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What is Private Banking?

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Private banking refers to a suite of services offered by a bank to high net worth individuals (HNWI) designed to grow wealth.  Most of these wealth management strategies in banking and investment are reserved for HNWIs with at least $250,000 in assets.  Clients with such considerable assets are more likely to be capable of utilizing financial solutions that require large investments like hedge funds and real estate. These services may also include specialized financing options, retirement planning, succession planning, and taxation solutions. 

Although bank customers with assets topping $50,000 may be able to take advantage of some of these services, banks usually reserve private banking to individuals with the means to benefit from an array of specialized financial solutions.  The key benefit of private banking is the personalized service that comes from having an individual account manager.  This account manager is often available to the client and provides wealth management strategies that are customized to their situation.

It is not quite apt to define private banking as wealth management, because private banking generally offers a much narrower set of financial options.  A private banker offers strategies that can be applied to the assets the bank can access, while a more comprehensive wealth manager would develop broad strategies that include all of a client’s assets.

Private banking may be differentiated into two types: active and passive.  Active private banking involves constant input and decision making from the HNWI, while passive allows the bank to manage the assets without substantial direction.  Most private banking in the past has been of the passive variety, but recent turmoil in financial markets has ushered in an era of more active management from clients who wish to be more involved in the management process.

Benefits of Private Banking

Private banking is able to provide unique benefits to clients with substantial assets, and is often used to attract this class of clients to commercial banks.

  • Privacy—As the name implies, the services offered to the client remain largely confidential.  This anonymous approach has had the stigma of underhanded dealings in the past, but most modern banks prefer to keep their activities with exclusive clients unpublicized for a variety of reasons.  Many tax shelters that limit exposure to taxation may be utilized legally but may contribute to negative public opinion.  Furthermore, many of these strategies are proprietary and banks seek to limit their adoption by competitors.
  • One-on-one service—The assignment of a relationship or account manager to handle a client’s assets allows the client to have access to a mid-level to upper management official without having to go through the customer relations staff first.  This easy access minimizes any obstacles to providing input on investment or wealth management decisions and allows the bank to develop strategies that are unique to client’s financial situation. 
  • Discounted services—The considerable assets that a HNWI brings to a banking institution is often rewarded by the bank by providing services like tax preparation and planning, travelers checks, or corporate checking at discounted rates.  Many other services like real estate investments that may only be available to customers with considerable assets may be discounted through the use of personnel associated with the bank. Many of these services are often highly prioritized by the bank and are processed expeditiously.
  • High returns—Because banks devote highly trained staff and enormous resources to the management of HNWI accounts, most of these accounts receive returns on their investments that consistently outperform the market.  According to some reports, private banking can yield returns up to 30 percent annually, but range more typically from the 7 to 13 percent range.  This spectacular performance is often attributable to access to high return investment opportunities like hedge funds.

Challenges in Private Banking

Despite the many advantages for consumers, financial institutions and private banking professionals, this sub-sector of the banking industry is not without challenges.  Many of these are systemic to the profession and have been problematic since the founding of private banking.  Others are a result of the financial crisis of 2008. 

  • Regulatory restrictions—The financial collapse of the real estate markets in 2008 led to huge instabilities in the banking industry.  This has prompted many of the most important nations in the world to institute new regulations designed to provide more transparency and accountability inside these traditionally opaque institutions.  Many of these regulations have made the licensing of private banking professionals more restrictive, which may inhibit the pace of career advancement for many but the most qualified.  In some cases, many private banking functions have been eliminated or become more restrictive. For example, Swiss banks no longer allow their clients to store assets with them in order to avoid taxes.
  • Lead acquisition—This is an ages old problem that all businesses face, but has special significance to the private banking industry.  In order to attract new HNWIs, many banks use traditional methods like referrals from their wholesale and corporate marketing divisions.  Although this remains an important channel, more banks are utilizing sophisticated multi-channel approaches that utilize social networking, client referral marketing, and event marketing.
  • Integration of client relations with financial analysis—The current anemic growth in many financial markets has made the community of affluent clients more apprehensive about making investments.  This has contributed to more private bankers utilizing their time consulting with clients and discussing financial strategies.  This has always been a role for private banking professionals, but it has grown in significance as more clients want to remain involved in the decision making process.  This has altered the time management aspect of private banking, as less time is devoted to financial analysis, but has helped many banks develop stronger relationships with customers.
  • Talent recruitment—The private banking industry has had to rebuild trusting relationships with HNWIs following the financial crisis, so recruiting, training and retaining highly qualified professionals is a high priority for most banks.  Not only must these individuals have well-developed interpersonal skills and financial analysis talents, but they must remain loyal enough to the institution to remain there and keep client relationships ongoing.  Private banking is based on very personal relationships between clients and their managers, so keeping those private banking professionals well-compensated and satisfied is a growing concern.  New incentive programs and other compensation packages, along with succession programs for substituting relationship managers have become more common throughout the industry.