As the U.S. and rest of the world continues to struggle with the global COVID-19 pandemic, the Paycheck Protection Program (PPP), a federal loan program designed to help small businesses in the U.S., has created a conundrum within the independent Registered Investment Advisor (RIA) community.
A quick summary of the PPP program.
As part of the CARES Act passed by Congress and signed into law by the president on March 27th 2020, the Paycheck Protection Program (PPP) is available to “(s)mall businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors— are eligible. Businesses with more than 500 employees are eligible in certain industries.”[1]
Since the launch of the PPP, a debate has emerged within the independent investment advisor community as to whether RIA firms are appropriate recipients of PPP loans. Recent articles in the New York Times and Wall Street Journal looked at this. Additionally, the Securities and Exchange Commission (SEC) stepped in with guidance that strongly suggests that RIAs should disclose if they received PPP loans.
Should RIA firms be held to a standard different from other small businesses?
On one hand, RIA firms are, for the most part, small businesses, so they are certainly, by definition, eligible for help through the COVID-19 crisis. On the other hand, independent RIAs have two qualities that distinguish them from typical small businesses such as restaurants and travel agencies.
- For RIA firms that generate revenue from assets under management, there was no hard stop to their operations. They continue to bill on assets through the crisis.
- An RIA firm’s entire business value rests on their purported competence in financial matters. As such, it’s reasonable to expect firms with expertise in financial planning to have planned for their own bumps in the road such that they would have been able to manage through a period such as this without relying on government funds.
Fifth Set’s View
Fifth Set believes that the core service provided by independent investment advisory firms is a trusted relationship built between the firm and its clients. Two critical components of trust are integrity and competence. Our view-through this lens is as follows:
- Integrity – The PPP Loan Application requires applicants to certify that “(c)urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” That was not the case for Fifth Set. Had we certified to that condition, we would have demonstrated a lack of integrity by claiming a need that was not truthful. While the decline in equity markets did result in less Fifth Set revenue in the second quarter, market volatility is a normal part of the firm’s business model and was not and should not be unexpected for independent investment advisory firms.
- Competence – Independent RIA firms are in the business of providing financial advice to their clients. Fifth Set’s view is that our firm practices what we preach to our clients. The firm spends prudently and invests appropriately such that PPP funds were not needed through this difficult period.
Independent investment advisory firms derive their value through trusted relationships with their clients. Firms and their advisors should be held to a high standard of conduct that demonstrates integrity and competence in financial matters. Investors deserve nothing less.
[1] Treasury department website (https://home.treasury.gov/system/files/136/PPP%20–%20Overview.pdf?)