The Legal Services Act may be the catalyst for alternative business structures but solicitors need to be more aware of the benefits of working with specialists such as financial advisers, argues Ian Muirhead



It is ironic that at a time when solicitors are being urged to act like businessmen rather than professionals in their response to the Legal Services Act, the Financial Services Authority (FSA) is encouraging financial advisers to go in the opposite direction.



In its current retail distribution review, the FSA is proposing an elite category of financial advisers who, by virtue of advanced qualifications and an approach to remuneration reflecting long-established Law Society principles, would be entitled to describe themselves as professional.



The fact that so many larger law firms have appointed non-solicitor chief executives appears to confirm that commercialism does not come naturally to many solicitors. Or perhaps it is the current structure of law firms which militates against commercialism, because the fact is that in many firms the only factors in common between members of different departments are their qualification and their regulation.



One benefit of the Act is that it will permit complementary disciplines to be harnessed to address client needs. For example, the property market might best be addressed by a combination of estate agent, surveyor, conveyancer, and mortgage and insurance broker; and the wealth management market by a combination of tax and trust adviser and financial planner.



According to press reports, some of the more commercially-minded accountancy practices are already circling law firms with a view to cherry-picking the complementary elements. However, accountants’ main orientation is towards the corporate client and it is the solicitor who is the most natural first port of call for the private client and who has historically taken responsibility for the co-ordination of clients’ affairs.



The Act provides the opportunity for solicitors to regain this historic role, and the addition of a financial service to their business proposition will help them do this. The same opportunity was, of course, presented by the Financial Services Act 1986, but solicitors looked the gift horse squarely in the mouth and permitted accountants to gain the initiative. Those firms that did accept the challenge failed to involve themselves sufficiently and took fright when regulation was tightened by the FSA in 2001. Now little more than 1% of law firms are authorised to conduct this work.



This time around, solicitors are looking to form associations with established financial advisers rather than seek authorisation themselves, but they are rightly wary of advisers whose business practices might reflect badly on them.



In this respect, the professional financial adviser, who works on a fee basis and accounts to clients for remuneration received, is likely to be a better custodian of client goodwill than the adviser who only gets paid if he or she succeeds in selling a product. The highest commissions are paid to those who tie themselves to one or more product providers, and despite the Law Society’s insistence on solicitors referring their clients only to independent financial advisers, some tied and multi-tied firms have persuaded their salesmen (euphemistically referred to as ‘partners’) that the restriction does not apply to them, with the consequence that these people are encouraging solicitors unwittingly to break the rules.



So for solicitors wishing to engage with financial advisers, possibly with a view to establishing an alternative business structure under the Act in the future, the adviser’s approach to remuneration is key. However, this must be complemented by specialist qualifications, and solicitors need to be able to identify the specialisations that are appropriate to their needs.



The platform on which most professional financial advice businesses are based is the construction and management of investment and pension portfolios. The regular reviews and portfolio updates that are essential to this service provide the basis for the on-going client relationship from which solicitors can benefit.



Specialisations are developed around this platform, for most of which a separate qualification is required. One of the most recent is collaborative law, for which Resolution has created an exam for financial advisers who wish to act as financial neutrals in divorce mediation. Those who have passed the exam are listed in an on-line directory. The most recent collaborative ‘pod’, launched in October, is the East Kent Collaborative Law group, involving financial planners Cane Cohen and solicitors Tassells and Gardner Croft.



A related topic for which the FSA demands a specialist qualification is the treatment of pensions in divorce cases. Another is trust work, which includes the tax considerations affecting investment for trusts and the financial aspects of inheritance tax planning. Advice on both equity release and long-term care are now also subject to exam requirements. A more niche area of work, in which only a tiny handful of independent financial adviser firms is involved, is the investment of personal injury and clinical negligence damages.



The starting point for a relationship with a financial adviser firm is usually a simple referral arrangement, preferably without any commission sharing, but as a stage on the road to alternative business structures. Some firms are going further and establishing 50/50 joint venture companies – a recent example being that between the financial advice arm of accountants Price Bailey and solicitors Kester Cunningham John in Cambridge. Apart from creating a greater sense of mutual involvement, such arrangements permit the participants to derive their return from dividends, thus obviating the need to account to clients for transactional remuneration.



Inter-disciplinary convergence is becoming the order of the day, and the firms that regard the Act as an opportunity rather than a threat will derive the greatest benefit.



Solicitors seeking independent financial advisers with specialist expertise can consult the SIFA Directory of Professional Financial Advisers (www.sifa-directory.info).



Ian Muirhead is managing director of Solicitors Independent Financial Advice