral shares with $0 minimums), Bridgeway has funds exclusively for advisors, a new company Vericimetry is also set up to work exclusively with advisors. Some businesses just don't want to deal with the headache of erratic cash flows and are willing to sacrifice volume for it.
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Re: Should you invest in DFA funds?

Post by larryswedroe »

Pete
couple of thoughts
First if a Vanguard fund has an ER of 1 bp and DFA had 10bp then DFA would be 10x as expensive, but it would still be relatively cheap. It is the difference in costs that matters as well, not just the level.
Second, there are sometimes structural or other differences that can easily overcome relatively small differences in ER, like just securities lending revenue, as I have shown.
Best
Larry
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