Three weeks ago I wrote in these pages that I believed RIAs should think twice before taking Paycheck Protection Program loans from the Small Business Administration. Unfortunately, it’s now becoming clear that RIAs large and small did not heed those words and have taken advantage of the program and ‘borrowed’ – I use the word advisedly – millions and millions of dollars that might have been better used by small businesses whose doors are now closed.
The questions that should be asked of any advisory firm that took PPP money go to the heart of the matter; whether the business in question was a viable business in the first place.
First, are you still able to bill your clients? I’ll bet you are, unlike the restaurants, the retail shops, the small manufacturers and other businesses that simply had to shut their doors and stop all work. If you are still billing then you don’t need a PPP loan, or you simply aren’t running a viable business.
What makes you viable? Well, how about access to capital? If you are in business and still financing it with credit cards that is not a viable business strategy and you shouldn’t be supporting it now with taxpayer funds.
Best practices suggest that you establish a line of credit with a bank or some other lender of good standing. Maybe you’re a breakaway. Well, the folks who set you up in business should either have provided you with capital or showed you how to get it without grabbing at bailouts.
If you haven’t got a capital partner or a bank then you aren’t a viable business. Since it’s my money you’re borrowing through the PPP I’m not inclined to lend you money for your bailout. And if I was a client, I certainly wouldn’t want to entrust you with my hard-earned savings as a financial advisor.
But let’s get back to whether you were running a viable business in the first place. Do you have cash in the bank? A strong and viable business has some money squirreled away for the unexpected, just as our clients have money in a ‘rainy day’ account for just these kinds of events and times. If you weren’t following your own advice – eating your own cooking – then you are not a viable business and again, I don’t want to bail you out with my tax dollars.
Having reviewed the disclosure documents of some two dozen RIAs from Boston to Atlanta to Texas to California who’ve taken PPP loans, I’m shocked that these companies apparently didn’t have a viable business model.
It’s clear that few, if any, firms are intending to pay these loans back, but are instead hoping for forgiveness. How do I know? While language about forgiveness has found its way into virtually every Form ADV I reviewed, I saw hardly a mention of a firm’s intent to repay.
In fact, some of the rationales for taking the loans, including the oft-used phrases like ‘abundance of caution’ and ‘economic uncertainty’ seemed to have been written by legal teams rather than the advisors themselves. I am not surprised.
More importantly, the level of obfuscation and misinformation I’ve read in the press and heard in the media is appalling.
For instance, it is not true that unlike RIAs with 30, 40 or more employees, most $1bn-plus RIAs are breakaway brokers of three or four advisors with a couple of assistants and hence have no need for a loan. That’s nonsense.
And that’s only the tip of the excuses iceberg. I’ll give you more in a second but first, let me give you some data that I gathered on a random sample of 19 RIAs reporting AUM of more than $1bn who’ve taken PPP loans. While eight of the firms did not report the size of their loans, 11 did. Average AUM for those 11 firms: $2.6bn. Do the math. Conservatively these companies are billing between $13m and $26m and yet the average loan taken was $701,245. Really? I’m surprised these companies were in such dire straits.
And not to let the non-disclosers off the hook. Those who didn’t have the guts to admit what they’d taken in PPP money averaged $2.4bn in AUM. These are not small businesses.
Another untruth: Your RIA is not unique and deserving of a loan simply because you have a separate team to run conferences, tape podcasts or film videos for blogposts. At my company, Adviser Investments, we have teams of traders, operations specialists, information technology experts, marketing pros, research analysts and the like. They aren’t advisors or ‘profit centers’ but they are key to our success as a business and just as critical.
To claim that you are somehow unique because everyone on your staff isn’t ‘smiling and dialing,’ as I heard one advisor say recently – well, aside from being inaccurate it doesn’t make you more deserving nor does it exempt you from being scrutinized for taking a handout.
I’ve also heard some advisors claim that the intent all along has been to pay these loans back; that they are only an insurance policy. Funny, but that’s not what I read or heard in the media, though once called out some advisors have indeed done a mea culpa and sought salvation, or at least reputational repair.
Oh – and no, it’s not true that PPP loans aren’t taxpayer-funded loans or bailouts. Show me a banker who willingly lends money over an 18-month or 2-year timeframe for just 1% and well, as we say where I come from, there’s a bridge I’d happily sell you.
I’ve got a suggestion. If you’re not going to simply return that PPP loan today (which would be the right thing to do) then revise your ADV one more time, tell your clients just how much money you took and what your plans are for repayment, rather than forgiveness.
I get it. Sending the money back now kind of makes a mockery of your claim that you needed it in the first place. But if you don’t do it now it’s going to look even worse when the Congressional hearings begin. And they will.