Dozens of planning and advisory firms soaked up millions in emergency federal aid. No shame there. The hard part is figuring out how to move forward.
A few months ago, the market was crashing and it felt like the end of the world. Nobody knew how bad it would get.
The government printed money to give employers a reason not to lay everyone off immediately. Roughly 5 million business entities filled out the paperwork and took the cash.
Quite a few of those businesses were extremely successful before the pandemic. Many are doing just as well today.
Now that the names are a matter of public record, the decision to take the money is part of the public conversation.
Your clients, prospects, competitors and potential partners can see what you did and roughly how much you asked for to supplement payroll.
When you’ve got deeper ambitions than survival, salvation can start to look like a potential nightmare.
After all, people can’t help but notice that someone like Kanye West applied for at least $2 million from the program to recapitalize a business that does $1.5 billion a year in gross sales.
Serious or not, he has presidential ambitions. Does it count against him for taking money allocated to help small businesses with no other source of emergency funding?
Members of Congress took the loans for their family businesses. Publicly traded companies took the money. Ivy League schools took the money.
Some of the big ones have been shamed for what amounts to taking food from the kiddie table. Several have given the money back.
Now apply that logic to the advisory industry.
No “name and shame” here
Go through the list and a lot of financial intermediaries took PPP money. They range from top-tier advisory networks to solo planning offices.
We could name a few here, but with every muckraker around already poring over the file there isn’t much point.
The people who participated are on the books now. The government knows who they are and what they said on their applications.
The public is in the process of finding out now. And with the market at least back in record territory, the entire urgency behind taking the money has evaporated.
AUM has recovered. AUM-based businesses are as vibrant as ever, at least on paper. Cash is flowing with every quarterly report.
Unless something has gone wrong with the underlying business over the last few months, people who could make payroll six months ago can make it now. The crisis is over, at least as far as that first shock goes.
Most of the loans were small. On average, people in the financial sector got $72,000, which is roughly enough to replace one quarter’s 1% fee (annualized) on $29 million in lost assets.
Since the market storm knocked a full 20% out of the market by the end of March, I think it’s a fair bet that every firm managing more than $150 million took that kind of hit.
Those firms may not sound like small businesses to the casual observer, but they usually are. It takes a lot more client money than that to turn into big revenue much less significant profitability.
When a firm gets to that scale, it’s often because of either a single mammoth account or a combination of multiple individual advisors operating under the same umbrella.
A lot of those umbrella firms are more like franchise operations than anything else. They’re a collection of independent units that behave like small businesses.
Some of the people who took PPP loans were those umbrella firms acting proactively on behalf of their affiliates. Others were individual affiliates of those networks taking the initiative themselves.
Like we tell our clients, you always know your own sense of how risky the environment is and how much cushion you need.
Every principal has a gut sense of how robust the business is under current conditions. Can you cover payroll? How long will your reserves last?
Some firms were overextended on expansion projects, buying new technology, staffing up or launching expensive marketing programs. Others had plenty of cash in reserve to ride out the storm.
Succession planning is more important
Most advisors didn’t reach for the money. Their risk antennae simply didn’t quiver in the storm.
Maybe if the market had remained depressed until this point, the situation would be very different today. There’s a big difference between a one-quarter lurch in AUM-linked income and an extended step back.
But we didn’t know what was going to happen back in March. Probably a few people simply saw a chance to grab free money while the federal window was open. Others saw a potential threat and moved to cover it.
I’m not going to say which motive ruled the day firm by firm. Taking advantage of the government is not a good look. Utilizing available resources to make sure your services continue uninterrupted for your clients through a crisis is.
I think a lot of people were thinking in terms of risk mitigation. That’s worth telling your clients.
And of course that’s assuming your clients care. The CFP Board of Standards now suggests that fiduciaries need to disclose PPP loans as a material fact relating to the advisory relationship.
There are a lot of material facts tied up in the relationship that your clients don’t care about. You pay your people. You make budget decisions. They all go into the sustainability of your practice.
Your clients don’t care about your profit margins. If they wanted to know, they’d ask. They know how much you charge them and if they dig, they can find out how many other clients you have.
But that’s a lot of work for the average client. This isn’t Kanye’s world, dominated by hype and public goodwill. There isn’t a lot of illusion going on in our part of the world.
What your clients care about is whether your services will be available in a crisis. That’s a succession planning conversation, a disaster planning conversation.
They want to know how well you’ll hold up in various scenarios. That’s where PPP money comes in. And it’s all they really care about.
If you're worried about them being worried, these are still loans. Those who don't need the money after all can pay it back.
