Financial Opinion and Insights

Archive for September 2010

SMAs in IRAs?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

In my last post, I talked about SMAs (separately managed accounts) in taxable accounts and a few of you asked questions if they made sense for IRAs.  

The truth is they make no more – or less – sense than other forms of asset management; but they do offer three advantages not found in mutual funds:

Access to Private Money Managers

Many of the money management firms that oversee assets for affluent investors choose not to offer their services to the general public and, therefore, do not manage mutual funds.  Interestingly, some fund complexes have caught on to this and a number of them now provide private asset management in addition to their mutual fund offerings.

For me, a key question in any arrangement revolves around what hidden compensation arrangements might exist between the platform provider, in this case the fund complex, and the money managers.  If there is one, it might influence the credibility of the selection process and also prompts the question, `When was the last time a manager got fired?’     Ideally, the managers and the platform provider are paid separately by the investor only and are not sharing any `under the table’ money.  Let’s face it, there’s no tooth fairy – it all comes from the investor; so, it’s important to know where the money is going.

One thing I like about institutional private money managers is the fact they’re generally compensated on performance rather than marketing goals; so, they have a financial interest in keeping expenses down and preserving value.  They also don’t have to sell-off positions to meet other people’s redemption requests since clients own their own securities.

Another advantage, I think, is that while many mutual fund prospectuses are so loosely written you wonder where the discipline is.  It’s been my experience that investors have greater control, which brings me to the next point.


If you have unique financial needs or specific investment strategy requirements, SMAs may provide the flexibility to customize your investment portfolio.   For example, if you have a significant portion of your assets invested in the stock of a single company (a lot of people already have large positions in employee stock and stock options), you may instruct your money manager to avoid the specific stock or industry that already represents a sizable portion of your portfolio.   Likewise, if you have social, moral, or other reasons that you wish to avoid specific stocks or industries, you may instruct your money manager to do so.  You can’t do either of these with a mutual fund.

Asset-Based Fee Structure

Many SMAs provide price breaks based on your assets. Thanks to economies of scale, larger SMA accounts often enjoy fee discounts.  A mutual fund that hypothetically has an expense ratio of 1.2% will charge that same 1.2% to a small investor with only $10,000 as it does to the investor that may have $1 million!   And, as explained in our report, Understanding Mutual Funds, the annual expenses are only the disclosed costs… there are others you won’t find in the prospectus, yet are very real.   You can request the report using the `Request Info’  tab on our website.

Private money managers’ fees, like advisory and platform provider fees, are generally reduced as a percentage of assets as the asset size increases – as I said, not true in mutual funds.

There aren’t any tax advantages for SMAs in IRAs because taxes are already deferred; but, as you can see from the above, they still can make sense for investors with over $250,000 in their IRAs.  If you are contemplating doing a rollover soon, you may want to read Six Best and Worst IRA Rollover Decisions, also available through our website.  Just use the `Request Info’  tab and let us know!

If you’d like to learn more, feel free to contact me.


The Independent Financial Group is a fee-only registered investment advisor and does not sell products earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues. Opinions expressed in this piece are those of the author. 

Separately Managed Accounts – Are They Right For You?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®


Ever heard of `separately managed accounts’?   

They’re not new.  In fact, I’ve been using SMAs with many of my own clients for more than sixteen years!  But, like most things in life, what makes sense and advisable for one person may be totally inappropriate and inadvisable for another.   

SMAs get their name from their structure.   To understand SMAs it’s helpful to understand the investment most investors are very familiar with:  Mutual funds.    

Mutual funds are investment companies that `pool’ investors’ money and invest in securities.   The investors don’t own the securities; they are shareholders in the investment company.  You could say that regardless of how many securities the investment company buys, the shareholder owns only one security – the shares of the investment company.    

 Also, since their money is `pooled’ a 75-year-old investor’s money is in the same `pot’ with a 25-year-old’s.    Where this might become meaningful is during a market decline.   It’s during market declines that many managers might want to purchase devalued shares at `bargain prices’ but may not be able to do so because of shareholder selling.  Often, it’s the younger, less experienced, investor who may see himself as a trader who will sell during this period.  That puts the manager in a position of having to sell positions – instead of purchasing – in order to raise cash to meet these redemption requests!  That can serve to penalize other shareholders in the pool.  It’s what’s called a `market-impact cost’.   There’s more to learn about mutual funds; but, for the purposes of this piece, it’s enough for you to understand that it’s `pooled’ money and there are issues to be understood.  To learn more, feel free to request our free report, Understanding Mutual Funds.  You can use the Request Info tab on our website.   

SMAs are just what they sound like:  Separately managed accounts.  In an SMA, the investor’s money isn’t pooled.  It’s managed separately.  There’s still a portfolio manager, just like a mutual fund, but this time the investor has direct ownership of the securities in the portfolio, not shares of the investment company.  An SMA owner’s statement will show the securities owned, number of shares, pricing, and generally a lot more.   Some, like our clients, even have access to 24/7 sophisticated performance reporting on not only each manager, but on the combined performance of all managers taken as a portfolio, with all gain-loss, and tax information.     

And, since SMAs are not comprised of `pooled’ money, they have a lot of other advantages, too.  But, as I said, they may or may not be right for you!   

Here’s a worksheet is designed to help us gather necessary information to determine if separately managed accounts (SMAs) may be a suitable investment for helping you reach your current and future investment goals.   

1.  What is the total value of your current portfolio, including both taxable and tax-deferred assets?   

Investors with significant assets can access the services of a professional money manager to create and manage a portfolio of securities.  Unlike a mutual fund, this portfolio (known as an SMA) gives the investor direct ownership of the securities. Direct ownership gives the money manager the ability to help minimize capital gains taxes through strategic buying and selling based on your personal financial needs.   

2.   Do you have more than $250,000 in taxable assets that are available to invest?  Do NOT include tax-deferred investments, such as 401(k) plans, IRAs, etc.   [Note:  SMAs can make sense for some IRAs because of other attractive features like portfolio customization and possibly lower expenses; but for the purposes of this worksheet, we’ll talk about taxable investments only.]   

High-net-worth investors can use SMAs to help control the timing of security sales and help minimize short term capital gains taxes. Assets sold within 12 months of purchase are taxed as ordinary income. Assets held longer are taxed at the long-term capital gains rate.  See our report, Understanding Mutual Funds, for more information on this.   

3.   Are you concerned about the impact capital gains have on your investments?   

SMAs allow investors to help manage the realization of gains or losses to fit their tax needs in any given year.   Mutual funds typically do not provide this flexibility.   

4.   What tax bracket are you in?   

SMAs may offer tax features that are often attractive to investors in higher tax brackets.   

5.  What is the total value of the assets that you have invested in equity accounts (include individual stocks, mutual funds, ETFs, etc.), and how many different accounts do you have?  How much do you have invested in bonds?   

Multiple accounts often appear to offer adequate diversification when, in reality, there may be substantial overlap in the holdings of different investments.  For example, I’ve often seen two different “blue chip” growth mutual funds holding many of some of the same securities.  Unlike mutual funds, SMAs may allow investors a level of customization over their holdings to minimize duplication.   

6.   What is the total value of the assets you have invested in mutual funds, and how much are you paying in fees on those investments?   

Many investors are unaware of the total fees they are paying on their investments. It is often possible to access the services of a separate account manager for a comparable fee.  Again our report, Understanding Mutual Funds, goes into more detail about this.   

7.   Have you ever paid capital gains on a mutual fund that lost money?   

Again, because mutual funds are a “pooled” investment vehicle, investors in a given fund can incur capital gains taxes when other investors redeem their shares and the fund manager is forced to sell securities to raise cash. With SMAs, the investment decisions of one investor have no impact on the tax liability of other investors.   

8.  Do you have any stock holdings that have significantly appreciated in value?   

SMAs can provide customized investment strategies designed to gradually transform a single-stock position into a more diversified portfolio in a tax-efficient manner.   

You’re probably saying, “Jim, it sounds like you really like SMAs!”  Well, I do! – But, again, not for everybody.   In case you’re new to IFG, this blog, or any of my work, you should know investment choices have NO affect on our income.  IFG does not sell products or earn commissions; so I don’t have a dog in the fight.   

 A smaller investor is likely better off with a portfolio comprised of no-load mutual funds and exchange-traded funds (ETFs); and there are even managers who will choose and manage a portfolio of those for the smaller investor; but, when assets begin moving north of $250,000 customized strategies, versus off-the-shelf fund purchasing – can become worthwhile.  At $350,000, there are strategies that make perfect sense; and, when assets get north of $500,000 it, in my opinion, becomes no contest.  At $500,000, one has to wonder why anyone would even consider pooling money!   

I’ve long held a personal belief that most retail fund managers are constantly `playing games’ in order to make their portfolios look good for purely marketing purposes.  Too many of them are compensated not so much on performance, but the ability to attract assets.   That’s what gets them interviewed in the media and makes `stars’ out of them so they – like baseball free-agents – can get bigger contracts either at home or with another fund complex.  

Institutional mangers that manage major endowments, pension funds, and SMAs are compensated on performance and their income is tied directly to investor success or failure, not marketing or asset attraction – that’s why you seldom see them on tv.    In fact, most of these managers can not be accessed by the public directly because of their high minimums.   Advisors are able to access them on behalf of clients by aggregating – not pooling – assets to achieve the manager minimums. 

Yes, I like them better whenever they make sense for a client.  I’ll get off my soapbox now.  

If you’d like to learn more, feel free to contact me.   


The Independent Financial Group is a fee-only registered investment advisor and does not sell products earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues. Opinions expressed in this piece are those of the author. 

Commissions or Fees, Which is Cheaper?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

You guessed it:  It depends.  Now, ten people may have ten different opinions about this issue; but, after nineteen years in this business – having begun in a Wall Street big name `wire house’ and gradually changing my business model from stockbroker to independent broker to independent planner/broker to independent planner/broker/advisor to independent planner/advisor and having spoken with hundreds of other advisors over the years at scores of industry conferences and conventions – this is my own humble opinion on this issue:

There’s no one right answer.  There’s only the one that’s best for YOU.

You have to do some analysis – and it helps if you can use a computer spreadsheet.  But, it might be worth remembering what your parents probably told you many years ago:

There is no free lunch.

If you’re thinking of using a financial advisor to get help, they – like any other professional – do charge for their services

  • Registered investment advisors (RIAs) charge fees
  • Registered representatives (stockbrokers and many independent consultants) sell investment products and earn commissions

Which is cheaper depends on how much you’re investing.  Then you have to compare what the fee advisor is charging against what the commissioned rep is selling.

Example:  Suppose you have only $50,000 and you want a growth fund.  

  • The commission approach:   It wouldn’t be uncommon or surprising to see a load of between 3-5% for this sale.  So, if the load were 4%, the rep would earn a $2,000 commission up front.  It wouldn’t be a surprise to see ongoing 12b-1 fees of 0.25% annually ($125, assuming no growth) which would compensate the rep for answering questions and servicing the account.
  • The fee option:   It’s not uncommon for advisory fees to start at 1% of assets and then go DOWN as the asset levels increase.   I think it’s fair to say few fee-only advisors would not look forward to doing all the research – and paperwork, including compliance issues – for $500 – and have to wait a full year to be paid in full.   They could charge planning fees; but how many people with $50,000 would pay the freight?  Not many I think.


Example #2:  Suppose you have $600,000 in your nest-egg and need help

  • The commission approach.  This can get dicey.  In the commissioned world, it wouldn’t be surprising to see `free’ planning services result in a recommendation of fully-disclosed low-cost investment products mixed with some undisclosed (hidden) high-cost products.    I know people personally who have invested as much as $1 million in a commissioned plan without knowing they’d actually paid as much as $40,000 in commissions up front – in the first 90 days – simply because many of the products looked ‘free’ to them! 

    I doubt the above experience is the `norm’ but, let’s face it:  If only 20% of your $600,000 account is placed in products with undisclosed hidden costs and paying 6% commissions, you’ve paid $7,200 in front on just 20% of your assets… that’s 1.2% of assets right there!  Even if the balance of the portfolio carried only a 1% charge, you’re still paying a total of $12,000 in the first year on your $600,000 portfolio – about 2% of assets. 

    Is all this bad?  Not necessarily.  The products may be worth it!  And, let’s face it, quality planning for that size portfolio, even with sophisticated software, still takes time simply because the investment screening requires more than simple button-pushing. 

    The point is you should KNOW what you’re paying and what you’re getting so you can make an informed decision.  It’s also important – I think – to know if the products and managers involved are proprietary (in house) or from third-parties.  What products and managers were screened-out and why?   Point:  Two identical annuity products might pay two different commissions.


  • The fee approach.  Generally not as dicey because of the straightforward service and fully-disclosed charges with no product sales.  But, still, RIAs differ in their charges and services.   Some will charge a one-time retainer to do your plan as well as an annual advisory fees for ongoing management oversight and portfolio consulting.   Others may not charge for the plan but will likely require a higher asset minimum to justify the time and may require that assets be placed on deposit before any work begins. 

    If there’s a planning retainer required, the amount will often depend on the complexity of the plan and the time involved.   Annual advisory fees can also vary, but it’s not uncommon to see fee schedules that start at 1% and then go down as assets increase.  For example, our annual advisory fees begin to go below 1% at the $500,000 mark.

    Each RIA sets it’s own fee schedule, but you will find that most RIAs take pride in transparency and providing full disclosure.  RIAs also use non-commission products and tend to work with stocks, bonds, no-load funds, and ETFs.  Many also like to use institutional money managers for the value they can often add coupled with the fact their charges also go down (as a percentage of assets) as portfolio value increases – something that doesn’t occur in mutual funds.

If you have questions about any of this, feel free to contact me at 800.257.6659 or 805.265.5416 – I’d be happy to help.


The Independent Financial Group is a fee-only registered investment advisor and does not sell any financial products or receive commissions or third-pary compensation or incentives of any description.

For more information about IFG, visit our website.  

Use the `Request Info’ button to request reports from Jim Lorenzen:

  • Understanding Mutual Funds
  • Six Best and Worst IRA Rollover Decisions
  • Avoiding IRA Distribution Mistakes
  • Why Most Investors Fail

Are Reverse Mortgages for You?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®


You’ve seen the commercials with celebrities touting reverse mortgages;  ever wonder what they are?  Actually,  they are just what they sound like:   It’s a loan; but the lender pays you and they don’t get their money back until you (or the last surviving borrower) die, sell the home, or `permanently’ move out of it (usually for a year or more).  You or your heirs keep the difference between the value of your home and what you owed on the loan. 

Reverse mortgages aren’t for everyone.  Consumer Reports, their booklet,  50 Steps to A Richer Retirement, reports one study that found less than one percent of the people who would be eligible have signed up; but, these loans do allow many retirees to stay in their homes and get some of the accumulated equity out of it. 

In most cases, you must own your home as your principal residence and usually be 62 or older.  You also can’t have any other outstanding mortgages on your home unless you intend to use part of the proceeds to pay them off. 

There are two types of reverse mortgages: 

  • The Home Equity Conversion Mortgage (HECM) is insured by the Federal Housing Administration (FHA) and governed by FHA rules concerning loan amounts, costs, and eligibility.
  • Proprietary Reverse Mortgages are just what they sound like:  They are proprietary reverse mortgage products offered by private lenders.  These are generally more expensive than FHA insured mortgages, but they may also have higher loan limits – you need to do your homework on any increased benefits vs.  costs.

Watch your step!   Reverse mortgages can often come with high fees; so you need to do your homework and get everything spelled-out in writing. 

For more information about reverse mortgage pros and cons, see the AARP website and the National Center for Home Equity Conversion


The Independent Financial Group is a fee-only registered investment advisor and does not sell any financial products or receive commissions or third-pary compensation or incentives of any description.   

For more information about IFG, visit our website.   

Use the `Request Info’ button to request reports from Jim Lorenzen: 

  • Understanding Mutual Funds
  • Six Best and Worst IRA Rollover Decisions
  • Avoiding IRA Distribution Mistakes
  • Why Most Investors Fail

Financial Tips Now Available

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

This blog is a quick one, probably because it’s little more than a shameless plug for some new reports we’re now making available.

If you’re interested, you can request them through our site, using the Request Info button.

Available Reports:

  • How To Avoid IRA Distribution Mistakes
  • Six Best and Worst IRA Rollover Decisions
  • Understanding Mutual Funds
  • Why Investors Fail

Hope you enjoy!


Written by Jim Lorenzen, CFP®, AIF®

September 15, 2010 at 8:00 am

Posted in Uncategorized

Politicians Seek to Keep Their Jobs While Americans Try To Find One

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®


The political season is here.  You can tell, because an administration made up of people who have never owned a business or made a payroll are now talking about small business job development through the use of one-time tax credits. 

What they still don’t get, of course, is that businesses won’t take on long-term obligations to achieve a short-term benefit. 

Businesses are not only in the dark about the tax landscape after the elections – when the lame-duck congress will be in session – but, they’re really concerned about the ultimate cost of the health care plan, most of which won’t kick-in until 2013 and beyond.  Businesses see that as another tax shoe that just hasn’t dropped yet… and no one knows just how bad that one will be. 

If you can’t do business, do deals. 

Earnings are up and interest rates are down.  You’d think that would be a perfect scenario for huge market gains!  But, with the tax uncertainties cited above, companies are hoarding cash and some – particularly in health care – are even raising prices now in anticipation of the increased costs that are coming.  

When companies have huge cash surpluses in a low interest rate environment – and are afraid to commit to future questionable growth investment subject to political whims, there’s only one way left:  Mergers and acquisitions.   During recessions, M&A takeover targets abound and companies with cash are in a great position to pick-up equity positions at bargain prices – a lesson small investors might benefit from with a caveat:  Buying ownership in companies – which is what buying stocks is a smaller version of – does require some preparation in the form of both education and homework. 

Example:  As I’m writing this, the S&P index is up only about 6% over the last 12 months, while Caterpillar (CAT) is up 49% for the same period!   I don’t know if  all the `shovel-ready’ rhetoric coupled with all the money voted to the states (remember the bill no one read but still passed?) had anything to do with it – and CAT CAT, like many, has become global; but strong companies can often benefit, supporting the notion that we may now be in a `stock pickers’ market, much like the 70s, where management can become even more important. 

What makes investors like Warren Buffett so successful, in my opinion, is a simple formula:  Homework + Education + Patience = Success.  The same holds true for most of life, don’t you think? 

Since most investors have the bulk of their holdings in mutual funds, we’ve prepared a report, Understanding Mutual Funds, that’s available by request.  Just go to the Request Info tab on the IFG website.