RIAs taking PPP loans is not so black and white

As the nation experiences widespread unrest and anxiety, a rift is also opening in the advisory industry. And like the protests erupting across the U.S., this division has no easy resolution.

When Congress enacted the Coronavirus Aid, Relief and Economic Security Act, known as the CARES Act, in March, its intent was to provide financial relief to small businesses and workers affected by the economic threat of COVID-19. At the time, we wondered if this unprecedented move would have any effect on the advisory industry and if firms would access the program. Some did. 

Since then, the market has roared back and efforts to slow the pandemic have shown promising results. Now, some in the industry are questioning whether it is appropriate for registered investment advisers with fee-based business models to accept forgivable loans made available through the Payroll Protection Program, also known as PPP. 

According to a survey of 181 financial advisers that InvestmentNews Research conducted in late May, about a quarter of firms that applied for the stimulus said the infusion was necessary immediately. But nearly two-thirds said they applied as a hedge against future economic uncertainty. 

In other words, they didn’t need the money. 

In a recent webinar covered by senior columnist Jeff Benjamin, industry leaders tore into one another over the propriety of RIAs accepting forgivable stimulus loans at the expense of small businesses that are struggling to survive. Accusations ranged from simple bad management to downright bad faith.

“Taking a government bailout just because it’s easy to get is immoral and unethical,” Daniel Wiener, chairman and co-founder of Adviser Investments, told Benjamin recently. Unlike hair salons and restaurants forced to close by the pandemic, Weiner explained, RIAs continue to charge fees based on the portfolio performance of their assets under management.

“It is a business model that should be able to accommodate both bull and bear markets,” he said. 

And there may be unintended consequence for firms that take the money.  

“Certain banks will look at this and say if a business took a PPP loan, they’re in distress and we can’t give them credit,” said Rick Dennen, chief executive of Oak Street Funding. But he doesn’t hold it against RIAs that took the loans, adding that if the loans are forgiven, the value of those firms will be enhanced. 

Indeed, the CARES Act was intended to help entrepreneurs and small-business owners maintain viability under truly extraordinary circumstances. While hair salons and restaurants clearly are among the most accessible and vital small businesses that need assistance, the small advice shop run by just one or several advisers is still a business — and it could need financial support, like so many other businesses affected by the pandemic.

As Emile Hallez reported, the vast majority of advisers who participated in the InvestmentNews Research survey said they had not applied for PPP loans, and only 20% said they had been approved for one.

When used appropriately, non-fee-based firms should not be ashamed to apply for and accept the PPP funds they need to stay in business and hold on to valued employees. Nor should they be tarred and feathered for admitting that they need assistance if they truly do.

Perhaps it’s a reach to call them “heroic,” as one well-known and very vocal industry member wrote in a blog post, but it wasn’t so long ago that some of the biggest and most successful companies in history needed to be saved from themselves in order to save our economy. And that “handout” helped to launch the greatest bull run in market history. 

The division in the advice community over this issue will be challenging to reconcile because it’s difficult for anyone to know what’s on another firm’s books. It’s easy to lob grenades at one another. What’s not so easy is to offer real solutions to real problems.