Why DFA Is a Strategic Partner of Our Mission


As most of our readers can probably tell, we are big fans of Dimensional Fund Advisors (DFA). Our recommended mutual fund lineup, record-keeper for retirement plans, and experts for research in the field of finance all come from DFA. While most clients and prospects probably think there is some sort of revenue sharing arrangement, this couldn’t be further from the truth. Like any successful business, having strategic relationships with firms that are aligned with our mission is key to having the mission flourish. 

Let’s start with the most common question as to why we prefer DFA funds to other leading index fund providers. Most people are more familiar with fund families like Vanguard or iShares and other financial advisors who follow a passive investment philosophy usually have no problem incorporating some mixture of Vanguard, iShares, and DFA. Our reason is very simple: DFA has proven that their process of capturing the dimensions of expected return is superior to that of Vanguard and iShares. By relaxing the strict standards of adherence that is required for traditional index investing, DFA can take a more cost-effective approach of tracking a particular segment of the market without sacrificing the overall purpose of the investment strategy. We go into more detail in Step 11 of our 12-Step Program for Active Investors.

But there must be more to the story. Past performance is no guarantee of future results so why is IFA willing to put all of their eggs into the DFA basket? This might be a much harder idea to grasp so we are going to use the analogy of Apple, Inc.. Simon Sinek is famous for his talk on “Starting With Why,” and specifically discussing how consumers make purchasing decisions based on why companies do what they do instead of what they do. For example, most people are strong advocates for Apple not because they make computers, phones, tablets, watches, etc., but mainly because people believe in the same things that Apple believes in as a company. As Mr. Sinek puts it so eloquently, it is not about buying computers, since people can buy computers from many different companies, but it is about Apple’s mission of constantly producing products that challenge the status quo with an elegant, intuitive design that is also user-friendly.

If we were to look on DFA’s website under their philosophy, the first thing you will find is research. And the first statement they make on that landing page is, “a scientific priority runs deep through Dimensional. We have a high regard for research, process, and time-tested data. A time line of innovation offers proof that Dimensional has always looked forward, ready for change, eager to go where the evidence leads.” How is this different than the many other providers of index funds? Research, time-tested data, and evidence have not led to active investment products where managers try to time the market or pick the winners - which Vanguard has an entire lineup of active funds. Nor have research, time-tested data, and evidence lead to developing exchange traded funds that track countries, currencies, or individual industries - since these standalone products are not fully diversified. In other words, DFA has not strayed away from its core belief in an evidence-based process in order to sell product.

Data, evidence, and rigorous research have been implemented in the design of DFA’s portfolios as well as the implementation of their strategy. Index Fund Advisors believes in the same approach when it comes to guiding clients with their investments. Doing anything other than what has been proven through academic research and successful implementation would in our view be a breach of our fiduciary duty.