Let’s talk private banking
For many the quintessential image of a private bank is one of marble halls, oak panelled offices and high class accents, albeit usually spoken in hushed tones! In some senses these institutions seem almost impervious to change but appearances can be deceptive. Behind the prestigious facades and impressive reception rooms, highly qualified private bankers continue to offer the bespoke, individually tailored services their clients have traditionally sought but they now do so from hi-tech offices with state-of-the-art systems and impressive internet capabilities.
Much may have changed in recent years with the cultural shift towards a more transparent digital-banking system but now, perhaps more than ever, affluent, rich and super-rich clients look to private banks to provide the personal attention their wealth demands. Put simply, these clients want to be able to pick up the phone to their personal banker, day or night, secure in the knowledge that this individual knows them, their wealth and circumstances and can therefore guide them to the very best solutions. With the best will in the world, this level of service simply can’t be obtained at your local high street bank…
Londons role in global banking
London, unsurprisingly, given its geographical location, time zone and language coupled with its financial and political stability remains at the heart of the private banking world drawing in high and super high-net-worth clients from across the globe. As the world recovered from the crash of 2008/09 it’s interesting to note that between 2011 and 2017 the amount of money under management in the UK private banking sector more than doubled to £226 billion according to the British Bankers Association. Over 2.2 million people put their cash into UK based banks ranging from Swiss behemoths such as UBS and Julius Baer right through to new start UK banks such as Hampden & Co with offices in Edinburgh and London.
The origins of private banking
The private banking sector, by retaining its core values and marrying these with modern technology and innovation, has flourished in the face of adversity but we shouldn’t be surprised by this. Since the very first private banks were established in Renaissance Italy, most notably the Medici Bank by Giovanni de’Medici in 1397, they have always been driven by innovators and entrepreneurs. Whether that be Mayer Amschel Rothschild, the Founding Father of International Finance, who sent his sons out from Frankfurt to establish Rothschild’s in the major capitals of Europe or in London men such as Francis Child and Sir Richard Hoare who, in the 17th century founded Child & Co and C Hoare & Co, both of which both still trade on Fleet Street today.
What is meant by a private bank?
Of course private banks weren’t always known as such. The adjective “private” was only applied to these banks in order to differentiate them from the new mass market retail banks that were formed to serve the emerging middle class. Private Banks remained resolutely focused on providing a more personalised service to their high-net-worth (HNW) clients, clients whose families they had often served for several generations. Indeed, some of Europe’s leading private banks became known, over several generations, for managing the assets of the continent’s royal families. The Liechtenstein, Dutch and British Royal families are respectively looked after by the LGT Group (Liechtenstein Global Trust), MeesPierson and Coutts who were founded in 1692.
As well as differentiating between bank types the term “private” also refers to a form of customer service, referred to earlier in this article, which is offered on a more personal basis and with an exceptional level of discretion. The nature of the discreet relationships private banks have with their clients ensures that information on levels of wealth or services are rarely if ever disclosed. Indeed, to this day, some private banks will still eschew publicity to the point that they wouldn’t wish to be named in this article, preferring always to fly under the radar! This particularly applies to some Swiss and offshore banks who minimise clients’ taxes through the careful allocation of assets or by hiding those assets from the taxing authorities. It should be remembered that tax evasion is only a civil offence in Switzerland, not requiring banks to notify taxing authorities.
How has the private banking sector expanded?
Whilst the origins of the term private bank are easy to identify, the boundaries of private banking services have become a little more blurred. It is easy to identify the independent UK banks formed in the 17th and 18th centuries that were originally family run and in some cases still are, banks such as Weatherbys and C. Hoare & Co. However, many high street banks now have dedicated divisions to offer private banking services or, as they tend to refer to this market, premium banking. The single common factor linking all banks that offer these services is money. Clients need to have liquid assets (money that is not tied up in a main residence) and in some cases a certain income level, but qualification threshold levels have undoubtedly reduced as the banking pool has widened.
Why should you consider private banking?
Weatherbys clients need to have at least £300,000 on deposit whilst at Hampden & Co clients are required to have incomes over £100,000 a year and ideally liquid assets of £500,000 or more. Both of these banks, along with many others, are keen to attract bright professional prospects on the first rungs of potentially rewarding careers, as well as gifted clients such as young footballers, musicians and actors. Brown Shipley private clients also need to have investable assets of at least £500,000 whilst at Arbuthnot Latham and C Hoare & Co this figure needs to be in excess of £1m, a figure matched by Coutts whose clients also ideally need to earn at least £500,000 per annum. Interestingly, C Hoare & Co has a reputation for being one of the toughest banks to get into with prospective customers having to be recommended by at least two people the bank already knows!
As you would expect, the barriers to entry at the private banking arms of most high street banks are lower. Their private banking minimum requirements typically require an annual income of at least £100,000. This is the case at HSBC who also like their Premier clients to have savings or investments of at least £50,000 with the bank. Meanwhile at Lloyds clients typically have at least £250,000 in savings, investments or personal pensions or an annual income of at least the same amount. Barclays Private Bank bucks this trend with a requirement for an investment portfolio of at least £5m but with the caveat that clients with smaller sums can readily access the Barclays Wealth Management Team.
What are the benefits of private banking?
Whilst the qualifying thresholds required by this diverse range of banks vary enormously, it’s vital that prospective customers understand the full range of products and services available at the banks that are open to them. As one would expect, propositions vary widely although of course there are some common financial services, such as checking and savings accounts, albeit with the personalised approach of a private banker or relationship manager assigned on an individual basis. This high-touch personal service extends from the mundane tasks of account management right through to a wide range of advisory services including advice on investment strategy and financial planning, portfolio management, tax efficiency, estate and inheritance tax planning, customised financing options and retirement planning.
Private Banking services, at their most comprehensive, address a client’s entire financial situation often offering discounts or preferential pricing on financial products and services. As an example they may receive special terms or prime interest rates on large mortgages or million plus mortgages, specialised loans or lines of credit. Furthermore, savings and money market accounts might well generate higher returns and be devoid of any fees and overdraft charges. Clients that operate overseas or are involved in import/export business are likely to obtain more favourable exchange rates on their transactions. With regard to alternative investments clients often have access to extensive in-house resources and to opportunities that are not available to the average retail investor. They may gain access to an exclusive hedge fund or a private equity partnership. Of course underpinning all of this is the concept of a one-stop-shop or concierge service with everything under one financial roof. In simple terms, a dedicated private banker acts as a liaison with all relevant departments within the bank to ensure the client obtains the best possible customer outcomes.
Wealth management and private banking
As well as servicing their clients’ immediate needs the best private bankers will also retain a strong focus on retaining this wealth for future generations. It is a sobering fact that up to 80% of wealth doesn’t reach the third generation so it’s little surprise that private banks such as Coutts provide financial education for the children of clients. Furthermore, successful clients often want to build a reputation and a legacy, to leave an indelibly positive mark on the world so private banks will advise in areas such as philanthropy and sustainable green investing. It would be fair to say that the expertise, knowledge and contact book of a good personal banker really does need to be boundless!
Additional benefits of having a private banking relationship?
The benefits of private banking are manifest and for the most part measurable, but of course there are some significant intangible benefits. Whilst the use of cheques has dramatically reduced in the last twenty years, they are still very much a feature of private bank accounts. A cheque drawn on a private bank has, for generations, conveyed a subtle but inescapably strong message about the person signing it! This is still very much the case today. Furthermore, many private banks foster the feel of a private club, offering their clients the chance to mix at social events such as hosted lunches, fine dining evenings and large social and sporting fixtures such as Royal Ascot and Henley. The opportunity for networking with like-minded individuals at these events is another great advantage of private banking.
The downside of private banking
Clearly there are a huge number of advantages to private banking and although these far out way any disadvantages it would be remiss not to mention the downsides that come with exclusivity. Firstly, when so much emphasis is placed on the dedicated relationship with a single personal banker, it doesn’t help when these bankers jump ship to join other banks and it’s an inescapable fact that staff turnover rates in the banking world are high. Added to this, personal bankers are paid by the bank and not, in contrast to an independent money manager, by the client. Consequently there may be some concern over conflicts of interest and loyalty.
So far as investments are concerned, being limited to the banks own proprietary products reduces choice and whilst other ancillary services offered in areas such as taxation and pensions may be sound, the advice might not be as creative as that available from dedicated external experts. Finally, of course, it’s usually the case that the wider the range of private banking services offered the higher the fees charged. Some banks will charge 1.75% per annum for assets under management – less than might be charged by independent financial advisors but a significant sum when added to monthly account fees.
Recent private banking trends
An interesting trend in recent years has seen some smaller private UK banks divesting themselves of their wealth management divisions. A prime example of this in 2016 saw C. Hoare & Co sell their wealth management business to Cazenove Capital Management. They did so with the stated intention of focusing fully on their core banking business. The decision was driven by a belief that the increasing financial sophistication of their clients meant many were increasingly managing their own money or hiring specialists to do it for them. The view that clients don’t want to be persuaded into investing money by their bank has certainly garnered some support amongst a number of UK private banks.
The private banking top 10 list
Perhaps another factor in the decision taken by C.Hoare & Co was the difficulty in competing with the industry’s very largest players when it comes to wealth management. Leviathans of the industry such as UBS, BNY Mellon, Bank of America, Morgan Stanley, Credit Suisse, Citi, JP Morgan and Goldman Sachs dominate the top 10 of the world’s largest private banks (or private banking divisions/subsidiaries of large bank holding companies) in terms of assets under management. Only RBC (Royal Bank of Canada) and BNP Paribas from France slip into the top 10 from outside of Switzerland and the USA. Together the top 10 alone, had a staggering figure of approaching $10,000bn under management at the end of 2016! Perhaps to reflect this focus on wealth management and to distance themselves from tax evasion scandals involving ultra-high net worth (UHNW) Americans, UBS replaced the words “private banking” with “wealth management” in their title in 2016. Credit Suisse made exactly the same move that same year.
New markets are booming
Whichever business focus private banks adopt in the years ahead, it is clear from their long and successful history that they will continue to play a pivotal role in the global economy. Switzerland remains the largest offshore centre, the USA, courtesy of over 3 million HNW’s, retains one of the largest private banking systems in the world and the UK is geographically well placed to be at the epi-centre of global operations. Whilst the growth of HNW’s is now relatively low in traditional private banking markets like the USA and Europe there has been an explosion in the number of millionaires in Asia. The internationalisation of the global economy, thanks to technological developments such as the internet and mobile phones, has opened up huge new markets for established private banks.
New tribes are emerging within the private banking space
Even in the traditional markets there are new classes of potential customers emerging for the Private Banks such as HNW female investors, emerging markets entrepreneurs and successful millennials to name but three. In truth, the needs of clients spread right across the globe are now so diverse that even the biggest banks will probably struggle to cater to these needs with their proprietary products alone. Client’s today demand “best of breed products” be this in equities, fixed-income securities, structured products, foreign exchange, commodities, deposits or real estate investments. As a consequence, private banks are increasingly offering what is termed as an open architecture product platform. Yes, they still promote their own proprietary products strongly but they are also prepared to distribute the products of other banks to their clients in return for a commission.
The future of private banking
In an ever-changing world it seems the ability of private banks to marry traditional values with cutting edge innovation and technology will guarantee their continued success. Their appeal is timeless and there can perhaps be no better yardstick for measuring the health of private banks and the incredibly diverse range of services and products they offer than the way they generate new clients. For many banks the primary source of leads is still by client referral… that speaks volumes.