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At the end of last year, the Association of Solicitor Investment Managers (Asim) reported a record £3.7bn invested through its members, up £500m on the previous year.
The non-profit-making association represents 43 full members and eight associate members, all of which run investment management firms or divisions that are either part of, or owned by, law firms.
This coming year, though, will see a significant change in regulation for all members. Under new Financial Services Authority (FSA) rules, it seems that all members will move from under the umbrella of the Law Society to FSA supervision. Law Society regulation is presently a unique selling point (USP) for Asim members, so will the change in regulation affect how the firms are able to market and sell themselves?
Simon Lough, director of financial investment at Cripps Harries Hall's London office, points out that many firms moved into investment management to fill a gap in the market that affected clients coming in for legal services. According to Lough, those conditions remain unchanged. "Most private client solicitors in the past had often put clients the way of an investor manager on an informal basis," he says. "The Financial Services Act 1986 forced people to decide whether they wanted to offer services on a formal basis."
Under those regulations, anyone purporting to offer financial advice had to be properly qualified and regulated, so a client who had just sold their business through their solicitor could not rely on a few tips on what to do with the money unless their solicitor had taken the relevant financial advice qualifications.
At the same time, many stockbrokers decided to withdraw from the private client market to concentrate on the more profitable corporate investment side. Those clients with less than around £1m to invest found that there were fewer stockbrokers to cater for their needs. This left many law firms looking after clients who had considerable amounts of money to invest but no advice.
With client care as a backdrop, most firms believe that the change in regulator will make no difference to their USP. Peter Nellist, a member of the Asim board and head of Clarke Willmott & Clarke's investment arm, says that the firm set up its investment arm because it had several clients which were receiving poor advice and did not know where to turn. In this situation, the firm is typical of most investment divisions.
Nellist believes that combining the traditional approach of a solicitor offering client care with financial advice leads to a much better service. "You have a strong solicitor ethic coming through automatically," he says. "Solicitors are like bank managers were 20 years ago. Then, you'd have received impartial advice from your bank manager, but now they've turned into salesmen. We've got a better client relationship. A lot of new clients come in transferring from stockbrokers."
By moving under the control of a new regulator, the members of Asim could find that there is little point in belonging to the association as there is nothing to define themselves from other investment firms.
Nellist says that an Extraordinary General Meeting will be held soon to decide whether the association should sit tight or join the Association of Private Client Investment Managers and Stockbrokers (APCIMS), which, as its names implies, is a much broader trade association.
It seems that Anthony Wands, who heads Thesis, the investment firm owned by the partners of Thomas Eggar Church Adams, has already made up his mind, despite Thesis being a founder member of Asim. "There are very few advantages to being a member of Asim these days," says Wands. "Now Cripps and ourselves give more than we take from the association. David Lough [of Cripps] and I must have done 30-40 seminars trying to explain to other solicitors how to set up investment units. Also, the association has very high secretarial costs."
Whether or not the new regulator makes a difference to the marketing of Asim members, or indeed to the association itself, remains to be seen, but what is certain is that the businesses themselves will have to change.
The new rules, known as N2, are expected to come into force sometime this year. Asim has been closely involved in the consultation process, which has seen the body lobbying for a level playing field for law-linked practices.
One issue that has raised much concern has been that of capital adequacy rules.
It is expected that the FSA will require all businesses offering financial advice to have reserves worth 13 weeks of revenue to act as an insurance policy for clients' money. However, there is currently no allowance for financial advice operations which are just a small percentage of a law firm. Using the example of Cripps, the investment division brings in 25 per cent of the firm's overall turnover (a relatively large percentage, as many firms have much smaller investment arms). But it would have to keep in reserve the equivalent of 13 weeks' revenue of the whole of the firm, which is roughly equivalent to one year's revenue from the financial arm.
Because of the proposed new rules, many law firms are being forced to look at shedding their investment arms. James Sageman, managing director of Lawrence Graham's investment business, says that he expects the department to become a separate business, owned by the partners of Lawrence Graham, before the end of the year.
After N2 is introduced, a period of one year's grace is expected to be given to law firms to comply with the new regulations.
Lawrence Graham is not alone in deciding that it needs to split off its investment business. Cripps admits that it is currently debating the issue. Fortunately, Thesis does not have to make the choice - it became a separate company 25 years ago because, says Wands, the amount of investment needed was too much to allow the business to remain inside the partnership of Thomas Eggar Church Adams. Thesis is also already a member of APCIMS.
Wands says that it is no bad thing that the members of Asim will have to move to FSA control. "The Law Society doesn't fully understand the issues involved in investment," he argues. "We're competing against the likes of Casenove, so we cannot afford any dilution of skills or resources. If that means having a proper regulator, then so be it - or we should leave the dining room."
In a period of change, however, Asim members remain optimistic. This year has seen eight new members join the association, including Irwin Mitchell, which started up its investment arm six months ago and already has £20m invested through the business.
But while most of the other firms mentioned formed their investment arms to service high-net-worth clients, Irwin Mitchell's focus is slightly different due to the firm's personal injury niche.
Ian Hale, who moved from Cripps to lead the new operation, explains: "Before we decided to set this up the firm had an arrangement with a third party investor. Irwin Mitchell has a very big presence in the personal injury business, and people who receive these [compensation] awards are often unused to handling large sums of money, meaning that there's a big responsibility upon us to ensure that the money is invested in the best way possible and that the process is not confusing for the client."
Under the previous relationship with an external adviser, Irwin Mitchell found that the service was not what it would have wished for its clients, and so set up its own operation. And like many other investment wings, there is no automatic referral procedure between the division and the rest of the firm.
"We often have to go into beauty parades with external advisers," says Hale. "We're cutting costs by bringing the operations inside. We cut out the double charging. Even within those constraints the lawyers try to be as impartial as possible when choosing investors. In fact, I've not had a 100 per cent success rate in winning Irwin Mitchell clients."
When it comes to winning work, the investment divisions make much of the fact that in many cases they do not earn commission.
Simon Brooks, investment manager at Blake Lapthorn, which has been fully involved in the investment management business for just over a year, explains: "The advantages of using a law firm to handle your investments is that, as the Law Society is our minder, we have very high ethical standards that we must follow. I give a lot of my commissions back to the client and charge them a fee. Investment portfolios are charged at X per cent of the portfolio value. Any commissions that come to me go into the client account, where they can use the cash."
Everyone involved in the business just has to hope that the patina of reliability which many associate with law firms continues to reflect on their investment divisions once they leave the cloistered world of the legal market for the rather more cut-throat one of the financial adviser.