Each day, news trickles out about another mid- to large-sized RIA firm that applied for and accepted a loan as part of the Paycheck Protection Program (PPP) backed by the Small Business Administration. In some reports, the news is passed along in a scandalous tone; after all, how could a billion-dollar wealth management firm need to borrow money? In other media coverage, it’s simply reported in the same tone you’d expect from coverage about a new office opening: relevant but not incendiary.
Truth is, there is currently little wiggle room in the narrative around the PPP lending program for participation to be seen as a good thing, unless your business was fully on life support. Taking out a loan to keep your company afloat isn’t exactly a calling card or bragging point for any business owner. But as I think about the issue from the perspective of a fiduciary-minded, “in-it-for-the-right-reasons” RIA firm owner, I start to think that many of these firms using PPP loans should be applauded, not questioned.
Avoid blanket approach to judgment
Hang with me on this. There is a morality play in motion now where some firms who applied for PPP loan money have either refused to take the amount they were granted or have decided to return the money, because other businesses need it more. I’d caution the industry against taking a blanket approach to judgment on those that refuse the PPP loans or take the PPP funding made available.
Fundamentally, most RIA firms are small businesses. In most cases, they employ between a handful and a few dozen employees. Very often, their offices don’t occupy prime real estate. For most RIA firm founders, growing a firm organically to $2 billion in assets under management (AUM) is a far-off dream — an entire career’s worth of effort. At $2 billion in AUM, a reasonable estimate for firmwide revenue would be around $18 million annually, depending on how the firm adjusts its fee schedule for the size of its client relationships. This level of revenue is rarified air in the big picture, with a large majority of RIA firms never even approaching it. By headcount, revenue and need, many RIA firms qualify both in terms of the letter and spirit of the PPP program.
Most RIA firms are small businesses
Remember, small businesses employ a huge swath of the population and tend to have smaller capital reserves and more limited access to capital than larger businesses. And yes, most RIA firms are small businesses. With the enactment of the PPP legislation, the government was stepping in to help stabilize the employment prospects of people who would otherwise be out of work, while throwing a lifeline to business owners who were already being forced to make tough decisions. In a sea of politics poisoned by partisanship, this was one policy idea that escaped the worst criticism. However, the notion of wealth management firms using this money has really bugged people out.
RIA firms have a duty to operate in the best interests of their clients. When they take on discretionary management of portfolios and implement financial plans, they make a professional promise to be good stewards of their clients’ financial lives. This implies that the RIA firm appropriately staffs its investment and trading function, technology and reporting function, IT and operations team, and appropriately licensed and credentialed financial planning personnel. The last 12 weeks have presented financial life questions unlike anything we’ve seen over the last decade and RIA firms owed it to their clients (both established ones and new clients who discovered acute financial needs) to stay active, vigilant and engaged on all fronts.
Consider every resource available
Without any true intermediate- to long-term visibility on where this pandemic will take us, savvy RIA firm leaders should consider absolutely any resource available to assure clients they will be able to continue meeting the promise they made to be good caretakers of their personal financial affairs. For some, that means biting the bullet on their pride and applying for the PPP loan. They can retain the resources needed to serve their clients at perhaps the most financially stressful time — for businesses and individual investors alike — of the last 20 years. They can assure the livelihoods of those who work in support functions and support the morale of the broader organization.
Certainly, there may be some wealth management industry firms that had other good options to support their businesses through trying times. But for others, securing PPP loan money may be the most impactful decision they make as fiduciaries for their clients this year.