Dimensional’s New ETFs Signal Trouble for Advisors
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Dimensional Fund Advisors recently announced an expansion of its ETF offerings. It will add seven ETFs, including an Ultrashort Fixed Income ETF (NYSE Arca: DUSB) and a World Equity ETF (NYSE Arca: DFAW).
This development is good news for investors but raises issues for some investment advisors.
A massive shift
As a financial advisor (more than two decades ago), I embraced Dimensional’s approach to investing. My firm offered its clients only Dimensional funds. Our key differentiator was our ability to give our clients access to these funds.
Now, anyone can buy Dimensional’s ETFs, with or without an advisor.
This development is great for investors, who can benefit from owning funds from one of America’s foremost fund families without going through a gatekeeper.
Where’s the beef?
Almost 40 years ago, Wendy’s introduced the slogan, “Where’s the beef?” It has become synonymous with questioning the substance of anything.
Dimensional’s ETFs will likely stimulate “where’s the beef?” inquiries from clients who pay an AUM-based fee and receive primarily investment advice.
As Larry Bates demonstrated with his useful “T-Rex Score” calculator, an investor who pays a 1% AUM-based fee for investment advice loses 25% of profits over 20 years in fees.
That’s not a typo.
The same investor can now buy Dimensional’s World Equity and Ultra Short ETFs and have a sophisticated portfolio without paying fees to an advisor.
Many are going to figure this out.
Howls of protest
I can already hear the howls of protest.
- What about behavioral coaching?
- What about rebalancing, tax-loss harvesting, and asset location?
- What about comprehensive financial planning?
Here’s my retort.
Advisors add significant value, including the above services, to investors with complex financial issues, those with a compelling need for their services (like those who are financially unsophisticated), or others who want to outsource their financial affairs. There will always be a large market for your services.
My concern is not that this market will disappear but that it may shrink considerably.
Behavioral coaching can be very valuable, but investors are more sophisticated. Once they have a historical perspective, many will not require behavioral coaching. Those that do may balk at paying a hefty share of their profits to get it.
Rebalancing is not “rocket science.” There is no reason why investors can’t do it themselves. It’s also of dubious value. Jack Bogle noted: “I am in a small minority on the idea of rebalancing. I don't think you need to do it. The data bear me out, because the higher-yielding asset is going to be stocks over the long term.”
Michael Edesess has challenged the benefits of rebalancing in articles he has written for Advisor Perspectives.
Tax-loss harvesting doesn’t benefit investors in low tax brackets. Its benefits for others are sharply disputed.
What about the big kahuna: comprehensive financial planning?
While financial planning has many benefits, it has limitations investors may not understand, including flawed assumptions, unexpected events, inaccurate data, and the effect of human behavior.
There are also serious questions about the utility of a Monte Carlo analysis, which is the bedrock of many advisor-generated financial plans.
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The impact of AI
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When can AI prepare a comprehensive financial plan that will rival yours?
According to Geoffrey Hinton, often referred to as the “godfather of AI,” AI will be more intelligent than humans “possibly” within five years. His prediction is more aggressive than this one from Ray Kurzweil, the head of Google Engineering: “By 2029, computers will have human-level intelligence.”
Mustafa Suleyman, CEO of Inflection AI, recently stated: “In the next five years, the frontier model companies — those of us at the very cutting edge who are training the very largest AI models — are going to train models that are over a thousand times larger than what you see today in GPT-4.”
Even before that short time, there’s cause for concern. Within a year or so, we could see AI versions “5 to 20X more advanced than GPT-4 models now on the market.”
I use Chat GPT-4 daily and am blown away by what it can do. I have no doubt that a version that is a multiple of its present capacity could do most of the tasks you perform for your clients.
What can you do?
I found this observation in InvestmentNews troubling: “The truth is, absent a rise in asset values, most advisory businesses aren’t growing all that much.”
If you’re not growing very much, what will your business look like now that (i) your gatekeeper role with Dimensional Funds no longer exists and (ii) some of what you are now doing (and charging for) can already be done by AI, with far more sophisticated services likely to be available soon?
Now is the time to start thinking about your value proposition.
Do you need to change the way you charge?
Should you start to focus on a niche market?
Should you enhance your soft skills, like empathy, listening, and situational awareness?
You can find helpful suggestions and observations in this article.
Dan trains executives and employees in the lessons based on the research in his latest book, Ask: How to Relate to Anyone. His digital marketing firm, makes extensive use of artificial intelligence to help advisors increase their SEO rankings and improve their marketing and helps advisors integrate AI into their practices.
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