Your firm’s referral arrangements with financial advisers could have a very significant effect – for good or bad – on your relationship with clients. Mark Brownridge looks how to find your ideal referral partner, and how due diligence can help

Being an expert is no longer enough. Clients need to really trust you and the advice you are dispensing. But there are levels of trust.

You need to be confident that you are asking the right questions for your clients, and can demonstrate to the regulator how you made your decision. Look at your client proposition and get to understand how a financial planner may or may not complement your clients’ needs

For example, a client may trust you, but not share everything with you. Other clients will trust you to a high degree, and share everything with you. Other clients still will trust you implicitly, share everything with you, without hesitation, and call you before anyone else. You are their ‘go to’ person.

Think of your own client bank. I’m sure you’ll be able to identify those differing levels of trust among each of your own clients.

But who do you trust among your own professional connections? For instance, who’s your ‘go to’ person for financial planning advice?

No doubt you have spent a significant amount of time building your client relationships and are very protective of them. So whether client situations require you to refer clients to financial professional connections, or you are looking to develop such relationships to build your client base further, how do you ensure that you select a financial planning firm that you trust to deal with your clients as expertly as you do? In this article, I provide some background on the current regulation of financial advisers.

The new meaning of ‘independent’

In January 2013, the Financial Services Authority (FSA) – the work of which is now done by the Financial Conduct Authority – completed the Retail Distribution Review (RDR), aimed at improving the services that clients receive from financial planners authorised by the FSA. One outcome of that review was that financial planners had to improve the clarity with which they describe their services to clients, so clients know whether the advice they are receiving is independent, or otherwise restricted in some way.

So, for a firm to be able to call itself ‘independent’ from 31 December 2012, it needs to provide unbiased and unrestricted advice, based on a comprehensive and fair analysis of the relevant market, and inform its clients that it provides independent advice before delivering it. The FSA’s changes are designed to reflect the idea of independent advice being free from any restrictions that could affect the firm’s ability to recommend whatever is best for the client.

Advice that does not meet these standards – for example, advice on a limited range of products or providers – is now described as ‘restricted’. Financial planners falling into this category must disclose, in writing and orally, and before providing advice, that they provide restricted advice and explain the nature of the restriction. They will need to be satisfied that the products they recommend are suitable to the client’s needs.

However, for the Solicitors Regulation Authority (SRA) and the Law Society, this new definition of independence created conflict. Both had previously used the FSA definition of ‘independent’, but following the implementation of the RDR, each now formed different interpretations of the new definition and how to apply them to referrals.

In January 2013, the SRA introduced a requirement in outcome 6.3 of its Code of Conduct, that before making a referral, solicitors must ensure that their clients are in a position to take an informed decision as to whether the referral will be in their best interests. Additionally, within the indicative behaviours (6.2 of the code), it is stated: “Any referral to a third party that can offer products from only one source is made only after the client has been informed of this limitation.”

Conversely, in a press release dated 29 November 2012, the Law Society warned that solicitors could inadvertently become caught up in mis-selling scandals if they referred clients to financial planners offering only restricted advice. Consequently, it took what it called “the unprecedented step of urging the profession not to follow the SRA’s new rules on recommending financial advisers to clients”, warning that it could expose solicitors “to negligence claims”. The Society therefore endorsed the SIFA Directory of Professional Financial Advisers, which lists only advisers who are independent and specialise in working with professionals. The directory categorises financial advisers by reference to business specialisations relevant to solicitors, including trust and tax, later life, matrimonial, personal injury, and Court of Protection.

Conducting due diligence

These divergent views from the regulator and the representative body cause problems for firms wanting to make referrals.

Some may feel that they can still make referrals with impunity, given the regulatory framework: financial planners or firms will be responsible for any planning or investment advice they give; they cannot delegate responsibility for advice; and any client complaints have to be dealt with by the financial planner or firm, not the referrer. This means that solicitors cannot be held responsible for any poor or inappropriate advice. However, firms cannot discount the reputational damage of referring a client who trusts you to a partner who breaks that trust by giving poor advice.

This is where due diligence comes in. Good due diligence helps ensure that you are choosing the right financial planner or firm for your clients. You need to be confident that you are asking the right questions for your clients, and can demonstrate to the regulator how you made your decision. Look at your client proposition and get to understand how a financial planner may or may not complement your clients’ needs. Utilise your compliance officer for legal practice (COLP) to centralise due diligence processes on financial planners, rather than letting individual members of the firm take their own decisions.

If things do gone wrong, well-documented due diligence will enable you to justify the decisions you made. By doing this, due diligence should reduce both reputational and financial risk.

Due diligence shouldn’t be a ‘tickbox’ exercise. Done properly, not only will you satisfy the regulator, but you will also be able to add real value to your business by helping further build, rather than erode, client trust.

Choosing your partner

Once you have your process in place, you can use it to build your referral network.

Research financial planners / firms in your area and what services they provide, and draw up a shortlist. Meet with the financial planners / firms on the shortlist to gain an understanding as to how they work with clients and whether this fits with your own approach. The following questions may help.

  • Do they offer independent or restricted advice?
  • What level of qualifications / accreditations has the financial planner and their team achieved?
  • Do they provide a full financial planning service or a transactional-based service?
  • Do they have policies and procedures which are consistent with the Institute of Financial Planning’s (IFP) Code of Ethics and Practice Standards?
  • Are their fees and charges clear, consistent and transparent?
  • What level of support does the financial planner / firm and their team provide?
  • Have the relevant legal requirements been met (check the terms and conditions)?

When making your selection, it is important to remember, as mentioned earlier, that there are different types of independent financial advisers (IFAs), even among those classed as independent.

Some IFAs, often operating under the term ‘financial advisers’, usually advise on individual transactions (such as finding a mortgage, taking out a pension or making an investment). Those using the term ‘financial planners’ are more likely to work with their clients on an ongoing basis, creating, maintaining and delivering their long-term financial plan.

Five top tips for implementing a due diligence process

  1. Decide what you are trying to achieve from your due diligence process (and that staff understand it, too) and what you want to get out of it. Spell out the criteria for selection. (Note that the Law Society recommends strongly that firms should only refer to independent financial advisers.)
  2. Implement the process, ensuring that you have the required buy-in and resourcing. The firm’s management needs to implement and support the process, and the firm’s COLP should administer it.
  3. Implement the process consistently across your business. Consider using it for other referrals, as well as for referrals to financial planners or firms.
  4. Once you have made your choice – whether that is a panel of referees or a single referee – document your outcomes and how you came to make your final decision, so you have the evidence should anyone ask (and that could include clients as well as the regulator).
  5. Revisit and refine your process over time, to ensure it can support a longstanding referral relationship and that it evolves in line with the market and changing needs – your clients’, your firm’s and your partners’. 

If you are nervous about making referrals and wish to only work with trusted and like-minded individuals, you could consider limiting your shortlist to firms accredited by the IFP, as an accredited financial planning firm (AFPF). To achieve the accreditation, firms have to undergo extensive due diligence (and meet regulatory requirements), so giving solicitors the reassurance that they can recommend them in good faith. You can find a local AFPF at

Hopefully, this article has given you some tools to help identify who you can trust to help your clients plan their finances, and who your – and your clients’ – ‘go to’ financial planner referrer should be. Your clients expect professionalism, and professionalism is about questioning, challenging and not accepting things at face value. Doing all of that as part of your approach to due diligence on financial planners or firms will deliver the best possible result for you and your clients.

If you want to know more…

… about working with financial advisers, you may be interested in our Back to Basics article on the topic, from the May 2010 edition of PS, and ‘Lay of the landscape’, on working with IFAs, including in alternative business structures, from the March 2012 edition.