Advisors authorized to construct client portfolios using DFA mutual funds and ETFs should consider the following information before using a DFA portfolio for a particular client and for communicating it, as necessary, to their clients.
Advisors are responsible for determining whether a particular DFA portfolio is appropriate for a client’s investment objectives, and whether such a portfolio remains appropriate over time. Betterment provides feedback to advisors regarding the risk and diversification of DFA portfolios, but Betterment is not responsible for determining whether a particular DFA portfolio is appropriate for a client, or for making any adjustments to a DFA portfolio’s allocation over time.
DFA portfolios incorporate both mutual funds and ETFs. Mutual funds trade only once each day whereas ETFs trade throughout the day. Trading decisions therefore are based on current ETF prices and the closing price of mutual funds from the previous business day. Because of the high number of mutual funds in DFA portfolios, typically, deposits, withdrawals, and allocation changes for DFA portfolios made in Betterment’s interface must be completed before noon Eastern time on a business day to result in trades on that same day; actions taken in the interface after noon Eastern typically will result in trades being placed on the following business day. These timelines are not guaranteed. Betterment may delay mutual fund purchase transactions to avoid violations of applicable laws or regulations, including rules pertaining to free riding. When withdrawing from DFA portfolios incorporating mutual funds the settled amount may vary from the requested amount due to price fluctuations between the withdrawal request and trade opportunity. Transactions are rounded to the nearest thousandth of a share, and there may be account adjustments following a cash flow into or out of a client’s account as a result of such rounding.
Certain of Betterment’s portfolio management features will work differently for DFA portfolios than for other portfolio strategies that Betterment supports. Betterment does not currently support Tax Loss Harvesting+ for DFA portfolios. Betterment does not currently support tax coordination for accounts using DFA portfolios. Betterment does not provide an initial allocation recommendation for DFA portfolios and Betterment’s auto-glide feature is not compatible with DFA portfolios.
Betterment uses a 5% rebalancing threshold for DFA portfolios. This threshold applies at the ticker level, whereas the rebalancing threshold applies at the asset class level for other portfolio strategies. Transfers of DFA mutual funds from accounts held outside of Betterment to Betterment goals using DFA portfolios may cause rebalancing transactions to occur if the transfer induces drift of greater than 5% at the ticker level. Automatic rebalancing transactions within the DFA portfolio will not initiate if they would result in the realization of short-term capital gains. If Advisors wish to ensure that no transferred DFA mutual funds are liquidated by Betterment, a transitory account may be a more appropriate destination for the transferred funds.