Recently Quoted: Dimensional SMAs top $1billion as more financial advisors use models

This was originally posted in a Financial Planning magazine article on 2-8-2023. You can find the original article here:

 Dimensional Fund Advisors is adding exchange-traded funds to its separately managed accounts after the firm’s platform passed $1 billion in assets under management.


 The Austin, Texas-based firm topped the milestone less than a year and a half after launching its SMA Center, which expanded access to the tax-advantaged portfolios to investors with as little as $500,000 in assets, compared with its previous minimum of $20 million, Dimensional said Feb. 8. The addition of Dimensional’s ETFs alongside stock holdings provides more flexibility to the SMAs, which are similar to portfolio models and rising in popularity to the point that “nearly all managed account sponsor firms” are working on ways to make the products more customizable, according to a report by research firm Cerulli Associates in October. 


Assets in all types of externally managed accounts jumped by 24% in 2021 to a record $10.7 trillion. At Dimensional, the SMAs began 2022 with about $100 million in AUM; by last month, holdings had soared above $1 billion across 400 accounts held at 130 different advisory firms, said Kaitlin Hendrix, a vice president and senior researcher with the firm. Financial advisors credit the ability to harvest tax losses that can offset capital gains and up to $3,000 in ordinary income, along with the SMAs that have ESG screens and other personalization, for the growth.


“It was a multi-year project to sit down and say, ‘How are we going to build this platform?’” Hendrix said in an interview. “Investors have unique goals, they have their own preferences and values and you can now apply that to your own investing approach as well.”


Investments in direct equities through the SMAs cost a maximum of 29 basis points, while the ETFs come with no additional charges on top of their underlying expense ratio, except for a fee of 10 basis points if advisors use both stocks and ETFs in the same portfolio. 


Dimensional’s SMAs are “a tool all advisors should consider using under the right client circumstances,” according to Kelly Klingaman, an Austin-based planner who started her own eponymous practice last year after spending a dozen years at the fund firm. The portfolios have “the same overarching investment philosophy” as Dimensional’s other products and avoid the tendency of other index-based strategies, which “blindly follow the stale makeup of an industry benchmark that’s only reconstituted a few times per year,” she said in an email.    


“The SMAs create a custom, diversified basket of securities for each client to hold directly,” Klingaman said. “These securities, on the whole, target higher expected returns by tilting to small cap, value and profitable companies. Trading and implementation follow a flexible approach based on how the market quickly incorporates new information into security pricing daily.”


Fellow planner Ben Hockema of Barrington, Illinois-based Illuminate Wealth Management said he had placed a half dozen clients in Dimensional’s SMAs. Those clients are seeking the benefits of tax-loss harvesting, implementation of their specific ESG focus and some “tax-aware shifting from the stocks to a more broadly diversified approach” in a portfolio that’s appreciated over time, he said in an email.  


“Our ‘Core’ portfolios use DFA ETFs and mutual funds for the stock part of the portfolio, but there are a few reasons that I have used the SMA to replace one or more ETFs in the portfolio,” Hockema said. “So far, I have been very pleased with these portfolios.”


Dimensional had offered SMAs to ultrahigh net worth clients for about two decades before opening them to smaller accounts in 2021, according to Hendrix. She compared the process of building one of the portfolios through the firm’s technology platform to using a new smartphone right out of the box after purchase.


“You can launch an SMA in five minutes,” Hendrix said. “You don’t want to sit and read a handbook, you want to go in and start playing with it.”

The 42-year-old firm has 14 offices across three continents, and its total assets amounted to $540 billion at the end of the third quarter. Last month, it joined the group of asset and wealth management firms supporting the University of Texas McCombs School of Business Wealth Management Network, where Dimensional co-CEO Dave Butler is a member of the organization’s advisory board and the company is helping students get into the industry.