The idea of a financial advice unit that is jointly owned by financial advisers and either solicitors or accountants potentially has strong appeal to both parties, writes Ian Muirhead.
The joint venture (JV) approach provides a vehicle from which both can benefit but which stops short of a merger of the firms in question, with all the attendant complications - both regulatory and human.
A JV can take any one of a number of alternative structures. It can be a limited company or a limited liability partnership (LLP). It can be directly authorised or an appointed representative of the adviser firm. The equity can be held by or on behalf of individuals or firms.
Furthermore, the capital can consist solely of equity shares or can include ‘B' shares, entitling the holder only to dividends. And the JV could have a single professional participant or several. A ‘multiple JV' would, for example, avoid the problem of being classified by the FCA as a network as a result of having five or more ARs.
One of the early decisions to be taken is whether the JV is to provide advice only to the clients of the participating professional firm or firms, or whether it will seek referrals from other professional firms. If the former, then it might well make sense to give the JV a name that reflects that of the professional firm - if the latter, however, it would make sense to avoid any such association.
The choice between limited company and LLP invariably favours the limited company structure, which is administratively more efficient, though tax considerations may have an influence. There have been instances where all the shares are held by the professional firm. There are two reasons for this, the first of which is that it might want to protect its exclusive rights to its name.
The second reason is that the adviser's interest will be in the income generated by the JV rather than its capital (saleable) value - in practice, most clients would be expected to stay with their financial advisers in the event of a sale. More normally, however, the shares would be split 50/50, underlining the equality of interest despite the theoretical problems of reaching decisions in a ‘deadlock' situation.
Again, it would be normal for the JV to be an appointed representative of the adviser firm, to avoid regulatory duplication, and the adviser firm would make available all its resources to the JV so the JV essentially becomes a sub-set of the adviser firm, which would recover its costs in the form of a management charge. Typically this charge would be 60% of the JV's income, leaving 40% to be divided equally between the participants and paid as a 20% dividend to each.
Professional firms are more likely than adviser firms to have partners leaving and joining and, to avoid the hassle of adjusting shareholdings in the JV, the professional firm's shares might suitably be held on trust for the partners for the time being.
Encourage firm-wide referrals
In some cases, where only a few partners are likely to be actively engaged with the JV, the shareholdings might be confined to those partners. Consideration might also be given to allocating a proportion of the dividend to staff, in order to encourage referrals from throughout the professional firm.
Some solicitors object to JVs on the basis that having what amounts to a tied referee would contravene Solicitors Regulation Authority rules and inhibit their independence. Referrals should, however, never be confined exclusively to a JV, which should instead be regarded as the default referee, with matters in which other adviser firms might possess superior expertise being delegated as appropriate.
The essence of the JV should be that the participants have developed such a close understanding of each others' businesses that the resulting synergy provides benefits in cost and efficiency, which an arms-length referral relationship might not achieve.
This underlines the need to ensure that the synergies are established before a JV is contemplated - which means obtaining the commitment of all the principal movers in the professional firm. Many proposed JVs fail even to get off the drawing board because the partners in the professional firms cannot agree among themselves.
Ian Muirhead is a director of SIFA. For more of his Professional Adviser columns, please click here
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