Advisory Firms Debate Potential Stigma of Paycheck Loans

(Updated with details in 15th paragraph about New England RIA’s charitable activities.)

While national debate rages about administration of the government’s $660-billion Paycheck Protection Program to help small businesses navigate the Covid-19 pandemic, financial planners are divided over the wisdom of taking the loans.

Proponents say they are winning points from employees and modeling strong planning skills for clients by taking advantage of government-sponsored largesse. Opponents say disclosure of the loans could raise questions for clients and prospects about advisors’ financial management skills and ethics.

“Taking government aid may not jibe with some clients’ values, and there may be concerns over the appearance of being on the ropes financially,” said Jeffrey Levine, head of advanced planning for registered investment advisers at Buckingham Strategic Wealth’s 35 offices. “It will also, undoubtedly, be used by competitors who object to the receipt of the loans on a moral basis, or just want to exploit the situation for personal gain.”

The so-called PPP provision of the multi-trillion-dollar CARES Act authorizes low-rate, short-term loans of up to $10 million that are fully forgiven if 75% is used for payroll purposes.

It was aimed at companies with fewer than 500 employees, but loans have been granted to profitable public companies, while many mom-and-pop businesses have hit roadblocks in obtaining the Small Business Administration aid.

Most financial planning practices fit the criteria for small business practices, and their owners should feel no guilt about applying for a loan, according to Philip Paleveev, a Seattle-based practice management consultant to planning firms.

“This industry vividly remembers 2008 and 2009, when at least a quarter of advisory firms experienced layoffs,” he said. “It’s completely valid, even for businesses standing on very solid ground, in light of the uncertainties. For a business owner, the biggest shame would be having to lay off people or reduce their compensation, or not having people to answer the phones.”

Diane Bourdo, president of The Humphreys Group, a five-person financial planning firm in San Francisco managing about $224 million, said the lesson she took from the financial crisis was the necessity of having an emergency fund or credit line that could cover some six months of operating expenses.

“We’re supposed to be doing what we tell all of our clients to do, to live within your means and plan for the rainy days,” she said.

Having liquidity allowed her to dismiss out-of-hand participation in the PPP program.

“I didn’t think about it for more than five minutes,” said Bourdo. “It’s not meant for people like me, and I do think there’s a stigma to taking it, though there may be extenuating circumstances. Yes, my revenue is down, but I’m not going to have to lay anybody off.”

In Dalton, Mass., Allen P. Harris, chief executive of Berkshire Money Management, said he has no compunction about the $196,500 PPP loan he obtained through Oak Street Funding shortly after the program was announced, even though he has plenty of liquidity.

“If the government is going to give support, why not take it,” he said, noting that his 14-person payroll may be a little fat for the approximately $550 million Berkshire manages for about 620 clients but ensures that he can execute his long-term operating plan.

Any competitor who might try to knock him as an opportunist, he added, “would look like a jerk.”

Harris said he and his firm have donated around $300,000 of face masks and other personal protective equipment since February to local hospitals, nursing homes and residents in his New England region, and also spearheaded a funding project to donate restaurant meals to area hospital workers.

Kimberly Foss said her decision to apply for a loan reinforces her advice to her clients at Empyrion Wealth Management in Roseville, Calif. to make the most of what the government has to offer.

“I tell them to make the full 401(k) contribution, and I’m doing this because it’s a smart business move,” said Foss, whose firm manages about $204 million and employs three full-time staffers and a part-timer. “The worst thing you can do is to lay people off.”

Empyrion, which took about a 15% hit to revenue in March, last week received a loan from Wells Fargo that is about half of what it sought, Foss said.

She isn’t concerned that clients or prospects who might read about her loan in a regulatory filing would question her planning chops or that a competitor might castigate her dining on a government loan.

“Let them throw pitchforks at me,” she said. “I have rent and employees, and this is eight weeks of free pay. It would be ludicrous for me not to take this money.”