The Long Road: The Other Side Of DFA

May 27, 2008

Some advisors point out investors don't need to buy higher-cost DFA funds to put together 'superior' portfolios.


Eugene Fama Jr. is definitely a dynamic speaker. But how much of his message is fit for the masses seems open to debate.

I got a chance to hear the Dimensional Fund Advisors vice president make a presentation during the recent annual convention of the National Association of Personal Financial Advisors, in Long Beach, Calif.

Fama made for an engaging speaker by combining investment theory with his own particular insights of growing up in the household of an investing legend. The son of famed University of Chicago economist Eugene Fama warned against getting too caught up in the latest hype regarding emerging markets and commodities.

With long, flowing black hair and a seemingly never-ending supply of quips, Fama's message was simple: Stick to your discipline and know your own tolerance for risk.

While entertaining, I found it somewhat confusing to listen to Fama tell advisors to tune out the noise. At the same time, wasn't he essentially plugging higher-costing versions of market-cap-weighted index funds?

Of course, Fama wasn't talking to a group of novice, or even individual self-directed, investors. And it's probably fair to say that DFA doesn't quite fit neatly into any particular category.

Still, I can't help wondering how much of that dilemma is due to nifty marketing. Sure there are differences with other brands. But are those so huge that they demand higher fee structures than many other market-cap-weighted funds? I found plenty of fee-only advisors who weren't swallowing the juice, arguing that DFA represents another twist on indexing rather than a revolutionary new methodology.

Discerning Shoppers Want To Know...

Several advisors described how they use market-cap-sized exchange-traded funds, at a fraction of the cost, instead of DFA products. In some cases, it might take two or three different traditional ETFs to cover the same ground. But for the discerning fund shopper, they pointed to several ways around DFA's barriers to entry for individual investors using ETFs from Vanguard, Barclays Global Investors and State Street Global Advisors, among others.

But I also ran into advisors, mainly from big DFA shops, who countered that such views show a lack of understanding. Either way, the DFA story does seem to have a cloud hanging over it. And that comes despite the fact these aren't exactly baby-faced funds anymore.

No doubt, a big part of such confusion can be blamed on how they're treated in the mass media. For years, many business editors have been deferring to Morningstar's definition, which labels DFA funds as actively managed.

At the other end of the spectrum are advisors. Some make their living through commissions. The ones at NAPFA were fee-only, meaning at least in theory they've got fewer conflicts of interests. Even though they seem to consider DFA funds more passive than active, their enthusiasm was striking in Long Beach. After Fama's speech, advisors rushed the stage like he was a rock star.

That left me with a strong impression, either rightly or wrongly, that questions about DFA's cost structure and claims of its indexing superiority are akin to hanging chads: If you don't do your own due diligence, few others are likely to unravel this puzzle solely on your behalf.

The bottom line for long-term-oriented investors who wish to directly control their own fortunes is that DFA funds are marketed as a different sort of passive animal. And they can only be accessed through advisors. That implies they're too tricky for most of us common, everyday investors to handle.

Ironically, DFA prides itself on speaking plainly and in a lively fashion to advisors. The presentation by Fama was as much fun as it was simple to understand. So is it really that much a stretch to wonder why you really need to be an advisor to buy their funds?

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