End result: making ABSs work

Since alternative business structures were first announced in the Legal Services Act 2007, there has been much talk about them, but perhaps less action than might have been expected.

Of course, it is easy enough to talk about ideas, but actually executing them and getting a good outcome is a little more daunting.

So, how do you turn a good idea into a successful service that delivers for clients and solicitor firms alike? Here, we share our experience of ABS, focusing on financial services delivery to clients. It is not all plain sailing, but there are clear dos and don’ts, which will make the journey easier.

The old model: ‘the reciprocation hamster wheel’

Having a good network and knowing who to trust will always be very important in professional circles. Learning from experience who to refer to for work outside of the lawyer’s remit takes time and once a trusted fellow professional has successfully handled a number of your clients it is a relationship you want to maintain.

Good practice within law firms will include sensible record keeping of where referrals are going. This will help partners understand which relationships matter and potentially the risk this represents – too much business referred to one investment manager or independent financial adviser (IFA), where little formal due diligence has been carried out, potentially leaves the firm exposed.

Alternatively, the scatter gun approach of referring clients to many IFAs about whom little is known is equally, if not more, risky.

If you are looking for reciprocation, experience suggests this can work, but is often limited in scope and can have a short shelf life as interest and focus changes for either party.

In our example here, both solicitor and IFA can become frustrated at the lack of reciprocation. This is not surprising, as this model relies upon much that is unspoken and hoping that you or he is currently in favour. Hardly a basis on which to rely.

Due to this lack of reliability, solicitors, and other third parties for that matter, spend an inordinate amount of time networking, consuming great quantities of coffee and canapés, in the hope that their flirtation will catch the eye. This can be enjoyable and the hospitality and catering industry is no doubt grateful.

A new model: joint venture (JV)

At Thesis Asset Management we ?have gained considerable experience in devising, creating and successfully running financial services JVs with ?firms of solicitors. Having taken ?counsel and worked with a number ?of solicitor firms we now know what works and what doesn’t.

One type of ABS, the appointed representative model, is gaining in popularity. Let’s look at what the attractions are.

• Ensures clients get a consistent reliable quality service.

• Reduces the risk of clients being referred to a third party where little or no due diligence has been carried out.

• Provides additional fee income.

• Provides long-term embedded value.

• Long-term financial interest helps to retain talent within the business.

• Helps identify more legal work.?

That is quite a list of benefits, although not all of them were obvious at the outset, and a lot have emerged over time.

Additional fee income can be facilitated by setting up a separate business wholly owned by the solicitor, which can act as an appointed representative (AR) to an investment manager. The AR acts as referrer to its JV partner, ensuring that all the regulatory requirements are met.

A fee is paid to the AR by the investment manager following each successful investment. There are a number of regulatory hurdles to be successfully encountered and guidance is necessary to ensure that this can be completed without falling at the first.

The long-term embedded value was reinforced recently when a firm of solicitors sold its investment service for approximately 3.5 per cent of funds under management. These investment funds were held under a discretionary mandate, which is a significant factor to consider. Potential purchasers of such a business like the low rate of attrition of monies in a discretionary investment structure. Money is said to be ‘sticky’.

Identifying more legal work was perhaps one of the benefits that was not initially considered as a reason for creating the JV, but it is now an increasingly valuable benefit. Many solicitors have a jealous regard for those other professions that have a natural annual cycle with clients which provide ample opportunity to understand what other needs have arisen or were previously perhaps not fully disclosed.

Solicitors are finding that the discipline of regular reviews required for investment business is giving them the time to speak to clients at an appropriate moment and uncover further needs.

Without an annual review it is not surprising that many firms expend considerable efforts in their marketing communications to encourage more client contact. Having a financial services JV means that the client is expecting to have a regular review, giving the firm every chance to understand changes in client circumstances and reduce the risk of the client considering an alternative firm for their needs.

Making the JV a success

Financial services companies and solicitors will often see the attraction of working more closely together, but will be well aware of the many initiatives that have fallen by the wayside. Clearly, all parties to a JV must feel it is sufficiently important to their business, which will bring the required focus to deliver a successful outcome.

Once the legal entity of the JV is created, the policies and procedures put in place can make a big difference. We have learnt some important dos and don’ts from our experience of the process (see box).

Alternative business structures have great potential to deliver a more effective service to clients and deliver value to solicitors. We expect considerable growth and success for those firms that can grasp this opportunity.

Lawrence Cook is the director of marketing and business development at Thesis Asset Management