What is Private Banking?
Private banking involves providing banking, investment, tax management, and other financial services to high-net-worth individuals (HNWIs). Unlike mass-market retail banking, private banking focuses on providing more personalized financial services to its clients, through banking personnel specifically dedicated to providing such individual services.
HNWIs possess more wealth than the average person, and are, therefore, capable of accessing a much larger variety of investments, such as hedge funds and real estate. Private banking offers clients information and advice regarding what may be the most appropriate investment options for them.
Most banks that offer private banking only accept clients with at least $500,000 in investable assets. However, some banks allow individuals with $50,000+ in investable assets to access some of the traditional personalized services offered through private banking.
Features of Private Banking
Clients need to fulfill certain requirements to be eligible to benefit from private banking services. It usually includes the maintenance of a minimum balance in the form of deposits, individual retirement accounts (IRAs), investments, or other types of assets. The minimum amount deposited in the account may also include qualifying linked deposits and investments.
2. Dedicated Representation
Clients are allotted a dedicated relationship manager, or a team of people with a thorough understanding of the asset ownership, risk aversion (or lack thereof), preferences, and long-term financial goals of the client. The relationship manager facilitates check deposits, initiates wire transfers, orders checks, etc.
Clients of private banking often receive benefits such as lower annual percentage rates (APRs) for mortgages, higher annual percentage yield (APY) on securities such as certificates of deposits (CDs), free safe deposit boxes, etc. It is possible because charging even a small amount of interest on a large loan generates substantial revenue for the bank.
4. High Management Fees
Clients need to pay large amounts of fees for the services rendered by private bankers.
5. Target Market
The affluent section of society is the major target market of private bankers. While executing normal lending activities, they may access tax documents or other personal documents to discover potential clients. However, the activities are also subject to considerations of conflicts of interest.
Benefits of Private Banking
Banks target very affluent individuals because doing so earns them significant returns and guarantees them regular income from clients. The clients of private banking benefit in the following ways:
Customer dealings/transactions and services offered to HNWIs typically remain anonymous. Banks provide their private banking clients with proprietary products that they keep confidential in order to prevent competitors from attempting to sell similar products to the same clients.
High-net-worth individuals are attracted to the culture of privacy in private banking because it offers them the ability to conceal personal information that, if publicly known, might give their business rivals an undue advantage. They may also simply have a desire to keep their personal financial dealings as private as possible. HNWIs are sometimes subjected to lawsuits involving their investments. Keeping such information confidential gives them a greater sense of security.
A bank may offer discounted services to HNWIs as a reward for the large volume of business that they bring to the bank. Services such as tax preparation, corporate checking, and estate management are popular private banking services that may be offered at a discount.
Clients involved in export and import businesses may receive attractive foreign exchange rates. HNWIs involved in real estate benefit from the quick and timely processing of their transactions through the lead advisors in charge of their accounts.
High Investment Returns
Banks often allocate their best-performing personnel to their private banking division to manage the accounts of HNWIs. The practice typically translates to higher investment returns for clients. The rate of return from private banking investments usually ranges between 7% and 13%, and may sometimes go as high as 30%.
It is possible because, due to their extensive resources, wealthy clients can get exclusive access to investment vehicles such as top-performing hedge funds, through their affiliation with the bank. The client also gets professional advice from an experienced investment professional on the best investment options offering a high rate of return.
The private banking division faces various challenges, some of which stem from the Global Financial Crisis of 2008, while others are systemic to the private banking profession. These challenges include:
Client acquisition is an essential part of private banking. Most banks rely on traditional customer acquisition methods such as referrals from the whole banking and investment divisions to land new clients.
Another option for getting new clients is through referrals from existing clients. Clients who are satisfied with the services provided by the private bank division may refer their friends or relatives to the bank. Other lead generation channels include social networking and event marketing.
If a bank is able to generate a large percentage of its new business through referrals from existing clients, then this is a strong indication that its clients are very satisfied with the services they are being provided.
The 2008 Global Financial Crisis led to the insolvency and collapse of several major financial institutions. As a result, governments moved to enact stricter regulations that require more transparency and accountability from banks. These regulations have made the licensing of private banking professionals more restrictive. In some cases, this has affected both the nature of the services they provide and their career advancement.
In countries such as Switzerland, banks were banned from storing assets as a means of tax avoidance. Many HNWIs previously stored their assets in tax havens as a way of hiding their wealth from government authorities. The new banking regulations have curtailed this practice.
Retaining Private Banking Professionals
Private banking is built on personal relationships between high-net-worth individuals and their advisors or relationship managers. However, since the financial crisis, private banking’s experienced a high turnover rate. It is partly due to the more restrictive regulatory framework. Banks now focus more intently on talent recruitment, training, and increasingly on retaining the most qualified professionals.
Some of the steps that banks have taken to improve retention rates among their private banking staff include better compensation packages, incentive programs, and developing and launching succession programs for banking relationship managers.
Private Banking vs. Wealth Management
Private banking and wealth management are closely related but differ in the kind of services they offer. Wealth management involves taking into account the client’s risk tolerance levels and investing assets according to their financial goals. Private banking, on the other hand, involves providing personalized financial and banking services to high net worth individuals. The bank assigns specific staff members in the private banking division to manage client accounts.
Private banking differs from wealth management in that private banking does not necessarily involve investing a client’s assets for them. Private bankers manage the client’s account, handling everything from cashing a check, to transferring large volumes of cash between accounts, to making payments on behalf of the client.
Although they advise their clients on possible investment options, private bankers typically do not actually make or manage investments for their clients (although in some instances they may – usually just as a courtesy service for the client). Private bankers basically provide whatever financial services a client desires. If that includes making and managing investments for a client, then the private banker will do so.
However, their services are most commonly related to facilitating financial transactions, such as transferring funds from one place to another or handling foreign currency exchanges. You might get a clearer idea of what the essence of private banking is about by thinking of private bankers as just very high-end, personal financial assistants to their clients.
Wealth management staff members advise their clients on the best possible investments and help them with investing their assets, with the goal of either maximizing their investment profits or ensuring maximum preservation of their investment capital.
They do not typically provide clients with private banking facilities such as account management and currency exchange. A wealth management advisor sits down with their client to discuss their financial goals and how to best go about achieving those goals. Wealth managers are closer in function to personal financial advisors.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: