Investment Business: cashing in on investment

Increasingly, people are looking to their accountancy firms for investment advice - if you aren't ready to provide it, you could lose out, warns Emma Keelan

The key provisions of the Financial Services and Markets Act 2000 have forced accountancy firms to reassess the range of investment business services they offer clients. But those who have chosen not to grab a slice of this very lucrative market are being warned that there is much more at stake than the commission. 'Firms that do nothing will lose their clients, it's as simple as that,' says Phil Shohet, managing director of Kato Consultancy. 'Clients want a more rounded service and they want it from their accountant.'

Indeed, it seems that clients themselves are driving the change. 'The reason small practices have to offer financial services is because clients want them to,' says Gordon Gilchrist, of 2020 Consulting. 'It's like any business: you have to satisfy your clients, otherwise they'll go elsewhere. We know from the research we have carried out that clients want financial services to be part of the accountant's domain. It's our divine right; we should never have lost it to IFAs (independent financial advisers) after the war. Accountants are the world's most trusted adviser.'

Now that the Financial Services Authority (FSA) has replaced the Institute of Chartered Accountants in England and Wales (ICAEW) as the regulatory body for accountancy firms offering mainstream investment business advice, there are three routes small practices can take to provide these services to clients: they can refer the clients to an IFA; they can become an 'appointed representative' of an IFA; or they can become directly authorised by the FSA.

Size matters

There is some debate about which of these options works best, but the size of the practice clearly plays a part. Understandably, very small practices favour the first option because they do not have the resources to afford an IFA. 'You need a certain level of billing - probably about £45,000 a year - before you can take the risk of employing an IFA,' says John Malthouse, chairman of the ICAEW's General Practitioner Panel. 'Pensions and investment is a complicated area, so smaller practices need to refer the work, and very small guys don't get involved at all.'

One such small practice is Merchant & Co, which refers all its investment business and, according to partner Craig Clements, has no plans to offer such services in the future. 'We used to do a little investment business for existing clients such as pensions work, but as the regulations became more onerous and compliance more expensive, we did less and less and eventually decided to reduce to the protective category.'

The problem with brokering work to a third party, however, is that the accountant has no way of guaranteeing the appropriateness and quality of the service being offered. More importantly still, they lose control of the client. 'The worst model is when the accountant picks a friend on the high street who can offer financial advice and who pays the accountant an introductory fee - it's the worst scenario because the accountant loses his relationship with the client,' Gilchrist says.

Shohet agrees: 'My view is that if you get involved in a service line, then you get stuck in and you do it properly. It's ridiculous to broker the work to an IFA: you either want to earn serious money and give a decent service or you don't.'

Something for everyone

Changes to the regulatory procedures have placed an extra strain on firms who do wish to offer investment business advice. That's why the second option of the appointed representative model suits many practices that would struggle to find the additional resources needed to meet these regulations. In this case, the practice links with an IFA who provides all the compliance back-up needed and takes responsibility for the investment advice offered. The practice employs its own investment adviser (or a member of staff takes the exams themselves) so that someone within the firm is qualified to give advice. This not only reduces overheads such as authorisation costs, but also enables the accountant to retain control of the client relationship. The appointed representative route does not have to be permanent either, and can act as a stepping stone to full FSA authorisation at some point in the future.

The drawback is that your clients are technically clients of the IFA, not the firm, and your income stream is based on commission. However, the IFA you join forces with will not only handle the compliance issues but may find new clients as well - another potential source of revenue. According to Shohet, although the compliance issues can hold firms back, there is plenty of money to be made.

The third route is to take the whole thing inhouse and become directly authorised by the FSA, which can be expensive. 'You probably need to have at least four partners to afford to set up on your own,' Gilchrist points out. 'But if you can afford it, this model is definitely the best one because you get complete control of your client. And there is a lot of money in financial services.'

Shohet concurs, but says that if you decide to take it on, it is not something you should do half-heartedly: 'There's a lot of money there - the margins are better than those for general compliance work, yet general compliance work is 80% of practice work. We know firms doing £1.5m turnover that have taken on the whole thing and are doing £1m worth of financial services. If you have a general practice doing £1m, on top of that you should be doing £200,000 worth of financial services. You should be aiming for 20%. Too many practices are fiddling around doing bits and pieces. There is a lot of work out there but you need to dig it out.'

If you don't want the unnecessary headache however, it doesn't have to be that way. Shohet argues that you can farm out the compliance work (although the responsibility remains with the firm) and still reap the rewards: 'All the regulatory procedures make taking it completely in-house very difficult. The best option is to find a trustworthy financial services operation and join forces with them. Break it on a 50-50 basis - you can always sell it on later.'

Together we're stronger

Last October, to help its members arrange their future investment business structure and overcome some of the problems of the three routes, the ICAEW set up Chartered Accountants' Independent Financial Services (CAIFS) in association with Bankhall Investment Associates. CAIFS offers a range of services designed to support firms at all levels of involvement in investment business. 'I was one of the instigators of the Institute using its muscle to set up CAIFS,' John Malthouse says. 'Together we are stronger. We ought to be able to use the combined power of our 15,000 practices to give the best service and to make the best profits.'

At the most basic level, firms can use CAIFS to find a suitable IFA to refer investment work to. These advisers are screened by CAIFS to give some guarantee of the quality of service. In addition, the adviser and referring firm are linked by the Referral Management System, internet software that enables firms to track the advice given to their clients.

For those taking the plunge into direct authorisation, CAIFS provides everything from help completing the FSA application form to software for product research. The IFA academy assists advisers with the examinations needed to acquire the minimum standard of entry that the FSA requires (currently Financial Planning Certificate or equivalent). There are also a number of services designed for both authorised firms and appointed representatives. For example, firms can draw on a wealth of technical resources to help them interpret the regulations, tax law and Inland Revenue guidelines that affect the life assurance and pensions industries. There is a technical unit for outsourcing all aspects of financial planning, a range of marketing services, and the compliance issues are handled by Bankhall.

According to Malthouse, whose firm Malthouse & Co uses Bankhall for its compliance work, the CAIFS deal works well: 'Through CAIFS we use Bankhall as an outsourcer. It's the perfect conduit between the chartered accountant and financial services.' He has no plans to take the whole thing in-house. 'If someone will do it for a fee and we still come out ahead, then why not? It's such a highly specialised area we do need their help, we need their polished experience.'

One-stop shop

Malthouse says it makes sense for chartered accountants to be dealing with investment business and that most of his investment work comes from existing clients: 'Audit and compliance tax work is unpopular at the moment. The growth is in ancillaries. You can substantially increase turnover with existing clients. We don't do any touting for business outside existing clients. We have two IFAs and the breadth of their work is pretty wide: they look after the pension fund, the directors' life assurance, we did some stuff on stakeholder, they even come to us on wills, although we farm that out. If they want a BMW, we'll find them the finance. The only thing we don't do is banking. In the old days we were the auditors, now we're the money men.'

And that's the bottom line: the large profits to be made from investment business services have already attracted many firms, but the biggest impetus is coming from the clients themselves. They regard chartered accountants as the people who should be handling their money. 'A lot of practices that were reluctant to go down this route have been driven down it by their clients, and by younger partners saying they should provide a good, rounded service, and they should do it right,' Phil Shohet says.

It's easy to see the appeal of a one-stop shop for clients. A broker can sell the client products, but a chartered accountant can factor in the tax situation in a way a non-specialist can never do. What is more, clients trust their accountant. 'A chartered accountant really is the best person to be giving investment advice,' says Malthouse. 'We could inherit the Earth here because not only do we major in technical competence, we also have integrity. We're second to vicars. As auditors, integrity is bred into us - ask clients which profession they most trust and they'll say their accountant.'

For more information about CAIFS, contact Sharron Gunn at or visit the website at

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