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Opinion: RIAs taking Paycheck Protection Program (PPP) loans fall well short of slam-dunk justifications in healthy industry -- especially if advisors leave them off the ADV

Dangled like free money and dressed up as AFLAC, the Payroll Protection loans triggered primal survival instincts and differing ideas of due care to clients, self and one's fellow man.

Friday, July 17, 2020 – 8:13 PM by Charles Paikert
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Charlie Paikert: In contrast to businesses that were forced to close their doors, there was never any decline in the demand for wealth management services.

Brooke's Note: How many times in the past decade have we seen some high priest of bank management waving his fist in the air about free markets, survival of the fittest and his long walk to school as a child only to be reminded bluntly by some pestilence of the press that he was first in line to take TARP (Troubled Asset Relief Program) money? It's amazing how manna from heaven turns out to be a product of the same old devil. At RIABiz, we have stayed away -- until now -- from the topic of Payroll Protection Program, or PPP, loans and let other publications cover it. As a business owner, I, too, was of two minds about it, and as an editor I wondered whether it was top-line news. But Charlie Paikert was not stuck in my relativistic world on this issue and in this tightly written, heartfelt piece, he shows full compassion for a very safety-in-numbers RIA contingent that erred on the side of taking the loans. But he also lets it be known he's not sure, in the black-and-white sense, that it was the right thing to do. He also wonders how, if RIAs are one payroll bridge loan from disaster, that that information isn't disclosed to the SEC in the next ADV.

I thought you guys were doing great.

I mean, that’s what nearly all of the RIA executives I’ve interviewed for the past three-and-a-half months have been telling me. 

Matt Crow, Mercer Capital
Matt Crow says PPP loans put advisors in an 'awkward position.' 

“We’re getting new clients, Charlie. Really.”

“We’re seeing organic growth.”

“I don’t know about other firms, but our business is up.”

Fantastic. Congratulations. Nice work in the middle of a global pandemic!

Then I saw the list of the more than 1,400 advisory firms that applied for loans from the government’s Paycheck Protection Program (PPP).

About two-thirds of financial firms borrowed between $150,000 and $350,000, according to Mercer Capital’s analysis of the SBA data. 

One-quarter of the companies received between $350,000 and $1 million; 134 firms got between $1 million and $2 million;  50 investment firms applied for loans larger than $2 million and only four got loans over $5 million.

Was there a mistake?

Large companies, not just RIAs, taking PPP loans have also been accused of stealing from the mouths of babes. 

Dan Weiner
Dan Wiener: 'That’s free money and it’s double-dipping.'

Quite a few of the firms in the Small Business Administration’s database told me they were doing great while applying for and receiving the super-low interest PPP loans (that can easily be forgiven) as mandated by the Congressional "CARES Act."

To get the loans, companies had to certify that the funds were “necessary to support ongoing operations.”

I’m not a lawyer, but doesn’t that mean without the money the business would be in danger of shutting down?

And didn’t you just tell me…

Defining a ‘viable business’

That’s where things get tricky.

Was any RIA who took the PPP money “a viable business in the first place?”

That’s the question Dan Wiener, chairman of Adviser Investments asked in a scathing op-ed in CityWire

Jamie McLaughlin
Jamie McLaughlin: 'The industry should have been better prepared for another market downturn.'

Unlike restaurants, retailers or other small businesses who were forced to close down, RIAs are still able to bill their clients and generate revenue and cash flow, Wiener pointed out.

As for access to capital to fund ongoing operations, Wiener questions the need for relying on the government to stay in business: “If you haven’t got a capital partner, or a bank, then you aren’t a viable business.”

Another RIA CEO, who spoke on condition of remaining anonymous, begged to differ.

This multi-billion dollar wealth management firm funds ongoing operations with working capital. When the pandemic lockdown began in March, the CEO said he was unable to get through to his bank — one of the largest in the country (he’s getting a new bank). 

The RIA wanted to make sure it had liquidity, the CEO says, and at the end of March, it was unclear that it would be able to obtain funds. 

The key phrase in the PPP requirements for a loan was the “uncertainty” surrounding a firm’s business, he said. The way the world looked at the end of the first quarter billing cycle in 2020 was, in fact, “the very definition of uncertainty,” the CEO argues.

Accepting the loan was not a sign of weakness, but a move to “make sure we would be strong,” he states. “We wanted to have reserves in place when we needed it to carry our business forward.

“To not make sure we had liquidity to get through a time like this wouldn’t be sound financial management.”

Do planners eat their own cooking?

Ah yes, financial planning.

After covering the financial advisory business for 15 years, I’d be a rich man if I had a dollar for every time I was told how important financial planning is and why that’s what advisors and wealth managers should be focusing on because, you know, asset management is just a commodity now.

So, shouldn’t firms that presumably told clients to have a six-month rainy day fund for emergencies have had one themselves?

Weiner thinks so.

“Wouldn’t it be hypocritical if, as a financial advisor, we had not taken that same advice [to set aside funds for emergencies] for our business?” he asks.

“Shouldn’t wealth managers be maintaining a robust balance sheet for just those periods when the economy, the markets or an exogenous event require emergency funding?”

Morgan Ranstrom worried about the ability to justify taking  a PPP loan.

Not so fast, counters the RIA CEO who accepted a PPP loan.

His firm’s advice to clients, especially those running a business is, Yes, of course, they should have reserves — and enough liquidity to ride out the storm: “That’s the essence of financial responsibility.”

The charges that wealth management firms weren’t prepared for an emergency are overblown, the CEO asserts.

“A global pandemic that stopped the economy in its tracks is a crisis of epic proportions. That’s a pretty extreme emergency, wouldn’t you say?”

Industry consultant Jamie McLaughlin points to the lessons RIAs learned — or should have learned — from the market crash in 2008 that kicked off the ensuing Great Recession.

“A lot of executives gave up their country club memberships and tightened their belts to keep staff on payroll,” McLaughlin says. “There’s a lot of uncertainty in this business. The industry should have been better prepared for another market downturn.”

Full disclosure?

Then there’s the matter of disclosure.

Richard Chen
Richard Chen notes the SEC doesn't require disclosure of PPP loans, but does provide guidance. 

Undoubtedly my disappointment at the widespread lack of RIAs’ disclosure to the public and their clients about taking PPP loans stems from my bias as a journalist who wants to know as much as possible about the subject I’m reporting on.

And after being told for so many years about the importance of transparency and how independent advisors, unlike the big bad brokers, are “conflict free,” it’s disappointing to see that so many advisors haven’t felt the need to disclose their PPP loans on their SEC Form ADV.

As fiduciaries, RIAs “must make full and fair disclosure to clients of all material facts relating to the advisory relationship,” the SEC states.

The agency doesn’t require advisory firms to disclose their PPP loans, says attorney Richard Chen, a New York-based attorney specializing in the financial services industry.

But it has provided guidance. 

“If the circumstances leading you to seek a PPP loan or other type of financial assistance constitute material facts relating to your advisory relationship with clients,” the SEC says, “it is the staff’s view that your firm should provide disclosure of, for example, the nature, amounts and effects of such assistance.”

For example: firms that require “such assistance to pay the salaries of employees who are primarily responsible for performing advisory functions for clients.”

Remember, a number of the firms who accepted the loans said they were gaining business and adding clients.

At a minimum, it puts advisors “in an awkward position if they are simultaneously telling clients that they are safe and well-managed while also accepting government aid,” said Matt Crow, president of valuation firm Mercer Capital.

More consequentially, Morgan Ranstrom, co-founder of Trailhead Planners, a Portland, Ore., RIA, told Wealth Management in late April that he was worried there was “a risk of perjury” if he applied of a PPP loan because he would have to “certify in good faith” that he need the loan to support Trailhead’s operations.

Stepping up to the plate…

Speaking of disclosure, hardly any RIA executives who have taken a loan have been willing to speak publicly.

Brent Brodeski says he took out a PPP loan, in part, to avoid layoffs in a faltering market. 

To his credit, Savant Capital Management CEO Brent Brodeski is one of the few executives who has. 

Savant has around 70 employees who are also shareholders and many had to take out loans to help finance Savant’s recent merger with Huber Financial Advisors,

Brodeski noted in a CityWire interview. The employees are dependent on Savant’s cash flow to pay down their loans, but that source of income took a big hit during the market downturn at the beginning of the pandemic.

That “unique nuance” justified Savant’s loan application, Brodeski argued, in addition to a fear that a faltering stock market could lead to layoffs.

While Brodeski’s concern for his employees’ stock holdings is commendable, it doesn’t meet the “payroll protection” goal of the government loan program, McLaughlin says.

“It’s worthy, but financing stock purchases is about a wealth opportunity, not protecting jobs,” he notes.


To be fair to large corporations, including RIAs, who took the loans, the initial $349 billion allocated in April went quickly, and many Mom and Pop businesses claimed they were unable to get loans that had been gobbled up by larger companies with more lawyers and better connections.

But Congress did approve an additional $310 billion for a PPP extension through Aug 8, and the SBA says money is still available.

Companies receiving loans only have to pay 1% interest and have up to two years to repay the government. But if they spend 60% of the funds on salaries within 24 weeks, the loan may be completely forgiven.

“That’s free money and it’s double-dipping,” Dan Weiner, chairman of Adviser Investments, told me. “They’re still charging their clients a fee and they’re also getting some of the clients’ tax dollars.”

There’s a reason the government made the loans widely available and hassle-free, the counter-argument runs: a faltering economy suddenly slammed by a global pandemic desperately needed — and still needs — as much liquidity as possible.

And hey, I get it: advisory firms are, at the end of the day, in a bottom-line business.

“Turning down low-cost working capital doesn’t seem prudent to me under any circumstances,” Mercer Capital’s Crow says.


“Firms can always pay the money back if they don’t need it, and if markets tank next week and RIA revenues plummet, the extra capital will do what it was intended to do: keep the workforce in place until conditions improve.”

Fair enough.

But in contrast to businesses that were forced to close their doors, there was never any decline in the demand for wealth management services.  

The industry loves to brag to PE firms and other investors about its recurring fees based on assets under management. While a (short-lived) market downturn may have dented the amount of those fees, they’ve certainly kept recurring, and quite lucratively at that.

As McLaughlin put it: “This has not been a glorious chapter in the history of the RIA industry.”

Matt Crow

Matt Crow

July 18, 2020 — 2:39 PM
Let me rush in here (where angels fear to tread). Having read the polarized commentary on this topic, I doubt anyone’s going to change their mind. It may be that, in hindsight, the typical RIA didn’t need PPP. So far, that appears to be the case. But the criticism of firms that took it is overkill. In most environments, it is safe to say that financial markets are leveraged to the economy, and investment management firms are leveraged to financial markets. So if the economy is in trouble, a bear market is likely, and RIA margins at risk of going negative. We see financials on a lot of RIAs. It’s not unusual for 65 cents of every dollar of RIA revenue to go to compensation, 20 cents to non-personnel costs (rent and such), leaving 25 cents for profit margins. A 25% decline in AUM wipes out profitability, and a steeper decline results in losses. In March, when firms applied for PPP, a significant decline in equity markets was underway, and if smart people like me had predicted the speed of the snap back in valuations, I wouldn’t be commenting on an RIABiz article on a Saturday morning. Some think financial planning types should have been better prepared for the risk. Okay. But very, very few RIAs keep more than a few months of working capital on balance sheets (we’ve only seen a handful over the years). And asset light businesses aren’t very bankable - it’s hard to leverage a workforce intangible and goodwill. So, they aren’t sitting on lots of reserves. Should they be? Why aren’t restaurants and florists and other small businesses? Because most small businesses pay out what they make to attract the talent it takes to be in business. I’m involved with four different businesses that applied for and got PPP - a retailer, a restaurant, a retirement community, and a professional service firm. Those loans ranged from $60K to $3MM. But despite the range of businesses, by type and scale, my thinking in applying for PPP for each one was the same: heading into the abyss of a public health crisis that threatened every institution I could name, I wanted every resource available to fight for survival. At this point, one of those four businesses is thriving, one is okay, one is struggling, and one is closed (hopefully only temporarily). And the pandemic is getting worse in the U.S. - so we still don’t know where this will take us. So I don’t begrudge the RIAs that applied for PPP, and I don’t understand the energy that others are putting into the criticism.
Bob Kargenian

Bob Kargenian

July 18, 2020 — 7:27 PM
With all due respect, I don't think critical comments are overkill at all. You can see my entire take on the subject in the attached link from Investment News, found here---https://www.investmentnews.com/where-are-customers-yachts-2020-version-194935. I believe the reason the vast majority of RIA firms who took loans don't want to speak on the record about it is because they realize they are on the wrong side of history. RIA businesses weren't interrupted. Revenue did not cease. How interesting it is that many of these firms, growing at double-digit rates for years, with hundreds of millions of dollars of AUM (and even billions), need help to make payroll or rent after a 12-15% decline in portfolios? I'm sorry, but we don't get to enjoy all the fruits of running a profitable practice and then have to grab free money from taxpayers because we're not walking the walk. Again, as I closed in my piece, this is not a legal issue. This is a moral and ethical one for our profession.
Scott Salaske

Scott Salaske

July 18, 2020 — 7:57 PM
The vast majority of RIA's who took PPP Loans simply saw free money (loan forgiveness) & started slurping up PPP as fast as they could - just like they were slurping up those ~1% AUM fees (and happily doing so) during one of the greatest bull markets in the proceeding ~10 yrs. Pure greed!
Daniel J McCarron

Daniel J McCarron

July 19, 2020 — 12:18 AM
On May 26 I wrote the following... It seems like every day there is another RIA taking a PPP loan. There is nothing illegal about RIAs taking PPP. Of course, every RIA that takes PPP will say they did it within the parameters of the program. What do we expect them to say? No one is questioning legality. Most SEC-registered investment advisers are small businesses. In 2018, 57% of advisory firms reported that they employ 10 or fewer employees. 87 % reported employing 50 or fewer.* Our local restaurants are also small businesses. My local restaurant set up a GoFundMe page for wait staff, who feed their family on tips. For these small businesses, PPP alone does not cut it. Are RIAs setting up GoFundMe’s? Do they live on tips? (Stock tips, maybe). RIAs are taking PPP because its there, not because they need it. Let’s face it, other than references in legal agreements, no one was prepared for the pandemic. Should we feel sorry for RIAs because this is a “hard environment”? Please. Well-managed RIAs must be better prepared for a rainy day. Especially since this is a cash flow business. If you have thin margins that is your problem, not your clients. If you are an RIA and AUM drops by 30% you must be prepared for that. What if there is a war or other major geopolitical event and my AUM drops 30%? Should I expect a forgivable loan? Do I want an adviser that is unprepared? What does that say about their business? Having worked with RIAs for 20 years I have a tremendous amount of respect for the outstanding professionals in this industry. I imagine that there may be some circumstances where it is appropriate for a small RIA to take PPP. But if you have Billions in AUM, Millions in Revenue, and Millions in Operating Profit, pass on the loan. It is not right. Especially if you plan on using it to pay for non-essential services. Do the right thing. Save the PPP for real small businesses in your town or neighborhood that deserve it. And leave them a nice tip. Well-managed RIAs will win, others will lose. That’s capitalism. * Source 2018 Investment Adviser Association Evolution Revolution Report.
Jeff Spears

Jeff Spears

July 20, 2020 — 2:01 PM
One PPP loan participant I talked to received the loan but recently fired two professionals. That definitely doesn’t feel right.


July 20, 2020 — 7:42 PM
I just spoke with a friend who took out a PPP loan for their company, which is being sold. The otherwise benign lawyers for the buyer of the company came down hard on the PPP loan and insisted it be paid back ASAP.
Randy Bullard

Randy Bullard

July 21, 2020 — 1:48 PM
Josh Brown had a long interview with Ron Carson in his podcast where they talked about their relative firm's PPP loans and the thinking behind it. Those firms (and others) aren't just RIAs. They're diversified businesses with media interests, conferences and associated staff/cost that were/are crushed by Covid-19. Certainly in Carson's case he has a large staff that logically could/should be let go as a function of Covid-19, which he was able to retain because the government set him up to do it. It's a valid argument that this is exactly what the program was designed to do - retain staff. I don't think it's nearly as black and white as a lot of people make it out to be.
WM Associate

WM Associate

July 22, 2020 — 1:44 PM
I work for a small firm who took the free money (and yes, that is what is was not matter now you try to spin it. I know the revenues because I directly see the numbers. He didn't need it. It was free money that you can easily justify in keeping. His revenue was down in April maybe 5% and quickly rebounded the next month and he has plenty of personal and business reserves. If he really needed it, why was he gathering as much information as he could to inflate the amount he needed? Why did he throw a temper tantrum when he did make it in the first wave of free money? His revenue for 2020 is going to be more than it was for 2019 going at its' current rate. He never gives a bonus especially for employees who had spouses who were out of work. He rakes in over 5-6 figures a month. Give me a break. Those who try to spin it to justify taking free money is no different from those who take advantage of the welfare system. Government waves free money in front of your face and lets see who runs up to the trough first. If you really want to take the high ground, give it back. I won't wait to see who does that.


July 25, 2020 — 12:33 PM
I totally agree with Matt Crow - everyone is a genius in hindsight (especially on the internet) - March 2020 many firms were looking into the abyss with markets down 35% in a record three weeks with no end in sight- no one expected that all would turn out ok. And it's interesting how people love to make severe judgement calls on firms and people. Yes, of course, there are always a few people that don't have good intentions unfortunately, however, many firms are made up of hard-working, great-intentioned people - that are not just trying to "spin-it". Give ME a break.
WM Associate

WM Associate

July 25, 2020 — 6:19 PM
Always love it when the temper tantrums in the proverbial sandbox begin. If you were following the media doomsday pundits, then yes, you thought the world was coming to an end. If instead, you are a student of the market, you had confidence and don’t panic like you tell your clients not to do. And spare me the “judgement” talk. Won’t work with me. Those that have something to defend end up being the most hostile and angry.

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