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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

Third Quarter 2021 Market Update

Throughout the past three months, we’ve seen signs of a slowing recovery and budding signs of market anxiety. So, this quarter, we will review the basis of those two developments and contemplate the coming shifts to economic growth, policy and confidence.

Additionally, recent developments in China have graced the front pages of business and general news publications alike. We’ll try and help you make sense of the events, as well as their potentially wide-ranging implications.

The Transition(s) – Going from Great to Good, isn’t all Bad.

Do you remember the last really, really great trip you went on? Or maybe a distinctly memorable celebration with friends or family?

Seriously. Take a moment. What do you remember?

Happy thoughts, I hope.

Ok, now recall the moment that your vacation/event concluded and life went back to normal. Maybe it ended when your return flight landed, maybe it was when you went to pick the dog up from boarding, or maybe it was the drive home. Despite everyday life being at the very least O.K., do you remember it feeling… like a letdown?

That feeling, that letdown, is where markets are at this moment.

After a stimulus-fueled post-COVID recovery, economic data, monetary/fiscal policy, and consumer/investor confidence are all in the process of getting accustomed to some sense of normal again.

The good news: at this point, the normal we’re headed towards doesn’t look so bad.

The bad news: transitioning from great to good will take time.

The Data

When an economist or analyst invokes the old adage that “Trees don’t grow to the sky,” they’re typically talking about the fact that growth can be fickle, especially at extremes.  In this case, it’s an apt way to frame economic growth in the United States.  The rapid rebound from the COVID recession left heads spinning.  Never had so much money been spent in such a short period. In our last newsletter, we reviewed the successful recovery to pre-COVID growth trends.  While those trajectories are not yet in danger of failing, the pace of growth is starting to slow. 

In the United States, the late summer and early fall have brought renewed COVID distortions and supply chain disasters. Of the 31 domestic economic indicators we track, 26 have stalled after setting a peak in 2021, many in just the last few months. While that sounds extremely negative, let’s look at regional surveys of current business conditions for some context.

Many of the regional activity indicators have peaked. Some have even entered downtrends. However, the majority are simply signaling that the economy has reverted to its 5-year average (white horizontal lines). Softer trends could continue and result in outright negative readings - but it seems a bit early to draw that conclusion.

The National Federation of Independent Businesses (NFIB) conducts an in-depth monthly survey of small businesses. Their questions span hiring plans, inventory satisfaction, pricing circumstances, and general business conditions. Like the regional surveys above, general business conditions have deteriorated recently, but conflicting data abound beneath the surface.

Capital expenditure plans, hiring plans, pricing initiatives, and employee compensation responses are at or near multi-decade highs. Hiring and capital expenditure plans for small businesses form the bedrock of our economy, as they represent investment in future growth.


On the other hand, companies are scrambling to raise prices and wages. Put it all together, and fewer and fewer business owners are answering in the affirmative when asked if it is a “good time to expand.”

An unwillingness to expand capacity, especially in supply-constrained industries, would be an untimely development in our battle with inflation.

The struggle with price inflation and margin compression is also impacting large, publicly traded companies, albeit unevenly on a sector-by-sector basis. Over the last few months, we’ve seen disappointing reports from Nike, Sherwin Williams, and FedEx.

Nike: Matthew Friend – EVP, CFO

“Previously, I had shared that we were planning for transit times to remain elevated for the balance of fiscal ’22. Unfortunately, the situation deteriorated even further in the first quarter, with North America and EMEA seeing increases in transit times, due primarily to port and rail congestion and labor shortages. Additionally, several of our factory partners in Vietnam and Indonesia were required to abruptly cease operations in the first quarter. As of today, Indonesia is now fully operational. But in Vietnam, nearly all footwear factories remain closed by government mandate.”

Sherwin Williams: John George Morikis – Chairman, President, CEO

“Let me begin by framing my comments with some key themes. First, demand is very strong across the majority of our business, and we are aggressively pursuing growth opportunities. Two, while industry supply chain constraints are continuing to impact production and sales, nobody has more assets and capabilities than Sherwin-Williams to keep their customers in paint and on the job. Three, we are aggressively combating raw material inflation with significant price actions across each of our businesses. We will continue to do so as necessary.”

FedEx: Rajesh Subramaniam – President, COO

“Labor shortages had two distinct impacts on our business. The competition for talent particularly for our frontline workers have driven wage rates higher and pay premiums higher. While wage rates are higher, the more significant impact is the widespread inefficiencies in our operation from constrained labor markets.”

Despite margin pressures for the companies above, they are all still expected to post profit growth in their current fiscal year. And in the aggregate, corporate earnings have never been higher. It’s the path to even higher earnings where the question marks live.

The Policies


Fiscal Policy - (Administration and Congress)

With Congress bickering over whether to pay the bills we’ve already accrued or to potentially re-imagine portions of the tax code and social safety net, there is no shortage of action in D.C. We won’t wade into the debate on what ‘should’ happen; instead, let’s review the coming shift away from ultra-supportive pandemic policies.

The federal budget deficit represents the annual amount the United States spends over and above tax revenues.

Before most of us knew what a coronavirus was, the U.S. government was running annual deficits of about $1 trillion – yellow circle. In response to the pandemic, an incomprehensible amount of money was spent. The annualized deficit from March of 2020 to September of 2021 was just shy of $4 trillion per year – blue line.

Now, there shouldn’t be any surprise that pandemic level spending is entirely unsustainable. But how much of a transition towards fiscal austerity should we expect? Will deficits go back to the ‘old normal’ of about $1T/year? Or will deficits remain structurally higher?

The Congressional Budget Office (CBO) produces a budget based on current spending projections (not including the proposed spending plans that you hear about in the news). Their baseline expectation is that we’ll revert to annual deficits in the $1.2T/year range – purple line.

Presidential Administrations also publish budgets. And while Congress rarely implements them, they do give a window into policy preferences. Based on the Biden Budget from May of this year, the average annual budget over the next ten years would be roughly $1.3T/year.

Monetary Policy – Federal Reserve

Supply chain bottlenecks, higher wages, and commodity shortages are driving inflation. And inflation is pressuring a policy shift at the Federal Reserve. The pivot away from aggressively accommodative policies is catching some off guard, but should we expect an outrightly restrictive posture soon?

As you’ll remember, the Federal Reserve uses three main tools to influence business conditions: short-term interest rates, asset purchases, and forward guidance. The first two are objective and measurable, while the third is a bit subjective.

In their current configuration, asset purchases and interest rate policy have never been more extraordinary.

Based on the median projection of Federal Reserve Regional Bank Presidents and Federal Reserve Board members, the Fed’s policy rate (blue line) will reach 1.75% at the end of 2024 – note that Federal Funds before the pandemic was an entire percentage point higher. Remember, lower rates = more accommodative financial conditions.

The Federal Reserve Balance Sheet (green line) has grown more over the past 18 months than most economists could have ever imagined. And the Fed is still buying more than $100 billion per month of Treasuries and mortgage-backed securities. The expectation is that the Fed will purchase fewer and fewer securities over each of the next nine months until their net monthly purchases reach $0 per month. At that point, the balance sheet will no longer increase in size. Note, though, that the balance sheet is unlikely to contract anytime soon.

Historically speaking, sub-2% interest rates and a $9 trillion balance sheet is undeniably an accommodative environment - even if it is slightly less generous than where we stand today.

Confidence – Consumers and Investors

The broad support consumers received during the most acute phases of the pandemic saved the economy from experiencing a 2008/2009 style retail recession.  In the aggregate, government support payments actually exceeded lost W-2 employment income. On an emotional level, however, consumers have yet to recover.

The University of Michigan, The Conference Board, and Langer each collect survey data on consumers’ finances, willingness to spend, and outlook for the future.

Despite record household wealth, the cleanest credit scores in a generation, and a rapidly decreasing unemployment rate, consumers have yet to reach 2019 levels of comfort/confidence in their financial position. Further, we’ve seen outright deterioration in each dataset this year. Negativity is centered around inflated prices and the unavailability of big-ticket items such as autos and homes. The worsening condition of the consumer psyche is among the most concerning of all the data retrenchments we’re watching.

Investor confidence can be measured in several ways, some more valuable than others. Survey data is noisy and short-term. Fund flows can be wildly contradictory depending on the security type in question (ETFs vs. Mutual Funds). To us, the best way to assess investor confidence is to ask: 1) How much equity (stock) do people own? and 2) At what price are they willing to own that stock?

When it comes to the aggregate household allocation to U.S. stocks, the concentration has never been higher.

Additionally, the price at which households own those stocks is nearly the most expensive on record.

While additional worthwhile considerations to investor confidence include the outlook for interest rates, inflation, taxes, and expected future growth, we’ll save those for another time. Suffice to say, investors own a great deal of stock at lofty prices. Investors have yet to reassess their confidence broadly.

Conclusion:

No matter where you look, seasons are changing. But just as the shift from summer to fall needn’t be anxiety-provoking, neither must the transition from great data to good data. As always, we’ll continue managing our portfolio exposures to match the changing circumstances. 


China: Corporate Debt and Common Prosperity

Late last month, China’s second-largest property development firm failed to make an interest payment to bank lenders. It’s by far the largest example of a string of debt defaults and restructurings by Chinese companies in recent years, as the state has slowly rolled back their implicit backing of government-affiliated firms. China Evergrande Group, together with its more than 2,000 subsidiaries, has sizeable investments in electric vehicles, internet and media production, entertainment, and the food industry, in addition to its flagship homebuilding operations. All told, the Group’s assets total roughly 2% of China’s annual gross domestic product. But Evergrande’s size has largely been fueled by debt - their liabilities sum to more than $300 billion.

The Group’s scale and relationship with banks and other institutions has stirred fears of a Lehman-like crisis in China should Evergrande fall into bankruptcy. The pain from such a collapse would be felt by more than just banks. Evergrande employs 200,000 people and hires another 3.8 million every year to develop properties. More than 1 million people have placed deposits on homes that have yet to be finished, and 70,000 individuals have bought interest-bearing wealth management products backed by the company. The situation puts the Chinese government in a difficult position: allow the firm to collapse and risk both financial turmoil and a fallout in public support ahead of next year’s National Congress of the Chinese Communist Party, or bail them out and risk stoking the moral hazard that helped create the country’s corporate debt problem in the first place.

Further complicating things is that the Evergrande crisis can be traced, in part, to the Chinese government’s efforts to rein in housing prices and curb credit issuance in the real estate market. Earlier this year, they unveiled a new ‘three red lines’ policy that limits debt growth for developers like Evergrande. Coupled with rising interest costs and falling property prices, Evergrande’s inability to raise new debt worsened a liquidity crunch, forcing them to sell assets and discount homes even further to try and shore up cash. So far, their efforts haven’t been enough.

The three red lines policy is just one piece of President Xi Jinping’s renewed focus on ‘Common Prosperity’. Whether to pursue the Chinese Communist Party’s long-stated objective of an egalitarian society, or simply to shore up popular support before seeking an unprecedented third term next year, Xi has resurrected the Mao-era slogan and spearheaded a wide-reaching crackdown on China’s rich and powerful in hopes of reducing wealth inequality.

Here are just some of the recent actions taken by the CCP to cut powerful businesses and their leaders down to size:

  • Jack Ma, the billionaire co-founder of e-commerce company Alibaba and its financial affiliate Ant Group, publicly criticized the Chinese government’s regulatory approach in an October 2020 speech. He scolded the system for being outdated and stifling innovation. Beijing responded by canceling Ant Group’s imminent IPO on the Shanghai Stock exchange, ordering Ant Group to overhaul its business, and launching an antitrust probe into Alibaba. Ma, a celebrity in his own right, has hardly been seen or heard from since.
  • Meituan, China’s largest food delivery company, is under investigation for antitrust concerns surrounding exclusivity agreements with merchants.  In addition, a summer ruling ordered online food platforms to ensure workers earned the local minimum wage. CEO Wang Xing has kept a low profile since he posted poem on social media deemed critical of President Xi earlier this year.
  • The $100B private tutoring industry was caught by surprise in July when Beijing banned companies that teach school curriculum from making profits or going public. They’re also restricted from tutoring during weekends or holidays. Publicly traded companies in the space lost more than half their value overnight.
  • China’s leading ride-hailing service, Didi Chuxing, announced an IPO in the United States and within a week was under antitrust investigation. Didi went ahead with their IPO anyway, but days later came under more pressure. The Cyberspace Administration of China (CAC) launched an investigation over data security concerns, prohibited Didi from registering new users, and removed their app from China’s app stores. It’s been rumored that Beijing could take the company under state control.
  • Over the summer, Chinese officials described video games as ‘spiritual opium’, then imposed a rule limiting children under the age of 18 to no more than three hours of video games per week (one hour each on Friday, Saturday, and Sunday) and an additional hour on holidays. In addition, regulators announced they would slow the approval process for new games and have warned against games that ‘misrepresent history’.
  • Technology conglomerate Tencent, already impacted by the gaming restrictions noted above, was ordered to give up exclusive music rights as part of an antitrust investigation. Regulators also blocked a merger with a rival live-streaming site. They, along with other tech powerhouses Baidu, ByteDance, and JD.com, have been fined this year for various past actions now judged to be monopolistic.
  • Stock regulators are preparing rules that would effectively ban foreign IPOs for Chinese internet firms that hold personal data from at least 1 million users. In other recent data security legislation, China has implemented new rules regulating the transfer of data across borders, cloud computing services used by government affiliated firms, and collection of consumer data by technology firms.
  • Banks and online payment firms have been restricted from using cryptocurrencies for payment or settlement – unless they’re using the digital yuan developed by the People’s Bank of China. Fund managers can’t invest in cryptos either, and Chinese institutions are prohibited from exchanging cryptocurrencies for fiat. The PBOC even plans to prosecute exchanges based outside country if they offer crypto services within the mainland. Bitcoin mining, which uses large amounts of energy, was targeted by provincial level governments after Vice Premier Liu He called for a crackdown on the practice in a May release from the Financial Stability and Development Committee.
  • Huarong Asset Management is an asset management firm majority owned by the state that was created to help manage distressed debt for commercial banks. Chairman Lai Xiaomin instead turned it into a speculative trading firm, and heavy losses required a government bailout in 2020. Lai was executed in January on charges of bribery, corruption, and bigamy. Just last week, Chen Feng and Adam Tan, the Chairman and CEO of HNA Group, were detained by police. HNA racked up debt with more than 80 acquisition since 2015, but is now under court-led bankruptcy after it was unable to pay creditors.
  • The CAC derided ‘chaotic celebrity fan culture’ and vowed to stifle the distribution of ‘harmful information’ in celebrity fan groups and to shut down problematic discussion channels. Sites are prohibited from publishing popularity lists, and talent shows can no longer charge fans to vote for their favorite acts. Film stars Zheng Shuang and Zhao Wei each ran afoul of Beijing and have suffered the consequences – Zheng was probed and fined by tax authorities, and Zhao’s films were removed from Chinese video platforms.

The regulatory barrage has spared few industries, if any. Health care, short-term housing, private investment, high-frequency trading, and even cosmetics, have all faced increased scrutiny in the past year. The impact on Chinese equities – especially Chinese tech stocks - has been pronounced, with the Nasdaq Golden Dragon China Index falling by more than 50%, its largest decline since 2008.

It all comes amid a Chinese economy that’s expanding at the slowest rate in decades and showing no signs of accelerating. Industrial production rose at a 5% annual clip over the last 2 years, downright mediocre relative to historical trends. Inflation-adjusted retail sales are nearly flat:

COVID deserves some blame, of course. Lockdowns hampered local demand, but more importantly, worldwide supply chain disruptions amid the pandemic have changed the way businesses think about product sourcing. In the years before COVID, tariffs and national security concerns had sparked a renewed interest in domestic production. The pandemic was tinder to a young flame. Inventory shortages and shipping delays have favored those with centralized supply chains, and technological advances continue to erode the labor cost advantages of overseas manufacturing. In short, globalization has given way to localization. The speed and scale at which the transition takes place could have severe implications for the world’s largest exporter.

There are issues on the home front, too. China’s disastrous one-child policy from 1979 to 2015 has resulted in a rapidly aging society. According to estimates from the United Nations, the country’s working age population has already peaked.

Economic growth will be difficult to sustain without an increase in birth rates, but potential parents – most of whom have no brothers or sisters – already face the financial burden of caring for their two elderly parents. The idea of having several children, too, given elevated home prices and the rising cost of education, is often an unwelcome prospect. We’ll have to wait and see whether the CCP’s aggressive campaign for ‘Common Prosperity’ succeeds in improving middle class wealth and turning the demographic tide.


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