Financial Opinion and Insights

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.