Is this a way of paying introducers that actually works?

Most introducer relationships don't work because they lack workable incentives, says Alan Smith, IFA at Capital Asset Managers. Instead, he says, this is how it should be done...

Informal 'introducer' relationships between IFAs and solicitors or accountants are championed as good business practice - beneficial to the adviser, accountant and client.

But Alan Smith, IFA at Capital Asset Management, claims the ad hoc, informal model is ineffective.

The age-old 'I'll scratch your back if you scratch mine' agreement lacks structure and rarely yields results, he said.

"In the traditional relationship things tend to be loose. That just does not work," said Smith, pictured.

"Our model is detailed and sophisticated. We create economic glue to stick things together."

How it works

Smith's firm has set up a system whereby introducing law or accountancy firms are encouraged to refer clients who, between them, will bring in at least £5m total assets under management to Capital each year.

In exchange, the introducing business will get up to 20% of the advice fees.

An arrangement like this allows Capital to measure the success of referral relationships and allocate an appropriate spend to them, Smith said.

He added the revenue-sharing element makes the selection of introducer firms doubly important.

"In the traditional relationship between IFA firms and legal firms, the lawyers tend to be superior, saying they will pass on clients if they can," he said.

"But we turn it on its head and select a specific type of firm for a defined relationship.

"We choose a firm and do due diligence on them. We select a firm that is like ours; small, boutique and entrepreneurial."

Smith said it is vital to outline the specific characteristics Capital works best with.

For example, the firm only works with younger companies, with fewer than five partners, and only ever works with a handful of companies at a time.

"We do a lot of due diligence. We take the firm through presentations and reports, showing them how these relationships can and do work," he said.

The model cannot work without a proper structure and a strict timescale, Smith said.

"We do a six month pilot project on very specific terms, otherwise nothing ever gets done; often when firms set up relationships, you make a lot of plans over lunch and then go away and forget about it all," he said.

Naturally, pricing is the most important aspect, Smith said, but he explained Capital thinks with the right pricing, paying for referrals is a justifiable business expense.

"Everyone has a cost of attracting new clients, and there is a margin within our business overheads to pay for that instead of other marketing," he said.

"We also offer to buy out that income strand at a pre-determined date. Often this is attractive when an older partner is looking to boost their pension, or a junior partner needs to buy out a retiring partner and needs the ready cash."

So what happens if such a relationship goes wrong? Smith thinks the existence of a quantifiable deal where referrals are exchanged for cash helps an IFA hold its introducer to account, rather than allowing that firm to melt away without referring any clients at all.

"If a firm fails to bring in enough assets, we pay up proportionally and then withdraw from the arrangement," he said.

"But we have quarterly meetings and monitor it all closely, so that, as well as the due diligence, should stop this from happening."

Controversy

However, not all IFAs agree with the model. Malcolm Steel, chartered financial planner at Mearns & Co, said charging for referrals will only cost clients eventually.

James Marchant, partner at Sovereign IFA, said: "It is a smack in the face to transparency, honesty and integrity to hand money over to an accountant.

"We have local law and accountancy firms and we just reciprocate referrals. If a firm referred a significant level of business, I would set up with them as a joint venture."

Alan Smith was talking to Rachel Dalton