REVIEWED BY JAMES CHEN Updated May 14, 2019
What Is Private Banking?
Private banking consists of personalized financial services and products offered to the high-net-worth individual (HNWI) clients of a retail bank or other financial institution. It includes a wide range of wealth management services, and all provided under one roof. Services include investing and portfolio management, tax services, insurance, and trust and estate planning.
While private banking is aimed at an exclusive clientele, consumer banks and brokerages of every size offer it. This offering is usually through special departments, dubbed “private banking” or “wealth management” divisions.
The Basics of Private Banking
Private banking includes common financial services like checking and savings accounts, but with a more personalized approach: A “relationship manager” or “private banker” is assigned to each customer to handle all matters. The private banker handles everything from the special like arranging a jumbo mortgage to the mundane like paying bills. However, private banking goes beyond CDs and safe deposit boxes to address a client’s entire financial situation. Specialized services include investment strategy and financial planning advice, portfolio management, customized financing options, retirement planning, and passing wealth on to future generations.
While an individual may be able to conduct some private banking with $50,000 or less in investable assets, most financial institutions set a benchmark of six figures’ worth of assets, and some exclusive entities only accept clients with at least $1 million to invest.
- Private banking consists of personalized financial and investment services and products.
- Private banking is an offering for the high-net-worth individual (HNWI) clients of a financial institution.
- Private banking clients typically receive discounts or preferential pricing on financial products.
- An assigned “personal banker” coordinates all the HNWI financial activities.
- The range of products and investment expertise offered by a private bank may be limited or less advantageous than “outside” options.
Private Banking Perks and Privileges
Privacy is the primary benefit of private banking. Customer dealings and services provided typically remain anonymous. Private banks often provide HNWIs with tailored proprietary solutions, which are kept confidential to prevent competitors from luring a prominent customer with a similar solution.
Private banking clients typically receive discounted or preferential pricing on products and services. For example, they may receive special terms or prime interest rates on mortgages, specialized loans, or lines of credit (LOC). Their savings or money market accounts might generate higher interest rates and be free of fees and overdraft charges. Also, customers who operate import-export ventures or do business overseas might operate at a more favorable foreign exchange rate.
If they are managing a client’s investments, private banks often provide the client with extensive resources and opportunities not open to the average retail investor. For example, an HNWI may be given access to an exclusive hedge fund or a private equity partnership or some other alternative investment.
Pros of Private Banking
Private banking offers clients a variety of perks and privileges and personalized service—an increasingly prized commodity in the increasingly automated, digitized banking world. Also, in addition to the customized products, there is the convenience of consolidated services—everything under one financial roof. As for the bank or brokerage, it benefits from having the clients’ funds add to their overall assets under management (AUM). Even at discounted rates, the private bank’s management fees for portfolio management and interest on loans underwritten can be substantial.
- One-stop shopping for financial affairs
- Concierge services/dedicated employees
- Favorable rates, discounted charges
- Perks and privileges
- Less institutional expertise
- Options limited to proprietary products
- High staff turnover
- Possible conflict-of-interest for employees
Cons of Private Banking
Drawbacks do exist to this exclusivity. Employee turnover rates at banks tend to be high, even in the elite private banking divisions. There may also be some concern over conflicts of interest and loyalty: The private banker is compensated by the financial institution, not the client—in contrast to an independent money manager.
In terms of investments, a client might be limited to the bank’s proprietary products. Also, while the various legal, tax and investment services offered by the bank are doubtlessly competent, they may not be as creative or as expert as those offered by other professionals on the “outside.”
Lucrative as private banking can be, it can pose challenges for the institution, as well. Private banks have dealt with a restrictive regulatory environment since the global financial crisis of 2008. The Dodd-Frank Wall Street Reform and Consumer Protection Act, along with other legislation passed in the U.S. and around the world, has resulted in a higher level of transparency and accountability. There are more stringent licensing requirements for private banking professionals that help ensure customers are being appropriately advised about their finances.
Real World Example of Private Banking
UBS, Merrill Lynch, Wells Fargo, Morgan Stanley, Citibank, and Credit Suisse are all examples of financial institutions with substantial private banking operations. Another relatively recent member to their ranks is TD Bank, with its TD Wealth Private Client Group.
Available to clients with at least $750,000 in assets, it offers many services to its clients. Services include money management, strategies for business owners, real estate financing; and “custom lending solutions. The service also offers retirement, succession, and estate planning which help avoid taxes.
The TD website promises $4,500 cash back on investment-account fees for accounts opened by June 1, 2019. They also advertise:
We offer the highest level of holistic, personal attention and service for all your banking and investing needs, all in one place, with one local Relationship Manager.WEALTH SERIES 7:3