DFA Funds: The Porsche of Index Funds
While continuing my reading, it seems like Dimensional Fund Advisors (DFA) mutual funds are the Porsche of index funds. They are sexy in that they index everything under the sun (including stuff Vanguard does not) such as having a SmallCap Emerging Markets fund. They are well-engineered, being based on the best academic research available and having famous professors Fama & French on their boards. DFA tries to take indexing to the next level. Finally, they are exclusive as their funds are only available through approved financial advisors. Of course, this also means you’ll also have to have at least $100,000 to play with and pay annual advisor fees. I believe this is to avoid the performance hit on their funds from any active trading by untrained investors.
I don’t know if the fees are worth it, but, just like a Porsche, I still have this mysterious instinctual urge to own some!
Here is another pretty good article about DFA funds from MSNBC, titled ‘DFA Funds Hard to Buy, Easy to Own‘. Does anyone out there own DFA funds? What kind of minimum balance requirements and annual fees does your broker charge?
March 14th, 2006 at 9:19 am
With all the attitudes and restrictions, what value do these Porsche type of funds offer? Any actively managed funds carry bigger fees , not to mention the initial financial planning cost… I guess I am still a believer in cheaper index funds…
March 14th, 2006 at 9:28 am
Their expense ratios are actually very low and competitive with Vanguard (where my Porsche analogy fails), and if you have a large amount to invest you can get away with advisor fees being a lower percentage of your portfolio. The funds remain index funds with very little turnover, and they historically have outperformed many other index funds due to the little things that they do.
Their performance records and high tax-efficiency help keep the high demand for their product. They seem to do very well despite hardly any advertising at all. I don’t know if I would choose them either, but for now it’s a moot point. I do plan to take a second look at them when my portfolio becomes large enough.
March 14th, 2006 at 9:32 am
My company’s retirement plans are managed by Fidelity, which means we can invest in many different mutual funds without worrying about fees or minimum balances. I have no clue about Fidelity’s personal accounts, but maybe they have something similar???
I have my money (which is well under $100,000) in a Dimensional Emerging Markets Portfolio and I really like it. It invests in large-cap stocks of emerging stocks and has an expense ratio of 0.69% and management fee of 0.5%. That makes it more expensive than domestic index funds, however, with this fund I get exposure to the international market at a minimal cost.
March 14th, 2006 at 9:38 am
I have been investing in DFA funds for 2 1/2 years. Before switching my mutual funds to DFA, I thoroughly research my options including ETFs and Vanguard. To sum it up, ETFs do not offer the diversity of DFA and do not have any good choices for microcaps and international. Vanguard trailed DFA by over 2% in every time period in which I could find information. So the superior performance of the DFA funds versus Vanguard more than makes up for the financial advisor fee.
If you have under $500K to invest, the cheapest option is to pay 0.9% to IFA.com to put you in DFA funds. IFA has an AWESOME website that should be thoroughly read just to learn about investing, even if you don’t use them.
If you have more than $500K to invest, there are a couple of flat fee advisors that charge $1500 to $3000 a year.
March 14th, 2006 at 9:42 am
city girl - that expense ratio sounds about right for an Emerging Markets fund, which usually cost more that even most international funds.
kpc - Do you use IFA? If so, do you like them? IFA also recommends a minimum portfolio of $100,000, and would charge a 0.9% annual fee for such a small portfolio (+ transaction fees from Schwab). Still, not bad if you want to be totally hands-off.
March 14th, 2006 at 11:06 am
Yuna is right to be skeptical, but they really are the only fund provider that’s better than Vanguard. Their advantage is that they are dispassionate about individual stocks, which I believe is the biggest advantage of index funds. In order for this to work right, they need most of their investors to be in it for the long run, so that’s why they only offer their funds through “specially trained” advisors. Most of their funds cut across traditional asset classes, so you need some more complex analysis to manage risk/return and diversification.
FundAdvice.com has a few articles about them, too.
March 14th, 2006 at 11:08 am
Oh, and I think Jonathan’s Porsche analogy is right on. They’re not made for just anyone (excluding the price), but they scream in the hands of skilled driver.
March 14th, 2006 at 11:53 am
so would that make berkshire hathaway a rolls royce?
March 14th, 2006 at 12:25 pm
I dunno, to me BRK is a custom car that may not perform so well with any other driver than Buffett
March 14th, 2006 at 1:15 pm
It looks like IFA will perform asset allocation for you for a 0.9% fee - is that basically it or am I over simplifying?
DFA looks good but I’d rather have the option of tax harvesting ETF’s if I need to.
March 15th, 2006 at 7:58 am
Paul Marriman has a web site http://www.fundadvice.com that has a recommended DFA portfolio for maximum gains combined with minimizing risk. I checked with a local DFA fund advisory service and they are asking 1% advisory service fee. This is in additional to any and all nomral maintenance fee incurred with each respective DFA funds. I’m actually considering this approach but I’m currently in sticker shock at the advisory fee. However I may try to develop my own model portfolio developed by various information sources such as IFA and Paul Marriman. I just recently wrote a blog on this topic.
March 15th, 2006 at 8:15 am
I forgot to ask. How is the book your reading “Intelligent Asset Allocator”? Looks like good reading. I may need to pick up a copy.
June 19th, 2006 at 3:29 am
I have been with DFA for about 8 months and the funds have been great. I completely changed my approach to investing, even after being Legg Mason Value Trust (LMVTX) for over 7 years. My advisor (Talis Advisors) is a DFA advisor that charges a .55% advisor fee for a $100K portfolio. I basically do all the work and just wanted access to DFA funds. The advisor fee was .7% for under $100K.
August 26th, 2006 at 5:01 pm
I’ve been with DFA for about 9 months and am very satisfied. We got into the funds for a 1/4 percent for 250K. The added bonus is that my wife and I are out of the equity business, we just sit back and relax. We do manage our income portfolio and sometimes buy some equities with our play money. This site will help you see the expenses ratio comparisions. Typically, Vanguard is the lowest with DFA right behind it.
link
August 31st, 2006 at 3:11 pm
In a recent blog, Paul Merriman stated that DFA still manages to best Vanguard by 1 to 2% after expenses/advisory fees. If I took the savings of the advisory fees & invested those on an annual basis with Vanguard, how much better would DFA really be? Or has that been factored in as well? The one thing that I see with DFA would be access to investments that I cannot get through Vanguard (US/Int’l Micro Cap, Int’l Small Value - VINEX is closed to new investors), etc …).
August 31st, 2006 at 3:47 pm
I’m not sure exactly, but I don’t think I’d consider DFA unless it was on the order of a 0.25% annual fee like Steve H. DFA funds aren’t true index funds so you’ll have to buy into their methods too.
September 17th, 2006 at 7:52 pm
Jonathan makes a good point that you will have to buy into their methods. (If DFA isn’t a index fund, it’s pretty darn close) Obviously I have, but that doesn’t mean everybody should. I think the main point of this discussion is that low fees and indexing work. If your investing is down to comparing DFA or Vanguard, you’re ahead of most investors.
September 25th, 2006 at 11:29 pm
Jonathan, where do you invest your 250K for a 1/4 percent. THanks
September 25th, 2006 at 11:31 pm
Sorry, the last question was for Steve H, where do you invest your 250k for dfa funds.
October 14th, 2006 at 5:17 am
When you say,
” where do you invest your 250K”, I’m assuming you mean which DFA broker?
October 16th, 2006 at 11:35 am
Steve, yes. which dfa broker do you use? was thinking about putting some money with them. do you like your broker and everything they do with the dfa funds. Thanks
November 4th, 2006 at 7:40 pm
[…] By using these factors to maximize return for a given unit of risk, twenty model portfolios are created. Fama and French also created Dimensional Fund Advisors (DFA), and all the portfolios are constructed mainly from these funds. […]
January 15th, 2007 at 10:27 pm
I too am strongly considering going with an investment advisor just to get access to DFA. Anyone getting a better deal than 1% advisory fees?
February 6th, 2007 at 12:18 pm
I just moved my accounts from Fidelity to Talis Advisors in Plano, TX to be invested in a DFA portfolio. The portfolio I selected returned 33.02% last year, 26.22% over three years and 24.61% over five years. My fee for the amount invested is .55% a year plus the DFA expenses which are very low. The total is less than 1% per year for this kind of return with low risk. I think I’ll be able to sleep at night now.
February 9th, 2007 at 6:21 pm
I 2nd the request. Whoever gets 0.25% to get hooked up with DFA, please let me know!
As for Robby, can you share how much $$$ you had to invest? Was it more than $200K?
February 13th, 2007 at 5:00 pm
Yes, it was over $500K. They have a graduated fee schedule with a minimum of $500 per year for smaller investers. A friend of mine had only $25,000 to invest and they were willing to take him for the $500 minimum investment fee. I am very pleased with my advisor. He has researched the tax ramifications of all of the funds I will be going into which are the most highly performing funds but are all in the Morningstar top quartile of fund performers and all above the category in terms of returns.
February 19th, 2007 at 3:25 pm
Robby,
I just E-mailed Talis to request information and gave them my number to call me. Can you tell me who is your advisor so I can ask for him/her? Also the returns you quoted differed from there all equity portfolio on their website. Did they do a different portfolio for you?
Also did anyone find out where you can get DFA funds like Steve H for .25% with $250,000 to invest?
Thanks,
Tom
February 20th, 2007 at 7:35 am
My advisor is Greg Schmitz. He presented me with a few portfolios to choose from and I selected the most aggressive which is Greg’s personal portfolio design. When I called him I mentioned the .25 fee with the investor doing all the work and he talked me out of it. He has more than earned the additional basis points, in my opinion. The Talis 100 portfolio is a bit more conservative in design but earns about 8% less per year. Since the risk level is still lower than the S&P 500 on the portfolio I selected I decided to go for the higher returns.
February 20th, 2007 at 2:23 pm
The direct line to Greg Schmitz at Talis Advisors is (972) 378-1792.
February 20th, 2007 at 7:01 pm
Robby,
Thanks!
I called and talked to Greg today. I really enjoyed talking to him and we are going to talk more on Friday. I am still waiting to talk to a couple other advisors before making my decision.
Tom
February 22nd, 2007 at 6:52 pm
I just google “fee only dfa” and found this site
http://www.feesonly.com/Fees.h.....Management
If you have 300K and use the “Self-Directed Investment Management”.
It’s $90 per month, that 0.3%
February 22nd, 2007 at 6:57 pm
I’m pretty sure most of the % quoted here are on an annual basis. So 0.3% x 12 months is 3.6% a year. Not so good
February 22nd, 2007 at 7:03 pm
Sorry, it should be (90*12)/300,000 = 0.36%
February 22nd, 2007 at 7:07 pm
Ha, didn’t even bother to do the math, shame on me (nor did I visit the site). 0.36% is not so bad.
February 22nd, 2007 at 7:17 pm
Well, if you have $1M, this one even cheaper at 0.25%
http://www.portfoliosolutions......ut_us/fees
Richard A Ferri is the President of this company. He wrote a few books on index investing.
February 23rd, 2007 at 12:44 pm
This is exactly the information I was looking for.
I am a young investor starting out with investments of 25k in my non retirement accounts.
I am already convinced that indexing is the way to go.
I really like the specialized funds that DFA offers.
I guess my only way to get in is with Talis Advisors for the min fee.
Any other cheap advisor recommendations for young investors will be appreciated.
Yogesh
February 24th, 2007 at 9:59 am
I have Smart529 Select account, it provides access to DFA. So far, the performance is better than my other 529 accounts utilizing Vanguard (passive) or American Funds (active).
February 25th, 2007 at 12:44 pm
Hello Folks,
I have been reading the string of comments on DFA funds with alot of interest. I currently have all my retirement funds with Fidelity as a result of my employer. As a result of a company offered buy out I have left and looking to move my retirment funds. I have met with a few advisors and one of them invests in DFA funds. I was quite with DFA. But as most of you mentioned the DFA advisory fees are a bit steep. This one charges a portfolio building fee, (first yr one time only $250 qtr) an on going retainer fee ($250 qrt) and a per cent of portfolio fee. He has a documented 7 yr avg return of 9.75 after all fees and expenses.
Will Talis and the others sites mentioned select funds to build your portfolio asset allocation. If they do are they all DFA funds or will they mix in some others. I would not trust myself to select funds and will pay for the expertise. But would like keep these costs down.
February 26th, 2007 at 10:47 am
My Talis Advisor would have allowed me to invest in other funds as well as DFA. I toyed with China Opportunities which I already owned but decided I would be straying from the indexing approach. Also, my advisor looked deeper into the DFA funds and found plenty of China coverage there. I decided to go with all DFA funds. They will help you design your portfolio. They have several already designed, some with bonds and mutual funds in different percentage allocations.
February 27th, 2007 at 5:36 pm
Robby,
Just curious how your agressive DFA portfolio faired today? I hope you stayed away from China Opportunities. I am still trying to decide which advisor I am going with. I would love to talk to you more about Talis. If you have a moment my E-mail is tcsturm@aol.com
Thanks,
Tom
February 27th, 2007 at 5:41 pm
Robby thanks for the response. I would probably be looking at a conservative to balanced portfolio of equity funds and fixed income. Do you know what Talis’ fee schedule is. Do they do this over the phone or by email.
February 27th, 2007 at 9:26 pm
Well, I lucked out today. My advisor put in the buy for my brokerage account yesterday and I will get the funds as of the close of today when the market dropped 415 points. We have been waiting on the IRA account because a couple of smaller funds that I owned have to go through a lengthy re-registration so I decided to wait a few days to see how this situation plays out. I believe Greg Schmitz would discuss the fee schedule over the phone with you if you give him a call.
February 27th, 2007 at 9:46 pm
I did notice that Morningstar showed the top performing international fund for today was the DFA Japanese Small Company Fund.
February 28th, 2007 at 10:49 am
How do you folks feel about starting and managing an investment portfolio over the phone and through the internet transactions and e-mail. I live in New England. As compared to sitting down face to face with an advisory.
March 5th, 2007 at 6:22 pm
Robby,
Did you meet with Talis in person to develop your portfolio or did you do it through the phone, email, internet.
March 6th, 2007 at 5:38 am
I spoke to Greg Schmitz over the phone and felt comfortable enough with him to proceed. The portfolio he and I selected was pretty much what I had planned. I still have not bought the international funds that will go into my IRA. I am waiting for the markets to stabilize somewhat before doing that. I am also concerned about buying a real estate fund now. Pat Dorsey has an interesting video on Morningstar about now not being the time to invest in REITS.
March 6th, 2007 at 9:55 pm
Out of curiosity, what is the actual mix of DFA funds in the Aggressive Portfolio? How tilted to value stocks and international stocks is it? Based on the advertised Talis returns on their website, it appears considerably tilted.
By the way, DFA currently doesn’t hold any Chinese stocks whatsoever, so you got some bad info. That is one of the reasons their Emerging Market funds are ranked #1 this year (every other active manager had loaded up on China and chased returns to justify their 2% expense ratios)
March 7th, 2007 at 12:40 pm
My advisor, Greg Schmitz, told me that he looked into the DFA funds and said that they do have China stocks in their mix. If you want to call him the number is listed in a previous post. He can also tell you about the portfolio I am invested in. It is basically large, small, international and emerging markets value and will include three regional funds and two real estate funds. DFA has just come out with its international real estate funds.
March 16th, 2007 at 3:00 pm
I am trying to set up some DFA portfolios in morning star to track performance. Does anyone have any good suggestions for DFA portfoloios with percentages?
Tom
March 23rd, 2007 at 1:35 am
ifa.com has a bunch of portfolios. Their percentage breakdown, for the equities portion of all portfolios (except portfolios 95 and 100) is:
20 dflcx, 20 dflvx, 10 dfscx, 10 dfsvx, 10 dfrex, 10 dfivx, 5 dfisx, 5 disvx, 3 dfemx, 3 dfevx, 4 demsx.
The ports are on an equities vs short-term bond spectrum from 15/85% (portfolio 5) to 0/100% (portfolio 90, 95, 100).
95 & 100 modify the equities breakdown, with a little more emerging markets and a LOT more small/micro cap.
March 23rd, 2007 at 1:38 am
And in a taxable account, the tax-managed funds DTMEX, DTMMX, DFTSX, DTMVX, DTMIX, substitute for their equivalents.
March 25th, 2007 at 6:33 pm
Jason,
Thanks for the info on portfolios.
April 11th, 2007 at 9:38 am
hey, currently, i’m with Talis. They’re charging me 0.6% annual fee for $120k. Apparently I negotiated a bad deal, b/c some of you posted 0.55% for $100k balance. i was looking to switch. Anyone has info on Malvern Capital? He posted on his website 0.2% per year. He replied to my email and said my balance is good enough for this plan. Anyone has any experience or heard about him?
April 11th, 2007 at 3:09 pm
Investor99,
I talked to Talis and I really liked the advisor I spoke to. The fee I was quoted at Talis was higher than what you are paying for a larger asset amount. It may depend on the advisor. I think it all depends on what you are looking for. It sounds like from Malvern Capital website that it is access to DFA funds with no other services or no advice. I have been searching for an advisor and it is a tough decison on what to do. I think that it depends on your situation. I don’t think you will find the best advisor with the best services that is also the lowest cost. Send me an E-mail and I can share with you what I found in my search. tcsturm@aol.com
April 12th, 2007 at 11:29 am
Has anyone worked with Merriman Capital Management. They have a very informative web site, a huge customer under management portfolio, and are a big advocate of DFA funds.
April 13th, 2007 at 1:52 pm
Merriman offers a free telephone consultation which I found helpful. Ultimately, I went with Talis due to lower fees and the personal relation I built up with my advisor. As of this week I have dollar cost averaged all my money into the funds and I am, so far, very pleased with the results. DFA has a very informative educational web site, as well.
April 13th, 2007 at 2:23 pm
Robby,
Did you work over the internet with Talis to manage your portfolio or was it face to face.
Any suggestions on financial investment planning over the internet. I am a little concerned with not having a face to face relationship with my financial advisor.
April 14th, 2007 at 2:42 am
I did all of my negotiations over the phone. I pretty much knew what I wanted to do and was looking for validation and analysis that backed up my thinking. I also needed help on what funds to put in taxable and non-taxable accounts. I felt very comfortable with my advisor and also the president of the company who I spoke with once.
April 14th, 2007 at 5:21 am
Robby,
Looks like you went with Talis. How long have you been with them, did fees, expenses and portfolio performance match up with what they quoted.
Is your portfolio all DFA funds from their 20% - 100% model menu, did they mix in any name brand funds.
How often do you speak with them to review your portfolio, have they suggested changes to your portfolio based on market changes, etc.
Out of all the DFA financial advisors out there what made the difference for you to select Talis over the others.
Robby would it be ok to discuss these questions in more detail over the phone or e-mail. (dchillman@verizon.net) Thanks for your help.
April 17th, 2007 at 1:50 pm
My name is Greg Schmitz from Talis Advisors. I sincerely appreciate the compliments and calls I?ve received from this blog, but I?d like to clarify a couple of points.
First off, although there?s China exposure through particular DFA funds it?s minimal and provided on stock exchanges just outside of China to help control risk. Unlike the Chinese stock exchange, these stock exchanges meet DFA standards on items such as property rights while allowing an investor to benefit from the vibrant Chinese economy without the risk of directly investing in China.
Secondly, I agree that fees are important, but most importantly is risk-adjusted return net of fees, fund expenses, and tax consequences.
If you would like any further clarification or have other questions please call me at 972.378.1792 or email me at gschmitz@talisadvisors.com.
Thanks, Greg
April 17th, 2007 at 2:08 pm
hey Tom and others,
i saw your reply. yeah, malvern capital is 0.2% and it is DIY. But from the data published in ifa.com. I was able to design a better portfolio than either IFA 100 or Talis 100. Talis 100 shows a 5-yr CAGR of 19.35%. I designed my own portfolio and get 28.1% for the same time period. I would rather go it alone and pay the lower fee. Also, with Talis, don’t you have to pay an extra hourly fee or a fixed fee for personalized advice on top of the quarterly fee? My contract says I have to. Hmmm, I think I am a pretty bad negotiator.
April 17th, 2007 at 4:37 pm
Folks, based on this blog and the research I have done I have made up my mind on DFA funds. Still working on selecting an advisor. I have spoken with a few of you on Talis and got good reports. I noticed that Rodlykins, KPC, Steve H have all gone with Talis. It would be very helpful if I could follow up with you guys on Talis. Could we follow up on e-mail (dchillman@verizon.net) or phone to discuss.
April 17th, 2007 at 6:26 pm
Investor 99,
I posted my E-mail on an above post and never heard back from you. Please E-mail me I would like to talk to you about Talis and Malvern.
tcsturm@aol.com
Tom
April 18th, 2007 at 4:42 pm
Anyone can design a portfolio that “outperforms” another based on backtesting. I could easily design a portfolio of actively managed funds that would outperform even a very well designed DFA or Vanguard portfolio if I’m cherry picking funds/asset classes in hindsight. This oversimplified statement ignores the fact that portfolios can only be judged on subsequent performance and that risk adjusted performance is of key importance. How does the Sharpe ratio on your portfolio compare to IFA’s or to Talis? Do you even know how to calculate it or what it means? What matters is portfolio efficiency. Read “Portfolio Selection” by Markowitz if you want to start learning about how real portfolio design works.
April 20th, 2007 at 10:35 am
Structure,
Very interesting comments who are you addressing them too. Which advisory firm are you referencing when comparing Sharpe ratios to IFA and Talis. Are they better than IFA and Talis if they are I would be very interested in this advisory firm.
April 20th, 2007 at 2:47 pm
Both IFA and Talis have very well designed portfolios. You’ll be fine with either firm. The point that I’m making is that anyone can design a “portfolio” based on backtesting. For example, a portfolio that consists of simply 1/3 DFA Real Estate Securities, 1/3 DFA Emerging Markets Value, and 1/3 DFA Int’l Small Cap Value will have a higher return than any well diversified portfolio over the past 5 yrs. Of course, it’s much less efficient than the well diversified designs that I’m comparing it to. Designing an efficient portfolio is simply a matter of mean-variance optimization, but it’s very time period dependent and requires some common sense. My comment was really aimed at “Investor99″ and his claim of having designed a portfolio that outperforms those designed by an advisor. Unless he has also calculated the standard deviation and the Sharpe ratio, he has no basis for this claim.
April 21st, 2007 at 2:48 pm
While we’re at it, let’s clear up some other misconceptions. First, although they are passive, DFA’s funds are not index funds. The exception is DFA Large Company, which is simply an S&P 500 index fund. DFA doesn’t bother much with this asset class (large cap growth) because their focus is on asset classes with higher rates of return based on the Fama/French research — value and small cap. Also, the advisors that work with DFA are not brokers. They are registered investment advisors. There is a big difference between the two and if you don’t understand it you should spend the time to educate yourself.
April 23rd, 2007 at 12:31 pm
Structure, thanks for sharing your investment experience. You can see where I am headed based on my submissions. You mentioned that IFA or Talis are good choices. Do you have another that you prefer. Also in reference to DFA portfolio Sharpe ratios is there a bench mark I should try to get to for portfolio efficiency. I know they will be different based on the portfolio mix from 20/80 to 100% equity mix.
April 24th, 2007 at 7:33 am
I’m not here to recommend advisors, just to clear up misconceptions about DFA and the advisors that they work with. Sharpe ratios are useful for comparing relative efficiency of porfolios with the same or very similar equity/fixed income mix. Most DFA advisors are well acquainted with the academic research that shows that short-term fixed income is the best choice to dampen volatility in a portfolio. When you compare the difference between DFA advisors in fixed income performance, it’s minimal. What matters most is the equity portfolio efficiency. I also noticed that someone here stated that the Talis portfolio design must be tilted toward value and international equities to achieve the performance figures being advertised. A tilt toward small cap and value will produce higher returns over time because value and small cap are riskier asset classes. There is no long-term performance difference between developed international and domestic equities. Most advisors underweight developed international equities because they don’t understand their function in the portfolio — diversification. Also, broad exposure to developed international equities is a far less efficient diversifier than international small cap and value. A good advisor will understand this and incorporate these concepts into the portfolio design.
May 13th, 2007 at 9:06 pm
Stucture,
Yes, definitely calculated mean-std. dev. and sharpe ratio. The biggest flaw with ifa.com’s calculation is that they calculated std. dev. on an annual basis. big mistake. dfa funds are not intended to be ‘traded’. if you’re buying dfa funds, you really ought to be holding them for at least 5 years. Therefore, calculations should be based on 5-yr rolling periods. The portofolio I designed has lower std. dev. and higher means in all 5-yr rolling periods. I can easily tell you one improvement, in ifa100 they have 20% allocated to microcap. that fund does a double whammy. it drags down the mean, and drives up std. dev. don’t include that fund, and right there it’s a huge improvement. i have to admit, all the DOE i ran and conclusions are based on past performance data, and as you all have heard before…past performance doesn’t guarantee future results
May 14th, 2007 at 11:09 am
Invester99 you have generated a lot of good discussion. Could you contact me by email. dchillman@verizon
May 18th, 2007 at 12:01 pm
Investor99, I agree that DFA’s funds are designed to be held for long periods of time. That’s really a basic tenet of MPT. I don’t think any advisor that works with DFA would disagree.
IFA actually calculates standard deviation monthly, then annualizes the number by multiplying by the square root of 12. IFA uses that method because it presents data that is consistent with the data on competing funds from Morningstar. You are absolutely correct that standard deviation is very time period dependent.
Again, it’s pretty simple to create a portfolio in hindsight that will outperform an any “live” portfolio. But, I agree that 20% allocation to any asset class is excessive. You are also right about the performance of the micro cap fund. But, if you buy into the Fama/French research (and if you don’t, you probably shouldn’t be investing in DFA funds), then you would have to expect that stocks in the 9th and 10 CRSP deciles (microcap, according to DFA’s definition) would have a high rate of return over long periods of time. In fact, this happens to be the DFA fund that has been in existence for the longest period of time (since 1/82). From 1/82 through 4/07, the annualized return has been 13.99% with annualized standard deviation of 18.99%. Not an impressive excess return over the S&P 500 with a lot more risk over this time period, which included some horrible years for this asset class. But, looking at longer term data (1/26 through 4/07), the CRSP 9-10 deciles outperformed the S&P 500 by about 2.34% (annualized). The bottom line — I agree with you that 20% is way too much, but it’s an asset class that should be included in the portfolio. In my opinion, you get a lot more efficiency out of the portfolio with a value tilt than a small cap tilt. That doesn’t mean that you don’t use small cap, but you use it appropriately.
June 1st, 2007 at 12:50 pm
FYI there is no China in any DFA funds. Robby and his advisor are just plain dead wrong about that.
June 9th, 2007 at 5:22 pm
Lets not forget the typical advisor fees (1.5/250000) on top of the fund fees required to own DFA with advisor fee % decreasing as the account value increases. Basically a wash for the investor. Considering that, would Vanguard come out on top on a cost basis valuation?
June 12th, 2007 at 5:28 pm
Bill,
There are a number of holdings within DFA’s emerging markets funds (including DFA Emerging Markets Portfolio, DFA Emerging Markets Small Cap, DFA Emerging Markets Value, and DFA Emerging Markets Core Equity) either headquartered in China or headquartered outside of China but significantly impacted by China’s economy. Of the holdings headquartered outside of China, some are impacted by having key business segments operating in China and some simply by trading with China. All holdings I am referring to trade on stock exchanges outside of China (such as the Taiwan exchange or the Hong Kong exchange). It is important to make the distinction between stocks trading on the Chinese stock exchange (which DFA does not engage in), and stocks trading on other exchanges (Taiwan, etc.) with either direct or indirect exposure to China’s economy.
Here are just a few examples of DFA Emerging Market holdings with China exposure:
China Synthetic Rubber trades on the Taiwan exchange and is actively developing its market in China.
China Life Insurance Company Limited is China’s largest life insurance company, a leading provider of annuity products and life insurance for both individuals and groups, and a leading provider of accident and health insurance. It trades on the Taiwan exchange.
China Metal Products has principal business units operating in mainland China.
China Petroleum and Chemical - a very large state-owned petroleum company headquartered in Beijing, China.
Great China Metal Industry Corp - headquartered in Taiwan with subsidiary businesses in Shanghai, China (Shanghai United Can Co., Ltd.), and Jiangsu, China (Huatong United (Nantong) Plastic Industry Co., Ltd).
China Manmade Fibers - headquartered in Taiwan but has exported as much as 100,000 tons of polyester staple fiber to China.
ChinaTrust Financial - headquartered in Taiwan, and per Investor Relations, ChinaTrust Financial is indirectly impacted by China’s economy.
Hope this helps,
Greg
June 12th, 2007 at 6:49 pm
San Francisco Business Times reports that the California Public Employees Retirement Systems (CALPERS) has amended its policies to permit Alliance Bernstein, DFA and Genesis to buy stocks in China, Egypt and Venezuela and other developing countries effective January 1, 2007. This appeared on the SFBT web site.
June 16th, 2007 at 9:15 am
The “typical” advisor fee is not 1.5% for any portfolio size, certainly not at $250K. It’s more like half of that. A portfolio of DFA funds will also have an expense ratio that’s slightly higher than the index portfolio (ETF or open end mutual funds). That, plus the advisor fee for small accounts ($250K range) is about 1.0%. If you’re paying more than that, you’re probably working with an “advisor” that doesn’t have a direct relationship with DFA. There are lots of them out there. They farm out the portfolio management to a company that works directly with DFA and they add another layer of fees.
Because a properly constructed portfolio of DFA funds can have much stronger exposure to both value and small cap, the expected return over a significant period of time will be well above what can be achieved through indexing. Depending on how much additional factor exposure the portfolio design achieves, the return will be 2-4 percent more than the index based portfolio. It’s very simple to see that, even when adjusted for higher expense ratios and advisor fees, this makes sense.
Index funds have many other issues that make them less than ideal investment vehicles when compared to DFA’s structured asset class funds. Index funds must trade positions when the index is reconstituted because the primary goal is to track the index. The cost of the trade can be signficant because it’s all done at the same time by all of the funds tracking the index and it tends to have a huge impact on the stock of the company being included/excluded from the index. There is also the spread to consider. None of this is reported in the fund expense ratio. DFA funds do not suffer from this problem and can frequently have a negative trading cost — unheard of in the mutual fund industry.
It’s good to have this forum to discuss DFA, but there is a huge amount of misunderstanding/misinformation about DFA being presented by “do it yourself” investors that don’t have all the facts. Caveat emptor.
June 21st, 2007 at 1:11 pm
DCHillman,
I would like to know whom you went with for DFA funds?
Thanks.
June 21st, 2007 at 1:25 pm
I just came to know that you can get DFA Funds through CFP selfworthfp (dot) com (uses Schwab), and charges less than what IFA charges about ? of 1%, and they let you start with less than most others min of 100K or 250K. This guy had 65K.
Has anybody decided yet on which one is the most cost effective and also a good adviser?
June 25th, 2007 at 7:09 pm
Anyone from here have personal experience with IFA. I am considering on going with them, but would like some thoughts from members here, if any.
June 27th, 2007 at 9:08 am
If I haven’t said it before, John Gorlow at Cardiff Park Associates (www.cardiffpark.com) charges a flat rate, usually around $1,200 per year, to manage your money. It will be more for more complex financial situations, but still… this is
June 28th, 2007 at 10:28 am
I wanted to provide you with an update released today related to DFA and their new policy for China.
Until recently, China did not meet DFA?s criteria for eligibility due to concerns such as unreliable property rights, unsatisfactory accounting standards, and a poorly developed stock exchange infrastructure.
After monitoring developments in China over the past few years, two senior DFA portfolio managers have recently met with economists, analysts, and stock exchange officials in Shanghai, Beijing, and Hong Kong. Recent reforms have eased investor related concerns, and as a result, DFA has concluded that China now meets their criteria for investing.
For the foreseeable future, DFA will restrict its eligible universe to a group of just over 200 Chinese equities that trade in markets outside of mainland China, typically Hong Kong. This universe is large enough to be divided into diversified strategies with distinctive large cap, small cap, and value characteristics, consistent with their approach in other markets.
They feel that China may turn out to be one of the larger markets in the emerging markets strategies. As of March 2007, it was the third-largest country in the MSCI Emerging Markets Index, after South Korea and Taiwan.
June 30th, 2007 at 5:56 pm
The focus on advisory fees here is amazing. What matters is net risk adjusted return.
Let’s assume that the risk free rate of return is 4.0%. We’ll further assume, for the sake of simplicity, that this is a retirement account and taxes aren’t a consideration.
Advisor A’s portfolio has a return of 15% with total expenses of 1.5% and a standard deviation of 14%; Advisor B’s portfolio has a return of 14.5% with total expenses of 1.0% and a standard deviation of 13.7%; and Advisor C’s portfolio has a return of 16% with total expenses of 1.5% and a standard deviation of 14.5%.
Which advisor would you choose? Why?
June 30th, 2007 at 7:45 pm
Structure,
False dichotomy. If you *really* believe that your stock advisor can mix DFA funds with high alpha (essentially, an extra 1% of return from 0.5% standard deviation boost), then hell, pay them 2% a year.
My view, and the view of most DFA investors, is that we need DFA funds to best Slice and Dice the market to get quasi-indexing in those areas not provided by Vanguard.
To that point, expenses will be the most controllable factor.
If you’re going to pay more than 0.25%, then you’d better be sure you’re getting what you pay for.
July 2nd, 2007 at 9:17 am
Alpha does not exist. A portfolio’s return is only a matter of exposure to risk. If you believe in alpha, why would you pursue a passive investment strategy?
The issue is portfolio efficiency and there are vast differences between advisor implementations. If an advisor’s portfolio design isn’t even close to the efficient frontier, why would it surprise you that another advisor’s portfolio could outperform it with only a slight (or even without) increased standard deviation?
July 4th, 2007 at 2:39 pm
Let’s clear up the next misconception. The vast majority of DFA investors do not use DFA’s funds to add specific risk exposure to a Vanguard portfolio. The vast majority invest in a portfolio designed by an advisor that is either mostly or all DFA.
DFA provides broader and more reliable exposure to asset classes than a simple indexing strategy can. With very few exceptions, DFA’s funds have outperformed the corresponding benchmark index over any significant time period. Even in cases where the performance is similar to the index, the DFA structured asset class approach provides more reliable correlation and less likelihood of future underperformance due to asset class dispersion.
Further, the ability to tilt the developed international and emerging markets allocation toward small cap and value results in lower variability of return at the portfolio level than can be achieved by using a broad index based approach to international diversification because the international small cap and value asset classes are significantly less correlated to US markets.
You should always be sure you’re getting what you pay for, but you need to have a clear understanding of how to evaluate it.
July 9th, 2007 at 4:07 pm
My advisor works through TDAmeritrade. I recently came into a substancial inhertitance that doubled my portfolio to over the 1mil mark. I had long time holdings of Exxon, Tex Util, Lockheed, JP Morgan/Chase, IBM, Duke Energy as my major holding with Exxon being about 25% of preinheritance portfolio. All of them were DRIPS. Vangard was my choice for Roth IRAs.
I was content with the situation and over 20 years according to the Advisor doing as good as DFA and the market as a whole. It was a somewhat difficult decision to make the switch never having had anyone manage my portfolio before.
Peace of mind at 52 and better risk portfolio exposure and a 4yo son were the factors. Did I make the right choice? The next 20 years will tell. What is your opinion? Thanks
July 12th, 2007 at 4:05 pm
Almost certainly, if your advisor has any idea what he’s doing.
TD Ameritrade is only the custodian and largely irrelevant. Most DFA advisors use the institutional divisions of Fidelity, Schwab, Fiserv, or TD Ameritrade to hold client assets.
When your advisor told you that you had done “as well as the market” over 20 years, was that a simple analysis based only on return? You were probably taking a lot more risk than necessary to generate those returns.
July 13th, 2007 at 6:32 am
The cap gains taxes generated with the switch were quite a shock. An extra 20k due to AMT for 2007, OUCH! Getting into the mind set after going it alone for so long is taking some getting use to. The fees are another thing in themselves. The fortunate thing about the Advisor is that coincidentally a very good friend happens to use the same firm and has been for 10 + years. I didn’t know this until a few weeks ago and just mentioned in passing. I will have to get together again and see what he says. Must be content having been there this long. Thanks for the advise.
July 16th, 2007 at 1:22 pm
The good thing about the capital gains is that it’s probably the lowest capital gains tax rate that we’ll see in our lifetime. The AMT hurts, though. This is NOT what the AMT was designed for. This needs reform and it needs to be done now.
The client retention for advisors using DFA is extremely high. Good luck with your advisory relationship.
July 17th, 2007 at 4:42 pm
I was wondering if anyone reading this knows how to get DFA funds in Canada. What advisor sells them? For how much?
July 19th, 2007 at 3:05 pm
Competent advisors don’t “sell” DFA funds. They work with clients to design portfolios based on DFA’s funds that meet the goals and risk capacity/tolerance of the individual client by controlling the exposure to the risk factors that drive portfolio return. The fee that you pay is for the advice that you receive. It varies by advisor.
Go to DFA Canada’s website: http://www.dfacanada.com and click on “online form” under the heading “Find an Advisor” on the right side of the home page.
July 20th, 2007 at 1:17 pm
Structure, I have enjoyed reading your comments about DFA funds over the last several months. Thank you for sharing your superb knowledge of portfolio diversification, risk and efficency. Especially the ideas about advisor fees. Perhaps I missed your connection to DFA funds, but where do you fit into the matrix? CLIENT-> INTERESTED PARTY->DFA ADVISOR->DFA FUND, none or all the above. The information you have provided has been valuable in my research for a new advisor.
July 20th, 2007 at 2:41 pm
Thanks, Mike.
I’m just attempting to clear up the misunderstandings about DFA and DFA advisors that seem to be common on this type of site. I don’t work for DFA and I’m not here to attempt to steer anyone to any particular advisor.
There are several good advisors that have been mentioned here and you should do your own due diligence. The advisor should be able to clearly articulate why they use a particular asset allocation. I would recommend against using an advisor that does not have a direct relationship with DFA, as their fees will generally be higher and the turnkey asset manager portfolios that I have seen don’t impress me. If you need financial planning, go with a firm that has advisors with CFP or CPA/PFS designations on staff. If you’re really just interested in asset management, these designations don’t mean much. If you want performance reports, be sure that the firm has that capability.
Good luck with your search.
August 1st, 2007 at 3:45 am
I have a question for everyone about DFA’s Core Equity funds being used in a taxable account. I thought that they were supposed to be fairly tax-efficient, but now I hear that DFA is going to unveil a “tax-aware” Core Equity fund, at least for the U.S. The core equity funds in general are quite new, but do people think they should be used in a taxable account for the “core” equity holding? (as opposed to some of Vanguard’s total-stock-market funds for the U.S. and int’l)
August 5th, 2007 at 9:25 am
The core equity funds from DFA are very tax efficient by design. Purely from a tax efficiency standpoint, it’s a no brainer. Here’s why: In the traditional portfolio construction using asset class specific funds, fund holdings move outside of the hold range of a particular fund/asset class and must be sold. This creates a capital gain that must be distributed. In many cases, the company that was sold fits the hold parameters of another fund in the portfolio. Think of a company that becomes too large to be held in a micro cap fund but now should be held in a small cap or small cap value fund. In the core implementation, this company would not be sold and repurchased — it simply moves to a different “bucket” in the core fund. This significantly increases tax efficiency.
There are other issues with the core funds, most notably how to achieve a target factor exposure, that a competent advisor will understand when constructing a portfolio. As with many good questions, there isn’t a simple answer. Adding some exposure to small cap/value by including the asset class funds with the cores can tilt the factor exposure, but at the cost of tax efficiency.
The decision about whether to use DFA or Vanguard as the core holdings for a portfolio comes down to indexing versus asset class investing, which has been discussed. This is essentially the same question.
Once again, working with competent advisor to determine the right portfolio construction for your particular circumstance is important. Note that you won’t find this with an “advisor” that outsources portfolio management or that sells access to DFA’s funds for the lowest fee. Typically, you won’t find a lot of portfolio construction expertise at small firms that focus on financial planning. Finding the right advisor is big factor in determing success with a DFA portfolio. Unfortunately, it is not a decision process that most individuals are well qualifed for. As a result, the process becomes vastly oversimplified — the lowest fee, for example — or, it becomes driven by what is essentially advertising — the most expensive website. Perhaps, a relevant topic of discussion would be how to evaluate DFA advisors.
August 6th, 2007 at 5:04 pm
Structure that is the $64,000 Question.
“Perhaps, a relevant topic of discussion would be how to evaluate DFA advisors”.
I have asked that question many times. The standard answer I hear is to ask other people who use the advisor, check his background with SEC, get comfortable with the advisor, get fee only advisors, etc, etc. Once you have done you’re basic research and everything checks out, how do I identify the great DFA advisors from all the rest of the DFA advisors. I am sure there are some very good DFA advisors as well not so good advisors.
In today’s complex investment world you need a MBA in financial planning just to know what you should know about financial/investment planning to ask the right questions. If I want to buy a car or electronics with the best technology and best market price/value I get an analysis report with all the comparisons to help me make an educated choice. I know this is not a fair comparison because of all the varibles in financial planning. But you get my point.
The average invester can do all the basic requirements research but when it comes to choosing a DFA advisor with the best track record and skills to build the best performing portfolio, how do evaluate all the DFA advisors.
August 7th, 2007 at 9:19 pm
Structure,
Thanks for your post. If “The core equity funds from DFA are very tax efficient by design,” then why, I am wondering, is DFA planning to launch a “tax-aware” version, at least one for the U.S.? http://www.diehards.org/forum/.....1186525223
I am just about to move my portfolio (from indiv. stocks), and since it is all taxable, I am feeling gun-shy about the core equity funds if DFA has plans for tax-aware versions. Any follow-up thoughts would be great. Thanks.
August 8th, 2007 at 7:42 am
I spent almost two months deciding between Vanguard Do-it-urself approach vs Advisor who has access to DFA funds.
I have been with Vanguard (Do-it-urself ) for almost one year but wanted to align all of my portfolios. I felt that there’s room to improve.
Finally going with an advisor (access to DFA) as he brought up many good points which didn’t come up during my analysis or help from various blogs.
It does make a difference when you have an advisor..or a good advisor with access to DFA Funds..that too at low cost.
Vic
August 8th, 2007 at 3:14 pm
Mills — A tax “aware” US core equity fund would be pretty simple for DFA to create and has the potential to be exceptionally tax efficient. Since it’s Larry Swedroe that posted the information, it’s very credible. A portfolio constructed primarily from the core funds is already significantly more tax efficient than the individual structured asset class fund approach, but a tax managed core would be even better.
Vic — It’s good to hear that you’ve found an advisor that has been able to add value beyond simply providing access to DFA. That’s the advisor’s role and there are some very good ones out there. The do-it-yourself index fund approach is good. It’s certainly a step beyond active management using a broker and/or actively managed funds. But, a well designed DFA portfolio will outperform an index based approach by more than a reasonable advisory fee.
August 9th, 2007 at 10:56 am
Thanks Structure.
Also, what I liked about the advisor is that he wasn’t focussed on making money. Seemed like he does it because he likes it. I mean we spent hours on the phone, never felt like I was pushed around or he was in a rush to see other clients
He helped in many ways to reduce the total cost as it was a big concern for me.
Also, not only in the initial stage but he’ll keep an eye going forward so that we can tweak the portfolio depending on how my financial situation changes.
So I’m very happy.
Thanks.
Vic
August 9th, 2007 at 11:46 am
Agreed, Fabian. It’s not simple, and the process is going to vary a bit for each individual depending upon goals/needs. Unfortunately, there is no report that exists that allows a potential client to compare DFA advisors.
Everyone should first be certain that they are working with an independent fee-only Registered Investment Advisor (RIA) and not a broker that is using an RIA as a turn-key asset manager and tacking on additional fees. Always check out the RIA firm with the SEC (for federally registered firms) or the state regulatory body (for state registered firms). You can get contact info for state regulators via the NASAA website.
If you need financial planning work, select a firm that has a planner with CFP or AICPA/PFS credentials. If you don’t need financial planning and are really just interested in portfolio management, these designations don’t really matter much.
Custody options are not much of a consideration unless you have a very small portfolio where transaction costs can be a factor.
An advisor should be able to show you the results that recommended portfolios have achieved over a reasonable amount of time. Beyond the return, what matters is the efficiency of the portfolio design. Any competent advisor should be able to explain the structure of the portfolio, the risk as measured by standard deviation, and the efficiency as measure by the Sharpe ratio. If the advisor can’t clearly articulate this, move on.
Most established firms have performance reporting capability and carry E&O insurance. These may or may not be important to you, but they are something to consider.
If an advisor (and there is at least one very large DFA advisor that does) advocates market timing, run (don’t walk) away as fast as you can. Ditto for any dynamic/tactical asset allocation scheme.
August 9th, 2007 at 4:47 pm
Structure:
Could you discuss “market timing” in more detail.
“If an advisor (and there is at least one very large DFA advisor that does) advocates market timing, run (don?t walk) away as fast as you can”.
August 9th, 2007 at 5:51 pm
VicFromATL,
Would you mind sharing which DFA Advisor you went with.
August 10th, 2007 at 7:34 am
Martket timing is simply the effort to adjust your exposure to equity risk by attempting to predict future market price movements. Market timing is controversial, to say the least.
The academic viewpoint is that it is a completely futile attempt to predict events that are essentially random. Several independent organizations have tracked market timers performance (in some cases over thirty years) and have found that their results are no better than expected by chance - and frequently worse. In a famous study, market timers were given two sets of charts - one set was of real stock prices and the other was a set of charts produced by a random number generator that was programmed to approximate the standard deviation of equities. The “experts” were unable to distinguish between the two. Most serious investors wrote off market timing as a viable strategy a long time ago.
Any “advisor” that advocates a market timing scheme should be avoided.
August 10th, 2007 at 8:29 am
Fabian,
I researched various advisors for a month or two and finally went to with Rahul Chahal @ Self Worth (http://www.selfworthfp.com).
He was recommended by ppl who used him for last few years and were very happy with the results.
Vic
August 10th, 2007 at 5:40 pm
Structure,
Thanks for your help.
August 18th, 2007 at 7:52 pm
This pgae has very good information about DFA advisors
http://www.retireearlyhomepage.com/dfaadv.html
September 23rd, 2007 at 10:02 pm
can you please recommend any DFA advisors in Austin. the website shows none in Austin, which seems pretty strange
September 24th, 2007 at 5:25 pm
Don’t expect any of these advisors to save you when your self-directed portfolios fizzle. Most investors would benefit from using a full service DFA advisor and not DIY.
September 26th, 2007 at 10:47 am
This is a great thread! I found more useful information here than I have in the last month of researching using search engines.
1. FYI- The Malvern web site does specifically include reference to DFA access only for .20%, the lowest by far I have found in over a month of searching. However, I sent an e-mail to Malvern Capitol and got the following response:
?Thanks for your interest. I have moved to Utah and am not accepting any new clients until at least January. I will be happy to talk with you at that time. I’ll attach an email I sent to clients to provide you with a bit of background. I will look forward to hearing back from you.
Take care, Karl.
Karl Ashliman, CFP
NAPFA-Registered Financial Advisor
“Financial Advice with Integrity”
http://www.MalvernCapital.com
435-656-0718
We are moving from Pennsylvania to St. George, Utah in early August. My business, MALVERN CAPITAL MANAGEMENT, LLC, will remain intact and move right along with us. I don’t anticipate any changes other than a new phone number and address.
My new home office number in St. George will be 435-656-0718. This number should be operational by August 15th at the latest. My email, Karl@MalvernCapital.com will remain unchanged.?
2. I spoke to Greg Schmidt at Talis. He will probably be posting here soon.
The firm?s fee is NOT .55% for DFA funds! That was apparently a special situation brought on by a merger or some such. I was quoted a fee of .85% on funds managed at the $150,000 level.
Greg is very responsive, knowledgeable and stresses customer service. I highly recommend that anyone needing a full service Investment Advisor contact Greg.
Another great possibility for DFA Access+ seems to be the new site:
http://www.assetbuilder.com
This is a relatively new ?startup?, formed in partnership with Scott Burns, the syndicated financial columnist to further his ?Couch Potato? investing strategy. Their portfolio mixes seem to be on a small/value tilt with a limited number of DFA funds in each portfolio, as opposed to say, IFA. Your securities are held at Schwab Institutional, so there is no ?risk? associated with investing with a ?startup?.
You get personal attention, portfolio development and management rebalancing one time a year, reports and a personal portfolio review of your existing holdings. This review and portfolio construction includes assets not managed by their firm into your total asset allocation. In addition an investor can go directly to the Schwab Institutional site, and their holdings, they just cannot trade.
Most importantly, their minimum account balance is $50,000 and their fee structure is very reasonable.
From their site: ?AssetBuilder investors pay a portfolio construction and management fee that ranges from 50 basis points down to 25 basis points, depending on the size of the account. AssetBuilder investors also pay the cost of the underlying mutual funds ((and the transaction fees to set up you account at Schwab initially)). Add the two and your total cost as an AssetBuilder investor will probably be as much as 150 basis points lower than what most investors experience.
AssetBuilder?s fee table
Amount of Assets Invested Annual Fee
$ 5,000.00 - $ 49,999.99 .50 of one percent (50 basis points)
$ 50,000.00 - $ 249,999.99 .45 of one percent (45 basis points)
$ 250,000.00 - $ 599,999.99 .43 of one percent (43 basis points)
$ 600,000.00 - $ 999,999.99 .40 of one percent (40 basis points)
$1,000,000.00 - $3,999,999.99 .30 of one percent (30 basis points)
$4,000,000.00 and above .25 of one percent (25 basis points)
September 26th, 2007 at 11:06 am
Ouch!
I did not see Rick’s comment until after I had posted! I believe Rick is a man on a mission, and for the most part, I agree with him.
The mission seems to be do not use DFA ?Access? only Sites?. I believe that Rick specifically mentioned assetbuilder.com as the latest ?fad? in DFA access sites on a similar board. I have seen Rick?s posts wherever I have traveled over the last several weeks. I believe he is published author and is one of the country?s foremost experts on Asset Allocation Theory. In all fairness, my experience with AssetBuilder.com is that they are squarely in the middle between ?Access Only? and ?Full Service?. Specifically, you need to know what you are doing if you intend to invest through them.
I only posted to further, and update the thread. However, personally I intend to use a full service Independent Investment Advisory firm, such as Rick?s or Greg?s at Talis.
September 30th, 2007 at 6:58 pm
I have enjoyed reading the discussion on DFA Funds and advisors who have completed their research and concluded that these funds are best for their clients, even though DFA does not pay them to do so.
I did not notice much discussion as to why DFA has chosen this path of working with advisors for their funds. Jonathan stated above, “I believe this is to avoid the performance hit on their funds from any active trading by untrained investors.” This is a small part of the reason. A more important reason is that good advisors reduce or eliminate the negative impact of emotions on investor’s portfolio.
“The investor’s chief problem - and even his worst enemy - is likely to be himself” - Graham, Benjamin (1894-1976) Legendary American investor, scholar, teacher and co-author of the 1934 classic, Security Analysis and mentor to Warren Buffett
Here is some text from my site that further explains.
The fund tracking service Morningstar started disclosing these “investor returns” in 2006. On the Data Definition page of their web site, they state that “Morningstar investor returns (also known as dollar-weighted returns) measure how the typical investor in that fund fared over time, incorporating the impact of cash inflows and outflows from purchases and sales. In contrast to total returns, investor returns account for all cash flows into and out of the fund to measure how the average investor performed over time. Investor return is calculated in a similar manner as internal rate of return. Investor return measures the compound growth rate in the value of all dollars invested in the fund over the evaluation period. Investor return is the growth rate that will link the beginning total net assets plus all intermediate cash flows to the ending total net assets.”
Now that Morningstar is tracking such data, investors bad behavior is finally quantified, as well the advantages of using a passive advisor who helps reduce investor error. In the Morningstar Indexes Yearbook: 2005, they analyzed how the average index investor did on their own versus those that are guided by an advisor using asset class index-type funds from Dimensional Fund Advisors. Here is what they had to say:
“Consider the success Dimensional Fund Advisors (DFA) has had in selling its funds through advisors who undergo training on the merits of passive investing and in portfolio construction theory. Consider that over the past decade the
dollar-weighted return of all index funds was just 82% of the time-weighted return investors could have gotten with
those funds. Yet, the figures for DFA are much better. In fact, the dollar-weighted returns of DFA funds over the past 10 years are actually higher than their time-weighted returns [see Table 1-3]. Suggesting advisors who use DFA encourage very smart behavior among their clients, even buying more out-of-favor segments of the market and riding them up, rather than buying at the peak and riding the trend down, which is usually the case with fund investors.” (See Click Here
Also, there are significant differences among DFA advisors beyond their fees, as many have eluded to above. What was not discussed is the additional risk of low cost advisors, such as their lack of understanding of the many concepts to properly select risk levels for clients, construct optimal portfolios at each level of risk and to optimize cash flow and rebalancing decisions and costs of both fees and taxes and lack of risk maintenance. Finally, do they have a record of actually doing what they say will do. Can they show you client returns from 5 years ago that kept pace with their portolios over that period? Their can be a high cost for low cost advisors that can easily exceed the differnce in fees. Investors need to be comfortable that an advisor really understands all these concepts. There is a fair price for investment advice. John Ruskin put it very nicely when he said,
“It?s Unwise to pay too much?
But it?s worse to pay too little. When you pay too much, you lose a little money ? that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot ? it can?t be done. If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.
- Mark
October 1st, 2007 at 6:10 am
Mark,
I would like to take this opportunity to thank you for the wealth of knowledge and information contained on your website! You site is where I began my learning process on the importance of asset allocation.
1. Do you plan to use the new DFA “Tax Aware US Core Fund in your portfolios soon?
2. The information as to exactly what one receives for the Investment Advisory fee is somewhat difficult to ascertain on the Site.
There is general information under “Ten reasons to hire an?. independent fee only advisor, but I cannot find a link on the site to a contractual or other document that spells out precisely what one receives.
I am specifically interested in the nature and level of details of quarterly reporting and timing on portfolio review and rebalancing. Can you provide guidance?
Keep up the good work!
October 1st, 2007 at 6:53 am
Investor99 said that: “The biggest flaw with ifa.com?s calculation is that they calculated std. dev. on an annual basis. big mistake. dfa funds are not intended to be ?traded?. if you?re buying dfa funds, you really ought to be holding them for at least 5 years. Therefore, calculations should be based on 5-yr rolling periods.”
IFA does show 5 year standard deviations for monthly rolling periods, along with 21 other periods from monthly to 50 years, and it is shown for 20 portfolios. See the 5th column on this table, Click Here. Also see this dynamic chart that shows the distribution of about 500 monthly rolling periods from 1 to 12 years, for 3 different portfolios.
Enjoy, Mark
October 1st, 2007 at 2:55 pm
Mark makes several important points. The comments about low cost advisors are particularly applicable to many of the participants here. The costs associated with operating a Registered Investment Advisor firm are substantial IF the firm hires and retains quality employees, carries the proper errors and omissions insurance, maintains an effective compliance program, and provides robust reporting capability. Most of the low cost advisors out there don’t do any of this and, as the Malvern Capital situation illustrates, may simply disappear without warning when it’s time to move the family to another state. I wonder what kind of access this company’s clients have to their advisor during this period of time.
October 2nd, 2007 at 8:38 am
Hi Skip, Thanks for your kind words. Here are my responses to your questions:
1. Do you plan to use the new DFA ?Tax Aware US Core Fund in your portfolios soon? We prefer to use the targeted value, because of the great tilt to small value.
Here is the description of the fund:
The Tax-Managed US Targeted Value Portfolio is a no-load mutual fund designed to capture the returns and diversification benefits of a broad cross-section of US small and mid cap value companies, on a market-cap weighted basis. The Portfolio invests in securities of US companies smaller than the 500th largest company in the market universe based upon market capitalization. The market universe is comprised of companies listed on the New York Stock Exchange, American Stock Exchange, and Nasdaq National Market System. After identifying the size breakpoint, a value screen is applied to the universe. Securities are considered value stocks primarily because a company’s shares have a high book value in relation to their market value (BtM). This BtM sort excludes firms with negative or zero book values. In assessing value, additional factors such as price-to-cash-flow or price-to-earnings ratios may be considered, as well as economic conditions and developments in the issuer’s industry. The criteria for assessing value are subject to change from time to time. The Portfolio seeks to delay and minimize the realization of net capital gains, particularly short-term capital gains, in order to minimize taxable distributions to investors.
2. The information as to exactly what one receives for the Investment Advisory fee is somewhat difficult to ascertain on the Site. Here is a paragraph off our home page that provides a summary:
IFA adds value through matching people with portfolios by carefully qualifying and quantifying 5 dimensions of an investor’s Risk Capacity and matching it to 5 dimensions of a portfolio’s Risk Exposure. This process produces investor-specific optimal returns by applying the IFA proprietary concept of 10dRisk?. IFA obtains academically identified capital market rates of returns for its clients from about 16,000 public companies in the U.S. and about 40 other countries around the world. IFA then designs highly tax-managed and low cost trading strategies, maintains ongoing proper risk exposures through rebalancing, manages cash inflows and outflows, and provides online monthly and inception to date detailed measurements of client performance relative to the IFA Indexes and other traditional benchmarks. This ongoing reporting on performance, gains, income and tax reporting is exclusively available at IFA and adds significant value since measurement is essential to improvement.
3. I am specifically interested in the nature and level of details of quarterly reporting: CLICK HERE AND FOLLOW THE INSTRUCTIONS, SEE MY FOLDERS FOR QUARTERLY REPORTS (or call me to discuss)
4. and timing on portfolio review and rebalancing. Can you provide guidance? Step 12 has these 2 sections on Rebalancing Portfolios:
12.2.3 Rebalancing Portfolios
Rebalancing a portfolio is one of the most important factors to achieving long-term investing goals. As explained in this 12-Step Program, it is best for an investor to hold a portfolio that matches personal Risk Capacity?, a component that can best be measured through a Risk Capacity? survey. For optimal returns, asset allocation within a portfolio should be based on an investor?s capacity for risk. Matching investors with portfolios is a critical element to optimal investment performance.
To maintain a portfolio?s asset allocation, periodic rebalancing must be done to ensure that the portfolio continues to reflect the level of risk an investor is willing or able to take. After a thorough evaluation of Risk Capacity?, an investor may be directed to an investment allocation of 65% stocks, 35% fixed income. After a year of bull market conditions, the stock?s allocation value rises to 75% with fixed-income at 25%.
This shift in asset allocation is to be expected, as asset class values change and grow at different rates. Rebalancing back to the initial allocation keeps the portfolio in balance for consistent risk exposure. In this example, the allocation would balance back to 65% stocks and 35% fixed income. Rebalancing in this particular case would entail selling some stock and buying more fixed income. The purchase of fixed income could also be accomplished by using additional cash on hand to invest.
Selling stocks that are performing well and buying more of the asset classes that are performing poorly is often difficult for investors, as it seems to contradict common sense. This resistance to rebalancing often leads investors to either do nothing, or to sell the perceived losers and buy more of the winners, going completely against the prudent principle of rebalancing. Rebalancing often involves buying low and selling high. Many investors make the costly mistake of doing the opposite, buying high and selling low, resulting in lower returns in the long run.
In the face of a fluctuating market, it is important to maintain a portfolio?s target asset allocation in order to control two important factors discussed throughout this 12-Step Program. These two factors are risk and return. Without rebalancing, portfolios will tend to become over weighted with some indexes, creating a change in risk. Rebalancing allows investors to take advantage of favorable time periods for each asset class, resulting in a more steady, less volatile performance.
A portfolio that becomes more or less risky due to lack of rebalancing also leads to less optimal returns, defeating the purpose of investing in a risk appropriate portfolio in the first place.
There are certain times when it is wise to consider changing a portfolio?s target asset allocation because of a change in an investor?s capacity for risk. These times include:
a) when investment goals change
b) when income level significantly changes
c) when number of dependents changes
d) at retirement
e) when life conditions change - medical, emergencies, etc.
f) when short-term vs. long-term expenses change
12.2.4 Rebalancing Formula
The logic behind rebalancing is that it maintains a consistent level of risk exposure. There are several rebalancing formulas that are used in the investment industry. Although rebalancing is necessary to maintain an optimal portfolio, it can incur transaction fees and taxes. Rebalancing is recommended either 1) annually, 2) when opportunities for new investments arise, or 3) when a portfolio significantly shifts out of balance.
What is considered a ?significant imbalance? depends on what formula is used. One common approach is the 5 percent/25 percent variance trigger. This rule states that it is time to rebalance when an asset class either a) moves an absolute 5% or b) 25% from its original allocation percentage, whichever comes first. Rebalancing among several taxable and tax-deferred accounts is a very complicated process. A highly sophisticated spreadsheet is required with many factors to be considered, such as the need for liquidity versus the need for reduced volatility. This information has a significant impact on the tax liabilities generated by the placement of indexes in different accounts. Rebalancing is required each time assets are added or subtracted from the overall portfolio.
A good rule of thumb is to test a portfolio quarterly and rebalance when necessary, generally on an annual basis. In addition, an investor’s Risk Capacity? should be measured once a year or upon any significant event in their lives, such a loss of a job, purchase of a home, marriage or divorce.
I hope that was helpful, Mark
October 3rd, 2007 at 4:30 am
Mark,
Thanks for the in-depth response and helpful quick-links. The quick-link to the Sample Reports was great, and showed me just what I needed to see.
October 4th, 2007 at 8:36 am
Skip1047,
Glad it was helpful.
Did you note the benchmarks in the Performance tab? We are the only firm I know of that actually tracks clients performance relative to the index portfolios we show online. This is report is very expensive to maintain, but if you are not carefully measuring and comparing, how do you know if you are capturing the returns you have the capacity to earn? Many investors hire an advisor, but have no way to properly benchmark their returns, so who knows if they got a bargain on fees or not? Comparing to the S&P500 is not near enough, as you can see from the reports online.
“Structure” seems to know alot about the advisory business and offers some very sound advice throughout this discussion. In particular this comment should be repeated, “The costs associated with operating a Registered Investment Advisor firm are substantial IF the firm hires and retains quality employees, carries the proper errors and omissions insurance, maintains an effective compliance program, and provides robust reporting capability.”
These are all subtantial costs that I can confirm, since I pay the bills. Software upgrades and transistions to new and improved packages and the consultants and personnel to implement and train employees are a huge cost that few advisors recognize until they have to upgrade. The SEC requires offsite storage of important documents, so advisors either copy and store offsight or digitize the records. This is a huge project that few low cost advisors have tackled. Just ask them. Also, the advisor is responsible for trade error costs. The trade error department at Schwab is very busy, so I can assure you it happens and advisory firms can find themselves in trouble if they do not have the capital to cover the error.
Since this discussion debates the questionable value of low cost advisors, you may be interested in a special web page I created to highlight the high cost of low cost advisors and a few examples where the cheap advisor failed the client. Click here to go to http://www.cheapadvisor.com.
May the Market Forces Be With You,, Mark
October 5th, 2007 at 3:54 pm
Mark,
I did not notice the performance tabs on the first look. The more I poked around in there, the more impressed I was with the reports section.
? May I be presumptuous and suggest that you might want to consider using a more modest example; your average new investor’s initial investment. $100,000 to $200,000 would seem to be more in the range to which most potential new investors could relate.
? In my many hours on the IFA site in the last month or so, I never ran across the Sample Joe reports link or page. (UPDATE-I JUST SEARCHED AND FOUND IT UNDER DEFINITIONS)?. ?IFA then designs highly tax-managed and low cost trading strategies, maintains ongoing proper risk exposures through rebalancing, manages cash inflows and outflows, and provides monthly and inception to date detailed measurements of client performance relative to the IFA Indexes and other traditional benchmarks. ?..?
? Boy, ?It is all in there?! Bring these great features out into the open! I would think that they would be most POWERFUL tools to attract new clients.
? I find the discussions of the process of managing the account AFTER it is set up to be sorely lacking on most sites. The most glaring omissions (sometimes I think intentional) include the reporting (frequency and content), rebalancing, cash management and tax management.
? My gut feeling is that if you were to consolidate these features, on which you are SO strong compared to the others in one (1) easily accessible spot on the Site, it would even further boost your competitive advantage. Why not scratch the ?Advisor Cam? (I have not spotted one of the illusive little buggers yet!) and put it to the right of ?Open Account?? Perhaps the section could be called, ?After you Invest? “What to expect AFTER you invest with IFA”, “After you invest with IFA”, or some such.
Without stating that you provide better after