INVESTMENTS WE USE.

13-point due diligence.

Access to the best mutual funds and share classes

Our status as an institutional-level investment adviser provides us and our clients with access to mutual fund firms and share classes that aren’t available to most brokers or individual retail investors.

Investments we use in client accounts are selected and monitored using an institutional 13-point due diligence process that features specific criteria and thresholds. None of the mutual funds we use pay us any form of revenue sharing or compensation for including them in client accounts.

Listed below are profiles of the some of the mutual fund families that we use.

Dimensional Fund Advisors (DFA)

DFA is an employee-owned firm based in Austin, Texas. It manages over $596 billion (as of September 2018) and is the sixth-largest and fastest growing major mutual fund company in the US according to Morningstar.

Since its founding in 1981, DFA has maintained close ties with the University of Chicago and other elite academic institutions in the fields of finance and economics. Board members and management include some of the nation’s most distinguished financial economists, such as Kenneth French, Robert Ibbotson, Nobel Laureates Eugene Fama and Merton Miller.

DFA’s investment philosophy is rooted firmly in Nobel-Prize-winning academic research which shows that markets are generally efficient and that no one can predict what’s going to happen with any level of consistent success. With this as its foundation, the objective of each DFA mutual fund is to outperform its targeted asset class while minimizing volatility and expenses.

DFA’s approach is in stark contrast to other mutual fund companies and stock-pickers who shift money around in their funds based on speculation and forecasts regarding business cycles, interest rates, or the next “hot” investment or asset class. This process, known as “active management,” has been repeatedly discredited for failing to demonstrate success over the long term.

Along with Vanguard, DFA’s founders are pioneers in index investing having helped launch one of the first index funds for institutional investors in the early 1970s.

DFA’s mutual funds are commonly referred to as “enhanced” or “value added” index funds. While most conventional index funds strictly and mechanically replicate their targeted index, DFA relies on academic research with a different methodology.

Based upon research by Dr. Eugene Fama (Nobel Prize 2013) and Dr. Kenneth French, DFA’s approach adds value by building cost-effective portfolios that capture the separate dimensions of returns (hence the name Dimensional Fund Advisors) and risk/reward premium for investments within each asset class.

These four dimensions of returns are listed below.

  1. Size
  2. Price
  3. Value
  4. Profitability

DFA also places great emphasis on minimizing overall trading costs. Traditional index fund managers have to buy or sell investments on the same scheduled day as all other index fund managers so as to rigidly follow their index. DFA employs sophisticated trading strategies and a lot of common sense by executing the buys and sells for its funds on DFA’s schedule, not some pre-determined pattern defined by the index. This enables DFA to realize meaningful reductions in trading costs as well as the ability to take advantage of the swings in prices of the funds’ underlying stocks as they react predictably to the regimented buys and sells of traditional index funds. These tactics can be very beneficial to the overall performance of DFA funds.

Vanguard

Vanguard was founded in 1975 by John C. Bogle and launched the first index fund for individual investors in 1976. Today it manages over $3.5 trillion in assets.

The “index fund concept” can be traced to Mr. Bogle’s undergraduate thesis at Princeton. He conducted a study which found that around 75% of mutual funds did not earn any more money than someone investing in the largest 500 companies simultaneously (a.k.a. the S&P 500 stock market index).

In other words, over three out of four managers of actively managed mutual funds did not do better than an investor passively holding a basket of the 500 largest publicly traded U.S. companies would have done.

Although some active fund managers will occasionally do better than the passive investor, the extra costs associated with actively managed mutual funds (manager salaries, internal trading fees, taxes, etc. …) are a serious drag on performance. It is these higher fees that give the index funds a performance “head start” of 0.50% or more compared to actively managed funds.

In addition, because of the random nature of markets, the best performing active fund managers never remain on top for long, and it’s impossible to predict which manager or mutual fund will be the next star performer.

Mr. Bogle’s undergraduate thesis was inspired by Paul Samuelson, an economist who had earlier won the 1970 Nobel Prize for Economics. In a Newsweek column, Samuelson had cited academic research imploring that someone start a passive index fund tied to the S&P 500.

The mutual fund industry screamed foul when Vanguard launched its low-cost index fund in 1975 and exposed the high fees and inability of actively managed funds to beat the market. Some mutual fund managers went as far as to say it was un-American to simply own the total market with an index fund, as opposed to investing in an active mutual fund and trying to beat the market even if the fund failed 75% of the time.

Vanguard is structured as a "mutual" mutual fund company. It is owned by its funds, which in turn are owned by their shareholders—the individual investors in those funds. Similar to a credit union, this client-owned structure allows Vanguard to return profits to its fund shareholders in the form of lower expenses, which in-turn directly boosts performance.

TIAA

TIAA (formerly TIAA-CREF) is a Fortune 100 financial services organization that is the leading retirement provider for people who work in academic, research, medical, and cultural fields.

Formed in 1918 by Andrew Carnegie through the Carnegie Foundation for the Advancement of Teaching, TIAA’s conservative approach to investing allowed it to survive the 1929 stock market crash and the Great Depression. It’s not surprising that Einstein invested his money with them in 1933!

Today their careful and conservative style has attracted over 5 million active and retired employees who have accounts at more than 16,000 institutions with over $889 billion in combined assets under management as of June 30, 2016.

TIAA is owned by the TIAA Board of Overseers (a New York not-for-profit corporation). Any surplus profits are returned to participants and shareholders in its mutual fund and insurance products. TIAA’s non-profit structure enables it to provide investment products with expense levels that are among the lowest in the industry.

TD Ameritrade Institutional

TD Ameritrade provides comprehensive brokerage and custody services for approximately $1 trillion in assets managed by more than 4,000 fee-based independent registered investment advisors (RIAs) and many more retail investors.

TD Ameritrade is a staunch advocate for the Fiduciary Standard of Care. This is the same client-first, ethics-based standard of care used by doctors, attorneys, and CPAs. It stands in stark contrast to the rules-based Suitability Standard of Care under which most firms and salespeople in the financial services industry operate.