Do Dimensional Advisors Add Value?

(Full disclosure:  I am a DFA-Funds approved advisor and recommend Dimensional funds for some client portfolios.)

An oft-repeated statement of advisors approved by Dimensional is that investors in DFA funds are protected from bad behavior of other shareholders because fund flows are all controlled by advisors.  Is it true?  Do DFA fund shareholders exhibit better behavior than DIY investors? I was genuinely curious to find an answer.  I know a fair number of well-informed DIY investors who have done just fine by themselves, and I’m generally a bit skeptical of my industry’s marketing claims.

To run a small sample to test for the possible value-add of a financial professional, I wanted to compare the actual returns earned by the fund investors of Vanguard, and the actual fund returns of investors earned by DFA.  In an effort to not turn this into a DFA vs. Vanguard fight, I’m not looking at comparing the nominal returns of the two companies.  Instead I am looking at the investor behavior delta: how far off from the actual fund performance were investors?  How did good or bad timing affect the actual investor returns?

Vanguard funds are available to every US investor (who meets the fund minimum, typically $3,000).  Dimensional Funds are only available to investors who work with a financial professional who has been through Dimensional’s approval process. So while there are likely many investors in Vanguard funds who are working with an investment professional, there are essentially no DFA investors who are DIYers (with the possible exception of DFA investors who fired their advisor and kept the funds).

To compare, I picked five major asset classes: Large Cap US Stocks, Small Cap US Stocks, Developed Foreign Markets, Emerging Markets and Real Estate.

Large Cap US Stocks:

Fund	Symbol	10-Year Behavior Gap
Dimensional US Large Cap Value	DFLVX	0.56%
Vanguard 500 Index	VFINX	-2.47%

Small Cap US Stocks

Fund	Symbol	10-Year Behavior Gap
Dimensional US Small Cap	DFSTX	0.31%
Vanguard Small Cap Index	NAESX	-1.27%

Developed Foreign Markets

Fund	Symbol	10-Year Behavior Gap
Dimensional Large Cap International	DFALX	-1.22%
Vanguard Total International Index	VGTSX	-1.19%

Emerging Markets

Fund	Symbol	10-Year Behavior Gap
Dimensional Emerging Markets	DFEMX	-0.69%
Vanguard Emerging Markets Index	VEIEX	0.11%

Real Estate

Fund	Symbol	10-Year Behavior Gap
Dimensional Real Estate Securities	DFREX	0.25%
Vanguard REIT Index	VGSIX	-1.45%

I am genuinely surprised by the results. On average, the behavior gap is measurably smaller in DFA funds than in Vanguard funds.  Notably, DFA investors performed the worst in international stocks and emerging markets, where the Vanguard funds had a smaller gap (even positive in emerging markets). Investors in Vanguard’s core S&P 500 Index fund had a terrible gap of -2.47%. The average behavior gap of the Vanguard funds was -1.25%.  The average gap of the Dimensional funds was -0.38%, a difference of roughly 0.87%.

I didn’t necessarily expect this to be the case. I’m very reluctant to jump on the “advisor’s alpha” bandwagon and claim that a good advisor can add 3-5% to investor returns (yes, these claims exist). For a relatively well educated do-it-yourself investors who has his or her behavior under control, those suggested figures are extreme.But these numbers are what they are, and they are telling. Investors are often their own worst enemies, and as we can see above, advisors can help narrow the gap.

Of course, a 1% asset-based fee could quickly wipe out the gap, perhaps suggesting that typical 1% fees for high net worth investors are an odd form of rent-seeking, whereby the advisor captures 100% (or more) of the value they may be adding. Since the economies of scale should belong to investors, I’m not much of a fan of asset-based advisory fees, certainly not in the 1-2% range. But perhaps a reasonable advisor fee can be demonstrated to add value to investor performance if, left to their own devices, investors would be inclined to behave badly.