Wheeler of fortune
If you want to see the human face of the passive investing revolution then Dan Wheeler is a good candidate. The colourful former Marine turned financial adviser, who passed away this weekend, left an under-appreciated legacy in the financial world.
Obituaries are a departure for Alphaville but hopefully you’ll find this one interesting. As Samuel Adams, a former colleague of Wheeler, said in his tribute:
If you know Dan, you know what a huge loss this is for the world. If you don’t know Dan, you should know that he changed the financial services industry. Millions of investors now enjoy fee-based advice and low cost funds because of his work.
Wheeler grew up in a working-class neighbourhood in East St Louis, where his mother was a nurse and his father an accountant. He drifted into studying history at a small liberal arts college before volunteering for the Marine Corps in the middle of the Vietnam war — a typically jarring change.
The rigidity of the military was frustrating, the horrors of war were unimaginable, and back home people on the street would shout that he was a baby killer. When his daughter was born, Wheeler decided to find something else to pay the bills.
Once again he began bouncing between odd jobs. He was an accountant at Arthur Andersen before its collapse, and a financial controller in the empire of arms dealer Adnan Kashoggi. Having then failed to gain a finance PhD, Wheeler was talked by a stockbroker neighbour into joining Merrill Lynch to sell stocks.
This also proved frustrating. Merrill’s brokers seemed clueless. Wheeler thought they basically just ripped off clients by churning money to generate trading commissions. But then he discovered the works of the Gene Fama, the University of Chicago professor and father of the efficient markets hypothesis. It all suddenly makes sense, Wheeler thought.
As a present to himself on his 40th birthday, Wheeler quit Merrill to be an independent financial adviser. Rather than being paid through commissions, he chose a “fee only” model. That meant Wheeler for the most part bunged his clients’ money into the Vanguard 500 index fund, one of the few cheap passive funds broadly available to ordinary American investors at the time.
In 1988 Wheeler read about an investment company called Dimensional Fund Advisors, and how it managed passive funds focused on riskier but higher-returning smaller stocks rather than those that populate the S&P 500.
Wheeler’s interest was further piqued when he saw that DFA was run by two protégés of Fama — David Booth and Rex Sinquefield. Both had played important roles in the first iterations of index funds born in the early 1970s.
DFA’s fund was only available to institutional investors, however, and both Sinquefield and Booth were sceptical of opening up their funds to hoi polloi.
First of all, managing “retail money” is both a regulatory and logistical pain to handle. Secondly, they doubted passive funds would ever really take off among financial advisers and the broad American public.
This might sound crazy today. But at the time, even Vanguard only managed $34bn, of which just 5 per cent was in index funds. Globally there were only 13 index mutual funds in 1988, with a total of $2bn of assets, according to data from the Investment Company Institute. ETFs didn’t even exist.
However, the irrepressible Wheeler convinced Booth and Sinquefield to at least give retail a shot. The experiment proved such a success that Wheeler quickly started working at DFA itself, setting up an in-house unit focused on selling its funds to fee-only financial advisers. They were able to use Charles Schwab’s new platform to consolidate many small clients into one omnibus account.
To ensure that these new clients were sufficiently committed to DFA’s efficient-markets dogma and wouldn’t bail as soon as a fund hit a sticky patch, Wheeler began organising mandatory conferences for any financial advisers that wanted to gain access to DFA’s funds.
The first one attracted just seven people. But eventually, through word-of-mouth, their popularity began to take off. Here’s what one converted financial adviser told the author Michael Lewis for a piece he wrote on DFA back in 2007:
“It was a propaganda session,” Blaine says, groping for the best analogy to describe DFA.’s seminar. “It was beyond AA. It was Leni Riefenstahl, but the right way.” Truth be told, for the whole two days of the seminar, he had the unsettling sense that he was being watched. He kept his head down and avoided saying anything that might cause DFA to suspect he was still an ordinary stockbroker. (“Had you said, ‘I think small-cap value stocks are inefficient,’ I think you could get kicked out.”) They weren’t teaching him; they were deciding whether he believed what he needed to believe to sell their investment advice. This was new.
It worked. In his first year Wheeler brought $70mn into DFA, $150mn in the second, and $325mn in the third. Today about two-thirds of Dimensional’s $584bn of assets under management come from financial advisers. The EMH indoctrination has certainly helped in what has been a pretty bad stretch of performance for a lot of DFA funds in recent years.
However, the influence of Wheeler’s efficient-markets “revival meetings” goes far beyond DFA’s AUM. Along with Jack Bogle’s messianism they have played a huge role in disseminating rigorous data, financial theory and a jaundiced view of active management among America’s thousands of financial advisers, and thereby helped accelerate the shift into index funds.
We can argue all day long about whether markets are “efficient” or not, but the ideas that DFA have helped spread are one of the reasons why Americans eventually embraced index funds with greater alacrity than the rest of the world.
Bill Fouse, another pioneer of index funds, once recalled Marshall McLuhan’s quip that “only puny secrets need protection. Big secrets are protected by public incredulity” to explain why ordinary investors were so slow to embrace passive investing. Wheeler’s infectious enthusiasm played an important role in ending that incredulity.
As Dave Butler, one of Wheeler’s first hires at DFA and now the company’s co-CEO, wrote:
In 1994, I considered leaving financial services and becoming a basketball coach and teacher back in California. By luck, or by chance, I sat down with Dan and he walked me through a description of a new model of advice, a “redefinition of investment advice,” as he liked to call it. Dan was sure that a model built around the best interest of the client would win. That was my “aha” moment, and I know of so many others through the years who have said the same about Dan.
. . . Dan was the best of the best. He was passionate about doing the right thing. He always looked out for the best interests of others. And he approached every day with a smile.
(Author’s disclosure, I’ve given a speech at a DFA event in London. I didn’t charge for it, but DFA paid for the flight and hotel as well as buying some copies of my book for clients at the conference.)
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