When it comes to prudent financial management, even novice investors understand the concept of saving for a rainy day. In fact best practices according to the Financial Planning Association dictate that a minimum of three months— and preferably at least six months— of income should be set aside for emergencies.
So it comes as no small surprise to find out that when the Small Business Administration and Department of Treasury released data on companies that applied for and received loans exceeding $150,000 under the so called Paycheck Protection Program, more than a thousand trusted financial advisors were listed among the recipients of these emergency forgivable loans.
In fact, according to Financial Advisor Magazine, more than 1,400 registered investment advisors (RIAs) took PPP loans, including 28 that are members of the top 100 advisory firms according to RIA Channel, a contributor to Forbes. These firms have assets under management ranging from $1.8 billion to $12.4 billion.
Among the largest RIAs, the most common loan amount, taken by a dozen firms, was between $350,000 and $1 million. RIAs that took this amount include Minneapolis-based Sawtooth Solutions, Charlotte, NC’s Independent Advisor Alliance and Minneapolis-based Focus Financial Network. Another 10 advisors, including Lake Mary, Florida-based LAMCO, Ridgeland, Mississippi’s Smith Shellnut Wilson and Chicago’s InterOcean Capital, received loans ranging from $150,000 to $350,000 and four firms, including Morristown, New Jersey’s RegentAtlantic and Atlanta’s SignatureFD received loans between $1 million and $2 million. One firm, $11.9 billion Carson Wealth of Omaha, led by brash founder Ron Carson, received a loan of $2 million to $5 million. Washington DC’s Steward Partners, a firm with 20 offices and $7 billion under management, received a loan from $5 million to $10 million. SVA Wealth Management, based in Madison, Wisconsin, took two separate loans for different parts of the business, $2 million to $5 million for SVA Certified Public Accountants and $1 million to $2 million for SVA Consulting. 9 [See table ]
The loan program was originally part of the $2 trillion CARES or Coronavirus Aid Relief and Economic Security Act, which Congress passed in response to nation’s economic shut down in March. The loans come with favorable terms including a 1% interest rate and a six-month grace period for payments. Additionally, loan recipients will have the opportunity to apply for loan forgiveness in the future.
Given that wealth management is known to be one of the highest margin, most profitable businesses in all financial services, and the fact that the need for an emergency loan would seem to fly in the face of what would otherwise be considered prudent cash management, PPP loans have created a stir within the industry. This has been compounded by the fact that financial markets and asset values have rebounded and remained surprisingly resilient despite the economic woes brought on by the pandemic.
“Some firms cited an abundance of caution and economic uncertainty, but there is never economic or market certainty in wealth management, so why would that be a rationale for stepping in and taking money that really ought to go to butchers, bakers and candlestick makers,” says Daniel Wiener, chairman of Needham, Massachusetts-based Adviser Investments with 91 employees and $5.8 billion in assets. Adviser Investments was approved for $2.2 million in PPP loans but turned it down.
“I know that some are going to say there's money left in the program, but part of the issue is all these big guys who didn't deserve the money got in line and inundated the banks with applications and a lot of small businesses don't have time to keep hitting refresh on their browsers, so at some point they gave up.”
One advisor that was able to tap the government for a loan was Ritholtz Wealth Management founded by cable television pundits, Josh Brown and Barry Ritholz. The duo announced their PPP loan of $350,000 to $1 million on Brown’s blog, The Reformed Broker. Their New York-based firm has nearly $1.3 billion in assets and a staff of 30.
“When we applied for the loan in March, it looked like the world was coming to an end,” argues Ritholtz. Defending his decision at the time, he said that an 18% quarter over quarter decrease was not the concern, his firm is ready to handle that type of volatility and saw similar in the fourth quarter of 2018.
“In finance, you know your compensation is going to go up and down with the market,” he says. His concern was around the worst-case scenario projections that the firm was grappling with, including an economic downturn stretching into 2021 and millions of deaths across the United States.
Unlike most other advisors Ritholtz and Brown are guilty of adding staff to man their growing needs beyond simply managing money. The duo have an events and website staff to manage their public profile. Ritholtz now says that it was those jobs were under threat if the market failed to rebound. He claims that when his accountant alerted him to the possibility of layoffs, the decision to apply for the loan was preferable.
Facing a public relations and social media backlash, Ritholtz and Brown now say they are returning their PPP loan and have instead, opened up a line of credit, according to the aforementioned blog.
Other are also having second thoughts about whether they truly needed government loans to survive the pandemic.
Stewart Mather is the founding partner of The Mather Group, a Chicago-based RIA with 72 employees and $3.9 billion in assets under management. His firm applied for and later received a PPP loan, but he eventually had a change of heart. Mather says that a “light bulb” went off when he saw that Harvard University and the Los Angeles Lakers had returned their loans following much public uproar.
“It just really made me recognize there's a lot of other businesses out there that were in need of the loans more than us. So we quickly repaid the loan and that was that,” he adds.
When looking at the requirements for the loan program, Gary Ribe of Jersey City, New Jersey-based Accretive Wealth Partners, had trouble getting past a statement that required him to attest that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Accretive, has just three employees and $118 million in assets under management. Ribe says that he couldn’t honestly attest that his firm’s financial situation applied, so he didn't apply.
Wiener adds that the SEC Form ADV, which is filled out by every registered investment advisor, requires a statement saying that there are no financial issues that would impair the ability to provide service to clients. He maintains that firms should be squaring what they are telling clients with their actions as many advisors continue to tell clients there has been no meaningful disruption to business based on Covid-19.
“What happened was, they saw that revenues were going to go down because assets under management were going to go down, but that's the business,” he adds. “We're in a business where our revenues fluctuate with the market.”
But Wiener, whose fee-only approach specializes in investing client accounts in no load funds from companies like Vanguard, may be a in the minority among the scores of advisors that saw the government’s program as “free” money.
“In the middle of a financial tornado, if a company doesn't take advantage of a very rapid credit facility, you’re a fucking idiot,” says one big RIA, who took millions in PPP loans according to the SBA but declined to speak to Forbes on the record, adding that the government should have put more restrictions on how and to who the funds were given.
James Angel, a professor of finance at the Georgetown University McDonough School of Business, is not at all surprised that the RIAs to jump after these loans.
“We want RIAs to be financially sophisticated, to be following the details of current financial legislation so the fact that they jumped on the free money basically shows that they are on top of their game,” he says, likening advisors actions to taking advantage of tax loopholes.
However, Angel said that he expects many RIAs to return the funds in the near term in order to recapture moral high ground that may have been lost as they did not face the same type of disruption in working from home as restaurants.
Disclosure: Forbes Media LLC confirmed on July 6, 2020 that it received a Paycheck Protection Program loan of $5 million to $10 million on April 15.
This article originally appeared on Forbes.
