Executive Summary
Last month, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2+ trillion emergency fiscal stimulus package, with the intention to mitigate the economic damage created by the Coronavirus pandemic. For many individuals and small business owners who are facing financial hardship, including many financial advisors themselves, the Paycheck Protection Program (PPP), which originally authorized $349 billion in forgivable loans, is a compelling opportunity offered by the CARES Act providing much-needed financial relief.
While the initial round of funding was quickly depleted (as funds were exhausted only 2 weeks after applications were first accepted), Congress is now considering renewing PPP funds with an additional $310 billion. While the opportunity for relief with a loan (potentially one that is tax-free and forgivable, depending on how it is used) is attractive, the question for many financial advisors is whether or not they should take a loan in the first place, as there are many factors for advisors to consider.
First is whether the funds being requested are truly necessary to keep the business running, and whether the advisor really does need the funds as much as the next person in danger of losing their business. PPP funding is forgivable only if used for specific purposes (namely, payroll costs, mortgage interest, rent, utilities, and interest on other loans incurred prior to February 15, 2020); importantly, loans are not intended to serve as a ‘rainy-day’ fund or as reserves for future anticipated hardship.
Another important consideration that advisors should make is around disclosure requirements. As while PPP loans are not required to be disclosed in item 14K on FINRA Form U-4, they may need to be included in Item 18B of the Adviser’s ADV. Furthermore, while the ADV disclosure is not considered a derogatory mark against the advisor by regulatory agencies, clients (or potential clients) may feel otherwise. However, the manner in which the advisor chooses to present themselves to clients can influence their perception of the disclosure (e.g., some advisors who openly talk about the loan with clients have encouraged those who also need financial relief to apply for a loan; this approach has worked well to inspire some clients).
Ultimately, the key point is that the PPP has been (and, if more funding becomes available, can continue to be) a valuable resource that may help financial advisors in financial distress caused by the Coronavirus. While there are many considerations to make before choosing to apply for a loan, advisors should think quickly and be ready to apply for funding should more funds become available.
*** Michael's Note: Be sure to check out our brand new Advisor’s Guide To The Paycheck Protection Program resource page for a run-down of all the important PPP provisions!
Show Notes
- Advisor's Guide to the Paycheck Protection Program
- FINRA PPP FAQ
- Darla Mercado's article about advisors who took out a PPP loan
#OfficeHours with Nerd's Eye View Video Transcript
Hello, everyone. Welcome to this episode of "Office Hours," here at the "Nerd's Eye View." My name is Jeffrey Levine, the Lead Financial Planning Nerd for Kitces.com. Thanks for taking some time out of your schedules to join me today.
Now with our time together this afternoon, what I'd like to do is focus on a question I've been getting an awful lot lately, which is, "Hey, Jeff. Should I be taking a Paycheck Protection Program loan as an advisor?" In other words, "As an advisor, should I be actually going out and looking for myself, not just for my clients, but for myself or my firm, for a Paycheck Protection Program loan?"
What we're not going to do today is we're not going to focus on the nitty-gritty technical aspects of this program. If you want more information on that, such as what counts as payroll, how big your loan can be, how much is forgivable, all those sorts of things, we've got a great guide set up, and it's the Advisor's Guide to the Paycheck Protection Program. And I will include a link so that you can access that information if you want.
Again, today we're just going to focus on the bigger question, which is, "Should I be looking to get one of these loans in the first place?" Now notably, as I record this today, we should be looking at a vote in the House of Representatives to authorize another $310 billion for that program, on top of the $349 billion, which was already exhausted in less than a month, really in a matter of 3 weeks from the time that the program began accepting applications. So we should expect that to pass. We should also expect those funds to run out relatively quickly, so answering questions like this, such as, "Should I be looking to get one of these loans myself?" is really important.
What we are going to do today is focus on four different areas of the question, "Should I take a loan?"
First, we're going to focus on the "necessary aspect" that you need to certify as an advisor when applying for one of these loans, that the loan is necessary due to the current economic uncertainty. The next thing we're going to do is we're going to talk about the possibility of disclosure events for certain advisors. Third, we're going to talk about the potential impact this might have on clients, as well as potential clients in the future. And finally, we'll just touch on, again, an ethical question that is important to at least keep in mind.
Is A Paycheck Protection Program Loan Necessary For Your Advisory Business? [02:25]
With that said, let's start with the biggest issue here that I see, which is the necessary provision. One of the things that you have to certify when you're applying for a Paycheck Protection Program loan is that the loan is necessary due to the current economic uncertainty caused by the crisis. Now, certainly, there is economic uncertainty. No one is going to deny that, right? It's entirely unclear how long this will last, how many waves we're going to see how long people will be set at home. As we're talking today, there are some states looking to reopen, how successful those reopening campaigns will be. So, all of that leads to a tremendous amount of uncertainty.
What is less clear, however, is whether the loan is truly necessary for your business in the way that is intended under this law. Now I understand why everybody's looking to rush out and grab these loans. Is it free money? It's as close to it as we could possibly get when we're talking about money coming from the Federal Government. It is as close to free money as there can be, provided it's used to support employees' payrolls, for the most part.
Now that said, we're seeing more and more indication from the administration that they really want businesses to focus on the 'necessary' portion. Notably, on Tuesday of this week, Secretary Mnuchin was part of the White House briefing, and the issue of what was going on with Shake Shack and some other big companies came up.
And Secretary Mnuchin went out of his way to say that they are going to issue more FAQs in this area so that businesses are aware of who should be and who should not be looking at this. But he also wanted to emphasize the 'necessary' aspect, the 'necessary' provision.
Now obviously advisors are not Shake Shack, right? We're not talking about huge, publicly-traded corporations that probably also had access to a whole bunch of other debt facilities. That said, the necessary provision applies across the board. And here's an exact quote. I want to read this to you because I think it's pretty powerful. What he said was this:
We're going to give people the benefit of the doubt, but we're going to put out an FAQ on the certification, and if you pay back the loan right away you won't have a liability to the SBA or the Treasury.
So what this tells me is that they're taking this relatively seriously. If you're an advisor or anybody else and you've already accepted one of these loans and perhaps now, in retrospect, you realize you shouldn't have; you may want to take the Treasury and the Small Business Administration up on that and repay that to avoid potential penalties. Because what he said, and again, this is another direct quote from Mnuchin, he said, "But there are severe consequences for people who don't attest properly to this certification."
So does this mean that advisors can't get this unless they're dying? No, of course not. You just have to make a good certification that the loan is necessary. So one of the questions that you might ask yourself is, "If I didn't get this loan, would I be thinking or have to layoff people right now? Would I be cutting back hours or thinking about doing that in the immediate future at the very least? Would salaries be reduced? What would I do? Would I have to close locations if I'm a bigger firm?" I think this is really important.
Now what this is not, right, what this is not is, "Oh my goodness. If this continues for another three or four months, I'll have another quarter of down-billing, and then another quarter of down-billing, then I'm going to have to..." That is probably going to have a tough time dealing with the "necessary provision," right? It's not for padding one's own rainy-day fund, whether it be personal or business.
Now put that aside. Let's talk about probably another aspect of this that should be considered, which is the actual type of business. Now, sole proprietors, I think you're in a little bit of a tougher situation here, and the reason why is sole proprietors tend to run very healthy profit margins in this business. And so as a sole proprietor, if you were running a 70% or 80% profit margin before on, let's say, $400,000 or $500,000 of income, even if you saw that cut in half, I think you've got an incredibly difficult time looking to go and apply for one of these Paycheck Protection Program loans because you're running a really profitable business still. It may not be nearly as profitable as it was before, but you're still running a very profitable business.
Which, of course, leads to a question like, "Jeff, how much of a hit do I have to take before I should feel comfortable going out there and applying for a loan to potentially not only pay employees but, as a sole proprietor, maybe pay myself as well." Because that's also part of what this Paycheck Protection Program is meant for. It is clearly authorized for self-employed individuals to include their net earnings from self-employment. And what I would suggest here is that the rules clearly delineate a more than $100,000 cash compensation amount from a less than $100,000 cash compensation amount.
So I would say that if you're looking at this for yourself, right, and your income hasn't been cut, your net earnings haven't been cut below that $100,000 mark, that's probably a good indication that you, your own net earnings themselves, you should not be looking for a Paycheck Protection Program loan. I think that's a good guideline, right? Is it definite? No, we don't have definite guidance there, but I think that's a pretty good guideline. There's clearly a lot of legislative intent here to say we want to protect individuals' incomes up to this $100,000 mark, right? There's substantial legislative intent there that we can interpret it one way. So that's very critical.
The other thing I would mention here, obviously, is that if you're looking at employees, that is completely different, right? Now for larger firms, right, when I say larger firms, let's talk in the 5-to-100-employee range, right? Because if you're less than that, you're probably a small partnership, S corporation, or you're a sole proprietor. And again, it's probably largely your income that's going to suffer here, right? At bigger firms, however, when you're looking at dozens if not hundreds of employees, then we can really start to see those profit margins begin to compress, right?
So a healthy larger firm might only run profit margins of, say, 20%, 25%. And so if we see a contraction in the markets of 20% or 25%, all of a sudden, the entire profit of that firm is gone. There is zero profitability left, and layoffs or hours being cut, whatever you want to call it, are a lot more imminent than in situations where you have much higher profit margins for smaller businesses. So very important to consider that there. Again, is it truly necessary? That's the first question as an advisor I think you really need to ask yourself, is it truly necessary? And again, for your own compensation, if it's dropping below that $100,000 mark, I think you've got a pretty good argument here. If it's below, I think you leave yourself open to a little more of a gray area.
Is Taking A Paycheck Protection Loan A Disclosure Event? [09:53]
All right, so let's move on to our next potential issue, which is, is it a disclosure event? Now thankfully, for those of you out there who are regulated by FINRA, FINRA addressed this very quickly in a FAQ on its website. There was a question at first of, if you got this loan forgiven, would it result in a disclosable event on your U4? Notably, question 14K asks, "Have you compromised with a creditor recently?" And so FINRA said, "No, we're not going to deem this as a disclosable event." So that's good news for those of you who are regulated by FINRA.
However, for advisors… for the actual advisory firm itself… for an advisory firm that accepts its loan, a Paycheck Protection Program loan, there is a real possibility that the firm may have to disclose that loan on 18B of its ADV. Now notably, 18 ADV says if you have discretion or if you have clients prepaying more than $1,200, then in those situations, you have to disclose any financial condition that is “reasonably likely”... those are the words, "reasonably likely"… that results in you not being able to meet your obligations to clients.
I think if you're going to argue on one hand that this loan is so absolutely necessary that you had to receive it based on the economic uncertainty, then I think you have a really hard time at the same point arguing, "Well, it was really, really necessary, but we're also okay. Nothing to worry about here, right? No problems, but we really needed the loan," right? You're talking out of both sides of your mouth. So whether the SEC comes out with guidance, that would be great. That would be fantastic if we had a firm answer here, a firm answer for firms, if you will.
But until then, I think it's entirely reasonable that the SEC would require an advisory firm to answer that question in the affirmative, to answer, "Yes, there is something reasonably likely to impair our ability. In fact, it was so bad that we went out and took one of these loans from the Federal government that was part of the special program that could be forgiven to make sure that our employees could remain on payroll for the current time. Because we just don't know how bad this is going to get," right?
All of a sudden, if you have to lay off a lot of employees, clearly that could impair your ability to meet your obligations to clients. And so that is a really, really important element for us to think about here. Again, there's no clear guidance on this for advisory firms like there is for FINRA-regulated brokers. However, I think it is entirely reasonable to think that the way that that question is worded in 18B of ADV Part 2A, that the answer should be “yes”.
What Will You Be Signaling To Current Or Potential Clients If You Take A Paycheck Protection Program Loan? [12:50]
All right, let's assume that we've gotten past that hurdle. What's next? How about just what sort of impact will this have on your clients and your potential clients in the future? You should assume as an advisory firm that news of your taking a Paycheck Protection Program loan is going to become public at some point, right? You should assume that people will know who took these loans and who did not take those loans. If it doesn't happen, fine. But I would go under the assumption that it will occur. And you want to know, “how will your clients, or how will your potential future clients perceive that?”
And a lot of this comes down to how you present yourself as a firm and what sort of clients potentially you work with. There are some great examples of advisors who have very publicly said, "Hey, we're going for these loans ourselves." In fact, just last week, Darla Mercado, over at CNBC.com, she put out an article with advisors talking about how they went through this process themselves. And I think it's great if you're the type of advisor or advisory firm that is, like, "Hey, we're with you."
Well, maybe that's not the best way to say it. Really what I mean is, "We're just your regular type of people," right, "Just like you," the more down-to-earth-type-feel advisors, right? There are also other advisory firms that go out there, and they want to have this very elevated perception if you will. I hesitate to use some of the words you may be thinking associated with, sometimes the big firms, etc. But you want to make sure that you're talking to your clients where they are, right? And some clients, they want to go into the office and see the advisor in blue jeans, because that's what they wear. And there are other places and other firms where if you walked in and your advisor was in blue jeans, the client would walk out before they even talk to you.
So I think it's just important to know your client and to evaluate the potential impact here. Would your clients be upset? Would they be upset that you were taking this money from a government program that could've gone to other small businesses? Would they be upset that, frankly, you were in the position that you may need the loan, to begin with? Does that raise some level of doubt as to...even if it's not a disclosable event on your ADV, just to your own clients, does it raise some level of doubt or make them wonder and create some issues, or for potential future clients, etc.? Does it stop people from referring you right now? There are all these potential “what-ifs” that you may want to consider.
But for other advisors, that's fine. If you want to discuss this publicly with your clients, maybe you specialize in small businesses, and you want to say, "Look, I'm a small business, and I did this for myself, so I can help you out in this regard, too." So again, just know your business, know your clients.
Is Taking A Paycheck Protection Program Loan Ethical (If Your Advisory Firm Might Not Need It As Much As Other Small Businesses)? [15:38]
And then finally, the last item here is just the overall ethical question, which is, “Do you really need this money?” Even if you qualify, do you really need this money, potentially as bad as other businesses do? This is not an unlimited resource, right? Again, we saw the first $349 billion spent in a matter of weeks, in a matter of just two or three weeks. And so at this point, it's exceedingly likely that this new tranche of $310 billion that we expect to be passed into law today will likely run out relatively quickly, potentially, by some estimates, in as little as 2 days.
So there is an ethical question here whether you really need it as bad as other people. And frankly, that is not a question that I can answer for you. You have to answer that yourself, but it is, again, at least worth considering. And so bottom line here, though, is that if you've met and you're comfortable with all those things, you truly believe this loan is necessary. You’re okay with it being a disclosable event - if that even ends up being the case - or it’s just not something you have to worry about because you’re a broker who benefits from FINRA's existing guidance, or an IAR who is an independent contractor of a Registered Investment Adviser, but not the owner of the investment adviser, itself. You are not concerned about the impact on your clients, and you’re okay with the ethical choices of taking it, which frankly, again, no one would fault you if you qualify, and you truly need this.
As an advisory firm, you should not be treated differently than any other type of business out there. So if you're in need, it's certainly something where you should look to apply for this loan as soon as possible. Because, look, again, it's going to go away very, very quickly. This is like one of those commercials where they say, "Act now while supplies last." Well, act now while supplies last.
Thank you for joining us today. I hope this helps answer some of the key questions we've been getting around this, again, "As an advisor, should I be taking this loan?" Hopefully, this addresses a lot of the key questions or concerns that you may have had. I want to thank you for joining us. Tune back each and every day for updated guidance and information here at kitces.com. Thanks so much. Stay safe, stay healthy, and we'll see you soon. Bye-bye.
NAICS Code 523930: We applied for PPP and were rejected as being an ineligible as one who gives investment advice. This was through Gusto our payroll provider who uses Cross River Bank and Kabbage. We reapplied though Wells Fargo, our main banking relationship, and they did not ask for a NAICS code. Be aware if you use the above code, you will be rejected. Can anyone shed any light on this? Thank you in advance
Thank you for posting this! We work primarily with advisors in the 2-10 employee range who are all on an AUM model. My big issue with those advisors taking the loans is how little impact they’ve seen thus far. Stocks fell 35%, then rebounded and are now only down 12% for the year. This is after a 32% gain in 2019, so unless you’ve lost a ton of clients, you are well ahead of your 2018 revenue.
The government has literally come in and shut down all revenue sources for most small businesses. Not those in our industry. We can work from home and bring on new clients (which many of the advisors who are also taking the loans have done.) Heck, these advisors could literally not work and still make money with the AUM model. I have a major ethical issue with those who are still receiving nearly all of their revenue saying these loans are necessary. It gives our entire industry a bad name.
Even without the big snap-back in the market. Are you saying, you, Mr. or Mrs. Financial Advisor are not set-up for a bear market? Regardless of the cause, we should plan for a bear market and thus have some sort of rainy day fund and/or set-up our budgets accordingly. Every budget year we model a “bear market” and remove that cash flow from our income projections.
Are there really firms out there who can’t handle a 20% drop in the stock market coming off a 32% positive year? In my opinion not only do those firms not deserve the loans, they also shouldn’t be advising people on their personal finances.
Couldn’t agree more Jeff. Any advisor taking a PPP loan should be shamed publicly. Reminds me of the greed and arrogance of Merrill Lynch’s John Thain during the Great Recession and his $35,000 toilet
Thank you Jeff. This is an issue I spoke of on the FPA advisor topic forum 2 or 3 weeks ago. I do know that I have heard advisors comment “I am going to file for some of that ‘free money'”…..I concur with most of the Kitces article above, but 100% agree with you. It hearkens to a day 10 years ago when I was at a National BD conference, and sat next to a rookie planner that won the BD award for the highest “production” in their first year at the firm. I asked her about her business model, and she replied: “I just 1035’ed all the VAs I could….”. Having begun to convert my business to fee in 1995, to now having 98% of my book as fee, I am disheartened to see so much recognition STILL given to “top producers” who get there with commission-based income. It all boils down to ethics. And living with yourself in this business. The enhances transparency of who took these loans will be good for our industry.
You are so right. The advisor I speak of sees the PPP exactly as “free money.” The whining that went on when the first cash available ran out was in keeping with a 2 year old who didn’t get to buy a toy at the toy store. I guess we find out a person’s true morals and ethics in times like this. It is very sad.
My feelings exactly.
With the major caveat that there will be unique circumstances, in general, any financial planning firm that seeks PPP is an embarrassment to the profession. Just two months ago, the stock market was the most over valued in history – more than 1929 and 1999/early 2000. If you bill on AUM and don’t have business contingency plans that account for an S&P decline of 50-60%, you can’t call yourself a planner.
I find it very hard to find a scenario where a financial planning firm seeking PPP is financially justified, and definitely not morally. Instead, our focus needs to be understanding the program well enough to guide small business clients through process of applying in cases where they have a true need.
Hey Kris!
Thanks for reading and for your feedback. I think you raise some excellent points. But while I agree that there are certainly some advisors who have been a little ‘loosey-goosey’ with the “necessary due to economic uncertainty” certification, I’m not sure I agree that firms should be expected to endure 50-60% drops in the market – or anywhere close – before qualifying for this program.
You’re spot-on that firms should have a contingency plan for such an event, but it’s hard to imagine many of those contingency plans wouldn’t include cutting salaries, headcount, or both. The PPP is largely designed to avoid firms from taking such actions.
That said, your larger point of “things really aren’t THAT bad for most advisory practices right now, is very fair.
I agree with you completely.
What about advisors who applied, got approved, never signed a loan application and had PPP $$ show up in the bank account. The application was done prior to seeing the full impact on COVID on the business (due to business client retainer relationships – many of which have shut down / seen huge reductions in revenue). Would you simply return the funds if not needed?
You have to sign a loan application. The money just doesn’t “show up” in your bank account.
Excuse me. Never signed a loan document. A loan application and closing loan documents are completely different things. In some cases, banks have required business owners to sign not just the “application” but the actual loan documents. That’s how most loans work. Other banks with the PPP just have had an application, approval and funding. No loan documents.
Sam, I knew exactly what you meant. I believe some folks would rather parse words based on some sort of moral high ground. I hope your business only ends up suffering with a $2,000 loss (we just won’t know until its over) and you get 10 times, or better yet 50 times that amount to help your “true small business” and its staff continue to thrive.
I presume you were referring to form ADV Part 2A, Item 18. It is my understanding that item 18 is only a requirement if a registered adviser “require or solicit prepayment of more than $1,200 in fees per client, six months or more in advance” thus for most of us a PPP loan would not be disclosable. Even if an adviser met the requirements for disclosure under Item 18, it would simply be a notation on the financial statement. If indeed the loan was the difference between insolvency and survival, then the disclosure would certainly be relevant.
Hey Jeff!
Thanks for reading and taking the time to comment. Couple things here…
1) Yes, as noted above, 18B of Part 2A is what would potentially require the disclosure
2) 18B applies to more than just those who pre-bill more than $1,200 6 months in advance. It’s an OR type of thing. It’s that, OR custody OR (perhaps most commonly) discretion. Many advisors have discretion, so this would apply to many.
3) It would be more than just a notation on the financial statement. If the SEC were to consider it a disclosure event, it would require disclosure in the ADV document in plain language. The Adviser would have to say something like “Due to a decline in revenue as a result of market conditions, it is reasonably likely that our ability to fulfill out contractual commitment to clients is impaired.” That sort of language would hardly be reassuring for clients. That said, if the choice is take the money or go out of business, or take the money or have to lay off a lot of people, it may still be an easy choice.
Give me a break….and shame on any of you shaming a firm for applying for PPP.
And any client that would ever look up if a solo advisor took an PPP loan should be fired on the spot….and I’d will them on any of the shamers……I’ve been reading this blog and these threads for years and I’ve never heard anything so ridiculous.
So sorry, Ross. I know someone who is applying for the PPP and the business has only been impacted to the tune of only about $2000 and that is a big “maybe.” Otherwise the MONTHLY income is still in the high 5 figures. I know of people who have lost their jobs and true small business owners who are struggling to keep their doors open due to mortgage payment, utilities, etc. Sorry you see reality as being “ridiculous.” Reality is far from it.
So sorry, Ross. I know someone who is applying for the PPP and the business has only been impacted to the tune of only about $2000 and that is a big “maybe.” Otherwise the MONTHLY income is still in the high 5 figures. I know of people who have lost their jobs and true small business owners who are struggling to keep their doors open due to mortgage payment, utilities, etc. Sorry you see reality as being “ridiculous.” Reality is far from it.
Lol, “true small business owners”
Not entirely sure what you’re sorry about. Don’t apologize for your opinion.
I woke up knowing I was right.
Russ,
Appreciate your passion here. I certainly don’t believe that any business that genuinely needs the money due to the uncertainty right now should be shamed. I think the frustration that you’re seeing from some of the people commenting is the feeling that there are some businesses, including (but certainly not exclusive to) advisory firms, that have chosen to read the certification very liberally.
In terms of clients looking up whether a firm (not just a solo) took money… 1) They may not have to look it up, as it MAY end up being a required disclosure on the ADV Part 2A, and 2) I don’t think it would be that out of bounds for receiving a loan to raise at least some questions in a client or potential clients mind. People want stability from their advisor, especially during times of crisis, and taking a loan under PPP is as least an indication of SOME kind of financial stress on the advisor.
Now, having said that, you’d hope that most advisors would have the kind of relationship with any clients to be able to explain the rationale behind the decision and be able to make it a null issue.
Ultimately, as I said in the close, I don’t believe that advisory firms should be treated any differently than any other type of business. Every situation is different, and needs to be looked at on its own merits. A solo advisor who has $300k of rev pre-crisis running an 70% profit margin who sees revenues dip by 20% and who still has projected net income of $150k is not the type of business I believe the PPP is intended to help. On the other hand, a newer solo advisor who had $100k of income pre-crisis with an 70% profit margin who has had the same drop of 20% in revenue IS a legitimate candidate (IMO).
Thanks again for your readership, and for taking the time to comment.
Exactly right. My advisor only loss about $2000 in revenue for March and that was with the downturn on which his recurring revenue was based. April will more than likely be improved over March. It is not needed. All the while that I have friends whose businesses laid them off because their work dried up until our state re-opens. The employees have no paycheck and the employer is struggling to meet the mortgage and utility payments. Those are the people needing and should be applying for the funds. Not someone making in the high 5 figures of monthly income who only applied (and actively encourage other like business owners to apply) to get “free money.” That is wrong and unethical. But then for people who always “wake up knowing that they are right,” that specific personality trait doesn’t accept that it is unethical.
“Free Money”, lol
I don’t wake up everyday being right, but I did about this.
I also found it ridiculous that there was outcry about public companies getting funds……everybody has a problem because they want to be mad about something. Did you see the list of public companies that got the loans?
Most of them NEEDED it. Potbelly (the sandwich shop) got it…..so what? How was that wrong? They don’t have employees to pay?
I appreciate the thorough reply and really enjoy your articles.
The definition of “needing” money is pretty subjective. If a person’s business has been negatively impacted by Coronavirus they qualify to apply for the loan. It isnt anyone’s place to compare one person’s situation to another. If a business owner feels vulnerable at this time that would be their decision to apply for a loan.
I found it comical to read folks comments about advisors only impacted by $2,000 and applying. It is impossible to quantify how any business has been or will continue to be impacted by this.
Taking a loan should not have to be disclosed on an advisors ADV or anywhere else. Not until there is something negative report. It is possible and in my opinion likely that a business will end up having to pay this loan back. Also what happens if a firm takes out a regular loan to shore up their business? Is that reported before anything negative happens or is it just a regular loan?
Nope, this is simply a political argument. Folks want to get bent out shape because things aren’t “fair”.
Advisors aren’t the only folks where one could make the argument (a weak argument). Construction companies are getting the loans and contractors. Many of them are on projects or building homes that were already in progress and making the same money.
They applied and they SHOULD….because they have been impacted. They spent time trying to adjust certain aspects to protect themselves, changed communications with their clients, supply chains impacted, and their pipeline COULD be impacted down the line.
I don’t agree with the ethical arguments. It isn’t ethical to have been making $600 a week working and $800 on unemployment. The unemployed should be shamed into giving the difference back : )
I believe some folks need to get over themselves.
Tell your clients “do as I say, not as I do,” and then keep justifying your faulty logic for stealing taxpayer money
Ok, not sure what that means, but ok.
And that says it all. Thanks, Russ. We read you loud and clear.
Thanks for the 11 day later comment to really prove your point……11 days to think about it and you are still wrong.
No, I’m just not a narcissist which I know seems to be a rarity in the wealth management world.
Advisors tend to be a lot like the “NFL Wide Receiver” of the Wealth Management world, I’ll grant you that. Keep being you, because you aren’t entirely wrong…..but that is the problem with conflict resolution, everybody is a little bit right.
I’ll just say this…I applied last night officially. I feel this provided plenty of time for all the cupcake shops to get their apps in ahead of me. Vocal critics in my locale better be prepared to go to the mat because it’ll get ugly.
Ross, since I work here and now exactly what is going on, I most definitely can comment on the ethics of the situation at my firm. I’m not talking fairness. I’m talking fraud. Period.
Don’t commit fraud.
I think it may depends on the business model that you run. I am specifically thinking about someone just starting off in the business as a solo advisor that works on an hourly or fixed fee basis. What happens when your client says, I lost my job I can’t pay you, does that change the conversation?
http://video.foxbusiness.com/v/6151937568001/
Any thoughts on this video??
Plenty of thoughts…..I believe the Treasury would never make it past the audit on a solo financial advisor applying For a PPP loan…..first off the most that an advisor could get individually is about $21,000 and as the video said many of their firms encouraged it.
Note to Advisors: Drop what you have on those conference calls and videos into a folder for evidence.
To expound if they have any employees whatsoever the case can be made…..it’s not just about whether you can afford to pay them….it’s whether you want to pay them……there are plenty of advisors that really don’t have a need to utilize employees working from home etc and don’t want to be around people during this……if they aren’t using them then they may decide there is no point in paying them……BUT if the government is gonna pay an owner to pay them and keep them on staff and off unemployment that changes things a little.
All the above applies if your revenue is 100k or 1M.
Jeff, where in the application or legislation does it say “not to be used for rainy day fund”? All I see is “COVID uncertainty.” I have many clients applying on the “rainy day” basis. Unfortunately, some of those most in need have been the least successful. If every recipient, not just advisors, had to make a public disclosure it might best ensure those in most need received. Thanks for the article!
The certification isn’t just “COVID uncertainty”, or else every single business would qualify. As I note in the video, uncertainty is essentially universally prevalent here. The certification asks if the loan is “NECESSARY due to the economic uncertainty” [emphasis mine]. If a business is making that sort of certification just to pad its rainy day fund, I think they are making an extraordinarily liberal read of that certification.
Jeff-You’ve really changed your tune from 3 weeks ago when you wrote/said: “The most important of these is the following: that there’s an economic uncertainty as a result of this crisis that makes the loan necessary to support ongoing operations. And that’s really important, right? Because are advisors going to be subject to economic uncertainty right now? I can’t imagine the advisor that’s not. You’ve got account balances down for those who bill based on AUM. For advisors who do a monthly recurring retainer model, individuals may not have the ability to pay them. They may be worried about paying their own mortgage or going out for food, so clearly there’s going to be uncertainty there for an overwhelming majority. I mean for those in the financial profession, it’s hard to imagine a scenario where there isn’t at least some economic uncertainty.” …….Now you’re coming up with arbitrary income thresholds, profit margin guidelines and uncertainly time frames for PPP qualification that are based on your own speculation and opinion and not any published guidance.
You also took Mnuchin’s quotes out of context. He was speaking about companies that didn’t meet the 500 employees or under rule (or “big public companies that have access to capital”), not the “necessary aspect”, as you put it.
I agree with what Matt Jarvis alluded to in your first post. You don’t talk about morale issues when you write about re-contributing RMDs to IRAs because of the liberal guidelines of the coronavirus related distributions rules or in any of your other well written posts. I’m not sure why you (and others) think that a business owner applying for a loan program for which they qualify has to include a review of whether or not it is ethical because Congress limited the available pool of money. Maybe some of these advisors that are anti-PPP on moral grounds also advise their clients not to do HIRCs because Congress didn’t intend for high income individuals to make ROTH contributions.
My impression is that business owners who question PPP applicants on ethical / morale grounds don’t understand the purpose of the program and it’s intended impact.
I also don’t understand the purpose of the previous commenters in this forum who have decided not to support fellow advisors in the community who decided that they wanted to / needed to apply for the PPP. I would argue that these shamers are the ones who are the embarrassment to our profession.
I don’t support bailouts for fellow advisors that supposedly provide prudent financial advice and maintain some of the highest profit margins of any industry.
With PPP loans, you are making the argument that “the government made the rules and I’m just using them to my advantage,” or “everyone else is getting free money, why shouldn’t I?”
Go ahead and take the money, but don’t complain when there’s public outcry and shaming. Even if it’s not disclosed on your ADV, it will eventually be a matter of public record with the SBA. Journalists are going to be combing these files and so will your competitors.
Hey Jon,
Thanks for reading and taking the time to comment. A few quick thoughts:
1) I still believe there is substantial economic uncertainty for just about all advisory firms. It continues to be hard to imagine a firm that looks out on the current landscape and says “Yeah… things are pretty much as we expect them to be.” But it’s not just uncertainty… it’s uncertainty that makes the loan necessary. I admit, I could have – and probably should have – done a better job emphasizing that point in my first video on the PPP. (Though in fairness to myself, I also recorded that very early on and before a LOT of the guidance on the PPP was released. And I cautioned everyone up front to take everything – including my own thoughts that night – with “a grain of salt” due to the lack of clarity and guidance.) Still… I could have done a better job there.
2) That said, I think during the past few weeks, the SBA and the Treasury (particularly Sec Mnuchin) have provided a significant amount of guidance – much of which is admittedly not “formal guidance” – that has helped to reframe the certification. To that end, I have adjusted my thinking accordingly (and I sure I will continue to do so as we continue to get more info). I still believe companies will be given the benefit of the doubt, but I also think there are a LOT of firms out there who are reading the certification WAAAYYYY too liberally, which was part of the impetus for filming the video above.
3) There simply is no “bright-line test” for determining whether a loan is necessary given the current economic uncertainty. And we have no historical context with which to look to either. But there’s obviously SOME situations that qualify, and SOME that don’t. I just gave my opinion on the matters. Furthermore… while the profit margins were just an example to state the loan is not meant to replace lost profit, the 100k income threshold is decidedly NOT arbitrary. Rather, there is both legislative and regulatory intent from which to interpret that. When the rules say “Don’t take into consideration cash payments of more than 100k/year to employees or via net SE income”, it’s pretty reasonable to conclude the intent is to protect income of up to that point.
4) Regarding Mnuchin’s quote… I really don’t believe that I took it out of context. I quite explicitly state “Notably, on Tuesday of this week, Secretary Mnuchin was part of the White House briefing, and the issue of what was going on with Shake Shack and some other big companies came up.” and further point out “Now obviously advisors are not Shake Shack, right?” before talking about the amnesty for repayment comments. So I think I pretty-well covered what he was responding directly to. But I don’t see any reason why his comments are limited to a Shake Shack-like company. Certainly those types of firms are high on the list of companies that should think about returning money, but any firm that, in retrospect, believes it read the certification too liberally, should have the same right.
5) It is not accurate to state that I don’t raise ethical issues about other aspects of the law. For instance, you raised the point of Coronavirus-Related Distributions… Let’s just use that one provision as an example… I have repeatedly stated in webinars, Twitter, and elsewhere, that I believe there are serious issues with trying to use such a distribution to spread Roth IRA conversion income out over a 3-year period, as it’s simply not what the provision is intended for.
6) I don’t believe that seeking a loan “must” include an ethical review, but I do think it’s fair to point out that there are ethical questions. As I noted in the video… that’s one thing I can’t answer for people. But I think just looking at these comments, we can see that people have very strong feelings (both ways). My point was just to make sure advisors at least give it a moments thought.
7) Finally, I’ll say this… I am fine with advisors who accepted loans and have zero intention on shaming them. As I’ve noted many times, there are DEFINITELY situations where it is warranted. I don’t know each person’s situation, and I don’t care to. That’s their business. I simply want to make sure that advisors who both choose to take such loans, as well as those who choose not to, are doing so after considering all the potential factors.
Thanks again for your thorough comment, and your readership.
Best!
Great article Jeff! I too have heard from a number of advisors applying for the PPP loan that have admitted there isn’t a current necessary need and it is disappointing. We are very fortunate to continue to be paid for work while working from home while other businesses truly struggle and most people have not really seen that much of a hit unless they are primarily commission based. Some people don’t have very profitable businesses and they should definitely apply but I wonder how many people would have applied if there wasn’t a provision for loan forgiveness. The morally right thing would be to apply for a standard loan or a line of credit if really worried about the loss of future earnings. I think a business owner should have to show they lost something like 30+% of their revenue for at least 6 months to be eligible for the forgiveness. I also agree that if you have been an advisor for 5 years or more and weren’t prepared for a market correction after seeing a 10 year bull market then you might not be a very good financial planner.
In the future I think I will suggest that a prospect ask potential advisors if they needed to borrow money during this time and whether they paid it back or took forgiveness. Why would a prospect pick an advisor to help them plan for uncertainty in their future if the advisor could be prepared for his/her own?
I agree they should have made the program with different guidelines, But they didn’t……these are the same people that think its a good idea to pay the unemployed more than when they were working.
Although you’d have to apply that to all businesses…..how terrible if the cupcake shop down the road took the loan, was about to fail, got some traction and finished with revenues down 20% over 6 months. So now we’re rooting for the business to survive, but not make too much or you gotta pay it back. Untenable, but I’m with you in theory.
Then we get to paragraph 2…….A little creepy, using that as somewhat of a marketing ploy. If someone were to do that to me it would be war! (and I’m not getting a PPP loan fyi)
Absolute war!
Russ,
Thanks for taking the time to comment. I think it’s important to make a distinction between businesses that are truly needing the money now and that happen to recover and have a great year (in other words, at the time of the loan, it was ‘necessary’), vs. businesses that are just seeing a revenue slump (and just seeing some profit being eaten away) that remains slumped for the full year. Both might end up in the same place by year-end, but broadly speaking, only the first biz likely saw the type of impact that would be needed to make a good faith certification that the loan was necessary due to the economic uncertainty.
Best!
disagree
Thanks for bringing this issue up, Jeff. I have been thinking a lot about this lately. I feel that the money was meant for small businesses/nonprofits who are truly hurting. As an example, I’m thinking about small restaurants. They had to close their business. Some are getting creative and doing take out but they are not making anywhere near as much money as when their restaurant was full every night. They have also had to layoff or fire employees. I know popular restaurants in my area that did not get a loan. Nonprofits who rely heavily on fundraising have had to cancel all live fundraising events, they need the funds. I also know of small retail businesses that didn’t get loans and they have had to close for the duration. On the other hand, advisors, especially the highly profitable advisors you refer to, have not had to shut their doors, have probably not laid off employees, are still collecting AUM, yes, less, but that is temporary. I know the argument is that if you applied and got it, that means you qualified. But, I think advisors had an advantage because we are all so good at the money thing and knew exactly how to apply for the loan and many got funds. It seems unfair to me. I just hope that this time around, more businesses that are in dire straits get these loans. I think advisors have to really do a soul-searching to determine is they really qualify for these funds.
Cathy, I think your rationale is much more reasoned than the wholesale shaming of advisors that received loans. Loans that they may have to pay back anyway and will only be “free money” certain requirements are met…..like not laying off staff they don’t need……and I could make the case that an advisor with no staff has an even better case.
Speaking of non profits and their events…..how are the events that advisors had planned going? That doesn’t effect the pipeline?
How long will advisor need to disclose that they got PPP funding? 10years like financial debt settlements in the U4
Jeff, how would you respond to firms who didn’t take the PPP because they had a suitable business emergency fund vs firms that took the PPP but did not have an emergency fund?
The gov’t is here to save the foolish, not the prudent. Planners should plan for their clients, not their own businesses. The Fed is here to stop the stock market from going down too much and the gov’t is here to keep poor business decisions from being too costly.
“Planners should plan for their clients, not their own businesses.” What the heck? So the “do as I say, not as I do.” Thanks for letting the ethical investor avoid you.
We can always get in trouble with general statements. Maybe newly launched firms with no revenue could justify the “need” or those who are fee-only serving middle class clients. My statement was to those seasoned firms with revenue based on AUM or AUA. If those firms couldn’t afford a 30% drop in the market (ignoring the quick snapback) they shouldn’t be advisors. That’s a NORMAL and EXPECTED decline that we should all plan for.
I’m also hearing that the businesses were supposed to get a $10,000 grant on the initial application for The EIDL loan and were given only $1,000 on the basis that it was “per employee”
Baloney! You can’t just change the rules. I smell a lawsuit…..works both ways.
While my main focus is stock/executive compensation tax and financial planning through myStockOption.com, I’ve been writing some blogs/articles for Forbes.com on the PPP Loans. For advisors that are taking them, one article of interest is:
You Got Your Paycheck Protection Program Loan. Now What? Advice From Small-Business Lawyers https://www.forbes.com/sites/brucebrumberg/2020/04/17/so-you-got-your-paycheck-protection-program-loan-now-what-advice-from-small-business-lawyers/
I write on topics beyond stock comp on myStockOptions.com. For those of you getting PPP Loans, applying, or have clients that are, my newest Forbes blog will be of interest. Read and if like it share with others. Thanks: Paycheck Protection Loan Backlash: How To Defend Your Business Reputation And Avoid Getting Shake Shacked. Link at: https://www.forbes.com/sites/brucebrumberg/2020/04/27/paycheck-protection-loan-backlash-how-to-defend-your-business-reputation-and-avoid-getting-shake-shacked/
Sorry, but help me understand why advisors need help. Isn’t one of the key missions in life to help clients achieve and maintain $ security through good times and bad? Aren’t we getting paid, working, and not shuttered as non-essential? Is it hypocritical to ask for help if one hasn’t built reserves, financial and contingency plans, deep client relations, and taught the same in our teams? My understanding of CARES Act, PPP, EIDL, etc is to help steady the feet of those damaged due to the shut down of businesses and to keep EEs on the payroll. Some will game (or take advantage of) the system and karma can be a bitch and it has a staggering price tag of $2.1-$2.5T (including additional stimulus). However, we can’t afford to keep this economy or people locked down. Leave the “free stuff” for those in need.
After thinking about this article and its comments I’ve been inspired to go ahead and apply. I’m confident that I won’t receive because I’m too late in the ballgame. My firm, my CPA, my banker, and a couple of my clients that are in the process or have received have all encouraged me to utilize the PPP. Wow, not one raised a moral argument, not one…..the more I read the intent of the program….it is to stimulate the economy and keep people employed (and strengthen the business for what may occur down the line)………This entire situation has made me wonder if I even need some of the folks I have on staff or would it be better to simplify my life and stop reaching for the stars. Maybe this loan will help me delay that decision for a while to keep someone out of the unemployment line.
Side Note: I will no longer patronize the places that applied for the PPP, gave it back and could have made a case to keep it………Not because they applied, but because they gave it back. Tired of folks being swayed by “group think”. It was in their hearts to apply…..should have fought for the money. Some didn’t have a choice, but some could have made a case.
So the advisor who decides he wants a billion in AUM, hires a crazy number of staff to help him achieve his personal goals, and as such has a smaller profit margin, is completely justified in taking a PPP loan?
But the solo who is more responsible, and as a result has higher profit margins, but feels just as much uncertainty due to the government-induced recession (possibly depression, we’ll see) lacks morals if he takes the loan?
I see this mindset regularly from people who couldn’t make it in this industry, occupy an ancillary position, and look in from the sidelines and throw barbs at those of us who are in the fight every day.
What a shame.
If you are a SEC registered investment advisor, not dual registered, is the SEC requiring you to disclose the PPP on your U4 under section 14k?
I was searching for loan to pay for my husband surgery and sort out my bills & debts, then I saw comments about Premier Lending Company. I doubted thus but decided to give it a try by contacting there email website https://rb.gy/ppahl0 they responded with their loan terms and conditions on how it works. i’was assured that the loan $50,000 instant will be credited into my account so I applied for a loan & paid the processing fee to obtain the loan. 48 hrs later, I was shock to see that my account has been credited} I got my mortgage and I paid for my husband surgery and my daughter fees and thank God today he is good and he can walk now and the burden is no longer so much on me more and we can feed well and my family is happy today, I said to myself that I will mourn aloud in the world of the wonders of God to me through Premier Lending Company I advise anyone in genuine and serious need of finance should contact them on there Email: {[email protected]} for more info on how to obtain a loan from them.
There are strict rules and regulations that financial advisors need to follow to maintain the privacy of their clients. You can check out this website to see why they have been using it like this.