(Bloomberg Markets) -- As Dave Butler tells it, it was his decision to quit Wall Street that jump-started his 30-year career in finance.
The 6-foot-9-inch Los Angeles native had already given up a professional basketball career because of injuries. Two years in New York made him long for California. That’s when David Booth’s Dimensional Fund Advisors presented Butler with a new way of looking at investing—from Santa Monica.
Now based in Texas, Butler is co-chief executive officer of Dimensional, which manages about $659 billion in funds and—more recently— exchange-traded funds. Butler, 57, spoke with Bloomberg Markets in mid-May about his career, the firm’s investment philosophy, and the changes he sees coming for the industry. The interview has been edited for length and clarity.
KATIE GREIFELD: Tell me about your early years. Where did you grow up?
DAVE BUTLER: Southern California, you know, classic beach lifestyle. I ended up going to [the University of California at] Berkeley to play basketball and go to school. Then I got drafted by the Boston Celtics. They [the National Basketball Association] had a player strike the year I came out. And so a team from Istanbul asked me to come over and try out. I had $247 in my bank account. They offered me a good contract, about twice the size of my potential NBA rookie contract. So I played my first year in Istanbul.
I ended up injuring my calf toward the end of the season, so I came back. I wanted to play still, so I lived in Yokohama, Japan, for a year and played there. My leg was still bothering me, so I went back to Cal and finished up my MBA.
I had the opportunity to interview with a bunch of big investment banks in New York but decided I wasn’t quite done with basketball. So I decided to go over to England to play one last year, in Birmingham. About a month into it, my leg was killing me. I knew I was hitting the end of my road. My mother called and told me that one of the big investment banks offered me a job. I walked in Sunday morning to see my coach and said, “I’ve got this opportunity on Wall Street. It’s time for me to move on.” I land in New York Sunday night. My younger brother, Greg—he played a couple years with the Knicks behind Patrick Ewing—I got to his apartment. He’s a 7-footer.
KG: So he’s actually taller than you?
DB: Yeah. He’s about 3 inches taller and probably another 40 pounds bigger. He had an extra suit. So I borrowed that suit, went into my job Monday morning, and that was the start of my career in financial services.
This was ’92, I’m pretty sure, and I was with Merrill.
KG: So what were you doing at Merrill Lynch, and how did you end up at Dimensional?
DB: I started off on the high-yield bond desk as a bank debt originator, calling banks to try to find debt that they wanted to sell to us. That was a good job, an interesting job. I liked the people. At that time investment advice was built around this broker concept of commissions and trading and so forth. And I did a lot of trading back in those days, and paid a lot of commission to my broker.
I had a couple different experiences there that weren’t what I thought they should be. At that time the brokerage industry was about looking into the future and making predictions about a stock or where the markets were going to go. And if I could get you to trade on that prediction, then that was good for me as a broker, because I made commission. On my personal side, I was doing a lot of that, had a couple bad trades at the end of my time there. I think this was in ’94. I wasn’t overly enthralled with what I was doing.
I thought I would go back to California and be a teacher and a basketball coach. I was in New York, reading the Wall Street Journal, and I saw an ad—bottom right-hand corner, 17th page—that just said “money manager in Santa Monica, California.” Santa Monica—I liked that concept. I didn’t know who it was. I thought I’ll just do that for the heck of it before I moved on to be a coach and a teacher. It turned out it was Dimensional.
On a Christmas break [in 1994], I flew out to see my folks. And I drove up to Santa Monica, went to [Dimensional’s] building, up to the 11th floor. Dan Wheeler, who was the first financial adviser working with Dimensional, was there to greet me. Then off to the left was David Booth—founder, chairman of the firm—and a guy named Merton Miller, who was a Nobel Prize winner and a board member at the time. And David said, “I’ve got to do another meeting. Would you mind taking Miller to lunch with you?” And Dan said, “Sure.” And so there I was, in my first interview at Dimensional, with a Nobel Prize winner in finance.
And the rest is history. Incredible conversation. [Miller was a] super-modest guy, talked about how markets work and diversification is your “buddy,” as he used to like to say. And you know, cost matters and all these kind of really simple capital market tenets. That was kind of an “aha” moment for me. I went home that night and pulled out my old finance books.
I started January of ’95.
KG: How big was Dimensional?
DB: Assets were around $9 [billion] to $9.5 billion. Recently we got up to about $680 billion. So I had the opportunity to see it go from just under $10 billion to $600-something billion and watch the growth of the firm. Employee-wise, I think we were probably in the 50s or 60s. Now we’re 1,400.
KG: How did your role change? What have the past 28 years looked like for you?
DB: I spent a lot of time on the road. I worked with independent advisers. My first role was called regional director—I worked a region of the United States. I would go out and basically preach this concept of Dimensional, which was really about efficient exposure to capital markets, positioning portfolios around certain premiums that research shows offer higher returns in the market, being flexible around trading. So I would describe why we made sense for the independent adviser to use with his or her client.
What attracted me 28 years ago was that I just thought this made a lot of sense. It was low-cost diversification, tax efficiency, built around premiums or drivers of higher expected returns that were in the market. And then coupled with this independent adviser model, which was different from the old kind of transactional, commission model. We had just over $1 billion from advisers when I started.
We were out there preaching the story. And enough of the advisers took note of it, and started working with us, that it became a pretty significant business for Dimensional.
KG: You started in Santa Monica. Are you still in Santa Monica, or are you in Texas?
DB: I’m in Austin. We’ve been here about 12, 13 years, I think.
KG: How was the move? It sounds like you’re very much a California man.
DB: I am a Californian, but we love Texas. I have four kids, they’re Texans. They grew up in a Texas environment and became Texan. So it’s been a great move. We’ve moved our headquarters here, and so that’s why I came. There’s a lot of great things in Texas that you don’t get in California. I’m a beach person, I love the water. I love to surf and volleyball and that kind of stuff. We get out [to California] for summers, pretty much every summer.
KG: Being based outside the traditional finance hubs, what are the trade-offs there?
DB: David Booth, he’s a visionary in that way. The one thing he decided was that we were going to grow. And we wanted to have a spot which, for our employees, would allow them to buy homes and have a good public education system and have a short commute, those type of things. So that was the vision. And the view on coming to Texas—to Austin—at the time was just: How do we establish a hub for our employees? And then we have a real broad, national base of clients, and a lot of them like that we’re outside the big hubs of finance.
KG: When Dimensional first launched exchange-traded funds, a few people raised the point that Dimensional has always had this air of exclusivity. By going into ETFs, does that make the financial adviser network redundant, or not needed?
DB: We spend a lot of time talking to advisers. So we have a constant feedback loop where we sit down with advisers, not only one-on-one, but also in study groups and conferences and so forth. There was an interest in using ETFs alongside mutual funds and separately managed accounts. So we started thinking about the possibility of ETFs, but we didn’t want to come out with an index ETF, with something that’s already out in the market.
I think the real trigger was in September 2019 with the ETF rule [the US Securities and Exchange Commission eased constraints on issuing new ETFs], and the idea of custom baskets that allowed us to be as flexible as we are on the mutual fund side and add value above and beyond an index.
So now we have 24 ETFs. They [financial advisers] can build out global portfolios with our ETF lineup. We’ve got a lot of great feedback that, as their practices get more complex, they needed to have multiple vehicles to capture the Dimensional approach.
Sometimes people ask the question: “Does that mean we’re going retail?” We have no interest in working directly with the retail individual. We work with advisers. That was our objective from 30 years ago. We support advisers delivering the great client experience. And we think adding ETFs into the mix gives them that ability to customize and be more specialized than they have been in the past. And if we do get any interest from retail clients, we have something called “Find an Advisor” on our website.
KG: You didn’t know the pandemic was coming. I assume you didn’t know the war in Ukraine was coming, either, or that the Federal Reserve would be firing off 50-basis-point hikes. How has the transition into ETFs been going relative to your expectations?
DB: They’ve actually exceeded our expectations. We’re No. 1 in terms of active ETF managers already. We’re either top 10 or cracking the top 10 in overall ETF assets. So it’s been phenomenal. And the feedback from advisers particularly has been very, very positive.
All of these things that you just mentioned, that is part of news and things that happen. There was a lot of greed last year. There’s a lot of fear this year. A big part of the adviser’s process is discipline. It’s trying to get clients to calm down and minimize their fear and their greed and maintain their position in the market. And we think if they can do that, they’re going to have a long-term experience that’s really positive.
KG: The lower cost of ETFs is definitely a big draw. What have those lower fees meant for your revenue, and have you tried to make up for it?
DB: We’re still a fund business as well. I think we’ve launched seven or eight mutual funds since we’ve launched ETFs. We launched an SMA [separately managed account] platform that went from a $20 million minimum down to $500,000. It ties into this whole concept of customization. I think where the advice business is going is that there’s a broader set of tools needed to be able to customize client portfolios to their needs and their retirement expectations and their social preferences and so forth.
KG: You’ve been in the financial-services industry for 30 years. During that time, what have been the biggest innovations?
DB: I see two big transformations. One is the introduction of indexing back in the early ’70s—this idea that our markets reflect information. The empirical test was whether stockpicking active managers could add value beyond chance. And it looks like, over 50 years of data, that hasn’t been the case.
No. 2 was the move from the commission, transaction-oriented business to something that’s more centered around a client’s individual situation.
The upside is the client’s better off. They’ve got lower costs; diversified, tax-efficient vehicles; and they’ve got this advice model that’s really more of a fiduciary model built around their best interest.
KG: When you look ahead over the next 30 years, what do you think your two bullet points are for what could happen?
DB: I think the role of the adviser is going to get bigger. The specialization, the kind of customization necessary for these advisers is increasing. When you think about charity, and 529s [college savings plans], and finding opportunities and tax situations and human capital issues—there’s such a massive amount of knowledge that comes out of each client’s situation. It’s something that elevates the adviser to not only [investment] adviser but family counselor, and a significant part of the development of the client’s emotional life and personal life and everything else.
The other big one is obviously technology. We’re getting more and more efficient in looking at data and understanding concepts and historical information and so forth. There’s also an aspect of technology changing how we interact with clients. In the next generation of clients, and employees, there’s going to be a different approach to the way we interact and communicate.
KG: Maybe the metaverse?
DB: I’m kind of old school. I like face-to-face, people-to-people contact. But I’m always open to that kind of stuff. I need to learn about it.
Greifeld covers markets and ETFs for Bloomberg News, Television, and Quicktake.