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.

How private banking works-

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 involved tasks, 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.

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.

Benefits of private banking-

• Privacy- 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.

• High Investment Returns- Banks often allocates 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.

Drawback of private bank-

• Limited Product Offerings- 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 that specialize in various types of investments. For example, small regional banks might provide stellar service that beats out the larger institutions. However, the investment choices at a smaller, regional bank might be far less than a major player such as JPMorgan Chase & Company (JPM).

• Bank Employee Turnover- 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.

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.