Planning for growth

Financial planning is a potential growth area for solicitors, especially in the context of the new forms of business that will be permitted under the Legal Services (Scotland) Bill.

That was the message at two well-attended Update seminars in Edinburgh and Glasgow last month, featuring speakers from SIFA (Solicitors’ Independent Financial Advice) and the financial planning/ wealth management sector, who believe that different regulatory measures are combining to create a climate of opportunity for those prepared to commit longer term.

As SIFA managing director Ian Muirhead recognised in opening the meetings, solicitors’ experience of financial services to date has been one of declining involvement. Increased regulatory costs have meant that discretionary investment management has become impractical for all but the very well resourced. Edinburgh firm Lindsays’ recent disposal of their investment management operation to the private bank Brown Shipley simply illustrates a trend that has been taking place for some time.

Commission out, fees in But the growth area, according to Muirhead, is in financial planning, where the helpful regulatory change is the phasing out (by 2012) of commission payments to, and the better qualifications to be required of, IFAs – who will in future have to rely on fees from clients. This improves the prospects for those able to offer advice on an ongoing, fee-paid basis, “handholding” clients by helping them make investment decisions regardless of whether a particular product is recommended.

As Muirhead pointed out, such activities are a natural extension of legal work in a number of fields apart from private client or trusts: divorce settlements, personal injury compensation, equity release and advice to the elderly, and advice to business owners can all involve financial planning, not to mention solicitors’ own pensions. He added that ongoing advisory work reduces the solicitor’s exposure to the whims of clients with transaction work, and offers diversification at a time when a shortage of “legal” work is likely to result in some attrition in professional numbers. Indeed Muirhead suggested that such an ongoing relationship, where the client takes part in the review, reduces the risk of complaints about bad advice.

Business models

His colleague Stuart Bushell, surveying the likely scene post-ABS, told the meeting that Scottish solicitors appear to be more business-minded than their English counterparts and generally show more interest in these ventures.

How to do it? Here you have to choose the most suitable business model. You could recruit your own financial adviser or team. Firms such as Turcan Connell have done this very successfully, but Muirhead suggested they are the exception, as it requires solicitors capable of managing a financial services business. You can refer clients to another firm, not on the traditional introducer’s payment or commission basis but in such a way that the relationship with the client is maintained by the financial adviser being seen to send the solicitor copies of regular client investment reviews, thus inviting possible comment on legal issues. Or you could set up a joint venture with, for example, a wealth management company (subject to ensuring that the company is not tied to individual product providers). The solicitors’ involvement is remunerated by way of dividend, thus avoiding the commission issue. The share will depend on how actively they participate – from effectively being sleeping partners at one end of the scale, to owning the company while leaving it to be managed by the IFA (who takes responsibility for regulation) at the other.

Serious questions

Andrew Cumming, managing director of Scott-Moncrieff Wealth Management, gave his views on the considerations to be thought through with joint ventures. While this is not a complete account, he warned to be sure you know the experience, qualifications and advice ethos of your prospective partner, and be prepared to do due diligence at a much higher level even than with a practice merger. Most importantly, decide whether your advisers will have appointed representative status (akin to a franchise, and probably best in the early stages), or whether the new firm will be directly authorised with the FSA, which has cost and compliance implications. And there must be complete clarity as to performance and service criteria.

After reviewing the various corporate governance considerations, he asked, is it worth it? – and answered yes, on the way the market is changing, as you drive income from non-core sources and create synergy with your own business and ethos. Provided, that is, you are prepared to be in it for the long term.