A DFA account typically refers to an investment account that holds investment products, such as mutual funds and exchange-traded funds (ETFs), offered by Dimensional Fund Advisors (DFA). It is not a unique type of account in itself, but rather a standard brokerage, retirement, or trust account through which investors access Dimensional's specific range of investment solutions.
Understanding Dimensional Funds
At the core of a "DFA account" are the Dimensional Funds themselves. These are investment vehicles managed by Dimensional Fund Advisors, a global asset manager known for its systematic, research-driven approach to investing.
- Provider: Dimensional Fund Advisors (DFA) is the investment management company.
- Products: They primarily offer mutual funds and exchange-traded funds (ETFs).
- Investment Approach: A distinguishing feature of DFA's investment approach is its emphasis on factor-based investing, which draws heavily from academic research to capture broad market returns and specific market "premiums" or "factors" (e.g., value, size, profitability).
For more detailed information on Dimensional Funds, you can explore resources like Dimensional Funds 101: What Are They?
How a DFA Account Works
Unlike many other fund families, Dimensional Funds are not typically available directly to individual investors through popular retail brokerage platforms. Instead, accessing these funds usually requires an intermediary:
- Advisor-Centric Model: Dimensional Fund Advisors primarily distributes its funds through a network of approved financial advisors, consultants, and institutions. Investors generally gain access to DFA funds by working with a financial advisor who has a relationship with Dimensional.
- Account Types: A DFA account can be any type of investment account capable of holding mutual funds or ETFs. Common examples include:
- Taxable brokerage accounts (individual, joint)
- Retirement accounts (e.g., Traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA)
- Employer-sponsored retirement plans (e.g., 401(k), 403(b), if DFA funds are offered)
- Trust accounts
- Custodial accounts (e.g., UGMA/UTMA)
The advisor helps set up the appropriate account type, facilitates the purchase of Dimensional Funds within that account, and provides ongoing management and financial planning.
Distinguishing Features of Dimensional Funds (Held in a DFA Account)
Investing through a DFA account means aligning with Dimensional's unique investment philosophy:
- Evidence-Based Investing: Dimensional's strategies are rooted in decades of academic research, aiming to capture systematic sources of returns rather than relying on stock-picking or market timing.
- Factor-Based Portfolios: They construct portfolios to emphasize factors like small size, value (low price-to-book ratio), high profitability, and robust investment, which academic studies suggest have historically been associated with higher expected returns.
- Broad Diversification: DFA funds typically hold a large number of securities to achieve broad market exposure and mitigate company-specific risk.
- Low Costs & Efficiency: While not strictly passive index funds, they operate with a highly systematic and disciplined process, often resulting in lower expense ratios compared to traditional actively managed funds.
- Long-Term Focus: The investment approach is designed for long-term wealth accumulation, encouraging investors to stay disciplined through various market conditions.
Who Uses DFA Accounts?
DFA accounts are most commonly used by:
- Clients of Fee-Only Financial Advisors: Many independent, fee-only financial advisors who adhere to an evidence-based investment philosophy choose to build client portfolios using Dimensional Funds.
- Institutions: Pension plans, endowments, foundations, and other institutional investors also utilize DFA's strategies.
- Investors Seeking a Systematic Approach: Individuals who value a rigorous, academic, and globally diversified approach to investing, rather than speculative or actively traded strategies.
In essence, a DFA account is simply an investment account tailored by a financial advisor to hold and manage a client's allocation to Dimensional Fund Advisors' specialized investment products.
