In 1940, Fred Schwed wrote a book called "Where Are the Customers’ Yachts?" He was a second-generation stockbroker turned author, and his book would become Wall Street lore. It’s a story about a man visiting New York City who admires the yachts Wall Streeters had purchased with money earned from giving financial advice to customers — only to wonder to himself where the customers’ yachts were. (There weren’t any.)
Today, that title is more relevant than ever. On Monday, the Small Business Administration released information on Paycheck Protection Program loans of $150,000 or more. The PPP is a forgivable loan program created by Congress to help struggling small businesses survive during the COVID-19 pandemic economic lockdown.
More than 1,400 companies in the government database were identified as investment advisory firms, the vast majority of which use a compensation model that pays them a percentage of assets under management, known as the AUM model. If assets grow, either because the firm brought in new money or markets went up, fee revenue goes up. If assets decline, either because of losing clients or down markets, revenue goes down. It’s the foundation of running the business.
Examples of advisory firms taking PPP loans ranged from a midsize firm in Los Angeles with $281 million in AUM, another based in Santa Monica, California, with $2.7 billion in AUM, and a much larger firm in Omaha with $15 billion AUM. The loans ranged between $150,000 and $350,000 in Los Angeles, $350,000 and $1 million in Santa Monica, and between $2 million and $5 million in Omaha.
[More: A tale of two PPP loans]
For any of the 1,400 firms that took a loan, the move is hypocritical, at best. At worst, it is disheartening for the profession, if not downright appalling. And I say that sitting on the same side of the table, as a founder (and an acknowledged fiduciary) of a fee-only investment advisory and financial planning firm in business for 16 years.
Mind you, the U.S. stock market historically has risen in three of four calendar years going back to the 1920s, so this is a wonderful business model for those who serve their clients well. But one does not get to play it both ways. This is not “heads I win, tails you lose.”
The PPP was designed for businesses with a significant interruption in their revenue. Examples include the tens of thousands of U.S. restaurants, salons, shops, small manufacturing firms or even small professional services companies like law offices whose business had largely ground to a halt.
By contrast, wealth managers did not suffer any interruption in their revenue and, unlike restaurants, it’s an easy business to run from home. Sure, the market declined for the quarter. Maybe it will be down for the year. Who knows? Perhaps stocks will be down for three years in a row, as they were from 2000 to 2002. It doesn’t matter why stocks or bonds go down. Once in a while, that’s what they do — at least until the Federal Reserve Board decides to bail out markets and companies.
Does a down quarter, or even a down year, entitle a wealth manager to ask for and receive a forgivable loan to protect employees and jobs and to support ongoing operations? I’m sorry, but I think that’s reprehensible.
My company, TABR Capital Management, is a small to midsize firm with just over $144 million under management. Yes, our revenue went down about 8% during our April 2020 billing cycle (reflecting the first three months of the year). Yet this was hardly different than the fourth quarter of 2018, when the S&P 500 fell almost 20% through Christmas Eve and the Russell 2000 dropped 25%.
Still, our revenue has grown steadily at about 5% per annum the past three years, and I’m certain that many firms may be growing at even higher rates. That’s great. I’m happy for them. But it begs a lot of questions.
Why should anyone in our industry be able to participate in the growth of their business, and then need a forgivable taxpayer loan just because their clients’ accounts experienced a drawdown, and the firm’s revenue decreased?
Follow my math. Balanced portfolios earned approximately 15% in 2019. Let’s say a firm is managing $500 million with a 1% average annual fee. That’s $5 million in annual revenue, assuming no change. But in the first quarter, diversified portfolios dropped around 12%. Now, quarterly revenue is at $1.1 million instead of $1.25 million. And you need a loan to sustain your business while crowding out actual locked-down businesses with dire payroll needs?
What kind of business are these firms running? Have they not put money aside for a rainy day, as we all counsel our clients? Where’s their skin in the game? Where’s the planning?
Frankly, if these firms can’t run their business prudently, why should their clients trust them to manage their money?
This is just another example of the moral and ethical issues with which our industry continues to grapple. True fiduciaries remain a minority in wealth management, whether at small or large firms, and they certainly don’t take “free” taxpayer money from the government that’s intended for those that are really hurting. It doesn’t matter that it’s legal. It’s wrong.
Bob Kargenian is president of TABR Capital Management, a fee-only investment management and financial planning firm based in Orange, California.
Relationships are key to our business but advisors are often slow to engage in specific activities designed to foster them.
Whichever path you go down, act now while you're still in control.
Pro-bitcoin professionals, however, say the cryptocurrency has ushered in change.
“LPL has evolved significantly over the last decade and still wants to scale up,” says one industry executive.
Survey findings from the Nationwide Retirement Institute offers pearls of planning wisdom from 60- to 65-year-olds, as well as insights into concerns.
Streamline your outreach with Aidentified's AI-driven solutions
This season’s market volatility: Positioning for rate relief, income growth and the AI rebound
