What is reasonable fee for DFA funds?

[wabmester]

wab.....in the chart that compares DFA vs Vgd fund expenses, do the DFA figures include the fee to the advisor?

No, I think that's just DFA's cut.

 

[haha]

Quite a while ago www.evansonasset.com was mentioned in these here parts as a DFA-based advisor. So if you are all set on using DFA, why not go with the low-cost DFA provider ... whoever that is?

I looked at this web site. Evanson charges a flat quarterly fee between $500 and $1000. It sounds like it could be a good buy for someone with a large portfolio who wants access to DFA..

It seems that Saluki’s firm is very high touch; I doubt one would get that at Evanson. Kind of Costco vs. Tiffany.

Ha

 

[yakers]

Nothing wrong with going with DFA or another FA if you are clear about what you want and can measure what you get. Some 20+ years ago I went with a fee based FA who put me into Oppenheimer and later American funds. This was good for me at the time as I knew almost nothing about investing. Now I do it myself and I am satisfied with the results and have no one to blame if my choices don't work out. DFA is better than most. If you get an AA you like and get decent performance you may beat VG or maybe not but as long as you like your AA and you get decent returns for the risk then you have made a reasonable decision. The enemy of a good plan is trying to get a perfect plan. Already you know more than most and have a decent way to proceed that you are comfortable with, sleep at night factor +some basis points?

 

[modlair]

Pardon me for quoting myself:

My understanding of the DFA formulaic approach is a great deal analagous to the recent discussions of fundamental indexation.

The S&P500 is not the market. Beating it may be done by tailoring some other low cost index, but that doesn't mean the tailored index beat "the market". There will be times when the tailoring fails to beat the S&P500 index. On those occasions there will be other tailored indexes that might have beaten the first.

It is not clear there is any value in paying premium costs to participate in a tailored index whose time window of advantageous performance may or may not be open.

Frankly, the same is true of S&P funds. There is no mathematical reason why they should be the yardstick. Other indices that outperform the S&P500 could just as properly, if costs are equivalent, be the yardstick.

And justin's find:

From IFA's website:

"Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios (in this case, IFA’s twenty index portfolios) designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time to obtain more favorable performance results."

These guys datamined and optimized their "model portfolios" to give the highest return for the least risk. The "IFA vs Vanguard" comparison on IFA's website is an extension of this backtesting - they are setting up model portfolios after they already know what happened in the market. Not real hard to do in other words. DFA funds slice and dice in many different ways than Vanguard does.

The fundamental indexation discussion of a few weeks back was not datamining. It was algorithmic and did show advantages. This DFA stuff appears to be non algorithmic (i.e., mining).

It is fair to note that Vanguard defended themselves when the capitalization nature of the index was focused on, but they did not rebut the concept.

There is nothing sacred about the S&P500. It is not The Market. It is an index based on an algorithm. There can be superior algorithms. The superior algorithms may not always be superior, but they MAY be superior more often than not. When that is true, it is THAT index that should be the gold standard and not the S&P500.

If someone can invent such an index that requires no tweaking and no management particularly, because it is algorithmic, there's no reason it can't have a low cost. Hell, you can build your own such index based on 1/N rather than capitalization, as was discussed.

And no, you don't have to buy 500 companies, because of the studies showing about 7 companies capture 95% of the variance of the S&P500.

Oh well.

 

[ats5g]

It's a real shame that IFA continues to call the DFA funds the "IFA funds." The only difference between the DFA funds and the Vanguard index funds in the same asset class is that the DFA funds are more concentrated in value and small caps. And this is only because the research that the DFA funds are based on [i.e. Fama and French] classify value/growth and large/small different that most index creators [S&P, Russell, MSCI].

For example, F&F break the stock universe into Large Value, Large Neutral, Large Growth, Small Value, Small Neutral, and Small Growth, so a stock can be either value, neutral, or growth. So when people speak about F&F or DFA Value portfolios or funds, the stocks in these are excluding neutral and growth stocks

With other index creators [S&P, Russell, MSCI], each stock will fall either into the growth or value indices, there is no "neutral" index. Hence, DFA's value portfolios are more heavily concentrated in value stocks, or high Btm ratios or lower p/b ratios.

Similar with F&F or DFA's small cap portfolios/funds. They are much smaller in market cap than the other index creators' indices simply because of the way each defines small caps and large caps.

Because of all this, naturally when small and value outperform larger and growthier, the DFA funds/portfolios will outperform. But this is not due to the fund's managers, stock pickers, etc. Now, IIRC, I've read that the DFA funds managers do make some alpha in transactions costs, but that doesn't explain the massive DFA fund outperformance.

So, what to do? Should one go running off to an advisor simply b/c he/she wants access to DFA funds. Absolutely not. An investor can certainly create his/her own portfolio that mimics the small/value tilt of a DFA fund portfolio. A few years ago, Jonathan Kandell proposed that one could use a combo of Vanguard's Extended Market Index, Large Cap value index fund, and small cap value index fund to mimic a 4x25 DFA fund portfolio.

Though my own little backtesting of US indices and DFA's funds to 1984, the 1% advisor fee swamped the higher return of the DFA portfolio due to the higher value and small tilt.

I think one should choose to use an advisor if one wants/needs an advisor.

- Alec

 

[Nords]

Nords, we the taxpayers paid some pretty hefty taxes to prepare you for a nuclear war. Do we get a refund on your salary and pension now that you retired without fighting one?

AEGIS cruisers cost billions of dollars and hopefully never fire a shot. I trained over 6000 military people to do jobs which they'll hopefully never have to do. I spent years fighting the Cold War so that you didn't have to. I also happened to be one of the survivors who lasted long enough to collect a pension, for which I hope your tax dollars will subsidize at least another six or seven decades of my retirement. Of course my example shouldn't inspire others to join the military, but hopefully it'll inspire them (and their families) to stay in the military as long as they're enjoying what they do.

A waste of your money? Perhaps-- especially if you never had to use my services. (Not in a nuclear war-- but we're in other parts of the history books.) By that "use it or waste it" logic then we're also wasting our money on police, firefighters, and any insurance policies you might also be paying for.

However we don't pay financial advisors to insure portfolios-- we pay them to take care of them. If a groundskeeper kills your lawn, would you pay them 0.50% per annum? We expect people to take responsibility for their dietary & physical health by educating themselves or by using nutritionists & personal trainers. Again, if those people don't do the job they're hired for, then they shouldn't get paid.

I would say this board has an unhealthy bias against advisors. DFA is pretty selective about the advisors it allows to use their funds. I happen to work for one and we do a pretty good job. 50 BPS is a pretty common fee and is similar to what we charge around here. I would hope they would throw is some planning and other services.

I'd say the board is biased against BAD advisors. We'd all love to hire good advisors but the problem is that they're like bad stocks-- you don't know how bad they are until you see what they've done to your money. I'm all for stories of good financial advisors who helped their clients retire early. There must be stories like that, right? Or is it that the pain of loss is so much greater than the satisfaction of gain? Or could it be that some of the really good advisors are giving it away on their websites and in their books borrowed from the library?

Also, to imply that you would have earned the same returns recently with your Vanguard funds means that you have not looked at the numbers. It's as simple as that. On the small cap side DFA is still running at about 200bps above the Russell 2K at 3,5 and 10 years. The large value has a slightly larger advantage on the 3 and 5 year numbers. It narrows slightly for 10 years. I could fill the page with similar numbers.

You're absolutely right. I used the phrase "I wonder" as a means of asking a question, which you've answered. Thank you. Your numbers would also imply that the financial advisor & DFA are worth the fees, which means that they're still staying ahead of the "other" indices.

That being said, I just wish that those who criticize every form of financial advice (i.e. Nords) could see what many highly successful people manage to do with their own investments. It's just downright scary. I have the advantage / disadvantage of looking at hundreds of people's financial secrets, from that experience I have learned a lot about how people act when it comes to their investments. Many of those DIY folks do exactly the wrong things. They don't rebalance, they don't set asset allocation targets, they don't do risk profiling, simply they wing it.

Hey, my BIL the CPA does the tax returns of those people. Funny thing, he manages his own money and does his own taxes because he learned how to. His motivation came from seeing what those highly successful people did with their own investments.

I think some workers spend more time/money on choosing their cell phone plans or their vanity license plates than they do on choosing their asset allocations or their investment plans. Yet a bad cell phone plan won't mean that you end up working for the rest of your life or depending on Social Security as your sole source of income.

It's not rocket science, but it's as complicated as we choose to make it. Investing is hard-- if we won't or can't do the math (let alone educate ourselves) then it's impossible.

 

[justin]

Because of all this, naturally when small and value outperform larger and growthier, the DFA funds/portfolios will outperform. But this is not due to the fund's managers, stock pickers, etc.

I agree 100% with this statement. The portfolios that IFA and Paul Merriman are selling (and yes, they are doing a sales job, because they want to make 1% off your portfolio, too) are more heavily tilted towards the small and value tilts. Small and value have done really well in recent history, particularly during the big bear market of 2001-2002. It is obvious that portfolios more heavily tilted towards small and value will outperform a comparison portfolio with a lesser small and value tilt.

Whether the small/value tilt will continue remains to be seen. I've got my money riding on the fact that it will, but I'm not paying 1% per annum (on top of potentially higher expense ratios) to get extra tilt.

 

[FinanceDude]

Whether the small/value tilt will continue remains to be seen. I've got my money riding on the fact that it will, but I'm not paying 1% per annum (on top of potentially higher expense ratios) to get extra tilt.

So, you wouldn't pay an extra 1% a year to make 4-5% a year more than the market?

Just kidding.............

 

[lifeisgood]

In an unusual display of decisiveness, I picked up the phone and called Vanguard. I will go with them instead of DFA and keep the 1/2%. So, case closed.

Thanks, especially for the insights on the small and value emphasis that DFA/IFA has.

PG