Joint ventures: a halfway house to ABSs?

Issues with dual regulation have discouraged the adoption of integrated business models and are pushing solicitors towards tie-ups with independent financial advisers, says Ian Muirhead

The SRA is exhorting firms to think outside of the legal box and take advantage of the opportunities offered by the Legal Services Act to provide multi-disciplinary services; consequently the Legal Ombudsman has noted that "professional services are being increasingly bundled together and there are overlaps between, for example legal, financial, property and claims management companies".

However, it is the accountancy firms that are leading the way, and Sir Michael Snyder of Kingston Smith, one of the trailblazers, commented in relation to solicitors' apparent reluctance to embrace change: "They need to think laterally. There's a lot of fear out there, but there shouldn't be."

Halfway house

Perhaps part of the problem, which the SRA is now seeking to address, are the complications within the SRA's process for licensing alternative business structures (ABSs). Insofar as legal plus financial ABSs are concerned, there are also problems arising out of dual regulation. These have discouraged the adoption of integrated business models and may be one of the reasons why the halfway house of joint ventures (JVs) with independent financial advisers (IFA) has become so popular.

With the appropriate documentation, JVs can be set up quickly and with minimal cost, because what is being created is a subset of a financial adviser business in which the solicitors have a shareholding. For regulatory purposes, the JV is an appointed representative of the IFA firm, which provides the regulatory umbrella. 

But, importantly, the solicitors can receive a dividend, this being a solicitor’s separate business for the purposes of the SRA Code of Conduct. Dividends need not be declared to clients, and the only disclosure requirement is that the solicitors must declare a financial interest in the JV.

Like all marriages, formal relationships between firms are not to be taken lightly or wantonly. Particularly where different professional disciplines are involved, a period of intimate familiarisation is required before the knot is tied.

The starting point in selecting a JV partner should be to ensure that the business specialities of the two firms are complementary, with the main areas of common ground for private client firms including trusts and estate, later-life planning and family. The objective should be to provide joined-up client services, on what the SRA refers to as a holistic basis.

Solicitor wavelength

It is important also to bear in mind that the separate business rules require that the financial adviser participants must be independent,which chimes with the Law Society’s strong recommendation that solicitors’ referrals for financial advice generally should be confined to independents. Preference should be given to firms and advisers who are either chartered or certified by the Institute of Financial Planning, and possession of the IFA accreditations provided by STEP, Resolution and the Society of Later Life Advisers are important in identifying IFAs who really are on the solicitor wavelength.

JVs are permitted to bear a similar name to the law firm with which they are associated, which enables the solicitors involved to refer clients to ‘our financial planning arm’. However, if the law firm’s website contains a link to the JV site, a holding page should be inserted to make clear the change in regulatory regime. The advantage of a similar name will, of course, turn into a disadvantage if there is any expectation that the services of the JV should be made available to other law firms, in which case a neutral name should be chosen.

Questions are sometimes raised as to whether it is permissible for law firms to have exclusive relationships with financial advice firms, and the answer is that it is not. The JV should be regarded as the default option, and arrangements should be made for business to be referred elsewhere if the client expresses a preference or if the specialist expertise required falls outside the competence of the JV.

Other questions relate to the propriety, from the point of view of potential conflicts of interest, of referrals to a JV by trustees of controlled trusts and deputies of the Court of Protection, and the usual answer is that it is for the individual solicitor to be satisfied that the referral is in the best interests of the client.

From a commercial standpoint, the major benefits of a JV are that it provides the basis for formal business planning and marketing. SJ

Ian Muirhead is a director of SIFA