Private banking & wealth management explained

Private banking nowadays is essentially another name for wealth management

private banking

Private banking & wealth management explained.  Source: shutterstock.com

Earning money in a modern quickly changing environment is hard enough. You have to adapt to emerging challenges, opportunities, and threats. It’s no wonder that wealthy people are seeking professional help with managing their assets. Banks are interested in affluent customers to increase their profits and boost their reputations. Thus, they offer private banking services.

Private banking is often defined as the individual VIP-services provided for selected bank clients. In fact, it is a rather complex notion which PaySpace Magazine Global is going to explain today.

What is private banking?

Private banking nowadays is essentially another name for wealth management. In some institutions, these two services are separated, but, in general, these terms can be used interchangeably. The slight difference is that private banking can extend to encompass wealth management, but wealth management firms cannot provide clients with private banking facility services. It is a private consultative service used to manage the capital of an affluent bank client. The client pays a certain fee to receive the services of a personal banking advisor ready to help on a 24/7 basis. Moreover, the range of services provided is much wider than those available to their ordinary clients.

Which services private banking includes?

Private banking is an umbrella term covering a scope of financial services. It may include:

  • financial and investment advice,
  • legal or estate planning,
  • accounting and tax services,
  • retirement planning,
  • development of the individual financial strategies,
  • professional placement and re-allocation of funds in a variety of investment instruments, such as precious metals, stocks, derivatives, art banking, real estate investments and other alternatives,
  • lifestyle management including concierge services, managing personal errands, organizing trips and events, etc.,
  • various luxury discount programs,
  • providing non-bank standard financial services, for example, insurance,
  • advice on philanthropic activities,
  • managing the family budget.

The list may continue, but the main point is that a single manager coordinates all the services needed to manage the client’s money and plan for their own or their family’s current and future needs.

What are the advantages of private banking?

Although Private Banking means the management of private capital and does not formally apply to the client’s business entities, the balance of corporate and private finances is inevitably taken into account when developing an individual financial strategy.

Thus, a private banking consultant may help resolve some business issues as well. We are talking about the possibility of assistance in negotiations with large companies and their owners, and sometimes even with authorities (in tax management and accounting).

private banking

Private Banking means the management of private capital. Source: shutterstock.com

In addition, many banks cherish those clients whose wealth they manage enough to provide special terms of lending or project financing (increased bank loyalty to client investment projects).

If a client has a very wide array of financial needs, they may have access to members of a specified wealth management team instead of relying on single-person expertise.

The wealth manager drafts a plan that will maintain and increase a client’s wealth based on individual financial situation, goals, and comfort level with risk. After that, the manager meets regularly with clients to update goals, review, and rebalance the financial portfolio. This way, the plan is never finite – it’s flexible and changes according to individual lifestyle alterations. Wealth managers may offer additional services when needed, with the ultimate goal of continually increasing the client’s financial assets throughout their lifetime.

Some private banking may take place offshore. For instance, the wealth management and private banking industries of Luxembourg are majorly based on cross-border business with clients coming from the Middle East, Asia, or Latin America.

Qualifications

High-net-worth individual (HNWI) clients are usually the target audience for private banking services. HNWI is generally someone with at least $1 million in cash or liquid assets that can easily be converted into cash.

The VHNWI classification — very-high-net-worth individual — can refer to someone with a net worth of at least $5 million. Ultra-high-net-worth individuals (UHNWI) are defined as people with investable assets of at least $30 million, usually excluding personal assets and property such as a primary residence, collectables, and consumer durables.

To become a candidate for this unique service, it isn’t always enough just to be rich. Source: shutterstock.com

To become a candidate for this unique service, it isn’t always enough just to be rich. Often, the main requirement for a Private Banking applicant is the amount of assets placed in the given bank. For some banks, the total sum of funds on customer deposits matters the most. For others, however, the total amount of a client’s assets placed in financial instruments at different investment platforms is more important. Often banks count individual retirement arrangements — or individual retirement accounts (IRAs) — and other types of investable assets.

In many developing CIS countries, banks providing Private Banking services hold low qualification standards. Therefore, the entry threshold may be the $100,000 equivalent of the asset amount. Moreover, some banks operate in the so-called mass-affluent sector, namely, they accept customers with asset portfolios between $50,000 – $100,000.

However, the better economy the country has the stricter requirements are. In the USA, the minimum amount required varies — $1 million will most likely be the minimum level for most private banks. But there are some exceptions; for instance, Chase Private Client requires an average daily balance of only $250,000. This balance may include qualifying linked deposits and investments.

In the UK, minimum liquid asset requirements may differ from £250,000 (Metro Bank, Lloyds) to £10M (JPMorgan, Citibank, Goldman Sachs).

At the same time, many banks and financial firms do not openly disclose the minimum wealth requirements, leaving the sum for private inquiries.

Less frequently, the parameter of “client’s personal turnover” is taken into account (meaning the average monthly income of the family and/or other persons sharing the client’s assets). These “aggregate incomes” may start with significantly smaller numbers depending on an institution.

Potential exceptions to minimum capital requirements may include the children of high net worth individuals. After all, they eventually inherit their parents’ wealth. It’s also possible for young professionals who don’t meet the requirements yet to receive an exception based on their education and career path. In both cases mentioned above, the bankers evaluate the client’s financial potential trying to forecast the future.

As an exception, (naturally, in agreement with the chairman or deputy chairman of the board) the status of a VIP client can be assigned to other clients — it all depends on the financial reputation of the client, their position in society, the transparency of the business and the legality of their income. As a rule, these are successful businessmen, founders, co-founders, and top managers of large enterprises, politicians, public figures, show business stars, cultural figures, and scientists. Some banks in Europe are known for managing the assets of royal families.

Stats and insights

Globally, in 2017 client assets hit a record $49 trillion. Source: shutterstock.com

The Capgemini World Wealth Report reveals that as of 2017, the United States had the most HNWIs in the world, at more than 5.28 million, and seeing 10% growth in its HNWI population from 2016. The entire HWNI population globally grew by 11.2% in 2017. Thus, the country is the real Mecca for wealth managers and private banking consultants.

The wealth management segment in the US is gradually changing. Technology-enabled remote and digital advice is becoming increasingly efficient, cost-effective, and popular among consumers (e.g., the digital advice sector grew by more than 90% in 2017).

Globally, in 2017 client assets hit a record $49 trillion. Asia is maintaining its position as the fastest-growing region.

Big financial institutions like Credit Suisse are already abandoning the term private banking as too limited for the scope of services they provide. They prefer more encompassing “wealth management” instead.

Meanwhile, banks with big wealth management operations generally trade on better multiples; shareholders like the high margins and lower capital requirements of the business and their potential synergies with other parts of the bank, not just investment banking products, but commercial banking, as well.

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