Desert island risk: can you survive alone?

Practising in today’s activities-based regulatory environment is tough for solicitors. But help is at hand for those prepared to part with tradition and share their clientele.

‘Integrate don’t delegate’ was the motto on which membership body SIFA founded itself in the ‘90s. It welcomed 235 firms to the fold with the sole aim of getting solicitors involved in financial services.

By 2001 solicitors were making for the exit, though. The technology crisis had triggered a downward trend on the stockmarket and the Financial Services Authority, as it was known, started its wave of naming, shaming and fining. There are now fewer than 50 firms in England and Wales dual-authorised by the Solicitors Regulation Authority and the Financial Conduct Authority.

But recent changes in the profession, and traditional law firms generally being under heavy pressure to survive, means there is even more impetus to integrate in today’s climate.

Ian Muirhead, chairman of SIFA, says it’s clear solicitors are the big losers from the Legal Services Act. And they are destined to become ‘back-room boys’ while others take a “more educated view on business management”.

“Both the LSB and LeO said recently that the original objective of the Act was multidisciplinary practice,” he says. “This is what the Law Society Council agreed on 20 years ago because they thought it would be good if solicitors moved into other areas. What’s come out is an invitation to all and sundry to get in on the act against solicitors, so it really has turned about-face.”

Breaking down silos between advisory disciplines and looking at holistic practice is the way forward. And survival, notably for smaller firms, rests on embracing the trusted adviser concept. “I would argue that the solicitor tag in future is going to be valid for describing an individual but not valid or attractive for describing a business,” he continues. “Financial advisers are clearly, in my view, the people who can help solicitors and help themselves because they have established a more respectable status in life.”

For some firms, this solution has been a commercially sound strategy for decades. A solicitor who appreciates the crossover of legal and wealth is unusual and integrating financial services is a model that won’t suit everyone, says Muirhead, but it’s worked for one original SIFA member.

Sound strategy

John Eaton, director of Leeds-based Lupton Fawcett, says he always thought solicitors were “shooting themselves in the foot” by hogging clients then watching them walk out of the door once an estate had been wound up, for example.

“Solicitors regarded themselves as having only been there for the transactional purposes, which seemed to me very shortsighted. We were really missing out on the duties of the client to carry on looking after them and get the overriding advantages of seeking to undertake financial services work,” he says.

Eaton’s firm decided it wanted ‘customers’ not ‘shoppers’. Clients were therefore offered the full range of services via a ‘told and sold’ matrix and retained. By looking after their wealth, it was an opportunity to not only see them regularly but forecast business revenue.

“You’d avoid the 16-times greater expense of trying to attract a new client rather than retaining an existing one, and the work is interesting, profitable, recurrent and repetitive. I couldn’t see any reason for not providing a holistic service.”

So why aren’t the majority following suit? Eaton says although it would be easy to point the finger at solicitors, the regulators are the ones building barriers. “It will make it financially very difficult for the smaller firm, whether solicitors or IFAs, to exist and cover the ever-increasing overheads because of the burden of compliance and regulation, which does seem to be getting heavier. You’d probably need a certain critical mass before you could afford to do it now.”

The starting point is reviewing client requirements to assess whether there’s suitability for the additional service. “With having a large private client base, it was very easy and very natural because you have the respect and trust already,” says Eaton.

“The clients think of the solicitors as perhaps being slightly slow, perhaps being slightly expensive, but at the end of the day, they can sleep at night – there’s total trust.”

For firms that can afford to step up, there are various well-trodden routes, such as a form of tie-up with an IFA or an accountancy firm. Less risky is simply cross-referral and building up a relationship with trusted suppliers, while joint ventures, which are now seeing a growing interest, provide a bigger direct involvement in the enterprise.

Symbiotic relationship

Becoming a joint venture, even one localised to a particular department, is perhaps the better option for smaller, regional firms – arguably the ones facing the biggest challenges ahead. It’s a convenient non-committal halfway house, which would prove to be no great loss if it didn’t work out, unlike the daunting task of trying to unscramble
an integrated firm.

Tarvos Wealth has had a joint venture in place for a while and is one of a few integral financial services within a law firm. Currently part of Furley Page in Canterbury, it is in the process of moving away from the main firm to provide services to other lawyers too.

Simon Ludden, financial planning manager, agrees such ventures are particularly important because solicitors have lost their way in the last few years. He says it’s obvious smaller law firms in his region are concerned about client retention and how they can keep their fees up against the likes of Saga. “My view is that professionals – solicitors, accountants, IFAs – need to get together. One thing we can really offer solicitors is client retention because the problem they have is that they’re extremely transactional in what they do. We don’t archive our clients like solicitors do.”

Ludden says Saga is probably the biggest ABS threat in Kent but notes Co-operative Legal Services is making its mark elsewhere. “There is very little reason for a client to be loyal to a firm of solicitors,” he says. “There’s no reason why they can’t just go to someone else, whether it’s about cost or service.

“It’s very clear from that Co-op advert exactly what they are attacking, which is the typical main high street solicitor. It’s aimed directly at them: come away from them and come to us because we’re speaking a clear language and we’ll give you a fixed price so you’ll know where you are. It’s quite a strong message.”

Ultimately, it makes business sense for solicitors to be marrying up their skills with their financial counterparts but there lies the problem. “Solicitors have to be a bit more commercial in how they look at things,” adds Ludden. “There’s still a lot of them with their heads in the sand. We’re in a unique position to form relationships with them and actually
help them move into the real commercial world.”

Running a business is not what solicitors are qualified to do, says Muirhead. They don’t have a proper handle on financial management or an appreciation of corporate ethos and discipline. “I think the accountants are in pole position,” he says. “They’re more financially aware, they’re much more deeply involved with financial services
and when they get probate as well the whole thing comes together and the solicitors will be on a hiding to nothing.”

New model

Fundamentally, the business model is wrong. As well as being largely transaction-based, it does not involve and necessitate fact-finding, he says. “[It’s] becoming apparent now with FinStab, when you add in the inability
of solicitors to manage a business and the disinclination and the fact that so many are operating under the same mentality as the Partnership Act of 1890 – i.e. every man for himself and ‘I’m not sharing my client bases because I might want to move on’.”

The basis of the client relationship is missing. Muirhead says legal work’s association with the negatives in life, such as death and divorce, is off-putting. Solicitors’ waiting rooms house a “dearth of marketing material” and decent databases are in short supply. “A few of the more switched-on have CRM systems which only scratch the surface. They’re simply contact systems for marketing. They don’t have to go into the incidental aspects that might spin
off their legal work.”

Some firms will never get it, he laments, and a significant section is far too preoccupied with firefighting and staying alive. It’s a cultural problem that perhaps rests with management. Some managing partners are almost afraid of telling their partners what to do, some are happy staying static until their imminent retirement and others don’t want to risk anything seen to be controversial, he says.

“It does strike me as ironic that solicitors, the most risk-averse people in the world to their own detriment, are being encouraged by the SRA to construct risk registers to identify all the risks to which they might be subject. It could well encourage them to go back into their shell even more. At the end of the day, it comes down to human nature: what sort of person is a solicitor?”

However, while there’s possible trouble at the top, there’s hope at the bottom. The next generation of solicitors are, for starters, being trained in cross-referrals and adopting a more dynamic approach towards practice. But today’s advisers need to step out of their comfort zone and look at the wider picture.

Eaton says: “For private client solicitors, without a shadow of doubt, if we can change the image of being ‘my solicitor’ to ‘my trusted adviser’, we can offer a much wider range of services. We’re much less likely to lose the client because all decisions that we take are emotionally driven.

“I don’t think solicitors are trained to ask the right questions sufficiently. They’re too keen on displaying their technical knowledge rather than the psychological aspect of finding out what the clients really want.”

Exit strategy

Meanwhile, the alternative business structure is a reality and must be seen as simply another addition to the market. But will it help or hinder the sector? Muirhead thinks it will assist the provision of joined-up advice but traditional companies will suffer and there will be a big contraction in standalone law firms.

He echoes the sentiment of Anthony Gold managing partner David Marshall – “get big, get niche or get out” – and commends Slater & Gordon on ticking the first two boxes in its recent acquisition of Pannone’s consumer services. “But getting big on a traditional law firm model doesn’t get you any further forward potentially, it simply magnifies the problem.”

Albeit Marshall’s advice was to personal injury firms, Muirhead underscores the message for private client advisers. “If you’re looking at an area like later life advice or wills and estate planning and particularly because of the inadequacies of what constitutes reserved legal activity, anyone can do it,” he says, “that’s the main competition.

“You’re going to get the real business managers competing against these amateurs called solicitors.”

Jennifer Palmer-Violet is editor of Private Client Adviser

What do you think? PCA is interested in hearing from firms who have successfully integrated financial services/agreed a joint venture or otherwise. Email jpalmer-violet@wilmington.co.uk

For more information and advice on structuring options from joint ventures to integration, contact SIFA

---