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.
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.
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.
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 beopportunistic 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 email@example.com to open an account or transfer an existing 529 balance. For more information on College Savings Plans visit www.collegesavings.org
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.
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.
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
Complete Portfolio Analysis/Review
Company 401k Plans
529 and Education IRAs
Qualified Plan Rollovers
Retirement Cash Flow Planning and Projections
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.
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
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.
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.
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.
Adjust this amount to reflect your unique and specific circumstances.
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.
Third Quarter Market Update
If you actively monitored markets in the 3rd quarter of 2019 and were asked to describe the price-action, you might use words like volatile, frenetic, or maybe just downright crazy. The daily standard deviation of the S&P 500 over those 90 days registered a higher-than-usual +/- 0.93%. Yet through all the volatility, the market ended the quarter up a measly 0.18%.
This concept of ‘going nowhere fast’ is not new; in fact, it’s the exact trait the markets have exhibited for the last 12 months. The chart below shows S&P 500 over the 12 months ended 9/30/2019. Over that period, the market has experienced: a 4th quarter melt-down, a 1st quarter snap-back, and a few trade-fueled panics. Yet for all the volatility and angst-provoking headlines, the market effectively went nowhere.
Sideways markets typically occur when fundamental concerns about the health of the economy rise to the surface. Since the great financial crisis lows in 2009, the S&P 500 has experienced three of these such phases:
The 2011/2012 consolidation was centered around the potential collapse of the European Union. The 2013/2014 uptrend that followed was the product of aggressively accommodative global monetary policy and a resumption in earnings growth.
The 2015/2016 consolidation was a miniature industrial recession triggered by the precipitous drop in the price of oil. The following uptrend in 2017 was sparked by the promise of corporate tax reform and deregulation.
Finally, the consolidation over the past 19 months has been one plagued by fears of a protracted trade war, a global manufacturing recession, and at times, a perception of restrictive monetary policy. It’s too soon to pronounce how this consolidation phase will end. But the direction of global trade policy and the upcoming 2020 presidential election will undoubtedly be significant inputs.
When most people think about stocks, bonds, business investment, or even the purchase or sale of a family home, they first think of money. And while money is the fuel that propels a transaction or a market, neither would be initiated or maintained without confidence. Confidence comes in many forms: whether it’s confidence in an institution, the rules of the game, or simply that tomorrow will look something like today, they all must be present for us to take the next step.
In markets and the economy, we’re generally interested in the level of confidence of two specific groups: the consumer and the business leader. If the consumer isn’t purchasing goods and services, why should the business leader hire and invest? Conversely, if the business leader isn’t expanding their enterprise and hiring, how can the consumer spend? Typically, when one of these groups pull-back from their specified activities, the other is not far behind.
Outside of compound interest, the US Consumer might be the most powerful force on earth. A few different surveys measure the comfort and confidence of US consumers. Each measure has its own methodology, so conflicting data is frequent.
The University of Michigan has monitored the sentiment of US consumers in its index since 1978. Their expectations index is presented below since 1985.
It’s tough to say that the consumer is thrilled by way of the University of Michigan methodology, but they are also far from the depressed levels seen from 2008-2011.
Bloomberg, which produces a weekly consumer comfort index, is presented next. And the new all-time high in their indicator is an unequivocally positive reading on the consumers' health.
Our final snapshot on the consumer (and our personal favorite) is the unemployment rate. All things equal, employed folks spend more. And the Bureau of Labor Statistics U3 Unemployment Rate happens to be about as low as it has ever been.
In our view, the consumer still has confidence in their ability to earn, which is translating to confidence in their ability to spend. As we approach the holiday season, maintaining favorable sentiment and employment readings will be critical to sustaining the current economic expansion.
Much like consumer sentiment, business sentiment is measured by more organizations than we’ll cover in this brief newsletter. Each survey tracks a specific subset of business leaders. The first group we’ll highlight here are Chief Executive Officers, as measured by CEO Magazine.
In addition to the deterioration in the CEO Confidence Index displayed above, we’re also seeing more qualitative reports of degrading business sentiment. A gauge of CEO confidence distributed by The Conference Board posted a 10-year low in October. A direct quote from that report on read:
“Tariffs and trade issues, coupled with expectations of moderating global growth, are causing a heightened degree of uncertainty. As a result, more CEOs than last year say they have curtailed investment…”
In past newsletters, we’ve highlighted the importance of US and Global Purchasing Manager Indexes (PMI). These indicators move down the corporate totem pole to the employees that manage hiring, orders, shipments, pricing, etc. A reading over 50 indicates economic expansion, while a reading below 50 denotes contraction. These surveys are divided into US Manufacturing and US Non-Manufacturing (services) sectors.
PMIs in the United States are headed in the wrong direction. This negative trajectory fits with the narrative of slowing business fixed investment spending. When business leaders are less confident about their underlying companies’ growth, it’s natural that they would pull back on broad-based business investment. Unfortunately, that is precisely what we see in the data.
As we’ve covered earlier in this newsletter, markets have effectively gone nowhere over the past 19 months. But does that indicate weak investor confidence? The price of the Dow or S&P on a given day is an excellent indication for how much it costs to buy the market, but it does a pretty lousy job of telling you the value of the underlying assets.
To gauge the value of what you’re buying, you need to equate that stock price to the earnings power, dividend, or otherwise productive capacity of the asset. Generally, this exercise is accomplished using what’s called the Price to Earnings (P/E) ratio.
The current P/E on the S&P 500 is 18 times 2019 earnings. And while 18x is not cheap, it’s also far from expensive relative to previous periods. As a gauge of confidence, the current valuation regime indicates that investors are securely in a ‘wait and see’ kind of mood.
Investor confidence is the ultimate combination of consumer and business confidence. Currently, consumers are still buying, and business leaders are just beginning to pause. Should business leaders begin to cut wages or hiring, watch out for a landslide in investor confidence.
Since the inception of S&P 500 price data in 1928, stocks have delivered an outstanding annualized return of 10%. As investors, many of us have been conditioned to believe that a compound annual growth rate (CAGR) of 10% per year is not only possible, but a near-certain outcome if we just stick to the plan. It’s comforting to know things will always work themselves out if we give them enough time. The truth can be harder to swallow: 10% per year is not quite the same as 10% every year. Moreover, you won’t have the luxury of leaving your assets untouched for 90 years, and you probably won’t sit by and watch your retirement account get cut in half without taking action. In short, just playing the game doesn’t mean we’re entitled to double-digit returns over our investment horizon.
Much like the last 10 years, the long-term history of the S&P 500 price index (below) has been marked by periods of uptrends and consolidations. Over the long term, market participants benefited from extended periods of outstanding growth, but sometimes invested for years without meaningful asset appreciation.
True, dividends would add to the return during the stagnant periods shown above, and it’s not entirely fair to exclude them. Then again, it’s not entirely fair to exclude inflation either. Inflation doesn’t get much attention anymore, especially when talking about investment returns - for that we can thank the Fed and 25 years of core CPI readings below 3%. But since we’re analyzing 100 years of historical data, not just the last 25, we can’t afford to ignore it. So what happens if we included both dividends and inflation? We still see extended periods of time where stocks provide no meaningful appreciation in purchasing power. Each data point in the chart below represents the annualized total return for the S&P 500 over the preceding 20 years. (The underlying equity and inflation data go all the way back to 1871, courtesy of Robert Shiller’s online database.)
No less than 4 times in the past century, equities provided less than 1% in real return per year for a 20-year period. For plenty of savers, 20 years is longer than their investing life! And though the annualized real return over the entire dataset is a respectable 6.9%, the 3.6% average achieved over the most recent 20-year period should remind us just how volatile returns can be. Mr. Market doesn’t care about our retirement plans. He doesn’t owe us anything. To be sure, stocks have been one of the best long-term wealth generators, but investment returns are cyclical. They can come in bunches or not at all.