More and more of today's advisers are specialising in select areas of expertise and working with accountants and solicitors who increasingly regard them as their professional peers and are comfortable introducing clients who might need specific advice on matters such as investments, pensions and tax planning.
Ian Muirhead, chairman of Solicitors for Independent Financial Advice (Sifa), is well placed to comment on the changing landscape. His body provides support services to solicitors, accountants and IFAs. He believes accountancy firms have always been more aware than solicitors of the importance of financial advice and said: "By their very nature accountants are more commercial and flexible than solicitors and in many cases better at running a business. Legal advice is transactional – a client may instruct a solicitor to do some conveyancing, draw up a will or handle a divorce, take a fee and then close the file and lose touch with the client. Accountants, on the other hand, will maintain regular contact with clients in relation for example to audit, tax returns and annual accounts."
As a result of the Legal Services Act, which effectively abolished solicitors’ monopoly of the retail legal services market, accountants are now providing competition for solicitors. There are about 300 accountancy firms authorised to conduct probate business and their representative body, the Institute of Chartered Accountants in England and Wales, has predicted this will rise to some 750. In the foreseeable future, accountants will be offering all types of legal services that were previously reserved to solicitors.
Key points
- More and more of today's advisers are working with accountants and solicitors.
- Payments can be justified if the solicitor really does provide a service.
- Advisers have to parade their areas of expertise to solicitors.
Mr Muirhead said financial advisers have a big role to play in helping solicitors maintain relationships with their clients and he is delighted that solicitors’ regulatory body, the Solicitors Regulation Authority (SRA), is urging solicitors to take an holistic view of their clients’ professional needs.
Since 2012 solicitors have been allowed to introduce clients to restricted advisers, although their representative body, the Law Society, which is now separate from the SRA, is strongly in favour of referrals being confined to independents, on the basis that independence has always been “one of the fundamental tenets of the profession”.
The rules affecting payments received from financial advisers for referring clients are similar for solicitors and accountants. In both cases, the requirement is that the professional referrer must account to the client and justify retaining the payment.
In most cases, the professional will have simply passed on the client’s name and contact details to the financial adviser, which will hardly justify the sums that might be received, and most solicitors prefer to refuse payments. They have always been highly motivated by ethical considerations and tend to assume ethics is the basis of regulatory compliance. Significantly, the area of the SRA website containing the code of conduct has a pop-up that reads: “Do you have a question about these rules? Chat to an ethics adviser.”
However, payments can be justified if the solicitor really does provide a service – in particular, solicitors who actively work with financial advisers to promote the value to the client of receiving financial advice. Ways of doing this include making financial services marketing material available in their reception areas and on their websites, participating in joint seminars and linking via online referral systems to provide joined-up advice. This can be followed by a simple two-way agreement with the client, explaining the benefits and the fact that the remuneration is coming out of the adviser’s pocket, not the client’s.
The need to account to clients will be triggered by any payment that is seen to be related to a transaction. The SRA will regard any such payment as being a commission. However, dividends received from joint venture companies established between solicitors and financial advisers need not be accounted for to clients, although referrals to JVs and other financial advice firms with which law firms have a financial connection should be supported by the client’s written consent as a matter of best practice.
The SRA is making it easier for solicitors to work with IFAs and has commented that changes in its rules provide the basis for a two-way street between the two professions. It has set in train new rules due to be introduced in the autumn of 2018, which represent a game changer for advisers and planners who work with solicitors.
At present, decisions as to which IFAs should receive referrals are typically made by individual solicitors in a practice. Seldom are decisions taken on a firm-wide basis, and seldom is the referral formalised. Consequently, there is no centralised due diligence and the law firm is exposed to the risk of client complaints for inappropriate referrals resulting in bad advice.
The new draft SRA rules state that referrals must be based on written agreements. The SRA has also stated its expectation that these agreements will be on a firm-to-firm basis. Individual solicitors within a firm will no longer be able to plough their own furrows and refer clients to a pet adviser as the new rules will put an end to this type of deal.
As Sifa put it in its recent briefing note: “This [the new rule] represents an important departure because it encourages solicitors to adopt a corporate mentality and to move away from the ‘confederation of sole practitioners’ syndrome which militates against the organisation of law firms on a commercial basis.”
In a typical situation it would be expected that most law firms would need to have referral agreements with a number of IFA firms, based on the specialist expertise and qualifications of those firms; and Lexcel, the Law Society’s quality standards body, recommends that in this situation a panel should be created and kept under periodic review. From the IFA firm’s point of view, this provides the opportunity to spell out its areas of expertise and the skill sets of its advisers and planners in a due diligence document.
I feel very strongly that advisers have to parade their areas of expertise to solicitors seeking financial advice for their clients. Do not just tell them you are an IFA – stress your areas of expertise. Not only is it a good form of due diligence, but also it will help you concentrate your mind and make you stand out.
For example, if you specialise in divorce matters, as my colleague Paul Gorman does, join the divorce practitioners' forum Resolution, which is committed to non-confrontational divorce, separation and other family problems. Or take another example – gain Society of Trust and Estate Practitioners (Step) accreditation. The body for professionals involved in trust and estate planning work and membership will not only provide useful networking opportunities, but also put advisers on the same wavelength as introducers. Another body is the Society of Later Life Advisers (Solla).
Gaining Solla accreditation is useful for advisers who understand the financial needs of those in retirement and in care. The important thing is that the IFA should work with solicitors in such a way as to complement and enhance the solicitor’s client proposition.
I welcome the news that relationships between advisers and solicitors are to be put on a more formal footing.
Richard Jephson is partnership manager at the Beaufort Group
