Private banking

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Private banking is banking, investment and other financial services provided by banks to high-net-worth individuals (HNWIs) with high levels of income or sizable assets.

Bank financial institution

A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.

To invest is to allocate money in the expectation of some benefit in the future.

Financial services economic service provided by the finance industry

Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises. Financial services companies are present in all economically developed geographic locations and tend to cluster in local, national, regional and international financial centers such as London, New York City, and Tokyo.

Contents

Private banking forms a more exclusive (for the especially affluent) subset of wealth management. The term "private" refers to customer service rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers. It does not refer to a private bank, which is a non-incorporated banking institution.

Wealth management is an investment-advisory discipline which incorporates financial planning, investment portfolio management and a number of aggregated financial services offered by a complex mix of asset managers, custodial banks, retail banks, financial planners and others. There is no equivalent of a stock exchange to consolidate the allocation of investments and promulgate fund pricing and as such it is considered a fragmented and decentralised industry. High-net-worth individuals (HNWIs), small-business owners and families who desire the assistance of a credentialed financial advisory specialist call upon wealth managers to coordinate retail banking, estate planning, legal resources, tax professionals and investment management. Wealth managers can have backgrounds as independent Chartered Financial Consultants, Certified Financial Planners or Chartered Financial Analysts, Chartered Strategic Wealth Professionals, Chartered Financial Planners, or any credentialed professional money managers who work to enhance the income, growth and tax-favored treatment of long-term investors.

Retail banking, also known as consumer banking, is the provision of services by a bank to the general public, rather than to companies, corporations or other banks, which are often described as wholesale banking. Banking services which are regarded as retail include provision of savings and transactional accounts, mortgages, personal loans, debit cards, and credit cards. Retail banking is also distinguished from investment banking or commercial banking. It may also refer to a division or department of a bank which deals with individual customers.

Private banks are the banks owned by either the individual or a general partner(s) with limited partner(s). Private banks are not incorporated. In any such case, the creditors can look to both the "entirety of the bank's assets" as well as the entirety of the sole-proprietor's/general-partners' assets.

At least until recently, it largely consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by a single designated relationship manager.

In banking, a managed account is a fee-based investment management product for high-net-worth individuals. The main appeal for wealthy individuals is the access to professional money managers, a high degree of customization and greater tax efficiencies in a fee-based product. They are not to be confused with managed bank accounts such as thinkmoney, e-money accounts and basic bank accounts, all of which are consumer banking products in the UK.

Concierge employee of an apartment building, hotel or office building

A concierge is an employee of a multi-tenant building, such as a hotel or apartment building, who receives guests. The concept has been applied more generally to other hospitality settings and to personal concierges who manage the errands of private clients.

Overview

Private banking is the way banking originated. The first banks in Venice were focused on managing 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).

A savings bank is a financial institution whose primary purpose is accepting savings deposits and paying interest on those deposits.

The middle class is a class of people in the middle of a social hierarchy. The very definition of the term "middle class" is highly political and vigorously contested by various schools of political and economic philosophy. Modern social theorists - and especially economists - have defined and re-defined the term "middle class" in order to serve their particular political ends. The definitions of the term "middle class" therefore are the result of the more- or less-scientific methods used when delineating the parameters of what is and isn't "middle class".

LGT Group company

LGT Group is the largest family-owned private banking and asset management group in Europe.

Historically, private banking has been viewed as a very exclusive niche that only caters to HNWIs 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" 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. [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 percent ($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 England, private banks were established in the 17th century, in parallel with the development of 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

The internationalization of the economy, technological developments such as the Internet and mobile phones ensure that banks have to innovate their value proposition and look for new markets. For example, the growth of HNWIs is low in traditional private banking markets like Europe, compared to Asia where the number of millionaires has grown to 3.6 million. [8]

Banks also provide a sampling of the private banking services at a lower price point 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, they amount to a sizeable revenue to the bank. The products offered to premium banking customers are the same as that for private banking customers with the exception that they do not include hedge funds or facilities to manage one's own business accounts. In short, it is wealth management at a much smaller scale.

Private banking rankings

Results from Euromoney's annual private banking and wealth management ranking in 2018, which consider, amongst other factors, assets under management (AUM), net income and net new assets. [9]

This table displays results of one category of the private banking ranking, "Best global private banking services overall 2018". [10]

Best global private banking services overall 2018
Rank 2018CompanyRank 2017
1 UBS 1
2 JPMorgan 2
3 Credit Suisse 3
4 Julius Baer 5
5 Citi 4
6 Pictet 6
7 BNP Paribas 7
8 HSBC 10
9 Goldman Sachs 13
10 ABN Amro 11







The top three banks in 2017 retained their ranking position in 2018.

UBS Global Wealth Management took the top spot in Euromoney's 2018 survey for "Best private banking services overall 2018." [11]

UBS Wealth Management announced in January it would be merging its Americas wealth management with its overall wealth management business to create a combined global division with $2.3 trillion in assets under management (AuM) – $1 trillion of which comes from ultra-high net-worth clients. [12]

J.P. Morgan & Co. Private Bank saw its assets increase 21% over 2017 and added 100 new wealth advisers. [13]

Credit Suisse Private Banking & Wealth Management's profitability has increased 40% for the first nine months of 2017 compared to the same period two years before. In the first nine months of 2017, AuM per relationship manager had increased 17% and revenues by 12% compared with the same period in 2016. [14]

Scale

In terms of AUM, the world's 25 largest private banks (or private banking divisions/subsidiaries of large bank holding companies), as of end-2016, are: [15]

RankBankCountryAUM (US$bn)
1 UBS Wealth Management Flag of Switzerland.svg   Switzerland 1737.5
2 BNY Mellon Wealth Management Flag of the United States.svg  USA 1600.0 [16]
3 Bank of America Global Wealth and Investment Management Flag of the United States.svg  USA 1444.8
4 Morgan Stanley Wealth Management Flag of the United States.svg  USA 1,439.4
5 Credit Suisse Private Banking & Wealth Management Flag of Switzerland.svg   Switzerland 687.3
6 RBC Wealth Management Flag of Canada (Pantone).svg  Canada 620.9
7 Citi Private Bank Flag of the United States.svg  USA 508.5
8 J.P. Morgan & Co. Flag of the United States.svg  USA 437.0
9 Goldman Sachs Private Wealth Management Flag of the United States.svg  USA 369.0
10 BNP Paribas Wealth Management Flag of France.svg  France 357.3
11 Deutsche Asset & Wealth Management Flag of Germany.svg  Germany 311.4
12 Julius Baer Group Flag of Switzerland.svg   Switzerland 297.5
13 BMO Wealth Management Flag of Canada (Pantone).svg  Canada 287.0
14 HSBC Private Bank Flag of the United Kingdom.svg  UK 261.0
15 Pictet Wealth Management Flag of Switzerland.svg   Switzerland 541.0
16 Northern Trust Wealth Management Flag of the United States.svg  USA 227.3
17 Wells Fargo Wealth Management Flag of the United States.svg  USA 225.0
18 ABN AMRO Private Banking Flag of the Netherlands.svg  Netherlands 217.4
19 Santander Private Banking Flag of Spain.svg  Spain 204.8
20 Bank J. Safra Sarasin Flag of Switzerland.svg   Switzerland 194.2
21 China Merchants Bank Flag of the People's Republic of China.svg  PRC 192.9
22 Crédit Agricole Private Banking Flag of France.svg  France 165.0
23 ICBC Flag of the People's Republic of China.svg  PRC 154.1
24 Lombard Odier Private clients Flag of Switzerland.svg   Switzerland 133.6
25 CIC Flag of France.svg  France 133.3

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. 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.

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 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. [17]

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 (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.

Lead generation

Lead generation is a vital part of 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 others 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 his/her friends when he/she is satisfied with the 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

Related Research Articles

Banking in Switzerland Foreign-friendly bank regulations

Banking in Switzerland began in the early 18th century through Switzerland's merchant trade and has, over the centuries, grown into a complex, regulated, and international industry. Along with the Swiss Alps, Swiss chocolate, watchmaking and mountaineering, banking is seen as emblematic of Switzerland. Switzerland has a long, kindred history of banking secrecy and client confidentiality reaching back to the early 1700s. Started as a way to protect wealthy European banking interests, Swiss banking secrecy was codified in 1934 with the passage of the landmark federal law, the Federal Act on Banks and Savings Banks.

An offshore bank is a bank regulated under international banking license, which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to less regulation and transparency, accounts with offshore banks were often used to hide undeclared income. Since the 1980s, jurisdictions that provide financial services to nonresidents on a big scale, can be referred to as offshore financial centres. Since OFCs often also levy little or no tax corporate and/or personal income and offer, they are often referred to as tax havens.

Credit Suisse Swiss bank

Credit Suisse Group AG is a Swiss multinational investment bank and financial services company founded and based in Switzerland. Headquartered in Zürich, it maintains offices in all major financial centers around the world and is one of the eight global "Bulge Bracket" banks providing services in investment banking, private banking, asset management, and shared services. Credit Suisse is known for its strict bank–client confidentiality and banking secrecy practices.

Julius Bär Group AG, known alternatively as Julius Baer Group Ltd., is a Swiss multinational private bank founded and based in Switzerland. Headquartered in Zürich, it is one of the oldest and largest Swiss banking institutions usually noted among fellow banks UBS and Credit Suisse.

High-net-worth individual (HNWI) is a term used by some segments of the financial services industry to designate persons whose investible assets exceed a given amount. Typically, these individuals are defined as holding financial assets with a value greater than US$1 million.

The Pictet Group, known simply as Pictet, is a Swiss multinational private bank and financial services company founded and based in Switzerland. Headquartered in Geneva, it is one of the largest Swiss banks and primarily offers services in wealth management, asset management and asset servicing to private clients and institutions.

Citibank (Malaysia)

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Union Bancaire Privée company

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Vontobel is an investment bank, headquartered in Zurich, Switzerland. It was established in 1924 and has around 1,700 employees worldwide. Vontobel offers wealth and asset management for private clients and institutional investors, as well as investment banking. As of 31 December 2016, Vontobel held around CHF 195 billion of client assets. The registered shares of Vontobel Holding AG are listed on the SIX Swiss Exchange. The Vontobel families and the Vontobel Foundation hold the majority of shares and votes in the company. Vontobel has branches at 22 international locations.

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Boris Collardi Swiss manager

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