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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.

Find out More

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, CFP® Photo

Taylor Graham, CFP®

Advisor, Client Services Coordinator
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Taylor Graham,CFP®

Advisor, 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.


Tyler Zimmerman Photo

Tyler Zimmerman

Equity Research Assistant
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Tyler Zimmerman

Equity Research Assistant

Tyler joined Mader Shannon in October of 2019 while in his final year at the University of Missouri - Kansas City. In his time at UMKC, Tyler served on the School of Management Dean's Advisory Board for two years. He has since graduated with a Bachelor of Science degree in Accounting.

While in school, Tyler also held positions at various finance and accounting firms that included wealth management and bookkeeping responsibilities.

Tyler's role at Mader Shannon includes conducting broad-based market research, securities analysis, client portfolio administration, generating reports, and helping maintain the firm's proprietary data. Tyler is registered with the Securities and Exchange Commission as an Investment Advisor Representative.

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

Second Quarter Market Update


A Recession By Any Other Name


Deny thy father, and refuse thy name;
Or, if thou wilt not, be but sworn my love,
And I’ll no longer be a Capulet.

’Tis but thy name that is my enemy;
Thou art thyself though, not a Montague.
What’s Montague? it is nor hand, nor foot,
Nor arm, nor face, nor any other part
Belonging to a man. O! be some other name:
What’s in a name? that which we call a rose
By any other name would smell as sweet;
So Romeo would, were he not Romeo call’d,
Retain that dear perfection which he owes


A google search will tell you those lines appear in the third most popular of Shakespeare’s many famous scenes. Arguably though, the anguish-stricken plea of Juliet for her beloved Romeo to not be a Montague and her not to be a Capulet is the most broadly understood. In the end, the names we assign things can simultaneously be essential context to the story while also being almost entirely meaningless.

The growing fever of recession/slowdown chatter has us commiserating with Juliet’s frustration about how we collectively use labels. What’s the deal? Are we going into recession? Depression? Everybody seems to be infatuated with the status of economic growth. That’s why we led our quarterly note in March with a review of recession expectations and why we’ll do it again today.

Forecasting economic trends is nearly impossible, and pinpointing what drove an expansion and sowed its demise isn’t much easier. So for simplicities sake, the following adage is routinely invoked to differentiate between recessions and depressions: “When your neighbor is out of work, it’s a recession. But when you’re out of work, it’s a depression.”

Before we dive into the data and analysis of recessions, we better define the term. Much like the sweetness of Juliet’s rose, the term recession is straightforward. It simply means negative growth. But what growth is negative? Employment? Stocks? Retail Spending?

Enter Gross Domestic Product. It has been refined over the decades to explain the productive capacity of a country. It includes Consumption, Business Investment, Government Spending, and Imports/Exports. Depending on the country being analyzed, specific components can have outsized influence. For example, in the USA, consumption makes up about 66% of our country’s output, and investment makes up only 17%. On the other hand, in China, consumption makes up 39% of GDP, while fixed investment makes up 42%. The drivers of GDP growth (or contraction) for a given country are essential to keep in mind.

The ‘back of the envelope’ definition of a recession is two consecutive quarters of negative GDP. You’ll find that a satisfactory definition for cable news, but doesn’t it leave something to be desired? How much did the economy decline? Did/will it only last two quarters? Is this recession like some of the other bad ones I’ve experienced?

If you’re looking for a more refined definition of recession, the National Bureau of Economic Research is the group to watch. While they provide plenty of sophistication in their recession pronouncements, they also tend to not ‘call’ a contraction until well after one has started. Until we hear from the NBER, we’re on our own to compare and contrast economic activity with past recessions.

The white line below represents every dollar of US GDP over the past two years. At the end of 2019, GDP for the USA was the highest on record. The pandemic brought a sharp decline and a rapid recovery, and the post-pandemic period produced steady growth. This chart adjusts for any inflationary distortions.

In the first quarter of 2022, the US economy experienced its first decrease since the pandemic. So far, the decline is tracking some of the milder recessions on record. Interestingly, the recessions of 1957 and ’53 experienced among the most dramatic decreases in GDP but had below-average stock market declines. We omitted the Great Depression from this chart since the -26.3% decline is unrivaled in the country's history.

So how do stock markets typically fare in recessions? They tend to peak in advance of recessions and trough before the economic recovery begins.

 While full market recoveries tend to happen before the official end of recessions, there are examples where stocks remained depressed for extended periods – most notably, the 2008 Financial Crisis and the Great Depression. On average, stocks tend to decline by about -29% in recessions. So far this year, the S&P 500 has been down by as much as -25%.

We’ve covered employment many times within these publications, but it bears repeating – every time we’ve had a recession in the USA, unemployment has risen. We got another strong reading today (7/8/22) on the US job market, and no signs of recession were present.

A discussion of the exceptionally healthy labor market would be incomplete without covering central banks. We’ll skip the inflation charts to keep from taking up your entire day – everybody knows it’s high. The primary consideration is that if inflation remains high, central banks will be pressured to raise interest rates further. All else being equal, higher interest rates slow economic growth.

Let’s have a look at the historic path of rate hiking cycles.

The white line represents the Federal Reserve policy rate, effectively the interest rate for overnight money/cash. Each line represents a period in which the Fed raised interest rates, typically a policy response to a period of rapid economic growth.

Two things to note: The path of future interest rates (white circles) indicates an expected policy rate of 3.5% by year-end 2022. If achieved, that would result in the fastest first year of a tightening cycle. Also, projections for 2023 and 2024 remain well below that of other periods in recent memory. If you look closely, slight rate cuts are penciled into the 2023 and 2024 projections. All projections are either derived from market-based measures or pulled directly from Federal Reserve publications.

An official indication of second-quarter GDP is due on July 28th, but economists far and wide have been assembling their estimates for months. After all, the government’s data for compiling official figures are readily available. One of the more reputable and consistent estimators of quarterly GDP is the Federal Reserve Bank of Atlanta. They provide the expected rate of expansion/contraction for each component of GDP. The mix can be messy, but it’s important to draw distinctions between what’s growing and what’s slowing.

The white line represents 2nd quarter GDP (at an annual rate), as seen by the Atlanta Fed. Their expectations have dropped throughout the quarter to -1.2%. You probably realize that if they’re right, it will mark the second quarter in a row of negative GDP growth. A recession!

But spend some time looking at the colored bars. Bars above the 0 line are positive contributors: consumer spending on services, non-residential investment, and net exports. The detractors are spending on goods, residential investment, and inventories.

First-quarter GDP was a similarly mixed picture – personal consumption and business investment were both positive, while inventories and net exports were significant drags.

So, two consecutive negative quarters of GDP might soon be in the books. Each report is uncharacteristically replete with potential explanations as to why maybe they weren’t so bad.

So then, do exceptions matter? Is a recession by any other name still a contraction in economic growth? Well, yes, it is.

But unlike the lovers in Shakespeare’s tragedy, nuance doesn’t have to be dead.


This Time Really is Different


We live in extreme times. To be fair, it always feels extreme, and the word ‘unprecedented’ is an overused one. It’s common to tell ourselves the problems we face are more significant than those faced in times past, but few things are ever actually new. In many regards, though, this time really is different.

For one, US bonds are off to their worst start in at least 100 years. Ten-year Treasury yields rose from 1.5% in December to 3% at the end of June. The interest rate increase on corporate bonds has been even more extreme, as high yield credit spreads (the additional interest required by investors to offset the risk of default) have jumped more than 300 basis points in 2022. In summary, the place investors have historically gone for safety has provided nothing of the kind, with the Aggregate Bond Index down more than 10% in the first half. 

As discussed earlier, the Federal Reserve intends to continue hiking rates for the rest of the year, which will be a headwind for bonds. However, if the market has already priced in the additional tightening, longer-term rates may have already seen their peak.

The National Federation of Independent Business releases a monthly report containing results of a survey of small business owners. For most of the last 5 years, those business owners have pointed to labor as the single most important problem facing their companies. The US labor force was tight before the pandemic struck, but now millions of workers have left the labor force, and employers are struggling to hire. There are 1.9 job openings for every unemployed person in America, a number unimaginable just two years ago.

This morning’s jobs report from the Bureau of Labor statistics confirmed the labor market strength, as the US economy added 379,000 jobs in June, and the U-6 underemployment rate dropped to 6.7%, the lowest ever for that data set.

A 2020 recession crushed domestic oil output. The Western world is rejecting Russian crude in response to the invasion of Ukraine. OPEC is unable to meet its production targets. Now, the world is facing an energy shortage, and Americans are paying more for a gallon of gas than ever before. Short of lifting the ban on Russian oil, there are no sustainable short-term solutions to the crisis. Saudi Arabia, OPEC’s de facto leader, has limited spare capacity to offset the production shortfalls of its peers. US producers are hesitant to ramp up spending and grow production after recent oil price collapses, and even if they did, it could take months to bring new wells online. In response, the administration has tapped the US Strategic Petroleum Reserve. The SPR was created in response to the 1973 energy crisis and has been used sparingly over the last 45 years. Until now.

With so many hard-to-solve problems on the supply side, any near-term correction in the energy shortage will likely have to come from a decline in demand.

Consumers are suffering from a bout of cognitive dissonance. They’re unhappy about inflation and concerned about the future, but they’re still spending money. Consumer sentiment, as measured by the University of Michigan, dropped to an all-time low in June. Retail sales, though, are still 8% higher than a year ago. The difference between what people are thinking and what they’re doing is nothing short of unprecedented.

Excess savings from pandemic stimulus payments have helped spending remain elevated even as prices rise. How long consumers are willing and able to pay up in the face of heightened anxiety remains to be seen.

Stocks may be off to their worst start to a year since 1970, but you can’t blame analyst earnings expectations for the weakness. Consensus forward earnings estimates for the S&P 500 still show expectations of above average profit growth over the next twelve months. Instead of analysts’ expectations, it’s investors’ confidence in those estimates that’s driving the market selloff. It’s normal for stock prices to lead earnings. It’s not normal for the two to diverge so dramatically. The forward price to earnings ratio of the S&P 500 has fallen from its 2020 high of 23x to less than 16x today, with most of the decline happening this year.

The valuation decline is extreme, and it might seem that either earnings estimates or market prices need correcting. But there’s no rule saying they must. With the S&P 500 now trading near 16x forward earnings, stocks are trading near their average valuation for the last 30 years.

So, if you feel that you’ve never seen markets move the way they’re moving, or if you’re conflicted about your financial position versus how you see the direction of the country or economy, you’re not alone. Take comfort in knowing that these times are unlike any other.

As an active manager, we feel exceptionally well suited for this moment. The environment is entirely without precedent - but this is not the first time our management style has met an unprecedented challenge. We’re confident that we can continue offering peace of mind and excellent risk-adjusted returns throughout this phase of slowing growth and increased market volatility.

Please let us know if you have any questions or would like to continue the conversation.

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

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