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Low-cost, fixed-fee DFA investment advisors


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This article was first posted July 1, 2007.

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Invest with DFA Funds, 12-Step Program

DFA funds are a collection of "enhanced" institutional index funds managed and marketed by Dimensional Fund Advisors headquartered in Santa Monica, CA. The company has some $140 billion of assets under management (versus $1.1 trillion for Vanguard.) DFA funds are generally well-regarded, but only available to individual investors if they are clients of a DFA-approved financial advisor. Financial advisors typically gain this 'DFA-approved' status after undergoing a selection process and attending a seminar on the advantages of the DFA approach to investing.

DFA seeks to outperform traditional index funds by overweighting in small capitalization and value stocks. Rather then slavishly tracking an index, DFA adopts trading strategies that allow it to wait for a good price rather than follow the herd when a security is added to or deleted from the benchmark index (e.g., S&P 500, Wilshire 5000, etc.) Morningstar rates many DFA funds higher than its corresponding Vanguard product. DFA also offers highly-rated funds in some of the more exotic and esoteric asset classes that Vanguard doesn't cover.

Morningstar Ratings on DFA and Vanguard Funds
Ticker
Symbol
Fund Name Morningstar
Rating
Short-term Fixed Income Funds
DFIHX DFA One-Year Fixed Income Index
VFSTX Vanguard Short-Term Investment Grade Bond Fund
Real Estate REITs
DFREX DFA Real Estate
VGSIX Vanguard REIT Index
US Large Cap Stocks
DFLCX DFA US Large Company
VFINX Vanguard 500 Index
US Large Cap Value Stocks
DFLVX DFA US Large Company Value
VIVAX Vanguard Value Index
US Small Cap Value Stocks
DFSVX DFA US Small Cap Value
VISVX Vanguard Small Cap Value Index
International Large Cap Value Stocks
DFIVX DFA International Large Cap Value
VTRIX Vanguard International Value Index
Asset classes where Vanguard doesn't offer an equivalent fund
DFGFX DFA Two-Year Global Fixed Income Index
DFSCX DFA Micro Cap
DISVX DFA International Small Cap Value
DFEVX DFA Emerging Markets Value
DEMSX DFA Emerging Markets Small Cap

The typical portfolio of DFA funds for a retiree would encompass 10 to 15 asset classes with an overweighting in small-cap and value equities. The portfolio is also diversified internationally. Here's what a portfolio of DFA funds for a retired investor might look like with a 60% equity/40% fixed income split.


Typical Retiree Portfolio Using DFA Funds
Allocation
(%)
Ticker
Symbol
Fund Name
20% DFIHX DFA One-Year Fixed Income Index
20% DFGFX DFA Two-Year Global Fixed Income Index
10% DFREX DFA Real Estate
10% DFLCX DFA US Large Company
10% DFLVX DFA US Large Company Value
5% DFSVX DFA US Small Cap Value
5% DFSCX DFA Micro Cap
5% DFIVX DFA International Large Cap Value
5% DISVX DFA International Small Cap Value
5% DFEVX DFA Emerging Markets Value
5% DEMSX DFA Emerging Markets Small Cap
100% . .

Additional Fees for investing in DFA funds

DFA funds' expense ratios, portfolio turnover and the brokerage commissions paid by the funds are generally competitive with low-cost Vanguard funds of the same asset class. However, individual investors incur a minimum of two additional layers of fees when investing with DFA. The first is the fee paid to the DFA-approved advisor. This fee can range from less than $1,000 per year if you use a fixed fee advisor or have a small, (i.e. minimum $50,000) portfolio to tens of thousands of dollars for someone investing $5 million or more with an advisor that charges a percent of assets annual fee (see table below.) Especially for investors with multi-million dollar portfolios, a fixed-fee advisor can offer immense savings.


Comparison of DFA-approved advisor fees
. Assets
Under
. Minimum Annual Advisor's Fee
Size of Client Portfolio
Firm Name Location Management
($ MM)
No. of
Clients
Account Size/
Annual Fee
$1MM $2MM $5MM $10MM
Cardiff Park Advisors Cardiff by the Sea, CA $109 290 No Minimum $800-$3600 fixed fee
for portfolio of any size
Evanson Asset Management Carmel, CA $1,419 1851 $1,000,000 $2,000-$4,000 fixed fee
for portfolio of any size
Portfolio Solutions Troy, MI $781 467 $1,000,000 $2,500 $5,000 $12,500 $20,000
AssetBuilder, Inc.
(see Note (2))
Plano, TX $0 0 $50,000 $3,000 $6,000 $12,500 $25,000
Altruist Financial Advisors Holland, MI $69 25 $2,000,000 $10,000 $10,000 $14,600 $20,100
Merriman Capital Management Seattle, WA $1,316 5500 $100,000 $7,500 $10,000 $17,500 $30,000
Index Funds Advisors Irvine, CA $703 1970 $100,000 $8,250 $14,250 $26,250 $39,230
Buckingham Asset Management
(see Note (3))
St. Louis, MO $1,620 3647 $5,000 minimum annual fee $10,750 $17,750 $30,750 $48,250
Halcyon Investment Partners Novoto, CA $624 773 $2,000,000 $10,000 $20,000 $35,000 $50,000
Edelman Financial Services Fairfax, VA $1,801 8329 $75,000 $14,000 $21,500 $41,000 $71,000

Note (1) Assets Under Management and Annual Advisor Fee obtained from SEC Form ADV as of May 10, 2007 for each firm listed, or the firm's web site.

Note (2) AssetBuilders initial Form ADV was filed 05/31/2007.

Note (3) Buckingham Asset Management fee schedule revised 06/01/2009. Buckingham's fee schedule is now "multi-tiered".

The second layer of fees is the commission paid to the custodian for actually buying or selling DFA fund. Schwab Institutional appears to be the most popular custodian among DFA-approved advisors, though TD Ameritrade offers lower fees. For the typical portfolio encompassing 10 to 15 asset classes, the annual transaction costs would range from $250 to $750 per year at Schwab and about half of that for a large account at TD Ameritrade.

Comparison of custodians' transaction fees
. Annual Transaction Fee
Size of Client Portfolio
Firm Name Transaction Fee $100k Account
15 DFA funds
$10 MM Account
15 DFA funds
TD Ameritrade $24 per trade for accounts over $500k
$31 for accounts under $500k
$465 $360
Schwab Institutional 0.36% of value, subject to a $25 minimum and $49.95 maximum per trade $375 $749

DFA funds for small accounts

While some DFA advisors accept accounts of $100,000 or less, the consensus is that you should probably wait until you have at least $1 million to invest before considering DFA funds. This will give you a larger asset base to absorb the burden of the additional DFA advisory and custodial fees.

For example, AssetBuilder, Inc. charges a 0.45% of assets fee on a $50,000 account ($225 annually.) A portfolio of 11 DFA funds would cost an additional $224 in Schwab transaction fees for a total cost of $449 or 0.90% assets annually. Someone with a $2 million portfolio using an advisor charging a $2,000 fixed annual fee would pay an additional $549 in Schwab transaction fees for a total of $2,549 or 0.13% of assets -- one-seventh the burden (as a percentage of assets) on the small account.

Are DFA funds worth the penalty of paying an advisor's fee?

Eric Hass of Altruist Financial Advisors attempted to answer this question in a September 2004 article in the Journal of Financial Planning. He determined that a switch from Vanguard to DFA made sense even with an annual advisory fee of as much as 1.285% of assets. Of course, DFA makes even more sense if you're pay a fee of much less than 1.285%.

Are there differences in the level of service provided between high-fee and low-fee DFA advisors?

That's hard to discern. Both high-fee and low-fee DFA advisors seem to be adept at assessing a client's risk tolerance and recommending an appropriate asset allocation, otherwise they wouldn't be DFA-approved. High-fee advisors seem to argue that clients might need a lot of counseling and hand holding to "stay-the-course" in turbulent markets. Low-fee advisors obviously haven't built a lot of extra client contact into their low, fixed fees. Still, for someone with a $5 million portfolio, the difference in the $3,000 annual fee for a low-fee advisor and the $25,000 to $35,000 per year charged by some of the more expense advisors on the list above is substantial. The $20,000 to $30,000 difference would seem to indicate 50 to 200 hours of "counseling" per year depending on the value you assign to the advisor's time. Are there that many people spending that kind of time talking to their advisors?

One high-fee advisor on list, Buckingham Asset Management advertises their willingness to manage a portflio of individual bonds at no additional cost. Obviously, building a bond portfolio takes a bit more of an advisor's time than just putting everything in a bond mutual fund. Whether the opportunity to take advantage of tax loss selling at the individual bond level more than makes up for the additional fees is something a potential client would have to determine.

For example, for a client with a $5 million portfolio, there is a $22,000 per year difference between Buckingham's annual fee of $25,000 and the $3,000 charged by a fixed-fee advisor. If we assume the client has a 50% allocation to fixed income ($2,500,000), he would be paying between $2,750 and $4,750 in mutual fund management fees, depending on the fund. (Vanguard's Short-Term Bond ETF (BSV) has an expense ratio of 0.11%, DFA's One-Year Fixed Income Fund DFIHX has an expense ratio of 0.18%, while the DFA Two-Year Global Fixed Income Index DFGFX has an expense ratio of 0.19%.) With the $2,750 to $4,750 savings in mutual fund fees, the added cost of using Buckingham over a fixed-fee advisor drops to $17,000 to $19,000 annually. Could Buckingham deliver the $17,000 to $19,000 in tax savings each year required to absorb the additional fees with any regularity?

Does it make sense to pay tens of thousands of dollars in fees for asset allocation?

Steven Evanson of Evanson Asset Management points out that "markets, not managers, produce [investment] returns". He advocates charging a fixed fee based on the number of hours required to manage the account. Financial advisors generally have no more training or skill than the lawyer or accountant you retain for tax or estate planning issues, so it makes little sense to compensate them at a higher rate than these other professionals (i.e., $150-$500 per hour in most neighborhoods.)

Since it should take a competent advisor no more than a few hours to assess a client's risk tolerance and allocate a portfolio, a multi-thousand dollar fee seems excessive. Certainly the tens of thousands of dollars in fees some DFA-approved advisors charge for larger portfolios would only be reasonable if the advisor was providing all kinds of ancillary services, up to and including making weekly visits to your home to detail your automobile and pick up after your pets. Advisor fees reduce returns, so you may as well shop around and cut them as much as possible.

There is also a good discussion of this article and DFA advisors on Morningstar's Diehard's forum (see link:)

http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000015&convId=202603&t1=1183768661

07/08/2007 Update to this article: Buckingham Asset Management

The Retire Early Home Page received an e-mail this morning from Mr. Adam L. Birenbaum of Buckingham Asset Management (BAM) alerting us to an error in the fees posted for his firm in the table above. (The full text of Mr. Birenbaum's e-mail is reproduced below.) We are of course embarrassed and heartbroken if we misinterpretated the fee schedule in the firm's SEC Form ADV. We took the fee schedule to be laddered, meaning that for a $1 million account, the client would pay 1.85% of the first $199,000, then 1.25% of the next $300,000, 1.00% of the next $500,000, and 0.90% of the last dollar for a total of $12,450. Mr. Birenbaum tells us that the 0.90% fee is applied to the whole $1 million once the account value crosses that threshold making the annual fee $9,000. While Mr. Birenbaum e-mail notes that the firm's "fee schedule is not multi-tiered", no such disclaimer appears in the fee schedule on Page 9 of SEC Form ADV.

The Retire Early Home Page apologizes for the misinterpretation and we've corrected the table above.

E-mail from Mr. Adam L. Birenbaum, July 08, 2007

To whom it may concern:

We were extremely dismayed to recently come across the incorrect information on your website regarding the comparison of fees for "DFA-approved advisors." We don't understand the methodology of your calculation but are most disappointed with the due diligence process your organization went through in presenting its findings to your readers. You have significantly misrepresented our firm's fees to the general public.

Buckingham Asset Management, LLC is a fee based advisor with the following fee schedule:

Fee Schedule

The following are the fees charged by Advisor for services provided:

Account Value -- Annual Fee

Up to $199,999* 1.85%

$200,000 to $499,999* 1.25%

$500,000 to $999,999 1.00%

$1,000,000 to $1,999,999 0.90%

$2,000,000 to $2,999,999 0.80%

$3,000,000 to $3,999,999 0.70%

$4,000,000 to $4,999,999 0.60%

$5,000,000 or greater 0.50%

Minimum Account: $500,000

*Client accounts where the total balance of all accounts is less than $500,000 are accepted only on a case by case basis.

Our fee schedule is not multi-tiered and, thus, our annual fees are as follows:

At $1 million, our annual fee is $9000 (not $12,450)
At $2 million, our annual fee is $16,000 (not $21,450)
At $5 million, our annual fee is $25,000 (not $42,450)
At $10 million, our annual fee is $50,000 (not $67,450)

We hereby demand that you immediately either delete this post or correct these misrepresentations, but in either case we are demanding you issue an apology on your website to Buckingham for your significant misrepresentation. We would also suggest that if you repost with corrected information, you review the other advisors to ensure accuracy of their information. Furthermore, we suggest that you provide detail about the services an investor receives for the fee paid rather than assuming that all firms you have compared provide equal service. We believe that to do otherwise would be a great disservice to investors.

We thank you in advance for your prompt attention to this and ask that you contact us by July 11, 2007 to let us know how you plan to handle this matter.

Very truly yours,

Adam L. Birenbaum
Associate General Counsel and Compliance Officer
The Buckingham Family of Financial Services
8182 Maryland Ave., Ste. 900
St. Louis, MO 63105
314.743.2248 (direct)
800.711.2027, ext. 248 (toll-free)
abirenbaum@bamstl.com
www.bamservices.com



07/17/2007 Update to this article: Portfolio Solutions

E-mail from Mr. Richard A. Ferri, CFA, July 17, 2007

Thank you for including Portfolio Solutions on your page for Low-cost, fixed-fee DFA investment advisors. Please allow me to make a few clarifications:

1) Portfolio Solutions is a fully discretionary investment manager. Among other things, that means our clients are not involved in the actual selection of investments. We decide which DFA funds to use in each portfolio if any.

2) There is no minimum account size however there is a minimum fee. The minimum fee is $500 per quarter per investment policy. An investment policy is an asset allocation that covers one account or a group of accounts. For example, a $500,000 client would pay $2,000 per year, which is 0.40%.

3) Each advisor negotiates commission costs with each custodian. While I am not a liberty to disclose the commission cost our clients pay at Schwab, I will say that it is significantly less than what you have quoted. In fact, the maximum per transaction cost our clients pay for DFA funds is below the minimum per transaction you have on your site.

Thanks again,

Rick Ferri


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