Dimensional's first UMA reflects a changing firm — and tough competition

Facing tough competition and demand for more streamlined, tax-efficient investments, Dimensional Fund Advisors followed rivals in launching its first unified managed accounts.

Austin, Texas-based Dimensional has earned legions of fans among financial advisors and their clients based on the company's track record as an innovator in low-cost yet actively managed mutual funds focusing on smaller-capitalized, undervalued companies. In recent years, the company confronted outflows in its mutual funds by instituting technology upgrades and offering ETFs, reversing the trend back toward a positive influx of assets. The opening of its UMA platform last month followed Dimensional's introduction of a Separately Managed Accounts Center in 2022. The UMA capability enables advisors to combine Dimensional's customizable SMAs with other types of investments and tax overlay management that can bring savings.

Dimensional

Active tax management in the form of harvesting losses and savvy rebalancing represents "the No. 1 reason that people are going to these types of solutions," Kaitlin Hendrix, a vice president and director of asset allocation research with Dimensional, said in an interview. "The unified managed account brings all of those things into one place."

READ MORE: All-in-one tech trend changing how financial advisors do business

Services like tax management and consolidated technology through UMAs are proving attractive as fund managers keep adjusting to continuing fee compression, the appeal of ETFs and the registered investment advisory firm movement. The latter trend is pushing asset managers to expand their menu of services catering to the largest and fastest growing RIAs, according to a report released this week by research and consulting firm Cerulli Associates.  

"It is no longer a competitive advantage to provide only key account coverage or make more client-friendly marketing material available," Cerulli Senior Analyst Kevin Lyons said in a statement. "Advisors are in search of more intricate resources that truly can benefit their practice by making it more efficient."

In a difficult environment for fund managers marked by "large and persistent outflows" from its mutual funds, Dimensional "has remained steadfast in its philosophy and responded in a way that benefits clients while improving its competitiveness," according to the latest note on the firm last year by Morningstar Senior Research Analyst Daniel Sotiroff. The $36.3 billion in flows into the firm's ETFs over the last 12 months have more than offset the $28.2 billion in assets leaving Dimensional's traditional mutual funds, Morningstar's data showed. After an outflow of more than $80 billion from the mutual funds between 2020 and 2022, the firm carried out an "admirable" response by slashing fees and pivoting into ETFs, Sotiroff said.

"Dimensional's endeavor into exchange-traded funds was the biggest step it took to shore up its business," he wrote. "The firm converted seven tax-managed mutual funds to ETFs between mid-2021 and mid-2022. Along the way, it launched an additional two dozen that largely follow the same strategies underpinning the existing mutual funds. The firm also reinvested in its separate accounts platform by bolstering the technology used to manage these portfolios. The effort was aimed at improving operational efficiencies.These measures appear to be paying off."

READ MORE: Can active ETFs outperform their way into more portfolios?

Besides operating amid those longer-term trends across all funds, the company is also fighting for business with American Century Investments' Avantis Investors, an upstart rival founded in 2019 by former Dimensional executives, according to analyses earlier this year by Morningstar and ETF.com columnist Allan Roth, founder of Colorado Springs, Colorado-based Wealth Logic. 

Fund management has changed greatly since the era when planners like Roth needed to gain approval to place clients' investments in Dimensional funds by completing a multiday training session, he said in an interview. The UMAs reflect both the growing competition among fund and technology firms that provide outsourced management tools, and the poor performance of small-cap funds offered by managers like Dimensional over the last several years, Roth said.

"There's a zillion platforms out there," he said in an interview. "They're trying to do everything. They will gather assets when small-cap and value starts doing better."

Dimensional's UMA carries a cost of 10 basis points with a minimum of $500,000 in investments, according to Hendrix. The firm has developed nine equity SMA strategies, and advisors can choose among 38 ETFs offered by Dimensional or more than 1,000 from outside managers. With an eye toward "operational efficiency for advisors" and "flexibility in asset allocation for investors," Dimensional is working to add more mutual funds and enhance the model management on the new platform, Hendrix said.

The opening of its first UMA included contributions "from every department" at Dimensional, she said. 

"It's hard to think of one that was not involved in this process," Hendrix said. "All of that infrastructure was quite a lot to develop to allow us to do this at scale and serve advisors."