Plugging the investment gap

Many solicitors' firms offering in-house investment management do not try to attract the person on the street, who is often dealing in small amounts of money and takes a disproportionate amount of time to decide what to do with it.

Often the greater emphasis is on earning repetitive, annual fees from managing the paperwork as well as the investment decision-making for people with portfolios from about £50,000 to £500,000.

But if you stop to think about the events which leave people with capital sums of money – inheritance, personal injury, matrimonial settlement, land sales and so on – there will almost invariably have been a lawyer alongside for some months or weeks before the money finally appears.

So, the client will often turn to the lawyer and ask them where they can get advice on what to do with the money. Those firms with an in-house investment service have the perfect opportunity to refer their client to advisers they have control over and in whom they have confidence.

Solicitors' firms are well placed to work with retired people, widows and widowers, who may have reached the stage of life where they want the burden of decision-making and paperwork lifted from them. There is an instinctive trust towards a reputable local firm of solicitors performing this role. Many firms have looked into the possibility of setting up an investment management business and some, rightly, have decided it is not for them. Others have gone for it and been successful.

Opinions differ but a possible yardstick is that partners should be sure their practice could generate £10 million to £15 million in funds under management within, say, 12 months of starting the service.

The first couple of years involve heavy investment of management time and commitment must be 100 per cent. It is also useful to perform an audit of private client funds which might be managed in-house before taking on new staff as it may quickly become apparent that a firm's client base is not suited to this business.

Most suitable firms should expect to have gross revenue of about one per cent of funds under management after a couple of years of operation, of which perhaps 30 per cent will be profit. The minimum number of staff is probably four: an investment manager and assistant and an operations/administration manager with an assistant.

Other costs, such as systems and information services, have proved lower than firms expected. A critical element for solicitor investment managers is the commitment of other parts of the firm. Fee earners as well as partners need to be briefed, especially those in the probate and trust department. They are essentially the "sales people" for the investment management arm. They must believe in the quality of the service offered and be confident it is in the best interests of their clients to use it.

Key features of the regulatory regime which apply to solicitors are: all commission earned by a solicitor belongs as of right to the client (except where the sum does not exceed £10); and all commission must be fully disclosed to the client.

Solicitors cannot shelter behind the protection of a limited liability company and partners remain fully personally liable in respect of any claims for negligence or dishonesty. Solicitors must have a professional negligence policy covering the firm and any nominee's company to an amount of £1 million in respect of every claim. In addition the solicitor-financed Solicitors' Compensation Fund provides unlimited compensation for any person suffering financial loss through the dishonesty of a solicitor. While nobody would want to market services by compensation and investor protection, we should be proud of this framework.

Heather Martin is Secretary of the Association of Solicitor Investment Managers.