2. Referral arrangement
With a referral arrangement, the relationship is closer and has progressed to a higher level of commitment. There will be a referral agreement, or at least a written record of the arrangement, which may include revenue sharing. Both parties are more committed to the relationship and so it becomes more active – more referrals, more communication and more collaboration.
There are five key elements required for a successful referral relationship. First, both parties need to ‘be on the same page’ about why they are coming together and how the relationship will be mutually beneficial. Is the remuneration arrangement appropriate for both, for example? If it doesn’t work for one party, it won’t work for either.
Second, there has to be a complementary service offer. If the accountant does a lot of tax work for SMSF clients, for example, the adviser should be able to cover related advice requirements. With the proposed removal of the accountants’ exemption, it is also more important to be very clear about who gives what SMSF-related advice.
The government estimates that 10,000 accountants wish to provide some licensed advice themselves (such as in relation to establishing an SMSF, making a contribution to an SMSF or setting up a limited-recourse borrowing arrangement). A financial adviser referral relationship can complement this by providing advice in areas such as the associated insurance requirements. Alternatively, the adviser can provide a total outsourced solution for accountants not wishing to obtain a limited licence.
Third, the client bases must be complementary. Accountants who have a lot of mum-and-dad clients may be well suited to an adviser who is good at budgeting, cash flow and debt-management advice. Those with mostly business clients may be suited to a specialist in risk advice.
Fourth, you should experience the advice process for yourself. That way, you are able to tell your client from firsthand experience what to expect.
Finally, there needs to be a well-thought-through referral process, including clear communication, to ensure that each party understands who provides what advice under which licence.
3. Joint venture
A joint venture represents a further increase in the level of commitment, collaboration and formality. A new entity has been established, with each party owning some of the equity. Binding legal agreements will govern the ownership, operation and governance of the relationship. Costs have been incurred but, justifying this, the relationship is now providing a material contribution to both parties.
Joint ventures share some characteristics with referral arrangements but also have some additional advantages.
For example, you can exert a greater level of control over how the advice is delivered. You will be involved with designing and agreeing on the advice process, so you should have a high degree of comfort in what your clients will experience.
You can also share in the equity value of the financial advice provided. Given that financial advice businesses trade on higher multiples (roughly three times ongoing revenue) than traditional accounting businesses (0.8 to 1.0 times), this valuation uplift may be substantial.
These arrangements, however, aren’t to be entered into lightly. They can be complex. You can incur substantial costs in setting them up, and they can be a mess to unwind if not set up appropriately. The only winners in these scenarios are the lawyers!
What makes for a successful joint venture? In our experience, it needs to be based on an established successful referral relationship and there has to be a sense of mutual commitment from the parties.
One of the ways in which we assist accountants and financial advisers is to help them think through some of the common scenarios. What happens if one of you wants to retire or you want to bring in a new partner, for example? Will there be drag-and-tag-along rights? Will there be buy–sell insurance? How will valuations be struck for any transactions? How will your arrangement interact with the financial advisers’ buyer-of-last-resort arrangement (if they have one)?
Sometimes, the most contentious issue is who will continue to service clients if and when the joint venture is terminated. Our view is that it is the client who will ultimately decide what type of advice they want to get from whom. We help parties identify, think through and resolve these issues, but we strongly recommend they also get independent legal advice.
