What it means
Where a high street bank offers the same products to everyone, a private bank builds a service around one client or family. That can include managing investments, arranging loans against a portfolio, planning for inheritance, advising on currency exposure and introducing the client to other specialists.
The aim is a joined-up view of the client's whole financial life rather than a series of separate products. The relationship manager is the single point of contact, which is the biggest difference from ordinary banking.
The manager knows the client's goals and family circumstances, and works with in-house investment, credit and trust teams to deliver one coordinated answer. Banks usually earn money in three ways: a percentage fee on the assets they manage, interest on lending, and transaction or product fees.
The fee on managed assets is a percentage of assets under management (the total value of client money the bank looks after), so the bank's income rises as the client's wealth grows. Minimum thresholds vary by bank and country, and are commonly set at levels that put the service beyond most people.
Some banks run a lower tier for the mass affluent, sometimes called wealth management or premier banking, with less personal attention. Moving between tiers is common as a client's wealth grows or shrinks.
For a business owner, private banking often becomes relevant after a sale or a major dividend. Clients should understand how the bank is paid, because a conflict can arise when the bank earns more from selling its own products than from independent advice.
In practice
Real-world examples.
Example
A technology founder sells her company and deposits $20,000,000 with a private bank. Her relationship manager arranges a portfolio, a mortgage on a second home and an introduction to a tax specialist. She deals with one person rather than several departments.
Example
A family-owned shipping group uses a private bank to arrange a currency hedge and a loan secured against its investment portfolio. The bank's credit team approves the loan quickly because it already knows the family's finances. The family avoids selling investments and triggering a tax charge.
Example
A retired surgeon with $3,000,000 compares the fees at a private bank with those at an independent adviser. She finds that the private bank's total cost, including product fees, is higher than the headline 1% suggests. She asks for a full fee schedule before deciding, and then uses it to negotiate a lower advisory rate with each firm.
Formula
Calculation
Annual advisory fee = assets under management x fee rate
Suppose a founder places $5,000,000 with a private bank that charges an advisory fee of 1% a year. The annual fee is 5,000,000 x 0.01 = $50,000.
If the portfolio earns a gross return of 7%, the gain is 5,000,000 x 0.07 = $350,000. After the fee, the net gain is 350,000 - 50,000 = $300,000, which is a net return of 300,000 / 5,000,000 = 6%. The fee therefore takes about 14% of the gross gain (50,000 / 350,000 = 0.143).Case study
Seen in the real world.
Coastline Family Office is an illustrative, fictional business owned by the Rahman family, who sold their chain of clinics for $30,000,000. They opened an account with a private bank, whose relationship manager presented an investment plan and a lending facility.
The family's finance lead, Priya, compared total costs. The headline advisory fee was 0.9%, or $270,000 a year on $30,000,000, but the bank's own funds carried additional charges that added about $90,000.
She negotiated the advisory fee down and asked that the bank's own funds be limited to a smaller share of the portfolio. In this illustrative story the lesson is that the headline fee is only part of the cost, and the all-in figure is what counts. The family also kept a written record of every service the bank provided, so that at the annual review they could check each fee against the value delivered. That habit, in this fictional example, saved them from paying for a reporting service they never used.
Watch out
Common mistakes.
- Judging a private bank on its headline advisory fee alone, when product fees, custody charges and lending margins can add materially to the total cost.
- Assuming the relationship manager is an independent adviser, when the person may be paid or rewarded partly on the bank's own products.
- Believing private banking is only about investments, when lending, tax planning and succession planning are often the most valuable parts.
Questions
People also ask.
Do you need a minimum amount to use private banking?
Most banks set a minimum level of investable wealth, which varies widely between banks and countries, and ask for evidence of it when you apply.
How is private banking different from wealth management?
The terms overlap, but private banking usually includes lending and banking services as well as investment advice, and normally comes with a dedicated relationship manager.
Is the money safe in a private bank?
Deposits are generally covered by the same deposit protection rules as other bank deposits where they apply, but investments are not guaranteed and can fall in value.
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