Should your firm team up with an IFA?

Law firms are coming under unprecedented competitive pressure. Recent research by Crowe Clark Whitehill concluded that almost 50 per cent of regional firms consider that accountants represent the biggest threat to their livelihoods. Unregulated legal advice is also growing and already accounts for between ten and 13 per cent of family and divorce work.

So, how should firms react to these developments?

Specialisation might be an answer. A past president of the Association of Personal Injury Lawyers advised members to ‘get big; get niche; or get out’. An alternative might be to diversify your client offering, acknowledging that consumers tend not to recognise the barriers which have differentiated one profession from another, and are simply seeking a trusted adviser.

Certainly, doing nothing could be a mistake. In the words of a 2016 Law Society report: ‘Business as usual is not an option for many, if indeed any, traditional legal service providers.’

In the past, solicitors have not shown any great facility for assimilating non-mainstream businesses. Early attempts by the very successful Scottish Solicitors Property Centres to establish a similar organisation in England and Wales petered out, and the pioneering firms which set up in-house financial services departments threw in the towel in response to the introduction of regulation by the Financial Services Authority (FSA) in 2001.

The SRA’s line

The Solicitors Regulation Authority (SRA) has suggested, perhaps somewhat fancifully, that solicitors might provide accountancy services, but this overlooks the fundamentally different mindsets of the solicitor and the accountant.

The fact is, for better or worse, many law firms still operate as confederations of sole practitioners, and this is a model on which the SRA seems to agree. It has not indicated any intention to require firms to install management systems and controls, which are the starting point of financial services regulation.

Admittedly, its new draft Code of Conduct includes, for the first time, a number of provisions which relate to firms as opposed to individuals, but its proposals for permitting solicitors to provide non-reserved services through unregulated firms and to practise as individuals without the conditions applicable to sole practitioners, are clear evidence that the focus continues to be on the individual.

Consequently, solicitor firms are unlikely to become the basis for the multi-disciplinary professional practices envisaged by the Legal Services Act. But this is not to say that solicitors will be unable to provide more diversified professional services in the future.

New alliances

What it does mean is that diversification is more likely to be achieved through alliances with other professionals, whether formal or informal, than by organic development.

Such alliances are already taking shape. In the words of Crispin Passmore, SRA executive director for policy, ‘We are seeing firms taking an increasingly holistic approach to problem-solving. And many firms benefit from the expertise and specialism of financial advisors, solicitors, accountants and others’.

Financial advice is undoubtedly a discipline which offers clear synergies with legal services. George Osborne’s ‘pension freedoms’ provide inheritance tax benefits which come into play in the context of wills, estate planning, divorce and later-life planning. Other financial products offer their own estate planning opportunities, while tax-efficient trust investment depends on understanding the characteristics of alternative investment ‘wrappers’.

Regulation

The current SRA Code of Conduct requires solicitors to ensure that referrals of clients for financial advice should be in clients’ best interests and (in outcome 6.3) that clients should be able to make informed decisions that this is the case.

The clear implication is that referring solicitors should conduct due diligence to satisfy themselves as to the suitability of referees and share with the client the information they obtain as to an IFA’s credentials. However, the fact that the SRA no longer has a field monitoring force means that this provision has not been enforced and will be replaced by the requirement of the new draft SRA Code, which is due to come into force in autumn 2018, that referral arrangements should be supported by written agreements.

Currently, most arrangements for the referral of clients for financial advice are ad hoc and informal. In many cases, individual members of firms are permitted to go ‘rogue’, appointing all and sundry financial advisers, with a fine disregard for due diligence.

If this laissez faire attitude continues after the new Code comes into force, it could result in a proliferation of referral agreements within firms. However, the SRA envisages that a single agreement should cover all referrals made to any one IFA firm, and it might be hoped that this would lead to a more centralised approach to IFA referrals, based on due diligence, co-ordinated by compliance officers for legal practice and agreed by management.

Due diligence

The objective of any due diligence exercise should be to ensure not only that the selected IFAs are reputable and competent, but also that their services are compatible with those of the law firm and will provide the basis for joined-up legal and financial advice.

Independence is important, and in this respect, the Law Society has recommended that referrals should be confined to IFA firms, that is those which are free from the influence of the providers of financial products. It is sometimes unclear in practice whether or not firms are independent, but a rule of thumb is that nationwide IFA firms are most likely to provide advice which is restricted in some way. The fact is that these firms need to keep their legions of advisers – who are in many cases self-employed – on a short leash in order to minimise their corporate exposure to regulatory and legal recourse for unsuitable advice. One way of doing this is to limit the financial products to which the advisers have access, but this opens the door to deals with product providers which may not be in clients’ best interests.

As regards competences relevant to solicitors, chartered financial adviser status denotes all-round ability, but an increasing number of IFAs have gone the extra mile to equip themselves to work with solicitors by obtaining the IFA qualifications offered by the Society of Trust and Estate Practitioners, and Resolution (previously known as the Solicitors Family Law Association). For elderly client work, the Society of Later Life Advisers, which has links with Solicitors for the Elderly, similarly straddles the two professions.

Investment / financial planning

In the past, many solicitors identified only the need for investment advice and recommended stockbroker firms to the clients, which would manage portfolios on a discretionary basis, particularly for trust investment. However, times have changed. Stockbroker portfolios have consisted traditionally of individual UK securities, whereas it is now recognised that from the point of view of both global and sector diversification (which is key to risk control) and tax efficiency, investments are often more suitably held in tax wrappers such as collective investments or, in the case of trusts, investment bonds.

It is also more widely recognised that in view of the importance of tax efficiency, there are clear advantages in referring to financial advisers who are able to take an holistic overview of clients’ needs, based on detailed fact-finding which goes far beyond that required of discretionary portfolio managers. In addition, it is financial advisers who are best placed to work with solicitors, to complement and enhance the solicitors’ own services, rather than simply receiving client referrals.

Closer association with referees can also assist solicitors to reduce their dependence on transactional business and participate in ongoing client relationships. IFAs are able to share their client information with referring solicitors, sometimes through bespoke referral software which also has the advantage for solicitors of providing a compliance audit trail and enabling them to track remuneration.

Structural options

The greater formalisation of referral arrangements presaged by the new SRA draft Code permits greater flexibility in relation to the remuneration of solicitors who work closely with financial advisers, and centres simply on client disclosure. Nevertheless, solicitors will need to justify to their clients any payments they retain, and in this respect, their marketing arrangements, whereby solicitors actively work to promote the benefits of financial advice to their clients (eg making explanatory material available, participating in joint client seminars etc).

Subject to clients’ consent, solicitors can also receive dividends from formal financial services joint ventures (JV), 50/50 companies which are appointed representatives of IFA firms for regulatory purposes. The separate business rules permit a JV to bear a similar name to that of the participating law firm, thus enabling solicitors to talk about ‘our financial services arm’. However, the fact that a JV is usually an appointed representative of an IFA firm means that it is the IFAs who are responsible for ensuring compliance with FCA requirements.

Many JVs fall short of expectations because the solicitors are unable to take a collective decision to make them work, and individual partners continue to make their own arrangements. The greater the number of partners, the greater the likelihood that this situation will arise, and it is significant that the most successful JVs have been established by smaller law firms or an individual department within a law firm. Personal injury is a case in point, where the expertise required of the IFA is of an esoteric nature, and solicitor and financial adviser work as a team, addressing legal, tax, social security and vulnerable client issues with greater efficiency than might be achieved through outsourcing.

Both the current SRA Code and the new draft Code require that when solicitors refer clients to financial adviser firms in which they have a financial interest, for example through a JV, they must obtain the clients’ ‘informed consent’. The Code does not specify that this consent should be in writing, but best practice and solicitors’ own interests suggest that this should be the case.

Whether referrals are made via a formal structure, such as a JV, or informally, some partners or directors may query whether it is desirable or even permissible from an ethical standpoint to align with a single IFA firm, and may question whether in any event a referee is competent enough to address the varying requirements for financial and investment advice which can arise from within a firm. In this respect, best practice would suggest that a panel of IFAs should be created, in accordance with Lexcel principles; and in the case of a JV, the JV participant might be regarded as the default referee.

The SIFA Directory

Information about financial advisers who work with solicitors can be found in the SIFA Directory of Professional Financial Advisers, which is endorsed by the Law Society.