Investing in your investment services

Following the Financial Services Act 1986, solicitors were encouraged to offer investment services by the Law Society, assisted by the establishment of Solicitors Financial and Property Services. Since then, however, first the Financial Services Authority (FSA) and now the Financial Conduct Authority (FCA) have imposed requirements which are more comprehensive, and it is mainly for this reason that most law firms have been discouraged.

By contrast, since the opening up of the legal services market, the competing financial market, such as accountants, banks, and independent financial advisers (IFAs), have been less slow to see the potential.

The legal profession is, therefore, now under much more pressure from competitors, many of whom are offering legal services traditionally associated with a law firm, such as probate, trusts, lasting powers of attorney, and will drafting.

Ian Mellor, the equity partner responsible for the investment service at George Ide, switched specialism from criminal law in 1999. He is now managing an investment department charging exclusively recurring fees, which are considerably greater than any which the firm received from criminal law services. The switchover began conservatively; we did not spend a great deal of money on elaborate computer systems or overpriced advisers.

We did ensure that we were fully compliant with the regulatory requirements, that we were competent, and we took particular care to train the necessary administrative and compliance support, before explaining clearly to our clients how we proposed to provide our new advice.

There are two main avenues:

FCA regulation: The FCA has no mandate to be unduly difficult or obstructive to a firm that wishes to offer investment advice. It does require, of course, that any firm wishing to provide such a service is solvent, well-run, and with full awareness of its regulatory requirements.

SRA Financial Services (Scope) Rules 2001: These rules are more extensive than many practices believe and allow the solicitor, who does not wish to follow the direct FCA route, to still carry out a great deal of work in investment matters. If FCA regulated advice is required, this can still be provided within a partnership arrangement which enables the introducing solicitor to remain very active for his client in the matter in a supervisory capacity, so a partnership with another law firm is possible for example.

Either of the above avenues are viable, but a firm should first carry out a detailed feasibility study to assess carefully not only the investment potential of the type of work which the solicitor undertakes, but also the firm culture, staff attitudes, and whether these fit the provision of an investment service.

Marketing a new service

Supportive business areas of legal work are:

Probate: At the first firm where I built a large investment service, about three-quarters of the portfolios under management originated from probate work. Many elderly people feel vulnerable when a partner dies, particularly if that partner has dealt with most financial matters. They would often, therefore, value advice from their trusted solicitor.

Trusts: If a firm has a strong trust practice, there is clear potential for investment advice. These may be trusts from wills or lifetime Inheritance Tax planning. Equally, a trust could arise from a personal injury (PI) claim, where it is not only often vital to establish a PI trust for the protection of means-tested Department for Work and Pensions benefits, but also to protect the claimant personally in difficult family circumstances.

Lasting powers of attorney (LPA): If a firm is advising on an LPA, investment advice will often be required and the best and most trusted form of that advice is by the firm itself.

Charities: How many law firms have a strong charitable trust practice? Yet there are many situations by will or during their lifetime where the client wishes to leave a significant amount to charity, unaware that probably the best way of doing so is through a charitable trust, rather than directly. A charitable trust can often be more suitable to enable the client to direct specifically how the funds are to be applied e.g. locally, to avoid wastage, and for specific projects dear to the client's heart.

Property and commercial work: Many commercial people often do not spend enough time in satisfactorily arranging their own financial affairs, but may mistrust some other types of financial adviser, particularly those who are more sales inclined. Accordingly, if the firm already advises a client on legal matters, what better service for all concerned than to also provide investment advice.

Personal injury: Apart from trusts in PI matters, who is to actually provide the investment advice? Many specialist PI firms are quite naive on what is to happen after the claim is settled, but it surely makes no business sense whatsoever to leave the client to fend for himself in such traumatic situations. We have a large PI department that many of our investment portfolios have originated from, with a high degree of ongoing client approval and protection.

Consider carefully therefore:

• What your clients require and need: Remember you are still more trusted than most other types of adviser and in investment work you are certainly more trusted than those who have been responsible for the mis-selling scandals of recent years. Does it make commercial sense for you to pass your client on to the competition?

• Increasing competition: We are now working in a legal market of alternative business structures, so competition is only going to intensify. This must be addressed more positively.

• Business development: It should be obvious that any business should service the full needs of its clients, because if it does not do so there is a very good chance of them going elsewhere for the advice they require.

John Atkinson FCSI is head of trusts at George Ide