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Boutique Fiduciary-Based Wealth Management


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Mader & Shannon Wealth Management's independence means we are free to focus solely on the needs and objectives of our clients.

We are committed to providing value to our clients and have structured our entire organization around this concept.



Portfolio Management


We define value in portfolio management as achieving yield and growth objectives with as little risk as possible while minimizing transaction costs and taxes. Active Money Management - The goal of active money management is to protect the client from major downtrends resulting from the collapse of an overvalued market, and still allow the investor the opportunity to participate fully in the growth in value and income that the equity markets have historically provided.

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Financial Planning


Retaining an independent financial professional is as important for planning as it is for portfolio management. Mader Shannon has no commitment to any product or service that will in any way conflict with the best interests of our clients. Our services are designed to offer objective advice and set reasonable expectations. We take the time to educate clients on suitable financial solutions, carefully exploring risk and performance expectations.

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Our Team

James W. Mader, CLU, ChFC Photo

James W. Mader, CLU, ChFC

Chairman and CEO
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James W. Mader, CLU, ChFC

Chairman and CEO

James W. Mader is founder & President of Mader & Shannon Wealth Management, Inc., an independent asset management and financial planning firm. He has been in the financial services industry for 46 years, where he spent the first 26 years as a marketing executive with two life insurance companies. In this capacity, Jim hired, trained, and managed thousands of financial services representatives.

He received the designations of Chartered Life Underwriter and Chartered Financial Consultant from the American College of Bryn Mawr, Pennsylvania in 1977 and 1984 respectfully.

Jim is the past president of the Kansas City chapter of the Society of Financial Services Professionals He has served a 3 year term on the national board and has served for the past 5 years as chairman of their investment committee who oversees the Society’s trust fund. The Society is a more than 80 year old organization of credentialed professionals with over 11,000 members nationally. The organization is made up of financial professionals from accounting, insurance, investments, and law.

Jim is licensed in more than a dozen states for life, health, disability, and long term care insurance.

Jim has provided expert witness services for investment and insurance litigation for law firms in Kansas, Kentucky, Missouri, and Nevada.


George R. Shannon  Photo

George R. Shannon

Co-founder
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George R. Shannon

Co-founder
Portfolio Manager 2001 - 2016

George R. Shannon attended The University of Texas at Austin on a football scholarship, where he graduated with Honors. He then was accepted and attended the UT Austin Graduate School of Business MBA program for two semesters. George left the MBA program to join the Merrill Lynch account executive training program in New York, to become a Merrill Lynch Account Executive in Houston. After a year as a stockbroker with Merrill Lynch in Houston, George applied for the Ph.D. program in economics at the University of Texas at Austin, was accepted into that Ph.D. program and took graduate coursework in Economics for two years. While in Austin he was recruited by Rotan Mosle, at that time the oldest brokerage firm in Texas, well known for expertise in the burgeoning oil and gas business in Texas. For a time George both worked as a stockbroker with Rotan Mosle in Austin and pursued his Ph.D. at the University of Texas. During that time he also provided a market report on KVET radio at 5:15 am each weekday morning. George left the Ph.D. program at the University of Texas, eventually joining E.F. Hutton, and later was recruited for management training by PaineWebber. George went through the PaineWebber Management Training program in 1986, again in New York. George has since managed brokerage offices for major brokerage firms such as PaineWebber, A.G. Edwards, and Southwest Securities, Inc.

George brings to Mader & Shannon forty years of experience in the financial markets and the brokerage industry; an excellent formal education in accounting, economics, and finance; and a proven track record of investment analysis and portfolio management. George has an analytical appreciation of value based on fundamental analysis, and believes an appreciation of the liquidity of markets, coupled with an in-depth understanding of the history of asset category performance; provide important keys to successful portfolio management.

George believes three of the most notable recent academic articles concerning reasonable expectations for future financial market performance are the contrasting views expressed by "Valuation Ratios and the Long_Run Stock Market Outlook: An Update"† by John Y. Campbell and Robert J. Shiller: "Stock Market Returns in the Long Run"† by Roger G. Ibbotson and Peng Chen: and "From Efficient Markets Theory to Behavior Finance" by Robert J. Shiller.


Bret Guillaume, CFP® Photo

Bret Guillaume, CFP®

President
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Bret Guillaume, CFP®

President

Bret Guillaume joined Mader & Shannon as a Financial Advisor in 2004. A graduate of the University of Missouri - Kansas City, Bret holds the designation of CERTIFIED FINANCIAL PLANNER™ professional.

Prior to joining the firm Bret held the position of Trader with JPMorgan in Tampa, Florida. Prior to JPMorgan, Bret traded options as an independent Registered Representative. Before entering the financial services industry Bret spent several years as a technology consultant for Andersen Consulting and CCP Global.

Bret is Past President of the Kansas City chapter of the Society of Financial Services Professionals. The Society is a multi-disciplinary organization made up of financial professionals from accounting, insurance, investments, and law. Bret is also a member of the Financial Planning Association.


Kyle Sanders, CMT Photo

Kyle Sanders, CMT

Chief Investment Strategist, Portfolio Manager
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Kyle Sanders, CMT

Chief Investment Strategist, Portfolio Manager

Since joining Mader Shannon in September of 2011, Kyle Sanders has worked in the capacity of Assistant Portfolio Manager, Investment Strategist and Equity Research Analyst.  He formed a keen interest in financial markets at a very young age and has fully committed himself to the portfolio management profession. 

In his time with Mader Shannon, Kyle has gained an appreciation for not just the mechanics behind the implementation of the Mader & Shannon Total Return Strategy, but also the client-centric approach that sets us apart. As Chief Investment Strategist and Portfolio Manager, Kyle is dedicated to advancing Mader Shannon’s mission of positive client outcomes and excellent risk management.

Prior to joining Mader Shannon, Kyle held positions in retail banking and commercial mortgaged backed security (CMBS) servicing.  He attended The University of Missouri-Kansas City where he attained dual degrees; Bachelor of Science - Accounting and Bachelor of Business Administration - Finance. During his time at UMKC, Kyle served in both leadership and liaison roles in various student and alumni organizations.

Kyle was awarded the Chartered Market Technician (CMT) designation, and he is continuing his education by actively pursuing the Chartered Financial Analyst (CFA) designation.  Kyle is registered with the Securities and Exchange Commission as an Investment Advisor Representative.

Austin Harrison, CFA, CMT Photo

Austin Harrison, CFA, CMT

Investment Strategist, Sr. Equity Research Analyst
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Austin Harrison, CFA, CMT

Investment Strategist, Senior Equity Research Analyst

Austin Harrison began his professional career at Mader & Shannon in 2015 and now serves in the capacity of Investment Strategist and Senior Equity Research Analyst. As a member of the portfolio management team, his role includes the research and analysis of publicly traded securities and their related economic trends, from both fundamental and technical perspectives. He also performs various account management functions within the firm.

Austin graduated with honors from Benedictine College with degrees in Finance and Accounting. He is a Chartered Financial Analyst® (CFA) charterholder, a globally recognized, graduate-level credential that provides the strongest foundation in advanced investment, analysis, and real-world portfolio management skills. Austin is also a Chartered Market Technician® (CMT) charterholder. The CMT designation demonstrates mastery of a core body of knowledge of investment risk in portfolio management and is the preeminent designation for practitioners of technical analysis worldwide. He is also registered with the SEC as an Investment Adviser Representative

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute. CMT® and Chartered Market Technician® are registered trademarks owned by CMT Institute.


Taylor Graham Photo

Taylor Graham

Paraplanner, Client Services Coordinator
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Taylor Graham

Paraplanner & Client Services Coordinator

In April 2016, Taylor Graham joined Mader & Shannon as the Client Services Coordinator. Taylor oversees client relationships for Mader & Shannon, expertly guiding families and organizations through their engagements with the firm and continuously delivering upon our commitment to serving the best interests of our clients. She also plays an integral part in Mader & Shannon’s financial planning processes including gathering client data and building retirement projections. {due diligence, facilitating comprehensive, rigorous assessments of clients’ existing financial advisors.}

Taylor graduated from The University of Kansas with a Bachelor of Science degree in Business Administration. Taylor is also a member of the Financial Planning Association.


Portfolio Management

At Kansas City's Mader & Shannon we define value in portfolio management as achieving yield and growth objectives with as little risk as possible while minimizing transaction costs and taxes. 

The goal of active portfolio management is to protect the client from major downtrends resulting from the collapse of an overvalued market, and still allow the investor the opportunity to participate fully in the growth in value and income that the equity markets have historically provided.

Active Money Management

History demonstrates that although stock prices move erratically on an hourly, daily, or weekly basis, market averages experience long term trends with respect to intrinsic value. Understanding the state of the markets with respect to this persistent trend of overvaluation or undervaluation is the primary key to implementing an effective active management investment strategy. 

The basic strategy of active money management is to reduce the risk associated with bull markets during periods of overvaluation, and to be opportunistic during bear markets that persist during periods of undervaluation. This combination enables clients to fully participate in the long-term capital growth the markets have historically provided. 

Active portfolio management does not conflict with the concepts of long term investing. Most of our clients are in fact long term investors dependent on income and growth from their portfolios. 

Take a tour of our Trading Room



Mader & Shannon Offers 529 College Savings Plan Management Through TDAmeritrade

 Mader & Shannon manages 529 College Savings plans on the TDAmeritrade platform. The plans are sponsored by the State of Nebraska and Union Bank & Trust Company serves as the Program Manager.

The benefits for our clients are as follows:

  • Mader & Shannon can continuously monitor the plans and make allocation changes periodically through primarily Vanguard funds (currently the IRS restricts changes to twice a year).
  • Tax parity laws in some states (including Missouri and Kansas) make the state tax deductions available even though the plan is in Nebraska.
  • Eligibility for tax-free withdrawals for qualified higher-education expenses applies to any nationally accredited school, not just those in Nebraska.

 

Contact Bret Guillaume at 816.751.0575 or bret@madershannon.com to open an account or transfer an existing 529 balance.
For more information on College Savings Plans visit www.collegesavings.org

Philosophy

At Mader and Shannon, we believe that an effectively implemented active management strategy can help clients achieve reliable upside participation while also providing excellent downside protection.  By dampening the volatile swings in the market, our strategy seeks to provide both a sustainable long-term rate of return as well as peace of mind to our clients.


Strategy & Daily Routine

We take a top-down approach to asset allocation and a bottom-up approach to security selection. We monitor global economic indicators like GDP, employment, wage growth and a host of survey data to determine overall economic health.  Interest rates, currency dynamics, and inflation are direct inputs to the valuation of markets, and must be incorporated to a comprehensive global evaluation. Finally, an appraisal of the fundamental health of broad indices like the S&P 500 aids in our assessment about the overvalued or undervalued state of markets.

From that baseline, we select securities that we believe provide the best risk-reward opportunity in the current economic environment. We seek to invest in companies that have good fundamental prospects and are, in our opinion, undervalued. Company-level research centers around earnings and revenue growth, valuation multiples, cash flows, and balance sheet health. Our investment universe consists only of highly liquid, exchange-traded securities.

Because we are an active manager, our outlook and positioning are flexible and dynamic. The only responsible way to make investment decisions is to base them on the most up-to-date and accurate information available. Our task each day is to gather market-related news and data, use it to develop an investment thesis, and then decide whether our current portfolio is ideally suited to perform in a given market environment. Such a task requires discipline, and over the years we’ve developed a daily routine that helps us accumulate and digest an unrelenting supply of information.

The Kansas City Trading Room opens an hour and a half before the US exchanges each morning. By that time, we are already up to date on the developments in Asian markets overnight, how the European markets are trading, and where the U.S. indices are expected to open.

Our first task on site is to download the previous day’s transaction and position data from our custodian. Once imported into our portfolio management accounting platform, we can generate performance and view holdings at the firm, strategy, and client levels.  The integration of the accounting platform with our Bloomberg and Level-2 quoting systems allows us to aggregate our discretionary assets and constantly monitor them on a tick-by-tick basis, each and every day.

By 8:00, our portfolio management team has scanned our various research platforms for developments on current or prospective holdings.  We then discuss our findings and develop our expectations for the coming trading session. If any team member believes a portfolio change is needed, that too is discussed, and before the opening bell rings, we have a plan for the day. From the opening bell, until the market closes at 3:00, the Trading Room constantly monitors holdings and the markets, regularly meeting throughout the day to discuss ideas and potential adjustments. 

The Mader & Shannon trading room operation is an intense environment staffed by dedicated professionals who relish the daily opportunity to help clients achieve their financial goals. 

As a wholly transparent money manager, we regularly host current and prospective clients in the trading room for market reviews and strategy orientations.

Wealth Management

Simply put, wealth management is the process of a team of experts providing the highest quality of financial products and services to improve the financial health of client.  In other words, it is the delivery of a full range of services tailored to solve for a specific financial objective or goal.

Wealth management incorporates a full suite of services that include financial planning, portfolio management, tax services, retirement planning, and estate planning. This provides a holistic approach allowing each scenario to be analyzed from every angle to achieve a successful outcome.

Typically, a wealth manager acts in a consultative manner and is focused solely on the client’s behalf. A wealth manager should be a fiduciary, working only with the client’s best interest in mind. Upholding the standard of a fiduciary in the financial service industry must include putting a clients’ interests before your own, acting in good faith and providing all relevant facts to clients, remaining free of conflicts of interest, and ensuring the accuracy of advice given.

Accomplished wealth managers should also hold credentials within the industry such as Certified Financial Planner (CFP®), Chartered Life Underwriter (CLU®), and Charter Financial Analyst (CFA®). The criteria that one must meet to hold these designations demonstrates not only their competency but their commitment in that respective field.

Here at Mader Shannon, we believe it is crucial to understand our clients and what is important to them. The services we provide are structured around our client’s investment objectives and tolerance for risk. We take the time to not only identify but understand our client’s aspirations. We then analyze the information and engage other professionals when appropriate to develop suitable recommendations. Our work is far more comprehensive than simply providing investment advice.

Our services are designed to offer objective advice and set reasonable expectations. We educate our clients on the suitability of our financial solutions, carefully exploring risk and performance expectations.

Typically, when a wealth manager acts in a consultative manner and is focused solely on the client’s behalf they are considered a fiduciary financial advisor. A fiduciary is a person or legal entity that has the power and responsibility of acting for another in situations requiring total trust, good faith and honesty.

Acting as a fiduciary has a very important meaning within the financial services industry. Much has been debated and written as the industry struggles with a self-imposed standard of care. It is often assumed that when choosing a financial advisor, they are all required to do what’s in the client’s best interest, but that is not the case. There are those that are held to a higher standard, and those that are not.

A fiduciary financial advisor is an investment professional who is licensed with the SEC or a state regulator and who are legally required to put their clients’ interests before their own. Having a fiduciary duty to your client should eliminate conflicts of interest and theoretically make a fiduciary’s advice more trustworthy. It is Mader Shannon’s obligation to uphold this standard as an SEC registered RIA (Registered Investment Advisor).

In addition to regulatory bodies requiring a higher standard of care, all the principals at Mader Shannon hold designations that, within their Code of Ethics, require that they adhere to or go beyond the fiduciary standard of care. Fiduciary financial advisor’s often hold credentials within the industry such as Certified Financial Planner (CFP®), Chartered Life Underwriter (CLU®), and Charter Financial Analyst (CFA®) all in which require that professionals act within this standard.

The luxury of being able to maintain our independence translates into a better relationship with our clients. Being able to think and act strategically in the interest of clients and not beholden to a parent company allows Mader Shannon to offer a more fiduciary centric service. Being a fiduciary financial advisor affords our clients a higher level of transparency in the way we provide our service, and perhaps more importantly, in how we are compensated for our service.

The following articles provide additional information on fiduciary standards within the industry as well as questions to ask and things to look for when choosing a financial advisor.

        From U.S. News and World Report:

https://money.usnews.com/investing/investing-101/articles/what-is-a-fiduciary-financial-advisor-a-guide-to-the-fiduciary-duty

        From CNBC:

https://www.cnbc.com/2015/06/16/is-your-advisor-a-fiduciary-chances-are-you-have-no-idea.html

 

Retaining an independent financial professional is as important for planning as it is for asset management. Mader Shannon has no commitment to any product or service that will in any way conflict with the best interests of our clients.

Our services are designed to offer objective advice and set reasonable expectations. We take the time to educate clients on suitable financial solutions, carefully exploring risk and performance expectations

Our Planning Services

We provide the following services for helping clients achieve their financial goals:

  • Comprehensive Financial Planning
  • Asset Management
  • Complete Portfolio Analysis/Review
  • Pension Plans
  • Company 401k Plans
  • 529 and Education IRAs
  • Qualified Plan Rollovers
  • Retirement Cash Flow Planning and Projections

 

Society of Financial Service Professionals Member

Financial Planning Association (FPA) affiliation


Why an Independent Agent?

There are two types of licensed agents in the life and health insurance industry: a “captive agent” representing one company and an “independent agent” representing multiple companies. Independent agents are also commonly referred to as “brokers”.   Captive agents are limited to the products offered by their company while independent agents can select from countless products to fit a clients needs. Obviously, an independent agent is most often going to offer more suitable solutions.  

In addition to a professionals independent status, it is important the representive be licensed to offer advice on securities, tax planning, estate planning, to tailor the most suitable solutions.   This becomes important for two reasons. Any good financial plan starts with a careful assessment of a person’s objectives, income, assets, and potential inheritance. Unfortunately most insurance agents are not licensed, trained, or qualified to do financial planning, instead they are trained to be transaction driven for commissions rather than driven by the customer's best interest.   Sales activity, with little regard for suitability and actual customer objectives, is counter productive and gives the industry a bad name.

A true independent financial planner must be licensed and have advanced training in many disciplines. Unfortunately, most insurance agents/financial advisors are only licensed to sell insurance, annuities, and mutual funds. Such limitation would make comprehensive planning difficult and expensive compared to a more comprehensive approach by an independent financial planner who works in a fiduciary capacity, or solely in the clients best interest. Such a professional is focused on plan design, researching suitable solutions, and performance, versus being product and transaction driven.

Mader & Shannon Wealth Management has always worked as a fiduciary putting our client’s needs first at all times.

Life Insurance As An Asset and/or Retirement Supplement?

In the current environment of low interest rates and bond yields one might ask, “How about life insurance as safe money investment?” For 99% of the 800 plus insurance companies a reliable investment return is not likely. However, a few top rated companies have produced internal rates of return (IRR) in the plus 2% range ten years out and plus 3% range 20 years out.

These returns won’t compete with the S&P 500, but keep in mind, there is a death benefit value permanently attached to this investment. Therefore, one can own a life insurance contract that is an asset as a conservative investment and at the same time provide a significant death benefit. In addition, properly managed, this asset can work favorably as a supplement to retirement.  

To sustain a suitable outcome using this strategy working with a professional independent agent is a necessity for a number of reasons. Insurance policies are long term, complex legal contracts with both guaranteed and non-guaranteed provisions which you would want fully disclosed and understood. You must pick an insurance company that has the financial strength and history of supporting a contract of this type. In addition, you want to thoroughly understand the taxation of life insurance proceeds since the are different from other investments.  

Like most successful investments, this investment requires management by a knowledgeable owner and a qualified professional. In this case, an insurance professional and a qualified investment advisor should be utilized for the life of the contract. To summarize, a well designed and managed life insurance contract, issued by a top rated company, can serve as key building block to a sound financial plan.

Types of Insurance

Term Insurance vs. Permanent

There are two basic forms of life insurance, term and permanent policies. Each one breaks down into subcategories based on different options designed to meet the needs of the consumer.

Term Life Insurance

As the name implies, term life insurance is issued for a specific period of time from one year to age 100. The purpose of term insurance is to cover a need within the issue period such as protecting an income stream while raising a family, or to pay off a mortgage or business debt in the event of an untimely death. Some term insurance policies offer a guaranteed conversion feature. This policy provision guarantees that the policy owner can convert the policy to a permanent insurance policy at the same underwriting status as assigned to the term policy. Consequently, term insurance can be utilized to fulfill a current insurance need at a low cost until the need for insurance diminishes or cash flow is available for permanent insurance.

Permanent Life Insurance

Permanent life insurance is designed and priced to pay a death benefit or be surrendered for the cash value when the insurance is no longer needed. There are three types of permanent life insurance: whole life, universal, and variable universal life.

Whole Life is the oldest of these policy types. It features guaranteed minimum premiums, guaranteed minimum interest rates credited to the cash value, and guaranteed death benefits payable at death. Whole life issued by a top rated company can still be a very good value even though it is not as flexible as the more recent policy types.

Universal Life

This policy type is a product of the computer age and is often referred to as Flexible Premium Adjustable Life. Due to the capacity of computers to conduct and maintain countless calculations, actuaries are able to expose the moving parts in a life insurance policy. Interest crediting rates, mortality costs, even expenses and premium taxes can be illustrated with ease. This allows for flexible premiums and face amounts, along with interest rates that reflect current portfolio yields. For the first time, policies could be designed to better fit changes in insurance needs and family budgets.

Universal life policies illustrate two interest rates, the “guaranteed minimum” and the “current” rate. The “minimum” is a contract guarantee while the “current” is credited as a product of the insurance company’s return on assets. The current rate is the basis for the “projected benefit” column in the illustration. It is important to understand that the cash values of the whole life and universal policies are invested as a general asset of the insurance company until surrendered or paid as a death benefit, therefore the financial strength of the company is very impotant.

Today the most popular feature of universal life is the guaranteed death benefit feature. Although this feature is only available from a handful of the strongest companies, it provides the lowest cost guaranteed benefit ever offered in a permanent life insurance policy. In addition, these guarantees can be structured for varying life expectancies.

Variable Life and Variable Universal Life

Variable policy cash values are not an asset of the insurance company and are managed as a separate asset in select funds much the same as a 401(k) portfolio is self managed. Although the insurance company is the custodian of the funds, the policy values are segregated from the general assets of the company and not subject to their creditors in the event of insolvency.

There is a critical difference however from managing a 401(k) allocation versus a variable life allocation. Variable Life policies have significantly higher expenses due to monthly insurance costs. As a general rule, monthly expenses of 2% to 4% or more are charged for insurance and administration costs. Consequently, a 10% return for 401(k) allocation could net one-half that in a VUL policy with a similar allocation. As a result, asset management is more difficult with variable policies than a typical 401(k) or an IRA. We recommend two rules of thumb for successful VUL ownership:

First, over fund the policy in the early years to maximize tax free growth inside the policy. Second, manage the portfolio as a sophisticated investor or retain a professional asset manager to assist you.

The obvious benefit of variable universal life is that assets can be grown in a most favorable tax environment, which, if successful, can reduce long term insurance costs or grow the tax free death benefit to larger amount than the original amount. However, there are no guarantees and the margin for investment failure is narrow. One must weigh the risk of investment results in variable life policy against the guarantees offered by competitive universal life policies.

How Much Insurance Do I Really Need?

In the vast array of information regarding life insurance there seems to be no one consistent way of determining how much you need. We believe client's should take part in determining what's necessary and understand the process rather than rely on internet 'calculators'. The following article was written by Brian P. Daley CLU. It was published in the Society of Financial Service Professionals' Life, Health & Disability newsletter, of which Mr. Daley is the editor.

Four Simple Steps

Step One

Determine the amount of annual after-tax income your survivors will require to maintain their current standard of living if you were to die today.

Step Two

Subtract from that amount the annual after-tax income earned by your surviving spouse if your spouse plans to work outside of the home if you were to die today. The difference is the family's annual shortfall.

Step Three

Divide the family's annual shortfall by 5 percent, as we assume that over the long term your survivors will be able to earn somewhere around 5 percent net after income taxes, transaction costs, and management fees on whatever cash they have available for investment after your death. (One may select 3 percent, 4 percent, or even 7 percent for that matter, but 5 percent is generally fair).

The resulting figure is the approximate amount of cash required, from whatever sources, at the time of your death to provide sufficient annual income without invading the principal until the eldest child is ready to begin college.

Step Four

Adjust this amount to reflect your unique and specific circumstances.

For example:

Will the surviving spouse's career plans or income needs change significantly following your death?

Will your spouse be receiving any imminent inheritance or income from elderly parents or from another source?

Are the children's education costs already fully funded, or are they beyond school age? Is there a special needs child who will require lifetime care?

What is the likelihood and what are the probable financial consequences of remarriage?

How long will it be until the surviving spouse will have access to tax-qualified monies such as 401(k) assets?

Such factors can increase or decrease survivor's dependency upon income from the estate and, therefore, are appropriate for you to consider when estimating the amount of coverage required by your survivors.

An Example: Assume a survivor will require $100,000 of annual after-tax income and that the spouse does not work outside the home. Dividing $100,000 by 5% equals $2 million. Thus a principal of $2 million would be required to generate uninterrupted annual after-tax income of $100,000. Depending upon your age and circumstances, the principal might be comprised of qualified and/or non-qualified investments, partnership capital, trust funds, and any current group or personal life insurance proceeds. The difference, if any, between the $2 million and the total of these other monies is the amount that may be necessary to make up through the purchase of new individual life insurance.

Portfolio Management Newsletters

First Quarter 2021 Market Update


Clients and Friends,

The flowers and trees are beginning to bloom around Kansas City, and boy, do we feel like we've earned it.  Every spring brings with it a promise of warmer weather and fresh starts.  But this year, the new beginning for our social lives and the growing warmth of the economy is far more exciting than the prospect of fewer coats or gorgeous cherry blossoms.

In this quarter's newsletter, we take a step back from the nuts-and-bolts of corporate earnings, interest rates, and market volatility to focus on a few recurring topics of client/advisor conversations.  Call it a 'Letters to the Editor' edition.

First Up: 

Our newsletter in January covered inflation in considerable detail, but inflation concerns from clients and advisors alike have continued to surface.  For that reason, we have concluded that quarterly updates on the state of inflation are probably warranted.  After all, the inflation drivers in 2021 should paint a clear picture of what's working in the economy.  To that end, we will provide a brief review of the current state of inflation and the stated preferences of policymakers.  (Check out last quarter's newsletter for an inflation primer)

Secondly:

You would have to be living under a proverbial rock to not have heard that the national housing market is Hot Hot Hot.  It seems that everybody we talk to these days expresses their disbelief about pricing trends and buyers' behavior.  In some cases, disbelief is often accompanied by anxiety about a potential repeat of the 2007 financial crisis.  We will review housing supply/demand dynamics and draw a few distinctions and similarities with the last great housing boom.

If you have any questions or concerns, we're here to address them at any time.  Please do not hesitate to reach out.

  • Kyle


Inflation

Supply chain chaos, transportation costs, and commodities in short supply drove inflation to multi-decade highs in the first quarter.  Those woes ricocheted through the economy in the form of dramatically higher copper/lumber/grain prices, new car and home appliance deliveries being pushed out months due to semiconductor/parts shortages, packages delayed, and even panic in the restaurant business due to a lack of single-serve ketchup packets.  No matter where you look, readings on wholesale prices have increased dramatically since the beginning of the pandemic.

Globalized supply chains tend to operate on a 'just-in-time' basis.  As in: "receive parts just in time to manufacture a car/refrigerator/Tonka truck" or "get a shipment of lumber just in time to build that house." The coupling of just-in-time accounting and globalization over the past 40 years allowed manufacturers to operate more efficiently, which boosted margins and earnings.  The pandemic made a complete and utter mess out of that symbiotic system.  And while it will take time to put the pieces back together, they will eventually recover as the pandemic abates. 

As for commodity prices, there is an old saying that is useful in a time like this "The cure for high prices is high prices." In other words – if prices are high for a commodity, then businesses are incentivized to produce more of that commodity; eventually, more supply will come onto the market and send prices lower.  Again, boosting individual commodities supplies takes varying amounts of time, but prices typically react negatively to increased supply.

The critical assumption in each of the analyses above is that the pandemic and its impact on prices will recede, and prices will revert lower.  The expectation for 'temporary' or 'transient' increases in prices is an integral one for the trajectory of interest rate policies from global central banks.

In the most recent meeting of the Federal Open Market Committee (rate-setting body of the Federal Reserve), Chair Jerome Powell reiterated that short-term supply/pandemic impacts would not yield sustained inflation.

"…we could also see upward pressure on prices if spending rebounds quickly as the economy continues to reopen, particularly if supply bottlenecks limit how quickly production can respond in the near term. However, these one-time increases in prices are likely to have only transient effects on inflation."

The Federal Reserve has also vowed that it will not react with restrictive interest rate policy due to 'transient' increases in inflation.

"I would note that a transitory rise in inflation above 2 percent, as seems likely to occur this year, would not meet this standard."

As the year progresses, wholesale price increases will filter through to consumers, at which time we will enter the next chapter of our inflation experience.  By then, our main question will likely have evolved from "How long will commodity/supply chain issues linger?" to "How sticky/permanent will consumer price increases be?"



Housing

It can be difficult to fully comprehend the devastating impacts that COVID and the accompanying shutdowns have had on economic activity around the world. For many families and businesses, the last twelve months have been the most challenging of their lives. Some areas of the economy, though, have thrived during the recessionary downturn. Perhaps none has been more impressive than U.S. housing. Fueled by an array of supply and demand tailwinds, home prices have surged over recent years. The median U.S. home price climbed from a pre-COVID level of $270,400 to $313,000 in February, even as home sales rose at a pace not seen since 2007.

Given fresh memories of a housing-sparked financial collapse, it's understandable that some view this latest boom with skepticism. Still, the dynamics of residential real estate have changed considerably since the mid-2000s, and trends driving the recent improvement in the industry could have lasting strength. Below, we'll outline a few of the forces helping to support the housing market in the U.S. 

Demand

If you find yourself about as interested in the housing market as you have ever been, you are not alone.  According to Google Trends, search interest in the term "homes for sale" has never been higher.

It should be no surprise that with search interest this high, buyers are in abundant supply.  In any transaction, you need a willing buyer and a willing seller.  However, a recent survey by the National Realtors Association showed a breathtaking mismatch in their estimates of Buyer/Seller willingness to seek a transaction.   

So the market right now is full of frenzied buyers and unmotivated sellers.  If there was ever a "seller's market" where newly listed homes are downright coveted, this is it.  Although, that one little question of where you'll live might linger as you contemplate listing (more on that in the supply section).

The level of enthusiasm in housing is plain as day.  It is apparent based on survey data, pricing trends, and even buyer's willingness to do things that seem downright crazy, like waiving contingencies/inspections or all-cash offers substantially above asking. Let's take a look at who these buyers are. 

Most buyers are in or around their peak earning and child-rearing ages of 35-55 years old.  That cohort also represents more than half of the U.S. population.

Buyers these days also have good or excellent credit.  Note the magnitude of sub-prime originations (lower credit scores) in 2003-2007 versus today.  Banks and mortgage companies simply are not offering mortgages to anybody with a challenged credit history or an inability to afford a hefty down payment (or mortgage insurance).

In addition to stricter lending standards, existing homeowners' financial positions are dramatically improved versus 2007-2008.  The amount of leverage in the housing market (amount of outstanding debt versus the properties' value) is quite low.  On average, Americans have over 65% equity in their homes. Significant equity positions are a stabilizing force for prices since folks that wish to 'move up' can use that equity as currency in a subsequent transaction.

Over the next 20 years, the aging of Millennials will be the main event on the demand side of the housing equation.  Unprecedented levels of student debt and coming of age in a recessionary environment hampered Millennials' home ownership journey.  But increasing rates of income and accelerating household formation clearly show a rising influence for this often-derided generation.

Some data related to homeownership and household formation has been rendered less valuable due to pandemic-related issues (statistical adjustments gone awry or outlier/base effects).  But the trend toward homeownership and away from renting for younger Americans is undeniable. 

The prospect of student loan forgiveness/relief is far too political for us to comment on in a quarterly newsletter.

But legislation seeking to unburden Americans of their $1.57 trillion in student loan obligations would almost certainly enable a new cohort of prospective home buyers. 

Supply

Single family housing supply has a simple problem: there isn't enough of it. The inventory of existing homes available for sale has been subdued for years, but it cratered to new lows in 2020. At current levels, there's only two months of supply available in the market – the lowest on record and less than half of what there's been in comparably healthy periods over the last 20 years.

Demographic trends are contributing to the scarcity. The heads of roughly 55% of all owner-occupied households in the U.S. are at or nearing retirement age, compared to only 41% in 1994. And for a substantial number of those households, the equity they've built is an important piece of their retirement plan. According to Census Bureau data, three-quarters of households aged 65 and older have home equity, but less than half own a retirement account.  And for the average homeowner in that age group, home equity comprises nearly 70% of their net worth.

In years past, cashing out and moving to a senior community might have seemed an attractive option for some retirees. But in light of a pandemic that disproportionately targeted older generations – especially those living in close contact with others – that option has lost some appeal. Fortunately, they have alternative courses of action. Whether by opening a home equity line of credit, taking advantage of record-low interest rates with a cash-out refinance, or securing a reverse mortgage from the legendary Tom Selleck, retired homeowners have plenty of ways to access their home's equity. Unfortunately for inventory levels, that also means fewer retirees will leave their homes in the foreseeable future.

Adding to the supply shortage is a lack of new homes being built. New housing starts in the U.S. have been below the long-term average for the last decade. What's more, that average doesn't adequately account for continued population growth; a million new homes in 1960, when the population was 180 million, is quite different from a million in 2021, after the population has nearly doubled.

The solution to the supply shortage, it seems, is quite simple. We need to build more homes. As is usually the case, though, solutions are simpler in theory than in practice. When the housing bubble burst 15 years ago, the entire industry came face-to-face with financial ruin. The homebuilders and suppliers that managed to survive, rightfully scarred by the experience, vowed to take a more cautious approach to their businesses going forward. Production capacity dwindled.

Now, housing is back. According to industry veteran and D.R. Horton CEO David Auld, it's the best market he's ever seen. That means there's room to add capacity back, but rebuilding capacity takes resources, and right now, resources are in short supply. For one, qualified labor is hard to come by. While millions of Americans remain out of work, the headline unemployment rate has already fallen back to its long-term average, and job openings have fully recovered to pre-pandemic levels. Thirty-eight percent of construction firms in a March small business survey cited a shortage of qualified labor as their top business problem. Fifty-five percent said they had few or no qualified applicants for job openings. 

Consequently, each of the large, publicly traded homebuilders anticipates increased labor expenses in 2021. The higher wages are intended to attract and retain workers, but it also puts upward pressure on home construction costs.

Material shortages have compounded cost pressures. Commodity prices, buffeted by supply chain issues and a year of consumption dominated by goods, rather than services, are at the highest level in years. For two key inputs to home construction, the cost increase has been especially pronounced. Copper prices have doubled in the last year. Lumber has quadrupled.

Somewhat concerned by cost uncertainties in the year ahead and unable to keep up with demand, several builders are deliberately slowing customer orders to ease construction backlogs. In some cases, they've chosen to raise prices until demand subsides. In others, they've refrained from releasing new lots for purchase. In any case, even if new homes can fill the supply gap, it would appear the prices of those homes are destined to be higher than in the past.

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Contact

Mader & Shannon Wealth Management is located just East of the Country Club Plaza.

Address

4717 Grand Ave. Ste 800, Kansas City, MO 64112, USA

Phone

1.800.838.9988 / 816.751.0585

Fax

816.343-5997

Email

contacts@madershannon.com

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