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'The Advisor Business Is Our Business': DFA Co-Chief

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What You Need to Know

  • “The advisor business is our business,” and the firm added ETFs to meet advisor demand, not to lure retail investors, Dave Butler tells ThinkAdvisor.
  • The SEC's new ETF rule was key to the firm making that happen, Butler said.
  • DFA has been experiencing big outflows, but ETFs and other initiatives may help to limit or reverse that.

Dimensional Fund Advisors, a favorite of many financial advisors, is changing its lineup of investment options, but according to co-CEO Dave Butler, the 40-year-old firm is not abandoning its one and only focus on financial professionals.

“The advisor business is our business,” Butler told ThinkAdvisor. “We don’t do retail business. We’re not built for that.”

In a wide-ranging interview, Butler explained that the firm’s addition of ETFs to its long-running  mutual fund lineup, which are available to all investors, was driven by requests from advisors, not by a desire to expand the firm’s customer base.

“What we’ve done with ETFs is that we’ve actually offered up more flexibility frankly to advisors who were looking for ETFs alongside mutual funds in their practices,” said Butler.

Retail investors who don’t use advisors can purchase DFA ETFs, but if they visit the firm’s website to find an ETF they will be directed to the “Find an Advisor” tab, to direct them back to an advisor, Butler said.

ETF Launches

DFA, which is one of the last of the major asset managers to add ETFs, launched three active ETFs last fall, converted four mutual funds to ETFs in June and expects to add two more conversions in September. Its U.S. Core Equity ETF (DFAU), introduced in November, has amassed $1 billion in assets since then.

“People will sometimes ask, ‘What does this mean for Dimensional? Have you changed your strategy in terms of working with advisors?’ and the answer is absolutely not,” said Butler. Adding ETFs “was not an attempt for us to go into the direct individual investor space,” he added.

While advisors’ requests drove DFA to add ETFs, the SEC’s new ETF rule was key to making that happen. The rule provides greater flexibility for the construction of in-kind baskets of securities and assets that ETFs use to purchase and redeem large aggregations of shares (creation units). “Once that ruling and ability to do custom baskets came around in September 2019 that’s when we said yes, we’re going to move forward and provide these advisors something we think they want for their practices,” Butler said.

Betterment Offerings, Managed Accounts

ETFs are not the only recent initiative DFA is using to serve advisors who, according to Butler, want more customization and low-cost diversification in investment products for their clients.

DFA recently joined Betterment for Advisors, becoming the first asset manager to offer mutual funds on the platform.

“A number of advisors using Betterment for their smaller client solutions asked us to be on there so they could mimic their offerings to smaller clients the offerings they had for larger clients,” Butler said.

DFA is also developing a special managed account product that will require a strikingly low minimum compared to its current SMA offerings — around $500,000 rather than $20 million and higher.

“We’re in the beta phase [and] probably by the third quarter we’ll be in a position to be able to offer that to advisors on a more systematic basis,” Butler said.

Also this fall, DFA will be the first asset manager included in Morningstar’s new advisor-managed accounts platform, which expands its current Morningstar Retirement Manager to include advisors working in that universe.

Will Asset Outflows Reverse?

Time will tell whether any or all of these initiatives will help DFA reverse asset outflows, which totaled $37 billion, or 8.3% of assets, in 2020 and $11.6 billion for the first half of 2021, according to Morningstar Direct.

The firm’s three ETFs launched in late 2020 have so far added $1.52 billion through June 30, 2021, according to Morningstar Direct and DFA remains among the top 10 asset managers that Morningstar tracks — it’s No. 10.

Total return of those ETFs and the four ETFs that were converted from mutual funds have averaged 16.81% year-to-date through June 30, compared with a 9.90% average return for the firm’s mutual funds, according to Morningstar Direct.

The firm’s investment approach, based on the research of economist Eugene Fama and finance professor Kenneth French, tilts toward small-cap stocks and value stocks. It has served it well this year and much of last year, but that wasn’t the case in many prior years when growth stocks, especially large-cap growth stocks, outperformed.

“Last year was a good year for value; March to March was incredible,” said Butler. “The market beats T-bills over time, small-caps beat large-cap stocks over time, value beats growth, but there’s also a big amount of dispersion and volatility around those results … We think the future going forward with advisors and with their clients is as strong as it’s ever been.”

And the addition of ETFs to the firm’s fund lineup will help. ETF inflows just set a new record — $505 billion as of July 26, breaking the previous $504 billion record set for all of 2020, according to Todd Rosenbluth, head of ETF and mutual fund research at CFRA.

“Dimensional Funds’ efforts to appeal to ETF investors through new products and converting preexisting mutual funds will help to limit and likely over time stop the outflows as the firm appeals to a broader more cost conscious investor base,” said Rosenbluth.