Tiburon Strategic Advisors' Managing Partner Chip Roame recently gave one of its fifth annual Tiburon CEO Summit Awards to David Booth, chief executive at Dimensional Fund Advisors at the Tiburon CEO Summit XXII in New York City.
Booth who was honored with focusing on consumer needs challenged conventional industry wisdom and urged taking responsibility in a casual conversation with Roame.
Booth said his firm was based on more transparency lower fees and lowering conflicts of interest between its advisor clients and the end investors There's nothing wrong with commissions but are people getting commissions for selling bad stuff he asked an audience of other fund executives and advisors
The University of Chicago alum whose $300 million donation in November was the largest in the institution's history launched Austin, Texas-based Dimensional in his New York City apartment. He started out with classmate Rex Sinquefield and support from academic luminaries such as Myron Scholes, Robert Merton and Eugene Fama.
"I was a single guy living in Brooklyn so the first office was my apartment and my first trading room was my extra bedroom," he said
Booth was a doctoral candidate at the business school and a research assistant to Fama the founder of the efficient markets hypothesis. In 1981 he launched a small cap index fund, which "was not even a term people used."
"The first question people asked was 'How is research done," he said.
During its early days Booth said Dimensional's funding came from institutional money But starting in 1989-1990 the firm began working with Dan Wheeler, a financial advisor to help it tap into the advisor market.
"We let him in but if we said 'If we catch you going in and out we're going to shut you off.'" By the end of that first year Wheeler brought in $70 million from advisors and Dimensional's advisory business was born.
Booth noted that his firm does not have wholesalers selling funds to advisors Instead advisors who request access to DFA funds must travel on their own dime to the firm's headquarters, go through a screening process and attend a mandatory two day seminar on the theories behind Dimensional's success.
In 2006, Dimensional moved its offices from sunny Santa Monica, Calif. to Austin, Texas in what Booth described as a "risk reduction" move. "All of our business in Santa Monica was in a seismic area and I had to picture myself as a grandfather telling my grandkids 'Once I was really successful before the big quake hit.'"
The firm currently has about 400 staffers in Austin and another 100 people in Santa Monica.
Over the past few years DFA has also opened offices in Australia, the Netherlands, Canada, England, Chile and most recently in Germany. In January the firm tapped Carlo Venes as vice president in Dimensional's Executive group responsible for leading its effort to expand in Asia (ex-Japan). The firm works with institutional investors including central banks sovereign wealth funds insurance companies and related entities throughout the region.
Currently 15% of the firm's clients are international according to Booth. The firm currently manages $231 billion in assets and its board of directors is a 'who's who' of the financial academic world including Scholes Merton and Fama. Nobel prize winner Merton Miller was also a director before his death.
"Most innovation comes from the academic world I always felt it was critical we have key understanding about risk return and how to control risk," said Booth. "One thing leading academics have is credibility Plus it is a lot of fun I like hanging around them."
He said his firm is focusing on placing more managed accounts in defined contribution plans "We're obsessed with costs. This is a great opportunity to do wealth management for the average Joe and Jane out there," he said.
Going forward, Booth says mutual funds may be well served to have more interaction with their clients via social media. According to Booth, investors want to get more involved but not necessarily manage the assets themselves. Rather they want to have more information and more interactivity particularly web-based. "Giving people a fair deal is what it's all about," he said.
While the DFA funds are considered passive they are not index funds according to one wealth advisory firm's description of DFA Each fund invests in a discreet asset class in the global marketplace with major markets being broken out into three classifications U.S. Foreign Developed Countries and Foreign Emerging Markets And within each market are subclassifications such as Large Cap Small Cap Growth and Value as well as various categories of fixed income.
When asked by Tiburon's Roame if the firm is indeed a passive manager Booth offered: "Roughly half of our clients view us as active and half view us as passive We haven't changed the terminology has changed."
