Financial Advisory Firms Eyeing Government’s Loan Assistance Program

Lenders to RIAs are scrambling to make sense of the requirements as advisory firms have an opportunity to take advantage of a forgivable loan program designed to help them meet payroll during the economic fallout. - The S&P 500 is down 19% since the beginning of February, which is likely hurting many advisory firms—many of which qualify as small businesses—whose revenue is largely based on assets under management.

Some firms may be thinking of reducing headcount or laying off administrative staff as a result. Unemployment insurance claims have already spiked to over 3 million as officials placed the economy into a “medically induced coma.”

“The biggest expense line item for RIAs of their fixed costs is personnel,” said Shirl Penney, president and CEO of Dynasty Financial Partners. “Many of them are probably having to contemplate laying off employees.”

Advisory firms in that revenue pinch are eyeing the newly signed Coronavirus Aid, Relief, and Economic Security (CARES) Act. It includes a $349 billion forgivable loan program—the Payroll Protection Program—run through the Small Business Administration and designed to help owners keep employees on the books through the crisis. Lenders to RIAs are scrambling to make sense of the requirements and rushing to help advisory firms get their documentation in order for when the application window opens, likely on Friday, April 3.

That amount far surpasses the typical $20 billion a year in typical SBA loans and relaxes many of the hurdles firms would have to show to qualify, though firms have to show an economic hardship as a result of the pandemic.

"What’s unique about the PPP program is that they have softened the traditional 7(a) lending requirements around documentation, credit score and business profitability," said Harris Baltch, head of Dynasty Capital Strategies. No collateral or personal guarantees are required, according to the SBA.

Most registered investment advisors would qualify for the program, available to firms with less than 500 employees. Funding is meant to help retain workers, so it can only be used for payroll costs, including benefits, as well as interest on mortgage obligations, rent under lease agreements and utilities that were in place before Feb. 15.

Salaries, commissions and bonuses are included in the employee costs. It does not include distributions, according to Mike McGinley, an executive vide president with RIA lender Live Oak Bank.

Businesses are eligible to receive up to 2.5 times the monthly payroll costs—up to $100,000 per employee—and other expenses, but cannot exceed $10 million. Businesses can apply April 3 through June 30, and independent contractors are eligible.

There are no fees and a 6-month deferral period, no pre-payment penalties, and a term of 18 months past the deferral period. The maximum interest is .5%.

The loan can be forgiven if a borrower can show that he or she has not reduced headcount or cut wages over eight weeks after getting the funding. At least 75% of the loan must have been used for payroll in order to be forgiven, according to the SBA.

What’s not yet clear is whether a firm that has an open line of credit elsewhere is still eligible, McGinley said. That provision seems to have been stripped from the original bill, he said.

Also unclear is if a firm can use the loan for other purposes if a firm finds it can meet payroll by other means. A statement on the loan application says if the loan is used for purposes other than what it is intended for, the government may pursue legal action.

Dynasty Financial Partners’ phones have been ringing off the hook with advisors interested in the federal program, Penney said. Most of the RIAs in Dynasty’s network have been impacted by the recent market downturn.

Dynasty has several SBA lending partners that it already uses as part of its legacy lending program, so the firm will use those relationships to get applications for the new program submitted.

Many advisors use the firm’s outsourced CFO option, where Dynasty can go into the firm’s books and records and help them determine how much they’re eligible for. For firms in the OCFO program, Dynasty will file the application on their behalf. The firm will aggregate the applications and submit them to its banking partners in a uniform way.

“What you don't want is to submit an application that's incomplete and you have to fix it,” Penney said. “And now you go to the back of the queue.”

Rick Dennen, founder, president and CEO of Oak Street Funding, a lender to RIAs, said 99.9% of his clients would qualify for the program, which is on a first-come, first-serve basis.

His firm is receiving daily calls from interested advisors, so much so that he created a CARES calling group, dedicated to answering calls related to the loan program and how it will be rolled out.

Oak Street Funding also has draft applications drawn up so they will be ready to apply for their clients when the portal goes live, likely on Friday.

Dennen said every advisor should apply for these loans to prop up their losses during the crisis. Those with diversified revenue streams may be down 2-5% in assets under management, but some could be down 30%, he said, and for producers whose compensation is tied to their specific AUM, they’re going to be paid less.

Scott Wetzel, managing partner at SkyView Partners, said his firm has seen very little interest from RIAs in the loan program so far because people just don’t know about it. But he expects a surge of interest once more information becomes available.

That said, it is the lightest loan application and document collection process he has ever seen.

“The entire program is designed to inject liquidity into the system via small businesses as quickly as possible to those most in need,” he said.

The size of the RIA firm isn’t the determinant on who should take advantage of the program, he added. It depends on the firm’s profit margins. For a practice with a profit margin of 20 to 30%, for instance, they likely had a drawdown in revenue of 15 to 20% and wouldn’t need assistance. But for RIAs with lower profit margins, say in the 10% range, the current conditions could create a need for them to maintain their staff, but not the economic means.

“I guess the resounding message is ‘read the details,’” said Brian Hamburger, CEO of MarketCounsel, a compliance and consulting firm to independent advisors, said during a Wednesday afternoon conference call. “Why there is some upside, advisors hear the term ‘forgivable loan’ and get excited. It’s not free money. It carries with it some burdens and obligations.”

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