Is private banking worth it ? What does this service bring you as a benefit, what are the costs ? Should you rather just be your own banker ?
I’m sure your questions could go on and on. You probably know that it is a fairly secluded world, usually reserved for the ultra high net worth individuals (wealth in excess of $30 million) or the high net worth ($5 million+), but not exclusively. Most of the world’s commercial or retail banks have so called private banking arms that play the role of personal banker for people making in excess of 250.000$/year or having a net worth in excess of $1-2 million.
That may seem like a lot of money, but the key question is, what does access to private banking get you ?
My own route into using this kind of service started when I had some trade issues with stock options, that a previous company had awarded me. In meeting with the bank, after they screwed up the trade, they suggested I meet a private banker, as the person in front of me was a bit lost with the financial mathematics of stock options. I’ve now been using a private banker for the last decade and I think that’s given me enough time to weigh up the pros and cons. I’m clearly not at the level of a family office yet, but I have aspirations.
Family offices, for those that might be wondering what that is, is a group of specialists inside the bank that work quasi-exclusively for you, to build your wealth and protect your assets. Of course, as soon as you say quasi-exclusively, or exclusively, the costs can be significant so usually your net worth would need to be in excess of $ 100 million, but for that you also get personal services, like private jet booking or sorting out the next holiday on your own private yacht or island. We can all dream, can’t we?
What does a private banker bring you and are their services worth it ?
1. Investment strategies
Private bankers differ from retail bankers in that they usually help you set up an investment strategy. Yes you could just invest in low-fee tracking funds, but the diversification of these funds can sometimes be limiting. You don’t always have the ability to directly expose yourself to some interesting asset classes and also you may not have the time to teach yourself how this all works. A private banker can jumpstart your allocation strategy and give you access to other asset classes.
2. Access to venture capital-like products
A private banker usually has access to the bank’s trading desk, exotic product desk, bond desk, real estate desk etc etc and they can open up the door to the products dealt with by these parts of the bank. Investing in start-ups, offshore real estate, being part of leveraged buy-outs – all these things can be accessible with the right private banker and you don’t have to invest in the millions. As a retail investor access to these kinds of asset classes is usally closed unless you have great connections or have worked in finance before.
3. Tax advice
Private bankers have acess to the bank’s tax department and can help structure very tax efficient investments and investment vehicules. They can also advise you on donations, successions and other tax structures that can help reduce or defer your tax burden.
4. Complete portfolio allocation review and rebalancing
A private banker will regularly review with you your overall asset allocation and offer advice on how to rebalance or better allocate your overall funds (even those the bank doesn’t manage).
5. Reactivity and personal service
Executing trades can sometimes become really hard if you’re working long hours, yet a quick email to your private banker and the trade is executed right away. Need a new loan to go with that investment property? The private banker will handle all the paperwork and get interest rates lower than the retail banker could propose. Need a cheque book or cash delivered to your house after work? A private banker can handle that.
Of course the above things come with a fee and aren’t for free.
So, what does it cost you?
Fees usually range from around 0,20% to 0.5% of the invested capital managed by the private banker. It can be higher or lower depending on your negotiation skills and investable assets. This fee would be limited to your investable assets (usually mutual funds, direct stock holding and bonds) and exclude real estate and other asset classes that the banker may have helped you invest in, like Contemporary Art and Wine.
In my experience those fees have been more than made up by the tax structuring, loan interest rates and access to other asset classes which have provided interesting returns, however that doesn’t stop me asking for my credit card fee to be reimbursed every year. Which it is by the way. Thanks private banker.
Now, before you go off running to see if you can find a private banker, make sure you follow some easy rules:
- Diversify: don’t give your banker everything to manage. Spread your funds via some direct management or some of those funky online robo-advisors. This strategy enables you access to the private bankers knowledge pool with less than the totality of your wealth and hence, less fees.
- Compare: not all private bankers are the same and some retail bankers might have the experience and the knowledge to help you just as as well as a private banker at less of the cost. However, in my experience, those kind of retail bankers don’t stay that way for long and you’ll soon be lumped with a change in your representaive from the bank. Private banker’s pride themselves on long-term relationships, so they tend to stay around fore a long time.
- Evaluate the pros and cons: everyone has different priorities and ways to build wealth. A private banker may not be the best to help you, as you might not want to use leverage, tax efficiency schemes or want access to exotic asset classes. If stocks and bonds and real estate is your thing and you have the time to manage and the skill set to understand, then go it alone by all means. The internet provides a wealth of data to help you, and so do I.
- Build your wealth first: Private bankers want clients with more investable wealth, as that is how they make their fees. However, they are also looking long-term, so you may get access with a lot less than what I noted above. It is a harder sell, so if you really want to use the expertise of a private banker: build your wealth first before you go knocking on doors. Hopefully you’re already looking at the ways and methods I’m sharing on this blog and you’re on your way.
Want to go further?
Investopedia gives a good description of the difference between private banking and wealth management.
Check out the Global Awards for the best Private Bank in your country
France: BNP Private Bank
United Kingdom: Coutts, the banker of the Queen
USA: Citigroup Private bank generally rates amongst the best in the USA