Save the Fees
Save the fees and manage your own money using low cost ETFs. You are going to be dollars ahead and here is the evidence. Let me describe the process I went though to come to this conclusion – and I am not finished with the analysis. This data is not going to win me friends among DFA advisors.
I logged on to one of the premier web sites on the Internet to find examples of recommended portfolios. There were ten options and I have yet to analyze all of them. I first selected the most aggressive portfolio, expecting it would yield the greatest returns as the five-year period includes the great bull market beginning in March 2009. The period of analysis I selected runs from 6/28/2007 through 6/28/2012. When the data available, I can include information from today.
Return from Portfolio X = 1.43% annualized with a standard deviation of 23.38%. These are actual historical results, not projections into the future. I can provide projected data, and will at some point.
Platinum readers have frequently read about the "Swensen Six" portfolio, so I ran the numbers on that simple portfolio. Here are the results.
Swensen Portfolio = 5.28% annualized with a standard deviation of 16.9%. The Swensen outperformed the aggressive Portfolio X by 3.85% annually, and did it with lower risk.
There are no fees associated with the Swensen as all six ETFs are commission free for TD Ameritrade customers. With Portfolio X, management fees are somewhere between 50 and 90 basis points depending on the size of the portfolio. And the fees are annualized so choose one of the numbers and subtract that from the 1.43% return. The annualized return is below 100 basis points annualized.
With this data in mind, are you going to believe the sales talk that an advisor can add alpha to a portfolio by providing access to DFA mutual funds?
Disclaimer: 1) Other time periods need to be selected to make sure this was not a unique case. 2) Other asset allocation plans need to be tested. For example, I will run a test using the Schrodinger Portfolio as it is a passive portfolio. 3) Less aggressive portfolios need to be selected from the Internet web site. Below is the data from one more portfolio.
After running a test on the most aggressive portfolio, I selected the portfolio smack in the middle of the tame to aggressive line-up of portfolios. Here are the results.
Portfolio Y = 1.86% annualized return with a standard deviation of 12.8%. While this portfolio was less risky compared to the Swensen Six, the performance still lagged by 3.42% points – annualized. Once more, one needs to subtract at least 0.50% from the 1.86% return. Fees are a drag on performance.
Platinum members can manage their own portfolios. Cut fees, increase returns, and do it with a less risky line-up of non-managed index ETFs.