The benefits of developing professional connections
There are two principal benefits to IFAs in developing professional connections.
First, solicitors' and accountants' clients tend to fit the profile of the ideal IFA client – to a large extent middle-aged to elderly and reasonably well heeled, or business owners. They are also accustomed to seeking professional advice and paying a fee for it, and in many cases there is a financial dimension to the legal and accountancy services they receive.
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Secondly, being seen to associate with professional firms enables IFAs to share their professional status in the eyes of clients. Some organisations in the IFA sector have stated as part of their mission the objective of achieving public recognition that fee-based financial advisers should be regarded as professionals in their own right. This is a worthy aspiration, but it understates the immense task of achieving a change in mindset among consumers. It also overlooks the fact that as a result of the Legal Services Act, which will permit solicitors to practise jointly with other professionals, the professions will in future no longer be operating in clearly defined silos.
The ensuing Big Bang will result in new multi-disciplinary business formations defined by reference to identified client needs rather than common qualifications, and there are as number of ways in which IFAs can become involved.
On paper, the integration of legal and financial services within firms controlled by solicitors has much to commend it, and firms such as Turcan Connell and Dickinson Dees have successfully reinvented themselves as family offices. However, the dramatic decline in the number of solicitor IFAs is palpable evidence that few solicitors – at least in England – are cut out to manage non-mainstream disciplines. Accountants, in particular, stand to benefit from the need for business management in the new business formations.
An early example of a scenario in which legal advice is provided from within a firm controlled by members of the accountancy profession is the big 5 practice PricewaterhouseCoopers, which offers the services of PwC Legal through all its UK branches. However, this model is not without its complications which go beyond the predictable cultural issues. Solicitors are subject to special restrictions governing the confidentiality of client information, which inhibits file sharing, and their professional compensation and indemnity scheme provides benefits far in excess of those provided by the FSCS, which invites obvious problems in the event of claims disputes.
About SIFA
SIFA was established by a solicitor in 1992 to assist law firms to become involved in financial services work. The Legal Services Act of 2007, which will come fully into effect in October 2011, opens the door to multi-disciplinary practice, and SIFA's revised mission is to assist solicitors and fee-based financial advisers to maximise the resulting opportunity to provide a combined client service which embraces both legal and financial needs. The SIFA Directory of Professional Financial Advisers is endorsed by the Law Society and accessible via the Society's web site.
The fact remains, however, that there is an irresistible logic to the provision of joined-up legal and financial advice, and this will not always be realised if the relationship between solicitor and IFA is that of an arms'-length client referral arrangement. Hence the growing popularity of joint ventures, which enable solicitors to delegate responsibility for FSA compliance to their IFA partners and to benefit financially by drawing remuneration in the form of dividend (subject to the vital condition that the JV must work on a fee basis and must satisfy the Law Society requirement that any commissions received are surrendered to the client). The JV structure also has the advantage of giving the participating solicitors a greater influence over the IFAs' quality standards than would be possible in an arms'-length referral relationship.
Some solicitors object to JVs on the basis that they feel morally bound to offer their clients what amounts to an open market option when recommending providers of complementary advice, in the same way as they do when selecting barristers. However, this need not be an issue, and some JVs operate a gap-filling policy, under which external specialists are appointed to provide advice where the JV lacks expertise.
Whichever form of relationship is adopted, the full benefits of combining legal and financial disciplines will only be achieved if financial advice becomes a natural part of the solicitors' business proposition. In the case of trusts, this means providing risk analyses of existing investment portfolios, assisting solicitors to compile factfind data, and undertaking regular reviews as required by the Trustee Act.
In many cases the investment of trust portfolios has in the past been entrusted to stockbrokers whose business model has focused on stock-picking individual equities and gilts and has resulted in inadequate diversification and tax and cost inefficiency. The arguments for alternative approaches to investment, which are more likely to satisfy the Trustee Act's suitability test, are discussed in Trustinvest, the SIFA Handbook of Trust Investment.