With the growing number of entrepreneurs and millionaires, private banking has become the latest buzzword. Not everyone might be able to relate to this term because it is a type of banking service that is provided to people who have reached a certain level with their finances. Yes, there comes a time when you need more than just standard wealth management solutions designed for retail customers to improve your financial standing. This is where private banking services come into play. This article sheds light on the latest banking trend that is expected to get bigger with the changing trends in the economic status of the people.
What is Private Banking?
Many people confuse private banking with private banks. While private banks are the banks that are owned by either the individual or general partners and the majority of stakes are held by shareholders, private banking is a type of banking, investment, and financial service offered by the banks to economically advanced sections of the society. This includes high-net-worth individuals, also referred to as HNWI, with high levels of income and sizeable assets.
Private banking focuses on highly personalized financial services and products specially designed for their clients who belong to an affluent subset of wealth management. The services are designed on a personal basis as opposed to mass-market retail banking. These services are offered by special departments like private banking or wealth management. Aimed at an exclusive clientele, the services presented are investment, portfolio management, tax services, insurance, estate planning, discretionary asset management, brokerage, and some basic services but with a more personalized approach. Personalized services include investment strategy, customized financing options, retirement, and estate planning.
So, how does the private banking system work? Each bank sets its limits for what constitutes the clientele for private banking. Generally, it includes those with at least $1 million liquid funds. Once that is decided, a personal/private banker or a relationship manager is assigned to each customer. This officer is responsible to handle all kinds of financial matters for their customers. Their responsibilities range from arranging a huge loan or mortgage to something as small as paying bills. Sometimes, banks offer a limited number of private banking services to the individuals who may own a substantial amount of financial assets but not as many as the bank’s limit of HNWI.
Since private banking services are different from retail banking services, so is the fee structure. With so many exclusive benefits, banks tend to charge much more than retail customers. Nonetheless, different banks have different fee structure and different ways to charge. Sometimes banks charge an advisory fee and sometimes they thrive on commission earned by third-party products, or both. The customer can choose the method that suits them the best.
Brief History of Private Banking
Now that you know what private banking is, it is time to learn where it originated from. Though private banking is largely driven by modern banking technology, it is an ancient concept. Originally, the concept of banking meant private banking. The first-ever banks focus on managing finances for wealthy families of Venice. Over the years, banks became a mass-model and they started serving the newly emerging middle class. It was during this time that private banks emerged, and they served to affluent families for several generations. Unlike retail and savings banks for masses, they were responsible for performing all sorts of financial and banking services for these families.
As per history, the concept of private banking originated in Europe where some of the banks were linked to perform banking activities for the royal families. Some of the best global private banking services are offered by UBS, JP Morgan, Credit Suisse, Citi, BNP Paribas, HSBC, Julius Baer.
Traditional private banking might be experiencing slow growth. However, in Asia, where the number of millionaires is growing rapidly, banks are providing private services at a lower price point as opposed to traditional private banking. These services are sometimes referred to as premium banking or priority banking. This clientele for these services includes mass-affluent customers who contribute a sizeable revenue to banks. The products offered to premium banking customers are the same as that of private banking services with a few exceptions depending on the banks and their clientele.
What Makes Private Banking Different?
Apart from specialized services, private banking’s primary aim is to provide the high-income group services with the benefit of privacy. In such scenarios, relationship managers or private bankers find it easy to keep agreements and deals anonymous. This works in the benefit of both customer and client. The client can receive tailored solutions at discounted prices. And the banker must keep these prices and the products confidential to prevent competition.
Since these are valuable clients, banks must provide customers with unlimited resources and opportunities to earn the best return on their investment. Therefore, HNWIs might be earning a higher interest rate on their investment than the general. Their loans and mortgages may include exclusive terms and conditions and discounted interest rates.
Tailored Products Included in Private Banking services
All in all, private banking is a one-stop-shop for customized financial services for HNWI. Even though the products and services vary vastly from banks to banks, here are some of the common examples.
- Account Management:
This includes all the basic services for deposit accounts such as checking, savings, certificate of deposit (CDs), and handling the money market. Along with these services, they are provided with slightly higher savings interest rate than the usual.
- Investment Planning:
One of the primary functions of private banking is to improve the financial health of their clients. Therefore, they create custom investment plans and strategies that are most suitable to the client’s portfolios, goals, and objectives.
- Tax Planning:
Private bankers are dedicated to providing the best way of managing tax under the current law and advise changes for the law in the future.
- Cash Flow and bill Management:
They might be committed to helping clients manage their cash flow most effectively and handle bill payments.
- Risk Management Solutions:
Risk management is a growing field. With so many assets at stake, this service becomes essential in order to deal with market fluctuations and learn more about liquidity risks.
- Estate Planning:
Most of the managers are also invested in designing an estate plan to ensure the most effective way of passing down the wealth to future generations.
- Custom Credit Strategies:
This includes credit products and solutions to optimize cash flow and tax expenses.
- Loans and Mortgages:
Private banks are also dedicated to arranging specialized loans for their clients for various purposes such as the purchase of land, property, aircraft, and more.
Apart from these products and solutions, there is a slew of special privileges and perks made available to the customers of private banking, such as preferential pricing, higher interest rates, exemption from overdraft fees and charges, better foreign exchange rates, prime interest rates on mortgages and loans, and custom financial offers for hedge funds, equity partnerships, and more.
Difference Between Private Banking & Wealth Management
In general terms, private banking and wealth management may sound synonymous. However, the two terms are vastly different. The former is about optimizing the wealthy clients’ portfolio. The latter is usually available to everyone. The services are not restricted to HNWIs.
As opposed to private banking, wealth management includes a broad range of services. Even though both departments exist to provide asset management services, there is a notable difference. Private bankers offer asset management, brokerage, and tax consulting services, whereas wealth manager offers advice in the areas of asset allocations, asset structuring, and more.
There is a great difference in the approach followed by the two. While Private bankers are committed to providing custom-made products, solutions by wealth managers may not be very personalized.
Pros and Cons of Private Banking
Private banking services are dedicated to wealthy people and they offer several perks and privileges that may not be possible as a regular customer of a bank. The biggest benefit of these services is the ability to choose the products and solutions as per your portfolio. The manager provides you the best solutions that are customized to suit your and only your needs.
Another reason why HNWIs choose these kinds of services is that it provides the access and convenience of consolidated services. The customers are provided with all the possible solutions best for their financial health under one roof.
Favorable rates and discounted charges make private banking solutions more attractive and lucrative for the customers.
Privacy is another reason why wealthy and affluent people invest their time and money in private banking. In fact, it is one of the biggest advantages of this kind of banking. Financial evaluations, rates, and investment strategies are kept confidential for the benefit of the bank as well as the customer.
From the banks’ perspective, private banking provides them an opportunity to add clients’ funds to their overall assets under management (AUM) or funds under management.
Cons of Private Banking
Unfortunately, there are some drawbacks for investing in private banking products, too.
Usually, there is a high turnover rate for private bankers. Since the bankers keep changing, it may impact the client-manager relationship. Also, it can impact investment strategies and add to the frustration of the investor.
Many times, a conflict of interest may occur. Such situations arise when the manager may have to choose between the banks’ interest or their clients’ interest. This is expected because the banker is paid for their services to an individual client by the bank and not the customer.
Finally, chances are that you only have access to proprietary products of the bank. At the same time, the solutions may lack professional-level creativity and expertise when compared to offerings outside the banks.
All in all, private banking refers to banking and financial services provided to wealthy clients. However, the mechanism may vary from banks to banks significantly. Meanwhile, with the emergence of new technologies like FinTech, artificial intelligence, and machine learning, banks are facing great competition in terms of private banking. There is a need for purposeful, conscious innovation to combat competition from the increasing number of FinTech enabling a constructive change in business models.