Bear market prompts rich billion-dollar companies to resort to federal aid

Fund managers who oversee billions of dollars in assets tapped federal aid at the height of the coronavirus pandemic, a decision that has proven to be controversial within the financial industry.

Several wealth management companies have revealed in recent weeks that they have received funding from the Paycheck Protection Program, a forgivable loan program passed by Congress to keep struggling small businesses afloat during the pandemic.

Carson Group, a $ 12 billion wealth management firm whose founder once positioned it as the future “Amazon or Netflix of financial services,” said in a securities filing last month that it had received PPP funds. Cornerstone Advisors Asset Management LLC, which manages $ 6.3 billion, also used the program, as did Creative Financial Designs, with $ 1.4 billion in assets, and Ritholtz Wealth Management LLC, with $ 1.3 billion. of dollars.

Small businesses qualified for such loans if they reasonably anticipated a reduction in income that could hamper day-to-day operations, a reason cited by several wealth management companies in their securities filings. At most, income is closely linked to their assets under management through fixed fees charged on investment portfolios. These assets were hit during the stock market liquidation in February and March, reducing the fees that companies could charge.

Critics are calling on wealth management companies to return the funds, saying they were not the intended recipients as other businesses including restaurants, cinemas and many retailers have been forced to shut down completely.

“It’s absolutely ridiculous and one of the most disheartening things I’ve seen in my career,” said Patrick Rush, managing director of $ 700 million financial management firm Triad Financial Advisors. “We just came out of a bull market of over 10 years and all of this massive growth. What do you tell your customers? We tell them to sit still, the markets are coming back. How can you say the same thing without believing it yourself?

Businesses and organizations in other sectors have also been criticized for accepting P3 money and other aid linked to federal aid programs. Some, including

AutoNation Inc.,

Shake Shack Inc.

and Harvard University, returned the funds. Regulators, including the Small Business Administration, the Treasury Department, and the Securities and Exchange Commission, have changed the PPP program to ensure that the money goes to the companies that need it most and that the funding is adequately disclosed.

This forced some fund management companies to return PPP funds early on.

David Mabie, director of Chicago Capital LLC, which manages $ 2 billion, said his company received $ 185,000 in funding in April. But Mr. Mabie and others from Chicago Capital had a moment of soul-searching about their need for a loan after the Los Angeles Lakers were called in for $ 4.6 million in funding.

“That one resonated with us,” said Mabie, who returned the money less than a week later and had to pay the 1% interest accrued over that period: $ 20.22. “We were trying to do a good thing by turning it over because we thought other people could have used it.”

The Lakers too repaid the loan.

Congress and the Federal Reserve are pumping trillions of dollars into the economy to combat the economic damage caused by the coronavirus. WSJ explains where all this raise money is coming from. Photo illustration: Carlos Waters / WSJ

Several wealth management executives have said the economic turmoil caused by the pandemic is unprecedented. The S&P 500’s plunge into a bear market in March was the fastest on record. But they also noted that the market had recouped a substantial portion of its losses within a month, around the same time the loans were being distributed under the program.

The rapid recovery has boosted the assets managed by these companies, rejuvenating a primary source of income. Wealth management companies charge an average fee of around 1% of a client’s invested assets. These billings continued throughout the pandemic and were only minimally affected during the height of the recession, MM said. Rush and Mabie.

Jamie Hopkins, chief executive of the Carson Group, said the company had several lines of business beyond its wealth management unit, and some of them were affected by state-by-state closures. Its events arm, for example, has canceled nearly 80 events so far this year, and the company is using its PPP money to cover those salaries, Mr Hopkins said, adding that none of the funds had been used for his wealth group.

“The purpose of this was to protect employees and jobs,” said Mr. Hopkins, who declined to disclose the loan amount. “We made the right choice. We would have let people go otherwise.

Carson Group has 424 employees, including 392 who play an investment advisor role and exclude any office workers, according to a securities file.

Cornerstone did not respond to requests for comment. The company said in a securities filing last month that “the uncertainty of the pandemic and high market volatility have raised expectations that it may need funds to support ongoing operations. However, this is currently not the case. The company has 28 employees.

Creative Designs said in its file that “the PPP loan was necessary to support existing operations without layoffs or reductions in employee compensation.” The company added that it expected the loan to be canceled and did not expect to experience service disruptions without it. He told the SEC that it has 157 employees, excluding office workers, 145 of whom perform investment advisory roles.

Neither company disclosed the amount of its loan.

The backlash has led some asset managers to publicly declare their intention to repay their loans, even if they are forgivable under certain conditions.

Josh Brown, CEO of Ritholtz Wealth and commentator for CNBC, said his company plans to repay money received under the PPP program.

“The economy is reopening; my clients seem OK for the most part. We took a hit of income and it sucks, ”Brown said. “But I’m not asking for forgiveness. Companies whose revenues have not been affected should not ask for forgiveness, unless they now have no morals. ”

Mr Brown in a way sparked the conversation about PPP lending in the wealth management industry, with a May 25 post. on his Reformed Broker blog which detailed the circumstances that led to the loan.

“I am never comfortable with debt, but I am even less comfortable with the idea of ​​having to let people go,” he wrote, pointing to employees who are not in. contact with customers, such as one who shoots videos for the company.

Ritholtz employs 30 people, according to a securities filing.

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Twitter

message from Mr. Brown share blog post drew dozens of comments, ranging from some calling it “shame” to others applauding a measure meant to protect jobs.

“Give me a time machine after the way people have treated me” for sharing his thoughts, Mr Brown said. “I would have remortgage my house and kept more of my money in cash. The lesson I learned is that we need to set up a line of credit in case things like this arise in the future. “

Write to Michael Wursthorn at [email protected]

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