Private banking
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Private banking is a general description for banking, investment and other financial services provided by banks and financial institutions primarily serving high-net-worth individuals (HNWIs) – those with very high income and/or substantial assets. Private banking is presented by those who provide such services as an exclusive subset of wealth management services, provided to particularly affluent clients. The term "private" refers to customer service rendered on a more personal basis than in mass-market retail banking, usually provided via dedicated bank advisers. It has typically consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge services, typically offered through a gateway provided by a single designated relationship manager.
History
[edit]Banking originated in provision of some services of what is now seen as "private" banking. Early Venetian banks provided personal finance for wealthy families. Private banks came to be known as "private" to stand out from the retail banking and savings banks aimed at the new middle class. Traditionally, private banks were linked to families for several generations. They often advised and performed all financial and banking services for these families. Historically, private banking has developed in Europe (see the List of private banks). Some banks in Europe are known for managing the assets of some royal families. The assets of the Princely Family of Liechtenstein are managed by LGT Group (founded in 1920 and originally known as The Liechtenstein Global Trust). The assets of the Dutch royal family are managed by MeesPierson (founded in 1720).[1] The assets of the British Royal Family are managed by Coutts (founded in 1692).
Historically, private banking has been viewed as a niche that only caters to HNWIs—specifically those with liquidity over $2 million, though it is now possible to open private banking accounts with as little as $250,000 for private investors. An institution's private banking division provides services such as wealth management, savings, inheritance, and tax planning for their clients. 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.[2]
"Private" can also allude 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 practising tax evasion. Although tax fraud is a criminal offence in Switzerland, tax evasion is only a civil offence, not requiring banks to notify taxing authorities.[3]
In Switzerland, there are many banks providing private banking services.[4] Switzerland has remained neutral since the Congress of Vienna in 1815, including through 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.[5] 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.[6] After World War II, in eastern Europe, assets were again moved into Switzerland for fear of confiscation by communist governments.
Today, Switzerland remains the largest offshore center, with about 27% ($2.0 trillion) of global offshore wealth in 2009, according to Boston Consulting Group.[7] Offshore wealth is defined as assets booked in a country where the investor has no legal residence or tax domicile.
In Great Britain, private banks were established in the 17th century, in parallel with the development of sophisticated agriculture, managing the assets of the royal family, nobility and the landed gentry.
The United States has one of the largest private banking systems in the world, in part due to the 3.1 million HNWIs accounting for 28.6% of the global HNWIs population in 2010, according to the co-research of Capgemini and Merrill Lynch[citation needed]. Some American banks that specialize in private banking date back to the 19th century, such as U.S. Trust (founded in 1853) and Northern Trust (founded in 1889).
Recent developments in private banking
[edit]Internationalisation of the economy, technological developments such as the internet and mobile phones ensure that banks have to innovate and look for new markets. For example, the growth of HNWIs is low in traditional private banking markets such as Europe, compared with Asia where the number of millionaires has grown to 3.6 million.[8]
Banks also provide some private banking services at a lower price than traditional private banking. These are called premium banking or priority banking services. They are meant for mass-affluent customers. The accounts do not generate as much revenue as traditional private banking, but given the number of customers, can provide sizeable revenue to the bank.
In 2016, Credit Suisse and UBS replaced the phrase "private banking" with "wealth management"; private banking has faced reputational risk as an area for tax avoidance or even tax evasion.[9]
Wealth minimums
[edit]Private banking services are only accessible to customers with a minimum amount of investible assets. For instance, in 2016, J.P. Morgan began requiring a minimum of $10 million in assets to qualify for private banking, with those with less being moved into their Private Client Direct program.[10] Nevertheless, this seems to be an exception as a majority of banks establish the minimum threshold between $500,000 and $1 million.
Indeed, private banking customers are frequently segmented according to their wealth. HNW are customers with a total worth between €500,000 and €5 million; very high net worth individuals (VHNWI), with assets ranging between €5 million and €30 million; and ultra high net worth individuals (UHNWI), with wealth in excess of €30 million.[11]
Private banking rankings
[edit]By AUM
[edit]In terms of AUM, the world's 10 largest private banks (or private banking divisions/subsidiaries of large bank holding companies), as of 2019, are:[12]
| Rank | Bank name | Total assets (2019) (US$ Billion) |
|---|---|---|
| 1 |  UBS Global Wealth Management
|
2,260.0 |
| 2 |  Morgan Stanley Wealth Management
|
1,046.0 |
| 3 | Bank of America Global Wealth and Investment Management
|
1,021.2 |
| 4 | Credit Suisse Private Banking & Wealth Management
|
770.0 |
| 5 | J.P. Morgan Private Banking
|
552.0 |
| 6 | Citi Private Bank
|
460.0 |
| 7 |  BNP Paribas Wealth Management
|
413.5 |
| 8 | Goldman Sachs Private Wealth Management
|
391.8 |
| 9 | Julius Baer Group
|
379.1 |
| 10 | Raymond James
|
366.3 |
Overall
[edit]Results from Euromoney's annual private banking and wealth management ranking in 2019, which consider, amongst other factors, assets under management (AUM), net income and net new assets.[13] UBS Global Wealth Management took the top spot in Euromoney's 2019 survey for "Best private banking services overall 2019".[13]
This table displays results of one category of the private banking ranking, "Best global private banking services overall 2019".[13]
| Rank 2019 | Rank 2018 | Bank name |
|---|---|---|
| 1 | 1 | UBS
|
| 2 | 3 | Credit Suisse
|
| 3 | 2 | J.P. Morgan
|
| 4 | 7 | BNP Paribas
|
| 5 | 5 | Citi
|
| 6 | 11 |  Santander
|
| 7 | 4 | Julius Baer
|
| 8 | 6 | Pictet
|
| 9 | 9 | Goldman Sachs
|
| 10 | 8 |  HSBC
|
Value proposition
[edit]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.
Many banks leverage the "parent brand" to gain a client’s trust and confidence. These banks have a strong presence across the globe and present private bank offerings as a part of the parent group. "One Bank approach" is where private banks offer an integrated proposition to meet clients personal and business needs.
Since private banking concerns understanding a client’s need and risk appetite, and tailoring the solution accordingly, few banks define their value proposition along this dimension. Most modern private banks follow an open product platform, and hence claim their advice is unbiased. They believe there is no incentive to push proprietary products, and the client gets the best of what they offer. A few banks claim to have a "strong advisory team" that reflects in the products they offer the client. A couple of banks also define their value proposition on their unified platform, their ability to comply with all regulations, yet serve the client without restrictions.[citation needed]
Product platform
[edit]Open architecture product platform is where a private bank distributes all the third party products and is not restricted to selling only its proprietary products. Closed architecture product platform is where the bank sells only its proprietary 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. Products offered to private banking clients include equities, fixed-income securities, structured products, foreign exchange, commodities, deposits and real-estate investments.[14]
Fee structure
[edit]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 (e.g. 0.75% of entire AUM). A few banks offer both a transactional model and an advisory model. The clients choose what suits them. A recent industry trend is towards the advisory fee model, because margins on commissions may go down in the future.[citation needed]
See also
[edit]
References
[edit]- ^ "History". www.abnamro.com. Retrieved 30 March 2018.
- ^ "Understanding Cost Drivers and Pricing Models in Wealth Management and Private Banking- MyPrivateBanking". www.myprivatebanking.com. Retrieved 30 March 2018.
- ^ Whitlock, Craig (29 March 2009). "Facing Pressure Over Banking-Secrecy Tradition, Switzerland Braces for Fight". Retrieved 30 March 2018 – via www.washingtonpost.com.
- ^ "Swiss Banks Buck Secrecy Squeeze With $53 Billion of Inflows". 14 October 2010. Retrieved 30 March 2018 – via www.bloomberg.com.
- ^ The Swiss banks by T. R. Fehrenbach
- ^ Hitler's Secret Bankers by Adam LeBor
- ^ "The Offshore Business Has Recovered—but Challenges Remain". bcgperspectives.com. Retrieved 30 March 2018.
- ^ Hanson, Joyce. "Top 10 Countries With Most Millionaires: Capgemini/RBC". AdvisorOne. Archived from the original on 16 January 2013. Retrieved 5 July 2013.
- ^ "The death of private banking…". Euromoney. 6 February 2018. Retrieved 2020-03-28.
- ^ "J.P. Morgan Private Bank's $10M Minimum Rattles Clients and Bankers". AdvisorHub. 2016-03-22. Retrieved 2020-03-28.
- ^ Morales Mediano, Javier; Ruiz-Alba, José L. (2018-03-29). "New perspective on customer orientation of service employees: a conceptual framework". The Service Industries Journal. 39 (13–14): 966–982. doi:10.1080/02642069.2018.1455830. S2CID 158723018. Retrieved 2023-02-16.
- ^ Scorpio Partnership. "Private Banker International Global AuM ranking". 4 September 2019. Retrieved 4 September 2019.
- ^ a b c "Private Banking and Wealth Management Survey 2019: Global Results". Euromoney. 6 February 2019. Retrieved 6 February 2019.
- ^ "Private Banking". thebanks.eu. Retrieved 30 March 2018.
