Transforming Research Into Practical Investment Strategies with Kaitlin Hendrix and Shawn Jaberzadeh

Jack Sharry: Hello, everyone. Thanks for joining us on this edition of WealthTech on Deck The 75 shows we have done over the past year and a half focus on the confluence of digital and human advice. We also talk about the strategies that wealth managers, asset managers, annuity companies, workplace firms, and fintechs are using to help investors participants, advisors and firms achieve success. Today we’re talking with a firm that took a unique approach many years ago to both asset management and distribution, and they have enjoyed extraordinary success. DFA Dimensional Fund Advisors is known for its unique approach and today we’re going to talk with two key players at DFA, one on the asset management side and the other from distribution. For this week’s show, we are speaking with Kaitlin Hendrix and Shawn Jaberzadeh. Katie and Shawn, welcome to WealthTech on Deck, it’s nice to have you both on the show. Thanks, Jack. Thanks for having us. Kaitlin first, and then Sean, let’s start with you providing some background and color on what you do at DFA Katie?

Kaitlin Hendrix: Sure, thanks. I’m on the research team here at dimensional I’ve been with dimensional for seven and a half years now. And when you think about research at an asset management firm, you often think about equity analysts, you know, research analysts trying to identify mispricing trying to find stocks or bonds that are trading too low or too high, so people can trade on those. At dimensional our investment philosophy is that markets work that markets are efficient prices incorporate the aggregate expectations of market participants. And so we use information and prices, we lean into the power of markets. So on the research team here, I think it’s a lot more fun said of trying to identify mispriced securities, which time tells us is pretty difficult to do, especially systematically, we spend our time identifying what drives differences in expected returns. So I’ll give you an example. One is if we look at the US equity market, we see that small caps tend to outperform large caps, we focus on small cap securities, overweight those, but our research also focuses on implementation. And that’s where I spend a lot of my time. So if we focus on the small cap example, those can be expensive to trade wide bid ask spreads high trading costs, how can we think about executing that efficiently? There are portions of the small cap market that tend to significantly underperform we exclude those. So those are some examples bringing to life how implementation can take it from academia, paper returns to net a fee returns to investors. And that’s really what I focus on doing at the research team here.

Jack Sharry: That’s great. We’ll talk a little bit about whether that has evolved or not in a little bit. But more on that later. Shawn, when he talked a little bit about what’s going on on the distribution side of DFA, you’ve always had a interesting and unusual model, which I have to say I’ve admired for a long time. But fill us in, What are you up to?

Shawn Jaberzadeh: Yeah, thanks, Jack. Well, so I’m a vice president on our global client group. And I specifically work with a segmentation of our clients that we consider as enterprise firms. So consider national registered investment advisors with large footprints, hundreds or 1000s, of advisors or financial professionals serving their end clients. And as Katie said, the research team at dimensional spending quite a bit of time trying to find out the drivers of expected returns on the global client group to your point Jack have been relatively unique in industry, we’re thinking about what drives greater advisors success. And so once they’re compelled to use our investment solutions, as fiduciaries for their clients, or supporting them on is ensuring that we bring the best of communication and business strategy, such that they have the full support of an partner like dimensional to be able to ensure that the investment piece has all of it needs to make them successful, because it’s one thing to have an investment approach. It’s another one to be able to articulate it. And it’s a whole ‘nother challenge to keep clients in their seats, when things are sometimes disappointing. And so really the full focus of our global client group is to support the advisor and a financial professional in their endeavor to ultimately support their end clients.

Jack Sharry: And we’ll come back to that as well because I hear an evolution from the original DFA which had a very small group of folks and followers and adherence and fans, to now a more global approach to larger firms and all the advisors. So we’ll come back to that in a minute. So Katie and Shawn, again, in turn, please bring us up to date on the DFA story. As the world continues to evolve, please explain how things are changing with regard to respective roles and what you are especially excited about and what you’re doing at DFA because the markets have changed from at least recent times, or recent decades, and now they’re more challenging and certainly the distribution landscape isn’t in is fast, compelling down the hill and changing seems like every single day. So Katie, when I started off in talking about what you’re seeing from an investment standpoint, then Shall I talk about what you’re doing from a distribution, particularly as you start to work with larger firms?

Kaitlin Hendrix: Yeah, I think that’s true. I think something that we’ve seen a lot of change recently is having much more of a demand for investors specific investments, customization around their portfolios, and especially around their tax management. So, over time, we have decades working in this space delivering separately managed solutions for ultra high net worth or institutional investors, and focusing on tax management specific needs. But more recently, we’re thinking about how can we bring those types of solutions to smaller minimums. And so we’re thinking about this from an implementation perspective. When I talk about tax management and investor specific tax management, this is kind of a buzzword in the industry. Now, I think this is coming up a lot. And a lot of people they think about tax loss harvesting, what we’re focusing on is going beyond tax loss harvesting. How can we deliver this investor specific tax management at every step of the investment process, and it’s really how design and management and trading all talk to each other. So this is something that an example I talked about, I mentioned to Sean, I was traveling over the summer with my kids at time, 10 month old, we were on a transatlantic flight, and I’m trying to change her diaper and an airplane bathroom and one of those flap down changing tables. And I don’t know, if you’ve had the pleasure of using those whoever designed those is not who uses them, they are not made for ease of use or efficiency. And really, when we you want the front end and the back end talking to each other. And so tax management at the investor specific level, that’s a great example. And we design portfolios in a tax efficient way we exclude REITs, for example, they pay typically non-qualified Income tax to the higher rate every step of the process. And just one example, you mentioned, you know, the market environments, the first half of this year, difficult market environment, the second half of this year, also difficult market environment. But we ran a case study of our lives, separate accounts. For example, over the first half of 2022, the market was down about 20%. Over that period, we harvested meaningful losses in those accounts about 14%. On average, investors can use those to offset gains in other investments or in future years. But we also captured a strong value premium. So those portfolios, on average, beat their benchmark by 2%. So it’s this integrated implementation process, you know, from front middle to back, talking to each other that allows us to deliver it. And so that’s really our focus bringing an institutional approach to more investors at lower minimums.

Jack Sharry: Gotcha. I won’t ask you if you had to use the changing table with any of your clients. Another time. Sorry, Shawn, so talk about what you’re doing a DFA how that’s a bit different. But my sense is, you’re operating differently than you did, at least in the early days of DFA.

Shawn Jaberzadeh: Yeah. And I think I’ve gotten a good sense of what you’re referring to just because I’ve had the privilege of being with dementia for 16 years and going. And I think back then, on the distribution side, we were fortunate to your point to really help grow with the independent advice movement, starting in the early 90s. But we didn’t have a lot of guys and gals that were supporting the distribution side of things, because we were really a research outfit working with institutions. And we had a lot of scale in that way. And so when you had financial professionals coming to us and interested in working with dimensional, we had to somewhat pick and choose who we would be able to expend our resource and time with just because of bandwidth. And as years have gone on, I think what you’ve seen a dimensional is one recognition from the outside of our walls about a very robust approach with solid implementations Kaitlin just mentioned that can actually help your clients create a differentiated story for your business so that it can be a win, win. And dimensional has really changed its tune over the last two decades to say, You know what, we’re not going to wait and see if we reach different growth levels, were going to ensure that all parts of the organization are prepared if we have the privilege of growing with our constituents. And so the people, the systems, the integration, even internally, the mentor really started to ramp up. And now to your point, Jack, we don’t have to pick and choose who we’ve got the time to be able to support, we’re able to support a growing movement within the independent advice space, whether that be a registered investment advisor, someone that is an independent broker dealer, folks who are working on the insurance side that want to provide some wealth management services. So we’ve been really able to boost our support of that community so that no matter who is interested in using dimensional, we’ve got the resources, the people in the platform to be able to serve them and meet them where they need to be met. Because as Katie mentioned, it’s one thing for an investor to want kind of exactly what they need. other investments. But financial professionals are humans too. And they all have very unique businesses. And so we need to be sure that we can take everything that we have at our disposal and tailor a client support mechanism such that it helps them have the most success that they want in their businesses, because some folks want to be the next biggest firm in industry. And some folks are happy with their lifestyle businesses. And some folks are somewhere in between.

Jack Sharry: And how did that transition go? Because I was think of DFA and I’m not day to day student of everything you do at dimensional? How did you make that shift? Because that’s a pretty significant shift you You were quite frankly, exclusive to certain types of advisors, I forget the exact parameters, but I remember is a quite an exclusive model to describe that transition and describe how available you are. And it sounds like it’s primarily in the independent Rhl. But he just sort of take us through that.

Shawn Jaberzadeh: Yeah, absolutely. I think when it goes back to was capacity. And so we had a handful of folks doing everything from the taking all the great work our research team does, and translating that into terms that financial professionals can take on, understand and decide how they want to incorporate in their portfolios, the distribution team was also running a lot of portfolio analytics. So that’s that it wasn’t just an idea, but you can actually help compel them that it was the right thing for their clients, you have the distribution team also doing all the communication support, whether it be running an end client event for them sitting down across the table, from their end clients to help support the advisor to win new prospects or transitional clients to a new sub investing. And so I think it became a scale issue where you had a few folks doing everything. And so when you speak about the transition now that when that under being very deliberate about creating verticals, for each of those subject matter expertise across investment, communication, analytics, data support, communications events, such that within the distribution model, you had experts that then were well integrated with different parts of the organization. So you can scale the opportunity set in the audience that we could serve. And so that really came with a deliberate approach to the structure we have internally. And I’m proud to say that we continue to expand that. So if I look back, just three or four years ago, as an example, we didn’t really have a organization inside of dimensional, that focused on all the study groups that we run. Well, now we actually have a head of communities and a team that is working with Hurricane Krause. That is serving the hundreds of study groups executive forms that we run. Also, as an example, because Kaitlin brought up or somebody manage accounts, that group helped us stand up two advisory councils dedicated to the topic of separately managed accounts. So someone dimension was thinking about, if and how. And when we would expand from what we’ve done for a long time and a separate count space, we were hearing directly from our clients. So the feedback loop was alive and well. So I think it’s just an example of being very deliberate, very focused, and not taking for granted that something that you can do well, you can even do better when you have some folks focus on it.

Jack Sharry: So what I’m hearing from both of you is that DFA has evolved over time, as you would hope and expect that it started a pretty exclusive club, actually, as I recall, but it’s now much more broadly available, and you’re really been a leader in the whole SMA evolution in what I’m hearing is you continue in that role. I gotta believe that to do what you’re talking about, not only did you have to build out the infrastructure, and the, and the support is, as Shawn was describing, but also technology has got to be a critical part of what you do. So can you kick it off and talk how is technology impacting how you manage portfolios, how you conduct your research, how you help achieve improved after tax returns, all that. And then Shawn, if you’ve maybe talked about it, the role of technology as you go to make your services available more broadly, in the marketplace.

Kaitlin Hendrix: I think something dimensional does well is bringing together this use of technology and operational scale and ability with human touch. And there’s a few things that have evolved over time where we can bring in technology to improve our operations. So one example Shawn mentioned recently, the separate accounts, we used to serve separate accounts in the ultra high net worth space, maybe a billion dollars across 20 accounts. Now we have in that platform, it’s about a year old $750 million across a couple of 100 accounts. So we need technology to deliver that investment experience to more clients at a lower minimum. In this space, we realized we could go and buy an existing technology provider solution out there to help us deliver these accounts to lower minimums. Or we could build it ourselves. And we decided to build it ourselves. And it’s really, for that full implementation process like we were talking about that way, our front end systems could talk to our back end systems. And we could build all the downstream processes in a way that is efficient and scalable, but also in a way that delivers the dimensional investment experience. Just because we’re delivering the same approach and a different wrapper. We don’t want to give up, the efficiency, the flexibility, the focus on on higher returns and lower costs. So that space I think, is a great example where we decided we’re just going to roll up our sleeves. We’re going to focus with the Advisory Council, like Sean talked about what do people need, and build the technology ourselves to serve a wider client base? That’s great.

Jack Sharry: Shawn, let’s go on to the distribution side and that evolution?

Shawn Jaberzadeh: Yeah, I think to use an analogy. You know, back in the day, you had a handful of folks that had really good perspective on the business the clients nationally, but it was more like digital zoom, you know, they can kind of see what they saw. They knew what they knew in the meetings they were. And to the extent they were communicating with one another, over a decade ago, we were running it a few years prior through a third party will be brought in house, a benchmark study. And the benchmark study allowed dimensional to ask all of our advisory clients to submit information about their businesses, from their profit and loss statements, how they’re spending on marketing, human capital, how they invest their assets on behalf of clients, what their goals were, what their challenges were across growth, and marketing, and clients sentiment, so forth. And we’ve run that program now for well over a decade. And now you can think of that as optical zoom at its best, because now, there’s no guessing there’s no high level perspective, but you can actually dig very specifically into different segmentations of our client base, and begin to tease out perspective on Well, what are some aspects that make a particular firm grow at a faster pace than their peers. And now we’re then able to take that information and those insights, share them at a broad level when we do conferences, or workshops, kind of one to many. But then we actually go into each of our financial advisor professionals’ offices, and we have review meetings with them when we review their results relative to their peer groups. And it’s not about a firm doing something right or wrong. But it’s about demonstrating to them if you’re trying to make a change in your organization, in your client experience in your marketing approach. In terms of how you approach growth, well, here’s some things that your peers in the community are doing. Here’s some of the information underneath there with respect to what systems or processes, what tools, how dimensional supporting them end to end, to ensure that they can lead into better success as well. So when he talked about technology, having a platform that can take 1000s, upon 1000s of data points across 1000s of organizations, and then teasing out information has been something that we’ve invested heavily in. And actually just this year, we now took something that was very paper oriented through submission and delivery, and PDFs. And now our financial professional clients have access to an online dashboard through dimensional website. So now they can look at things in real time, they can do their own sorts, and it’s a lot more flexible and tailored to what they need. And so technology has been a big part of how dimensional can continue to push the boundaries on being a better partner to firms than we’ve ever been before.

Jack Sharry: So similar to what you’re doing on the portfolio management side with harnessing data harnessing technology to create insights and smart decisions, you do the same thing on the distribution side.

Shawn Jaberzadeh: Yeah, that’s exactly right. You know, dimensional has always been a very fortunate position. Jack, as you mentioned, we’ve had a lot of fans and longtime clients that interest us to have conversations with them that sometimes go far beyond investing. And we never wanted our perspective to be based on our opinions or hunches. So you’re exactly right, we said the way we approach investments is about robust integration of the best ideas. Well, let’s be sure we do that with our extraordinary community of financial professionals. And it’s been a huge success. And now we don’t only do it for their business, we also run an investor study where we’re able to have a technology engine behind it such that advisors can go out to their end clients to get an updated perspective on how are things going, how the service is being valued, and what can be improved. And we work alongside the advisors to help them on the accountability of fun afterwards.

Jack Sharry: No wonder there’s a business school named after your get it. I get it. So before we talk about where you see DFA in the industry headed in the future, let’s take a step back. I was curious, how did you folks wind up in this business? Kaitlin, when you started off? How did you get rolling on this? And then Shawn, same thing. How did you get started? And I’d love the story usually has nothing to do with what you intended way back when but let’s hear it.

Kaitlin Hendrix: Yeah, my graduate degree is in financial economics, a very quantitative focus. And before joining Dimensional, I worked in economic consulting, mainly expert economic analyses in securities litigation and international arbitration. So it sounds like a different path. But there actually is a lot of overlap. In the litigation setting. market efficiency is actually a critical piece of the puzzle. So I often worked on cases of class action fraud. And the fact is there any allegedly fraudulent statement made by a company is baked into the share price of that company. So there’s this idea of fraud on the market. And so when I joined dimensional for years, I had already lived in this reality of information and market prices, just in a different way. And now a dimensional instead of looking back at an event that already happened, and establishing fraud and liability and damages, I’m now using information and market prices to look to the future to sort securities on differences in returns and build solutions for clients that benefit from that information. So it’s similar but a lot more fun being outside of that litigation setting and the litigation hours as well. But some overlap there.

Jack Sharry: Gotcha. Gotcha. How about you, Sean?

Shawn Jaberzadeh: Interestingly enough, I always wanted to be a lawyer. So when Katie was talking about litigation, I’m like, I was all about that. So when I reflect on, on my childhood day reports, it was always about wanting to be a lawyer. And when I got out of college, UCLA, I needed to get real world legal related experience. And a friend of mine was working at dimensional at a time and said, Hey, they’ve got this legal position open, why don’t you take it, and I came in and interviewed and the woman who was in HR, at the very end of my day was like, Hey, you did a great job. And, you know, this position, kind of entry level position in the legal department is yours. But I will say that there’s another one in the compliance department and you’d be able to work directly with our Global Chief Compliance Officer, I think you’ll get a lot more hands-on experience. So like, you know, I don’t know any better, you seem trustworthy, I’m gonna, I’m gonna take your advice, by suddenly dimensional in compliance, and she was not kidding, we were going through a very big regulatory audit, as many asset managers do. And so I got to learn a lot about the firm in a very short amount of time. And I was just enamored by the professionalism, the collaborative nature of the folks and so forth. And about a year after I started in compliance, I got a chance to move to the global client group. And I guess my joke is, I’ve been deferring law school ever since. But I couldn’t think of anything better. Building relationships, working on projects to help people. So I feel like I’m scratching the itch I wanted all along, but doing it in finance, which has been great.

Jack Sharry: That’s terrific. That’s wonderful. So I know you’re both focused on the present, and what you’re doing day in and day out. You also spend a lot of time I’m sure thinking about where things are headed. So where do you see DFA or industry headed over the next three to five years? Can you want to kick it off?

Kaitlin Hendrix: I think it’s three things that we’re already focused on. One is tax, and other is ESG. Sustainability. And third is flexibility. So investors are demanding that curated tax management customized for them. And there’s also increasing desire for ESG values aligned investing, and then its flexibility and robust investment design that make it possible to deliver those things in an efficient way. Net of cost. So I really see this focus of this curated experience, but bringing it to more people, you know, as Shawn is up for democratizing, that, that kind of experience. And I think that’s really where dimensionals going, as well as the industry or responding to industry demand to?

Jack Sharry: Yeah, I have to say that I, as I listen around that that word tax keeps coming up, it’s like it’s not going to go away. I’m curious, what role is tax in your mind? I mean, I think it was coming anyway. But certainly these rugged markets have only put the spotlight more squarely on Texas is vitally important to maybe cover up that if you would.

Kaitlin Hendrix: I think the market environment, it can be a bright spot that advisors and financial professionals can have a conversation with their client, when the market environment is really difficult. But we’re doing something about it, the plan that we put in place, we’re ready for this, I think that can be a really important behavioral aspect. Also, changing regulatory environments, you know, especially with the elections going on, and with the current political environment, people are thinking about what are tax rates going to be in the future? And how can I plan for that today? So we see it coming up in different ways. And then of course, as we’re approaching year end, it’s always on top of mind, but we’re thinking how can you incorporate in this taxes in your process through the whole year? Let’s not wait until year end to have these conversations? Sure. Let it be a bright spot. A point to have a conversation around at any time.

Jack Sharry: Gotcha. Gotcha. I agree. So Shawn, tell us about what you see over the next three to five years for both DFA as well as for the industry.

Shawn Jaberzadeh: Yeah, I would agree with Kaitlin as far as where the industry is headed, which is a continuation down this path of meeting clients where they need to be met. But on the business side, hopefully without having to sacrifice scale, that at the end of the day, a lover of profitability to sustain that growth to be able to serve clients. I think when I think about dimensional and what we’ve done a really good job of that I just see us continuing is we think about the arc of the advisor movement. You know, most advisors in the early days, were just doing money management, right? The value proposition was solely on the portfolio there you’re managing. And then at some point, financial planning began to enter the space and so a Financial Advisor did more than just manage your investment portfolio, they made sure it linked up with a overarching plan to ensure that you can actually have a higher probability of meeting all your goals and aspirations. And then now you’re getting a lot more as time goes on, whether it be, as Caitlyn mentioned, aligning their values through ESG, customizing their taxes, preparing, or sometimes advisors have to choose, do they INSOURCE additional services or they outsource to their partners. And that’s happening across state and tax things that are tangentially Of course, something to do with their investment portfolio, but arguably also very important building blocks of what clients are trying to do for their lives. And so I think we’re dimensional is going to continue to push and forward is going to be a institution and organization that advisors and professionals can lean into, for objective, very robust research and information about a topic solutions that are the best tools that are transparent, low cost, that where the adviser can feel proud about including it in the overall picture of a client, and then helping the advisors supporting them with the communication such that when clients have questions or to your point, Jack, they’re going through difficult market cycles. The advisor has all the tools and resources they need at their disposal to walk the client through what they’re doing, why they’re doing it, and reminding about how ties into the bigger comprehensive picture of their lives.

Jack Sharry: Terrific. So I’ve really enjoyed our conversation. And I also want to know three key takeaways from each of you and a plus a personal stories we have, we’ll make sure we get all that in before our time goes lie to you want to kick it off, what are three key takeaways you’d like to make sure our audience leaves from our discussion today.

Kaitlin Hendrix: I think the first is that we can use the power of markets, information and prices, and we can beat the market without trying to outguess it. The second key takeaway, I think, is implementation matters. Paper returns are not what we take home at the end of the day. And I think the third is flexibility. Just being able to adapt for changing needs of clients, changing market environments, building it into our portfolio, flexibility will help deliver those efficient solutions.

Jack Sharry: Terrific, Shawn, how about you?

Shawn Jaberzadeh: Yeah, the first is, it’s increasingly important to tailor the client experience beyond a one size fits all, because I think consumers don’t want that in a lot of parts of their lives. And so investments are no different today. The second is, it’s probably never been a better time to partner with tech enabled platforms to expand your service offering to clients such that you can increase your retention, you can actually give more value than you ever have. And I think there’s so many partners out there. And then finally, I think the attention of selecting a few extraordinary partners, to be able to help you across everything that you need to do in your business, such that you don’t have 10 partners that you need to coordinate amongst, but just a handful that can really give you everything that you need for your business growth.

Jack Sharry: That’s great. Well, thank you both. This has been very enjoyable. I’m glad I’ve had an opportunity to get to know you and look forward to some future conversations, hopefully. So as we look to wrap up there, one final question that I always love to ask away from work, what is something that you do outside of work that people who may not know you well, would find interesting or surprising, something you’re particularly excited passionate about? Interested in? That would be a surprise, Katie.

Kaitlin Hendrix: We spend a lot of time outdoors and my husband and I love to go backpacking and hiking. So we go on long term tracks in different places around the world. Just carrying everything on our backs. And that’s been a lot of fun. But now that we have an infant or trying to think that we can have our hobby evolved, so we actually took our 13-month-old camping over the weekend, we have an adorable little infant sleeping bag and thinking all that through. So we love doing that. And yeah, spending a lot of time thinking what we can do next. So he or she that’s yeah, she’s 13 months old.

Jack Sharry: That’s great. And how did she fare? How did you fare?

Kaitlin Hendrix: She did great. It was actually the second time we’ve taken her camping the first time we took her she was six months old. And it was much easier when she was not walking. You know, just having milk now she wants food. She wants to run around. And so she had a great time, but we were wiped out.

Jack Sharry: Yes, I believe it actually, years ago. I have four sons all in their 30s now but I used to carry them all around at various stages early on. And Jerry backpack. There’s a little child that they probably still have a bunch of ants here, but a lot of pictures of walking the trails in Connecticut at the time. So I can relate. It was a lot of fun.

Kaitlin Hendrix: Yeah, that’s great memories.

Jack Sharry: Yes. Shawn, how about you? What was something you’re particularly interested passionate about that people might find surprising.

Shawn Jaberzadeh: Yeah, passionate. I’ll have to be on the theme of kids. I’ve got three young children, five, seven and eight and a half. And the two older ones. I’m a big fan of basketball. And so they’ve gotten into youth basketball. And so I actually coach both of their teams. I also lead a upper division in the community and it’s during COVID and coming out of it. It’s been a really awesome opportunity to be I’m more involved in my kids lives outside of school where I can’t be with them, but also giving back to the community and so big NBA fan and UCLA Bruin fans, it’s nice to begin to indoctrinate my boys. And hopefully my sister.

Jack Sharry: I didn’t realize UCLA play basketball. Just kidding. Katie and Shawn, thanks so much. This has been a great conversation. Really enjoyed it for our audience. If you’ve enjoyed our podcast, please rate review, subscribe and share what we do here at WealthTech on Deck. We’re available wherever you get your podcasts. Thank you again, Katie and Sean. It’s been a real pleasure. Thank you.