Countdown to RDR: Forging professional connections

The latest in our series leading up to the implementation of the RDR looks at how IFAs can widen their professional connections, particularly with solicitors, as advisers Ian Muirhead (pictured), Michelle Hoskin, Rod Milne and Arthur Childs explain.

The retail distribution review (RDR) gives new model advisers greater opportunities to link with other professionals. Fees or agreed remuneration, statements of professional standing and new capital adequacy requirements will all provide an excellent foundation for enhancing relationships with accountants, solicitors and other professional introducers.

Advisers who want to continue calling themselves independent will have to meet the RDR’s whole-of-market requirements. This will be essential for maintaining connections as the Law Society stipulates that any financial adviser must be independent before solicitors can refer clients to them. For advisers who are able to maintain independence in 2013, this should be a further boost to competitiveness.

Breaking down the solicitor silo

The Legal Services Act, which is coming into effect in phases, is opening up the legal profession to competition. It will potentially force solicitors to seek more commercial opportunities, including links with IFAs.

Many advisers have found forging connections with solicitors hard work compared with accountants, who are more commercial. Many solicitors are waiting to see how the effects of the Legal Services Act play out before entering into any relationships. They are naturally cautious, may have lingering suspicions about financial advisers, and their confederate structure means it is often hard to find the right person to speak to.

As solicitors change their business models, silos that have operated in the past could start to erode. Solicitors may increasingly seek to provide holistic advice and be the trusted adviser, the person with the client relationship who manages all the client’s affairs via their connections. This gives them a strong incentive to find the best IFA in their area, or perhaps to create a panel of IFAs they can recommend. 

Complementary professions

Ian Muirhead, managing director of Sifa, says: ‘The RDR is improving the quality of advisers. We are saying to solicitors that the new model adviser community is now eligible to enter the professional community.’

He describes legal and financial advice as complementary and the ‘ultimate’ mix. ‘One is deficient without the other. For example, it is impossible to go through a divorce without taking account of the finances.’

Muirhead also points to the weaknesses in many solicitors’ business models, mainly the fact they are over-dependent on individual transactions. Advisers whose models are based on ongoing reviews are well-placed to help them.

The two ways legal firms and IFAs can work together is through a referral relationship, from which the lawyer may not derive any financial reward, according to current Law Society rules, or through a joint venture.

Joint ventures are increasingly attractive as they enable solicitors to participate in a dividend and avoid the costs of dual regulation. According to Muirhead, even more important than this is the fact that the relationship gives the solicitor the role of a trusted adviser. ‘It means he or she understands what the IFA is all about,’ he says. ‘Increasingly, there is a focus on quality of advice and the reflection on the solicitor for having made a referral to a quality adviser.’ 

Choosing connections

Sifa has put together six due diligence criteria to aid the selection of IFAs by solicitors. These have been approved by the Law Society’s quality body, Lexcel, and are available on the Sifa website.

Sifa also recommends advisers wishing to forge connections with solicitors specialise in areas where they can work together. The best way to do this is to gain accreditations from the Society of Trust and Estate Practitioners, family law organisation Resolution, the Society of Later Life Advisers or the Association of Personal Injury Lawyers.

One of the biggest obstacles is perception. Research conducted by Sifa and JPMorgan two years ago concluded that solicitors often regard referrals as a one-way street, that is, the advisers do not often reciprocate.

Michelle Hoskin, partner at The Adviser Partnership, has some practical solutions to help overcome this perception. ‘When an adviser is in the early stages of developing a relationship with a solicitor, we advise them to put together a professional development charter. This outlines the commitment of the parties and includes things like proactively looking for business, what should be displayed in literature, running joint seminars and issuing joint press releases. It can also set a dedicated point of contact, regular partner meetings and preferential rates. These things engender buy-in and commitment,’ she says.

Hoskin also recommends asking a partner firm if they have any questions they would like included in a fact find that may help generate business for them and vice versa. These questions should be embedded in the documentation and processes of both sides.

If possible, three-way meetings also work well; financial advisers who work in solicitors or accountancy firms say they are essential.

Joint venture challenges

HFS Milbourne in Guildford has three joint ventures: two with accountants and one with a company secretarial and business partnering firm. It also sponsors the Surrey Law Society, which brings such benefits as a presence at seminars and editorials in the society magazine.

Rod Milne, joint managing director of HFS Milbourne, says: ‘We do a lot of work with solicitors, mainly on divorce, trust and probate. The sponsorship cements our position as a pension transfer and divorce specialist.

‘I am not convinced a joint venture with a law firm would work. Accountants are very business-focused and entrepreneurial, and are of a similar mind-set to us. Lawyers are different. There never seems to be a focal point to the practice, and many of the partners do their own thing.’

This mind-set could take a long time to change. ‘One of the things we learned with law firms is not to sell to them, never call them up and ask "where is the next case?" Our relationships have taken four years to build,’ he says.

Setting up joint ventures with accountants is much more straightforward. ‘We identify a firm we want to work with, then we both do a detailed questionnaire about our practices and talk about the possibilities,’ explains Milne. ‘We then set up a company, half owned by the partners of each practice, which is just a receptacle for the money. The joint venture is either a trading style of our business or an appointed representative of us. We keep 65% of commission or fees and the other 35% gets paid into the company, from which we split the dividend every six months.’

A joint venture ensures each side pulls their weight, says Milne. ‘We have terms of business and timescales. It is all properly laid out so both sides have an obligation to make it work.’

Professional connection advice

The following are some tips for forging professional connections, compiled with help from Mark Chandler, independent financial adviser at Ellis Bates Financial Solutions:

• Have a good understanding of the designated professional bodies and regulators involved (such as the Solicitors Regulation Authority and the Institute of Chartered Accountants in England and Wales) and an even clearer picture of what aspects of financial work they are able to undertake.
• Understand the difference between licensed and unlicensed accountancy firms.
• Be familiar with section 19 of the Financial Services and Markets Act 2000.
• Be sure about your firm’s proposition and put this into a tender style document. Treat this exercise like due diligence on your own firm.
• Be sure to consider the professional firms by department and tailor your approach to their areas of advice.
• Develop departmental propositions, such as private client, professional indemnity and family for solicitors, self-assessment for the tax team, and audit for accountants.
• Provide professionals with checklists and questions (again by department) to help establish the need for financial advice.
• Provide a template referral form to capture initial information.
• Provide training sessions for fee earners.
• Be clear about the type of referrals you are looking for.
• Where possible, formalise the relationship with an authorised third-party agreement.

Transition tale: Arch Financial Planning

Arch Financial Planning has been tidying up its business in preparation for the implementation of the retail distribution review.

The first task was to transfer 100 archive boxes of data into digital format and then destroy the boxes. Arthur Childs, managing director, says: ‘Because we have been going for 21 years, we have got a bit messy. In a few months, we will have a nearly paperless and much emptier office.’

Childs has also tidied up the investment proposition. In 2007, the firm adopted the Nucleus wrap and Childs sits on the wrap’s advisory board. Arch moved clients into model portfolios. ‘We had £100 million of client money invested all over the place,’ says Childs. ‘Our nine advisers are now all using the same process to get to the same model portfolios.’

Clients on the wrap get at least an annual visit, a quarterly investment report, a monthly e-newsletter and the daily Arch money guide via Twitter. 

Post-RDR segmentation

Arch conducted a client segmentation process, while looking for ways to help less well-off clients. ‘Under the RDR, we will have to look after our top-end clients and the others we either have to throw away, which we don’t want to do, or find a process for dealing with them,’ says Childs. ‘Since last year, the minimum level of assets for new clients has been £150,000, or £750 a year in fees. We segment internally but are not writing to say, "We are not dealing with you any more".’

The firm is trying to use the internet to help all those who cannot meet the minimum. ‘For example, we have many clients who will be hitting 65 in the next 12 months and their pension funds are less than £70,000. We want to set up a website providing information to help them help themselves in finding an annuity, if they don’t want to pay our fee,’ says Childs.

‘It might not be as good as the one we could get them, but it will be a lot better than simply going with their current provider’s offering. This can help other retirees, not only our clients.’