Luke F. Delorme: Should financial advisers get PPP loans?
During the height of the COVID-19 crisis, the government rushed through a bill to provide loans to small businesses. The loans, furnished through the Paycheck Protection Program, were meant to provide a short-term bridge for small-business owners to retain employees on their payroll as their revenues collapsed.
The program based potential loan amounts on how many employees earned less than $100,000 per year. In some cases, these loans could be paid back with minimal or zero interest, or potentially even be forgiven under certain circumstances. This measure has undoubtedly helped keep many small businesses and their employees afloat.
According to a recent report in Financial Advisor Magazine, more than 1,400 registered investment advisers took PPP loans, including 28 of the largest 100 advisory firms in the country, whose assets under management reportedly range from $1.8 billion to $12.4 billion. The Small Business Administration website provides data regarding who took these loans. Several of these larger financial firms have come under scrutiny for taking these loans, especially those that had seemingly adequate cash reserves to weather the storm.
Typically, a large part of advisory firms' revenue is tied to stock market performance. When the market does well, firms earn more revenue. But, they also can see a sharp drop in revenue when the market does poorly. Critics are crying foul because, in their view, by taking the PPP loans, advisers are trying to have it both ways; they want to be compensated for an unexpected market collapse but still benefit from any recovery.
Some advisers are starting to pay back the loans now that the data has been released. For an industry trying to bolster its ongoing image problem, should they have thought twice about taking these loans in the first place? How do they look if they don't even have the emergency reserves to cover a few months of expenses?
Many RIAs are defending themselves with a narrative that they never knew how bad it was going to get, which is true. Though the market has since recovered, recovery was far from certain at the time the PPP loans became available. Some claim that the market decline was a result of an economic coma induced through government-mandated shutdowns, so it is justifiable to accept these loans made possible through the government.
Both arguments hold merit.
At the RIA I work for, we looked at the possibility of taking one of these loans. Although it may have been financially beneficial, we ultimately decided that it was unnecessary for our business. Although our assets under management declined during the first quarter, revenue was enough to pay salaries. Besides, we had always maintained a very liquid balance sheet with plenty of cash, designed to accommodate extraordinary events.
I don't fault anyone for being nervous about their small business and taking a loan, although I do wonder whether their customers will be so forgiving. Many may well consider it unethical. This episode is unlikely to bolster the dim view of the industry held by many.
At the very least, certain firms may be required to promptly provide important disclosures to their clients and prospective clients, as RIAs must disclose "any financial condition that is reasonably likely to impair its ability to meet contractual commitments to its clients." Among other PPP loan criteria, applicants were required to attest that "Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant."
It's an issue the Securities and Exchange Commission is likely to carefully monitor and enforce.
Luke F. Delorme is the director of financial planning at American Investment Services Inc. in Great Barrington.
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