An Advisor’s Business May, For The Most Part, Be Unaffected
While the PPP loan is geared to those businesses that have 500 employees or less, not all those eligible in theory may ultimately qualify, despite whether funding is ultimately granted or not. It is likely that the SBA and Treasury Department would agree that the goal of the PPP loan was not to put advisors back in the same position they were in during the bull market, but to keep businesses suffering from Covid-19 related issues afloat in the near term.
Most advisors are in a situation that they may be able to survive financially for some time. Their business, excluding the impact of the market decline, is mostly unaffected in comparison to other industries. Most rational clients have, at this point, decided to stay put with their current advisor and have acknowledged the unprecedented events that have affected their portfolios. We do not foresee clients flocking from their current advisors to others in the near term. Thus, advisors are still collecting fees from client portfolios. Although those fees may be lower than during the bull market over the last several years (and most advisors have been planning for at least some market correction), advisors should really consider (1) whether there is current economic uncertainty in their business; (2) whether PPP loans are necessary to sustain their business for the next several months; and (3) whether their ongoing operations could be permanently affected by the crisis. If the answer to any of these factors is “no,” but PPP funds have already been collected, advisors should consider returning PPP funds by May 7.
Good Will With Customers
Many brands have experienced public dismay over accepting apparently unneeded PPP loans. Mark Cuban, celebrity billionaire entrepreneur, warned successful businesses like Shake Shack that they were “killing” their brand by applying for and accepting PPP loans. Although Mark Cuban is unlikely to know or comment about a small business advisory firm, the public backlash may be some indication of an advisor’s clients’ reaction. Advisors should be worried about their clients’ opinions. Most clients have seen a significant drop in their portfolios given market volatility and current conditions. However, these clients continue to pay advisory fees despite little or no active management in their accounts and may even have forgone applying for the PPP loan for their own small business. Thus, advisors should really consider whether putting themselves in a potentially better position than their clients is the best move from a business relations standpoint.
In response to Shake Shack’s return of their $10 million PPP loan, Mark Cuban further commented, “Shake Shack didn’t give the money back because they didn’t want the money. They saw what the public outcry was.” Similarly, advisors who accepted PPP funds could experience their own client outcry upon receiving updated ADV disclosures. The cost of losing one client over time could outweigh the funds received from the PPP loan.
In conclusion, with regard to the PPP loan, advisors should consider:
1. Whether they can certify in good faith that the PPP loan was necessary to withstand the current economic uncertainty and to support the ongoing operations. In making this determination, advisors should consider:
a. Whether their business has been truly negatively affected during the crisis;
b. Whether their business will be unable to recover in the near future causing significant financial strain; and
c. Whether operations are difficult or impossible without the funds.
2. Whether acceptance of the PPP loan will likely lead to scrutiny by the federal government or the public at large; and
3. Whether disclosure of the PPP loan on their ADVs will have a future and potentially long-term adverse impact on their retention of clients or revenue.
Kerry Zinn is a principal and Tanya Lambrechts is an associate in the financial institutions practice at the law firm Bressler, Amery & Ross. They are reachable at [email protected] and [email protected].