What is private banking? Definition and meaning
Private banking is a service that includes investment, banking and other financial services provided by banks to very rich people and their families. The word ‘private’ in the term refers to customer service that is delivered on a much more personal basis than in mass-market retail banking.
The term does not refer to a private bank, which is owned either by one person or general partners, and is not incorporated. Both private and publicly listed banks are involved in private banking.
Private banking is a major subset of wealth management, aimed at individuals with a very high net worth.
Private banking services include protecting and growing assets in the present, offering and providing specialized financing solutions, retirement planning, philanthropy, succession planning, wealth structuring, and family governance.
Customers may choose to be actively involved in the day-to-day management of their wealth, or empower a team of specialists to act on their behalf (based on specified objectives and limits).
Typically, private banking services will only be offered to individuals with more than $500,000 worth of investable assets. These people are able to invest in real estate, hedge funds, and other ‘alternative investments’. Alternative investments are those that do not fall into the traditional asset classes of bonds, cash and stocks.
Some prestigious banks claim they will cater for a wide variety of clients. For example, Coutts & Co, where Queen Elizabeth II banks, says regarding its private banking service:
“We don’t have a typical client. We work with people who are progressing quickly in their careers, building businesses or planning for retirement. There are no stereotypes. What they all share is a desire to see their wealth grow.”
UK’s Lloyds Bank says its private banking service is available for people who have more than £250,000 ($392,000) in savings and investments, or a sole yearly income of £100,000 ($157,000) or more.
While much of private banking is still about giving the customer a personalized service. People today are more interested in how well the bank is managing their wealth and investments, and less by how much they get pampered.
Since most wealthy individuals desire a degree of anonymity in their financial transactions, strict confidentiality rules are often a major part of private banking.
In contrast with typical retail banking, private banking customers will usually have a dedicated account manager who is acquainted with their funds, needs and plans, and can offer a wide range of services tailored to their requirements.
The dubious reputation of private banking
Private banking is often mentioned by the media in derogatory terms. Banks that offer this type of service often do so from their branches or headquarters in tax havens, in order to help their clients escape the higher tax rates of their home country.
Switzerland, which is famous for its super-secretive banks, is home to many private banking services, that are provided to customers from all over the world.
Since the global financial crises of 2007/8 struck, many governments in the advanced economies (and others) have closed in on countries that host these banks.
Several private banking service providers say they are finding it difficult to establish relationships with self-made people, otherwise known as new money.
In November 2014, HSBC’s Swiss-based private banking division was accused by Belgian authorities of assisting rich Belgians evade taxes.
Private banking providers say it is much more difficult to persuade self-made rich people to extend their time horizons. Their ‘old money’ clients have been brought up to think several decades (and even generations) ahead. People who made their own fortunes do not generally look further than ten years into the future.
According to the Federal Financial Institutions Examination Council, (FFIEC) a formal U.S. government interagency body:
“Private banking activities are generally defined as providing personalized services to higher net worth customers (e.g., estate planning, financial advice, lending, investment management, bill paying, mail forwarding, and maintenance of a residence). Private banking has become an increasingly important business line for large and diverse banking organizations and a source of enhanced fee income.”
The FFIEC adds that private banking services are vulnerable to money-laundering schemes. Past money-laundering prosecutions have revealed this vulnerability.