Are DFA Mutual Funds Worth it?
October 30, 2008 – 5:44 am
Dimensional Fund Adviser is a mutual fund company that has been getting quite a bit of press these last few years. My synopsis is that DFA offers institutional index funds and offers a wide variety of them. The downside, however, is that you need to work with a financial adviser to gain access to these funds in most cases (unless you are lucky enough to have access to this funds in your 401k).
I understand the thinking behind DFA’s stance as well. They want long-term investors, and having a financial adviser will help ensure that fund owners (clients) don’t overreact if the market takes a tumble. Lower turnover means lower expenses, which benefit all shareholders. The financial advisers that have access to these funds are not DFA-specific professionals. I would be interested to know what kind of financial affiliation they do have with DFA, meaning that I wonder how they are compensated. The good news is that DFA funds are no-load to my knowledge, and at least you know that a financial adviser that works with DFA is at least willing to recommend index funds (these advisers, I can only assume, are all fee-only advisers).
My problem, however, is that I don’t liked being “forced” to use a financial adviser just to access these funds. Although I’m sure a good financial adviser is worth their fee, I don’t personally want to pay the fee for such services (which can range from 1-2% of assets I’m told). I don’t see why DFA can’t institute some painful early redemption penalties if investors don’t follow their guidelines. How about a 5% or 10% penalty for share held less than five years for example? It seems like they could figure out some kind of guidelines that would allow small investors like me access to these funds.
I also wonder how much better these funds are versus a do-it-yourself Vanguard or low-cost ETF portfolio. I know DFA takes a science-based research approach, and it seems reasonable to believe that by trying to reduce turnover they are able to gain noticeable fund operating efficiencies (and these efficiencies would not be visible in the “expense ratio” of a fund). As we know, however, expenses count. And I’m not convinced that the additional expense is worth the added value.
If I was looking for a fee-only financial adviser I would at least consider one that had access to DFA funds. What’s your take though? Are DFA funds worth the added expense of using a fee-only financial planner? Could it be worth it for even a small part of your portfolio?
One lower-cost alternative I’ve found, if you’re interested, is AssetBuilder.com. AssetBuilder will give you access to DFA funds for a management fee of 0.5% to 0.25% (depending on invested assets). Currently they’re only accepting new accounts of $50,000 which is very high in my opinion, but it might be an option for some. Some 529 plans have access to DFA funds, including at least one plan from West Virginia.
Have any of you worked through a registered adviser to have access to DFA funds? Do you think it is worth it?
Image Credit: aymlis
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10 Responses to “Are DFA Mutual Funds Worth it?”
Good post!
I’m a optimist I always think people are their own best financial advisers
A fee only planner is definitely the way to go if you have don’t have the time. Being forced to get one is a whole other subject
“No one cares more about your money than you do”
The problem with “science-based research” is that it’s quantitative. I think recent history has show if you ignore the qualitative you may just screw yourself out of some money.
By Rick Vaughn on Oct 30, 2008
DFW are not worth the extra money unless you believe the returns are going to overshadow the advisor fees. Vanguard gives you cheap access to a wide variety of index funds and for the funds it doesn’t have you can usually pick these up in ETFs.
By T on Nov 14, 2008
DFA funds are great, but most of the asset classes that most investors want exposure to can be had cheaper (without an advisor).
DFA adds value by providing other asset classes (international small value, emerging small) that have previously been difficult to find elsewhere in in index fund. However, that is changing. Several ETFs now offer international small funds, and even emerging market small funds.
DFA still have international small value to itself. And emerging market value. But let’s face it: your allocation to these asset classes (if indeed they can be termed classes), is so small, if THAT is the only reason you are using DFA, you are overpaying. Since you must pay a fee to the FA for ALL of your assets, not just those invested through DFA, the small allocation to these esoteric classes comes at a cost of .5-1% for the ENTIRE portfolio.
By Mark on Nov 14, 2008
Very good point Mark. Thanks for the feedback.
By todd on Nov 14, 2008
1. anyone know what the 11 DFA funds are?
2. I looked at the section on the assetbuilder.com website comparing DFA funds results versus vanguard and an index and was puzzled. By and large the DFA funds lagged the Vanguard and the index across the several sectors. Did I miss something here
3. Mark makes a good point that paying a fee on one’s entire portfolio to gain access to a couple of funds that you should have only a slight percentage of your portfolio may make little sense.
4. Assetbuilder.com looks interesting. However, I am not sold on the value focus as the key to an overall successful portfolio. Also,it is time consuming to rebalance to a chosen asset allocation periodically and it can be challenging to do it at times, such as increasing stock funds in the present environment.
Further I don’t understand what AB means by it’s “science”. What is the added science?
It could be said that the greatest value of an investment adviser is simply to encourage the investor to follow his plan.
By fred murphy on Nov 30, 2008
Buy and hold index funds philosophy doesn’t work anymore in this tight market.
A quick look on DFA performance YTD is a proof of that.
Big time liquidity issues with DFA are a concern since their adviser couldn’t / wouldn’t explain to me.
Daring just to discuss these issues triggered strong reaction from the firm, bullying to expel you and never let you back in again.
DFA country club was great investment vehicle up until now, their “big brains” should have seen this coming and at least come up with a contingency plan.
Lecturing investors with less than $1m like they are 6yo about how are they about to blow this “once in a lifetime” opportunity to belong with DFA looked like time-share sales event.
By Bruce on Dec 16, 2008
First of all, I am an 18 year professional investment advisor, former analyst, and I DO NOT use DFA funds. Having said that, I must say the author of the above article, and the posts that followed, are conclusions with little foundation, meaningful facts, and not worth much more than a conclusion made by a 5th grader. Any long term conclusions, regarding DFA funds, based on poor performance in a single year is not very thoughtful. With that linear logic no one would have invested in the stockmarket after the crash of 1987 because “performance YTD is proof…” stock investing doesn’t work, right? Meaningful peer-reviewed research completed by the academic community, as well as the professional community (unbiased community), have concluded that DFA funds beat other “typical” passively managed alternatives by a substantial margin. Yes, even after paying 1% advisor Fee. One widely circulated white paper concluded that DFA Fund portfolios add ~2% per year excess returns vs Vangaurd alternatives (Duke University 7/2008, Tower and Yang “Enhanced vs Passive Mutual Fund Investing: Has DFA outperformed Vangaurd By Enough to Justify the advisor and transation fee?”). The reason (I believe) for investing in DFA funds, and hiring an advisor with access to DFA funds, rests on probability of success and costs over a long period of time….I mean all of the costs. Not just the costs on a meaningless Morningstar report. The DFA concept/questions are simple: Given a level of risk, do you (the investor) know the risk characteristics and the variables that will most likely determine the best portfolio returns? Do you know how to capture those variables in a portfolio? Do you know which vehicles capture those characterists best? If you pick actively managed funds, do you know how to predict future MF performance that is likely higher than that of the appropriate index? The academic research and empirical evidence clearly shows this is not likely. DALBAR studies shows that the average individual investor misses ~60% of the available returns (4% of 10% over 10 yr and 20yrs). I believe the true “knock” on DFA investing has to do with inability to react to Black Swan events, not capturing secular changes in markets, and the assumption that mean reversion always happens in a short period (say 1 year. Why not 15 years?). Black Swan events, simply stated, is exactly what we experienced from August to now: 3rd (or 4th) standard deviation event. DFA orthodoxy would suggest rebalancing as the market kept falling and returns will be received for this additional unit of risk, over time. But contend that secular or cycle changes may be missed, as well. DFA investing would not suggest a reduction of international investments or value investments, eventhough everyone knew there were big problems in the financial sector (huge percentage of exposure to financials in value funds). DFA orthodoxy does not allow for a conclusion that long term corporate bonds may outperform a combination of stocks and high quality bonds over the next 2 years. Plus, there is a qualitative issue with advice from a DFA advisor: What kind of investment strategy feels right for you? That question is often discounted by academics because the majority of that community assumes investors to be rational and profit maximizing investors (take the highest probability of success). I suggest that some are not. Think of it this way. Imagine you are retired and you know that you need a portfolio of 1 million dollars to support your income needs (or feel like you can sleep at night). You currently have 1.1million. You give this information to the advisor. DFA advisors will likely draw portfolio conclusions based on 30 to 80yrs of CRSP data, a monte carlo simulation, clients income needs, and the portfolio combination that will allow the client the best chance of not outliving their money. The DFA advisor may conclude 40% or 50% in stocks. Are they really giving the client what they want? This same information given to an active advisor may examine the current environment and conclude that the economy has a >30% chance of contracting and the market valuations suggest vulnerability exists. The advisor may conclude that no stocks are appropriate for that client, at this time. Given that risk level in the market, corporate bonds look pretty good. When the risks subside, then we can add equities. That is the real difference. BUT, if you are a buy and hold investor and you are interested in the best possible chance of beating the S&P500 over a 10yr+ period of time, then stop deluting yourself and pay the fee for an advisor. It works….the data is very clear. But if you want someone who will go to 30%+ cash, 50% government bonds, 20% stocks, in times of recession then get an active advisor. Don’t do it yourself unless you have a solid background to do so. If you do it yourself I will likely see you in the future AFTER you bought a bunch of emerging market funds, oil and natural resource ETFs, and “Green” funds……oh, and by the way, ETF are not the Panacea of costs some investors think they are. Most ETF investors are paying 1% a year more than MF counter parts and they don’t know it. Cheers.
By ken on Jan 10, 2009
DFA funds are not what they are cracked up to be. First of all, they are not risk advese. Look at their records 2007-2008. All went down much more than market. They have a bias toward small – value – stocks. thus, they are hot when small value is hot. They have no growth component. Therefore, they miss big parts of the cycle. The only outstanding fund is the core international. But, that is mostly the movement of emerging markets. The rest can’t beat ETF indexes. Lok at Barclays ETFs. The internal cost ranges .08-.60. DFA is very costly. they never tell your about the fund’s commission cost. But, after oyu add in advisor fee, you are talking 2.5%. Big hat, no cattle.
By Larry on Oct 6, 2009
I engaged a financial advisor this August and he will be dealing with DFA funds,My main reason for doing this is my age at 78 plus my health.His fee is 0.75.My wife doesn’t have a clue about stocks etc. In this IRA portfolio is corporate bonds plus Vanf. ST Inv. Grade. No mutual funds as yet.I believe the fee is resonable and I’m willing to give it a try for at least a year.
By Richard on Oct 29, 2009