Joint Ventures. Find the form of joint venture to fit your firm

Transcription

1 Joint Ventures Find the form of joint venture to fit your firm An article by Ian Muirhead, Director at SIFA for New Model Advisor March 2013

2 Joint ventures with solicitors can take a variety of forms, each with different tax and regulatory consequences, which advisers should weigh up before establishing one The buzz in the legal profession is around alternative business structures, the name given by the Legal Services Act of 2007 to firms that are authorised to provide legal services but are not wholly owned or managed by solicitors. It means financial advisers can set up and head an alternative business structure incorporating legal services as a one-stop shop for clients. However, the slightly smaller step of entering into a joint venture (JV) may often be preferable. A separate jointly owned business JVs could be regarded as a halfway house towards alternative business structures. The major difference is that an alternative business structure is an integrated business unit, whereas a JV is a separate business jointly owned by parties whose main businesses are ongoing under their respective regulatory regimes. Most of the JVs that involve solicitors or accountants are with financial advice firms and, strikingly, the Solicitors Regulation Authority (SRA) code of conduct requires that JVs should only be created with independent financial advisers. However, there are two points of interest here: firstly, 'independent' is as defined in the dictionary rather than by the Financial Conduct Authority (FCA): and secondly, the same commitment to independence applies both to solicitors' in-house activities and to their JV involvements, but not to their client referrals to third parties (although the Law Society has strenuously urged its members to refer only to IFAs). Appointed representatives A JV business could be directly authorised, but the more usual and economical arrangement is for it to be an appointed representative of an IFA firm. It could be either a limited company or a limited liability partnership: a decision likely to be determined primarily by tax considerations. Typically, shareholding or membership will be shared equally, on a 50:50 basis, with the solicitors' shares being held in trust for the law firm partners 'for the time being'. In some cases a JV will be staffed separately from the advice firm, but in most cases will employ all of the resources of the advice firm, which levies a management charge against the income received from referred clients. The JV is therefore simply a segregated part of the adviser's business. The IFA firm will receive all of the JV's income and will typically retain 60% to 70%, leaving 30% to 40% available for distribution to the parties as dividend or profit share. On this basis, the solicitors would stand to receive 15% to 20% of the profit, which equates to the maximum commission share that could be justified in pre-retail distribution review days.

3 One-to-one multiple connections One-to-one JVs, which tend to be the norm, are permitted by the SRA to bear the name of the participating law firm, which would enable the lawyers in Sloggs Solicitors to refer proprietorially to 'their' associated financial services firm, Stoggs Financial Planning. However, there is no reason why more than one professional firm should not be involved. But in that case, a neutral name would be preferable. A further option is a JV set up as a financial advice hub for several professional firms in a particular locality. Under this model, only the adviser holds equity shares, and the various referring firms are allocated 'S' shares, which entitle the holders only to a dividend calculated as a percentage of the value of the business introduced. No transactional remuneration It is important the solicitors' remuneration should take the form of dividend deriving from the overall income received during an accounting period: it should not be related to individual transactions. Any transaction based remuneration is likely to fall foul of the SRA on the basis that it represents a device intended to avoid the need to explain to clients any payments resembling commissions. The documentation involved will include shareholders' or members' agreements, articles of association, a management agreement and SRA disclosure and associated paperwork. The reason JVs are so popular with solicitors is that they represent a way of providing an enhanced client service and deriving supplementary income while delegating responsibility for FCA compliance to their adviser partners. There may also be potential for a capital profit on sale. Advantageous ventures From the adviser's 'point of view, JVs have the advantage of being formal arrangements between corporate entities, unlike arm's-length client referrals, which are arrangements between individuals. The creation of a corporate relationship makes it easier to gain the solicitors' commitment to business plans and joint marketing initiatives. Solicitors also stand to benefit from adviser s superior fact-finding and database management skills, including client segmentation and targeting. JVs should never be considered until a close rapport has been established through arm's-length referrals. Even when this relationship exists, there will be hurdles to be overcome, usually arising out of solicitors' widespread lack of management systems and controls. However, there will be more convenient common ground between advisers and solicitors because the new SRA code of conduct is based on FCA principles based regulation.

4 IAN MUIRHEAD S COMMENTS ABOUT OCM WEALTH MANAGEMENT Jason is a great innovator, and the processes he has developed place OCM at the forefront of the adviser community in terms of cost-efficiency and client service SIFA is recognised by the SRA and FCA as the representative body for solicitor financial advisers. To find out more please visit

5 Contact us OCM are listed in the SIFA Directory of Professional Financial Advisers. To find out how we can work together, please contact our team of advisers today on or by ing the team at Offices We have manned offices in Northampton, Milton Keynes and London as detailed below: Northampton Milton Keynes London OCM Head Office Midsummer Court New Broad Street House 3 Bouverie Court 314 Midsummer Boulevard 35 New Broad Street The Lakes Milton Keynes London Northampton MK9 2UB EC2M 1NH NN4 7YD Tel: Tel: Tel: Fax: Fax: Fax: In addition to the above, we also have client suites for meetings in the following towns and cities: 1. St Albans 2. Rickmansworth 3. Richmond 4. Solihull 5. Cambridge 6. Leicester 7. Nottingham