Private banking

Private banking is banking, investment and other financial services provided by banks to private individuals investing sizable assets. The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers. It should not be confused with a private bank, which is simply a non-incorporated banking institution.

Overview

Historically private banking has been viewed as very exclusive, only catering for high net worth individuals with liquidity over $2 million, although it is now possible to open some private banking accounts with as little as $250,000 for private investors. An institution's private banking division will provide various services such as wealth management, savings, inheritance and tax planning for their clients. A high-level form of private banking (for the especially affluent) is often referred to as wealth management. For private banking services clients pay either based on the number of transactions, the annual portfolio performance or a "flat-fee", usually calculated as a yearly percentage of the total investment amount.

The word "private" also alludes to bank secrecy and minimizing taxes through careful allocation of assets or by hiding assets from the taxing authorities. Swiss and certain offshore banks have been criticized for such cooperation with individuals practicing tax evasion. Although tax fraud is a criminal offense in Switzerland, tax evasion is only a civil offence, not requiring banks to notify taxing authorities.

Historically, private banking has developed in Europe (see The list of private banks). Some banks in Europe are known for managing assets of some royal families. The assets of Princely Family of Liechtenstein is managed by LGT Bank (founded in 1920). The assets of Dutch royal family is managed by MeesPierson (founded in 1720). The assets of British Royal Family is managed by Coutts (founded in 1692).

In Switzerland, there are many banks providing private banking service. From Congress of Vienna in 1815 Switzerland has remained neutral including the time of two World Wars. After World War I, the former nobles of Austro-Hungarian Empire moved their assets to Switzerland for fear of confiscation by new governments. During World War II, many wealthy people, including Jewish families and institutions, moved their assets into Switzerland to protect them from Nazi Germany. However, this transfer of wealth into Switzerland had mixed and controversial results, as beneficiaries had difficulties retrieving their assets after the war. After World War II, in east Europe, assets were again moved into Switzerland for fear of confiscation by communistic governments. For the history, Switzerland is trusted for offshore center in Europe. Today, Switzerland remains the largest offshore center, with about 27 percent ($2.0 trillion) of global offshore wealth in 2009, according to Boston Consulting Group. (Offshore wealth is defined as assets booked in a country where the investor has no legal residence or tax domicile)

In England, some private banks were established in 17th century. In these days, the capitalism based on agriculture had developed there. So some financial institutes that managed the assetes of gentries and novelmen developed into private banks. Gradually, private banks in England had managed the assets of royal family and the riches who escaped from French revolution. Then the private banks had played the role as the family doctors for finance of various riches.

United States is one of the largest countries in the scale of private banking because the high number of wealthy people who live in the United States, with its 3.1 million HNWIs accounting for 28.6% of the global High net worth individual population in 2010, according to the co-research of Capgemini and Merrill Lynch. Some American banks that specialize in private banking date back to 19th century, such as U.S. Trust (founded in 1812) and Northern Trust (founded in 1889).

Scale

Before Lehman Brothers collapsed, UBS was the largest wealth manager.

The twenty largest global private banking branch in 2011 (listed by assets under management):

Rank	Bank	AUM ($bn)
1.	Bank of America Merrill Lynch	$1,944.74
2.	Morgan Stanley Smith Barney	$1,628.00
3.	UBS	$1,559.90
4.	Wells Fargo	$1,398.00
5.	Credit Suisse	$865.06
6.	Royal Bank of Canada	$435.15
7.	HSBC	$390.00
8 .	Deutsche Bank	$368.55
9 .	BNP Paribas	$340.41
10.	JP Morgan Chase	$284.00
11.	Pictet	$267.66
12 .	Goldman Sachs	$229.00
13 .	ABN AMRO	$220.06
14 .	Barclays	$185.91
15 .	Julius Bär	$181.68
16.	Crédit Agricole	$171.81
17 .	Bank of New York Mellon	$166.00
18 .	Northern Trust	$154.40
19 .	Lombard Odier Darier Hentsch	$153.10
20 .	Citigroup	$140.70

In the list, there are five Swiss companies including two private banks and eight American companies.

Value Proposition

Most Private Banks define their value proposition along one or two dimensions and meet the basic needs across others. Some of the dimensions of value proposition of a private bank are parent brand, one bank approach, unbiased advice, strong research and advisory team and unified platform. Leveraging the “parent brand” to gain a client’s trust and confidence is something which many private bank divisions claim to do. These Banks have a strong presence across the globe and are proud to present their private bank offerings as a part of the parent group. “One Bank approach” is something where private banks offer an integrated proposition to meet clients personal and business needs. Since Private Banking is all about understanding a client’s need and risk appetite and tailoring the solution accordingly, few banks believe in defining their value proposition along this dimension. Most Private Banks these days follow an open architecture product platform and hence claim their advice to be “unbiased”. They believe that there is no incentive to push their propriety products and client gets the best of the breed product available in the market and benefits the most. Few banks also claim to have a “strong advisory team” which reflects in the solutions provided to the client. Couple of banks also defines their value proposition on their “unified platform”, their ability to comply with all regulations and yet serve the client without any restrictions.

Coverage Model

The coverage model to service the clients could broadly be classified into 2 categories. Most Banks have a client facing Relationship Manager who is the single point of contact and does Business Development and Sales. The operations team helps the RM serve the client by facilitating certain activities such as KYC etc. The Advisory Team, which consists of Product specialists, research analysts and equity advisors are responsible for asset allocation for the client. They coordinate with the RM to understand client’s needs and construct the portfolio for the client. In this model the relationship manager has to divide his time between business development and investment advisory. It is relatively less expensive to move with this model. Few other banks have an additional Investment Advisor layer between the RM and the support team. This additional layer helps RM focus more on Sales, new to bank client acquisitions and relationship building. Investment Advisor focuses on managing a client’s portfolio by making the necessary changes based on his needs, The Investment Advisor also accompanies RM if needed for a sales pitch. The additional layer of Investment Advisor helps serve the client better but is a costly model.

Product Platform

Open architecture product platform is where a private bank distributes all the third party products and is not restricted to selling only its propriety products. Closed architecture product platform is a concept where the bank sells only its propriety products and does not entertain any third party product. These days the needs of the clients are so diverse that it is practically impossible for a bank to cater to those needs by its proprietary products alone. Clients today demand the best of breed products and most banks have to follow an open architecture product platform where they distribute products of other banks to their clients in return for commission.

Fee Structure

Different Banks charge their clients in different ways. There are banks that follow the transactional model where the client is not charged any advisory fee at all. The banks thrive totally on the commissions they get by distributing third party products. There are other private banks that follow a hybrid model. In this model, the bank charges a fixed fee for certain products and advisory fee for the rest. Some of the other banks are totally advisory driven and charge the clients a percentage of AUM (eg. 0.75% of entire AUM). Few banks offer both Transactional Model and Advisory Model and the clients are allowed to choose either of those which suits them better. The recent trend in the industry is to move towards the advisory fee model because the margins on commissions are prone to go down in the future.

Lead Generation

Lead Generation is a vital part in the Private banking business. Various banks go about in different ways to acquire new clients. While some banks rely heavily on their wholesale banking referrals there are a few other that have strong tie ups with their Retail and Corporate banking divisions. Most banks do have a revenue sharing mechanism in place within divisions. It is either a onetime charge to the division or an annuity that the division gets for a client referral. Many Banks believe that the primary source of leads must be client referrals. A client would refer to his / her friends when he / she is satisfied with service provided by the private bank. Generating a good number of leads through client referrals shows the good health of the private bank.

See also

• Wealth management
• Private bank
• Family office
• Multi family office
• Bank secrecy
• Offshore bank
• Swiss bank

External links

• Private Banker International - news, data, analysis and business information for the private banking industry
• About Swiss Financial Centre by Swissworld.org
• Businessweek: In the Battle of the Big Brokers, Merrill Is Winning