News, Vision & Voice for the Advisory Community
The Santa Monica-based fund company is certain as ever of its mission -- and even more successful
September 13, 2010 — 4:43 AM UTC by Brooke Southall
Brooke’s Note: I reached Michael Lane by cell phone in San Jose, Calif. last week where he had just wrapped up a meeting with Loring Ward, a TAMP that uses DFA funds in its products. I initially called him to learn details of his company’s new deal with an RIA-targeting annuity company, Jefferson National. But I also asked him for an update on his company, which some in the industry call a cult because of its ability to create lasting and lucrative relationships with certain advisors. I had written articles years ago about the company’s growth and wondered if it had continued.
It barely markets, makes no cold calls, turns away hundreds of advisors every year and won’t allow retail investors to buy its funds without the help of advisors.
Yet the growth rate of Dimensional Fund Advisors is the envy of every asset management company.
The Santa Monica, Calif.-based indexing juggernaut has already brought aboard about $5 billion of net new assets in 2010, which brings its total from RIAs to about $90 billion – an increase of $62 billion in the past six years. Those include some big firms. See: Giant DFA customer puts young CEO in charge to execute ambitious national plan
DFA’s growth is not the result of giant alpha achieved by clever stock picking or hedging. After all, it sells about 100 index-based funds that roughly mirror market averages.
But the company does offer what may be more valuable to advisors in the long haul – heavily-researched guidance on asset allocation that helps them determine how much stock to hold versus bonds, and how small or large, and how value- or growth-tilted the stocks should be.
Not a slave to indexing rules
Although it offers index funds, DFS is not a slave to indexing procedure. For instance, as the S&P 500 adds and drops shares from its list, the shares of those companies get overbought and oversold. DFA may hold off on transactions on those days.
This kind of wonky, well-thought out approach appeals to many advisors. Once accepted by DFA, they grow steadily more attached, sending more assets the firm’s way
“Financial advisors seek to add value to their clients beyond what they can do on their own and DFA helps them do this,” Charles “Chip” Roame, managing principal of Tiburon [Calif.] Strategic Advisors.
This message tends to sink in best when markets are worst and DFA’s academic methods propelled it from about $1 billion annually in net new assets to $10 billion after the tech bubble crashed, according to Lane. It has experienced a similar lift in its asset gathering since 2008, he adds.
Of course, DFA has also forged a growth path during boom years and it may have index funds too thank for that. Passive investing has gained greater acceptance over the past decade. Larger financial advisors especially have been moving assets toward index funds, which explains the tremendous growth of State Street, Black Rock and other companies well-positioned in that market, Roame adds.
DFA isn’t the only company to embrace a high-touch approach, either, based on the testimony of these 10 fund wholesalers. See: 10 fund wholesalers and executives offer views about how they seek to add value for RIAs
Yet DFA approaches its service and marketing in a much more focused way.
DFA handpicks the advisors that it works with, an exclusivity that stems from its business philosophy of long-term investing and its determination to work with investors who don’t move assets in and out of its funds, according to Michael Lane, vice president of DFA. He oversees relationships with TAMPS, broker-dealers, banks and insurance companies.
“It’s really been our choice. We choose 14% of the advisors who contact us,” he says. [For information about how to be come a DFA-using advisor, see the comment left at the end of this article by Ron Rhoades.]
Some of those advisors have become famous for following the DFA way. See: 'Dying banker’s last instructions’ article in New York Times sends book sales soaring for two DFA advisors/authors
DFA raised its $90 billion of assets from a mere 1,350 RIA firms, a number that is only about 15% higher than it was in 2004. Eighty percent of DFA advisors have been around from two years to 20 years. Advisors in their first two years with the company contribute relatively few assets, Lane adds.
Among those 1,350 advisors, only a small percentage is truly driving asset growth, says Roame.
Beyond the old 80/20 rule
“The largest FAs control all the assets; it’s likely even beyond the old 80/20 rule,” says Charles “Chip” Roame, managing principal of Tiburon Strategic Advisors. “DFA gets [the advantages of] that while other firms run around trying to serve 10,000 financial advisors.”
Indeed, less has proven to be more for DFA when it comes to numbers of relationships.
“The number of assets has tripled and the number of advisors has increased maybe 15%; we have much deeper relationships,” Lane says .
DFA also has chosen to target CPAs as a niche market, a prescient move, says Roame.
“CPAs continue to be an emerging market as do former CPAs morphing to be full-time financial advisors – and CPAs like low-cost tax-sensitive investing a la DFA,” he adds.
One example of this is St. Louis, Mo.-based Buckingham Asset Management LLC, which manages and administers about $12 billion of assets — largely invested in DFA funds.
Financial advisors are a receptive audience for a high-service approach that includes help running their portfolios and practices. “Service beats sales. DFA is adding people to serve, not to sell; selling happens by those served well,” says Roame.
DFA has invested heavily in this aspect of its business during the past two years.
Drastic staff increase
“We’ve drastically increased the size of our FA [training and consulting] group from 10 to 50 people,” says Lane. “We’re doing a lot more work with the financial advisory community.”
DFA recently forged a deal with Jefferson National because its advisors are seeking greater opportunities for tax deferral in the face of probable tax increases.
DFA’s connection to its advisors is so deep that some people in the industry call the firm a cult.
“They attract a certain type of RIA and they make them believe,” says Burton Greenwald, a Philadelphia-based mutual fund consultant, who sees a downside to DFA’s approach.
“By definition, you disregard a great universe of potential distributors, including virtually all the 800-pound gorilla distributors.”
John Bowen, CEO of CEG Worldwide, whose company has trained FAs who use DFA funds on behalf of the company, says that DFA is not so much cult-ish as a good, productive community.
“DFA has really stepped up this year [with its training and education],” he says. “People look at it as a cult. I really look at it that they built a community that’s delivering tremendous value.”
Sticks to its guns
A major reason that DFA sticks to its guns — in terms of what advisors it chooses and how it guides them to invest — is that it doesn’t want the returns on its funds adversely affected by inflows and outflows, Lane says. When funds suffer outflows in down markets, they are forced to finance the redemptions with sales of securities they might otherwise hold – resulting in a sell-low, buy-high death spiral of trading.
“We mitigate our risk,” he says.
DFA will likely never have market-smashing returns because it adheres to indexing, which is a way for investors to participate in the gains and losses of the markets. The company does take pains however to be sure it gets the most out of those indexes by keeping costs low [about the same prices as many ETFS] and refusing to engage in indexing behavior that it believes has a low probability of success.
Some of its funds have straightforward names like the US Core Equity 1 Portfolio or the DFA International Small Cap Value Portfolio but others — like the DFA Selectively Hedged Global Fixed Income Portfolio — show that the company may be applying more of its own intelligence.
Not an elite club
Despite the aura of exclusivity that hovers over DFA, it is not elite club that it sometimes appears to be, according to Lane.
“There’s no quota, no exclusivity; we have nothing like that,” Lane says. “It really comes down to each individual advisor. If 500 FAs came in tomorrow and they were all good advisors and met the standards and went through the process…” [they would be approved for investing client assets in DFA funds].
Still, the process and standards can be initially off-putting to advisors accustomed to having mutual fund companies falling all over them for their business.
Harold Evensky, president of Evensky & Katz LLC told CNBC for an earlier article about having to trek to seminars DFA sponsors at places such as the University of Chicago. “I remember way back when they told me you had to be approved that I was incensed,” he told the cable network. “But it’s not elitist criteria they’re pushing; it’s professional criteria.”
Mentioned in this article:
Tiburon Strategic Advisors
Top Executive: Charles Roame
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