Opinion: RIAs taking Paycheck Protection Program (PPP) loans fall well short of slam-dunk justifications in healthy industry -- especially if advisors leave them off the ADV

Let me rush in here (where angels fear to tread). Having read the polarized commentary on this topic, I doubt anyone’s going to change their mind. It may be that, in hindsight, the typical RIA didn’t need PPP. So far, that appears to be the case. But the criticism of firms that took it is overkill. In most environments, it is safe to say that financial markets are leveraged to the economy, and investment management firms are leveraged to financial markets. So if the economy is in trouble, a bear market is likely, and RIA margins at risk of going negative. We see financials on a lot of RIAs. It’s not unusual for 65 cents of every dollar of RIA revenue to go to compensation, 20 cents to non-personnel costs (rent and such), leaving 25 cents for profit margins. A 25% decline in AUM wipes out profitability, and a steeper decline results in losses. In March, when firms applied for PPP, a significant decline in equity markets was underway, and if smart people like me had predicted the speed of the snap back in valuations, I wouldn’t be commenting on an RIABiz article on a Saturday morning. Some think financial planning types should have been better prepared for the risk. Okay. But very, very few RIAs keep more than a few months of working capital on balance sheets (we’ve only seen a handful over the years). And asset light businesses aren’t very bankable - it’s hard to leverage a workforce intangible and goodwill. So, they aren’t sitting on lots of reserves. Should they be? Why aren’t restaurants and florists and other small businesses? Because most small businesses pay out what they make to attract the talent it takes to be in business. I’m involved with four different businesses that applied for and got PPP - a retailer, a restaurant, a retirement community, and a professional service firm. Those loans ranged from $60K to $3MM. But despite the range of businesses, by type and scale, my thinking in applying for PPP for each one was the same: heading into the abyss of a public health crisis that threatened every institution I could name, I wanted every resource available to fight for survival. At this point, one of those four businesses is thriving, one is okay, one is struggling, and one is closed (hopefully only temporarily). And the pandemic is getting worse in the U.S. - so we still don’t know where this will take us. So I don’t begrudge the RIAs that applied for PPP, and I don’t understand the energy that others are putting into the criticism.

With all due respect, I don't think critical comments are overkill at all. You can see my entire take on the subject in the attached link from Investment News, found here---https://www.investmentnews.com/where-are-customers-yachts-2020-version-194935. I believe the reason the vast majority of RIA firms who took loans don't want to speak on the record about it is because they realize they are on the wrong side of history. RIA businesses weren't interrupted. Revenue did not cease. How interesting it is that many of these firms, growing at double-digit rates for years, with hundreds of millions of dollars of AUM (and even billions), need help to make payroll or rent after a 12-15% decline in portfolios? I'm sorry, but we don't get to enjoy all the fruits of running a profitable practice and then have to grab free money from taxpayers because we're not walking the walk. Again, as I closed in my piece, this is not a legal issue. This is a moral and ethical one for our profession.

The vast majority of RIA's who took PPP Loans simply saw free money (loan forgiveness) & started slurping up PPP as fast as they could - just like they were slurping up those ~1% AUM fees (and happily doing so) during one of the greatest bull markets in the proceeding ~10 yrs. Pure greed!

On May 26 I wrote the following... It seems like every day there is another RIA taking a PPP loan. There is nothing illegal about RIAs taking PPP. Of course, every RIA that takes PPP will say they did it within the parameters of the program. What do we expect them to say? No one is questioning legality. Most SEC-registered investment advisers are small businesses. In 2018, 57% of advisory firms reported that they employ 10 or fewer employees. 87 % reported employing 50 or fewer.* Our local restaurants are also small businesses. My local restaurant set up a GoFundMe page for wait staff, who feed their family on tips. For these small businesses, PPP alone does not cut it. Are RIAs setting up GoFundMe’s? Do they live on tips? (Stock tips, maybe). RIAs are taking PPP because its there, not because they need it. Let’s face it, other than references in legal agreements, no one was prepared for the pandemic. Should we feel sorry for RIAs because this is a “hard environment”? Please. Well-managed RIAs must be better prepared for a rainy day. Especially since this is a cash flow business. If you have thin margins that is your problem, not your clients. If you are an RIA and AUM drops by 30% you must be prepared for that. What if there is a war or other major geopolitical event and my AUM drops 30%? Should I expect a forgivable loan? Do I want an adviser that is unprepared? What does that say about their business? Having worked with RIAs for 20 years I have a tremendous amount of respect for the outstanding professionals in this industry. I imagine that there may be some circumstances where it is appropriate for a small RIA to take PPP. But if you have Billions in AUM, Millions in Revenue, and Millions in Operating Profit, pass on the loan. It is not right. Especially if you plan on using it to pay for non-essential services. Do the right thing. Save the PPP for real small businesses in your town or neighborhood that deserve it. And leave them a nice tip. Well-managed RIAs will win, others will lose. That’s capitalism. * Source 2018 Investment Adviser Association Evolution Revolution Report.

One PPP loan participant I talked to received the loan but recently fired two professionals. That definitely doesn’t feel right.

I just spoke with a friend who took out a PPP loan for their company, which is being sold. The otherwise benign lawyers for the buyer of the company came down hard on the PPP loan and insisted it be paid back ASAP.

Josh Brown had a long interview with Ron Carson in his podcast where they talked about their relative firm's PPP loans and the thinking behind it. Those firms (and others) aren't just RIAs. They're diversified businesses with media interests, conferences and associated staff/cost that were/are crushed by Covid-19. Certainly in Carson's case he has a large staff that logically could/should be let go as a function of Covid-19, which he was able to retain because the government set him up to do it. It's a valid argument that this is exactly what the program was designed to do - retain staff. I don't think it's nearly as black and white as a lot of people make it out to be.

I work for a small firm who took the free money (and yes, that is what is was not matter now you try to spin it. I know the revenues because I directly see the numbers. He didn't need it. It was free money that you can easily justify in keeping. His revenue was down in April maybe 5% and quickly rebounded the next month and he has plenty of personal and business reserves. If he really needed it, why was he gathering as much information as he could to inflate the amount he needed? Why did he throw a temper tantrum when he did make it in the first wave of free money? His revenue for 2020 is going to be more than it was for 2019 going at its' current rate. He never gives a bonus especially for employees who had spouses who were out of work. He rakes in over 5-6 figures a month. Give me a break. Those who try to spin it to justify taking free money is no different from those who take advantage of the welfare system. Government waves free money in front of your face and lets see who runs up to the trough first. If you really want to take the high ground, give it back. I won't wait to see who does that.

I totally agree with Matt Crow - everyone is a genius in hindsight (especially on the internet) - March 2020 many firms were looking into the abyss with markets down 35% in a record three weeks with no end in sight- no one expected that all would turn out ok. And it's interesting how people love to make severe judgement calls on firms and people. Yes, of course, there are always a few people that don't have good intentions unfortunately, however, many firms are made up of hard-working, great-intentioned people - that are not just trying to "spin-it". Give ME a break.

Always love it when the temper tantrums in the proverbial sandbox begin. If you were following the media doomsday pundits, then yes, you thought the world was coming to an end. If instead, you are a student of the market, you had confidence and don’t panic like you tell your clients not to do. And spare me the “judgement” talk. Won’t work with me. Those that have something to defend end up being the most hostile and angry.