Did you know there is such a thing as private banking? You might if you hold more than $1 million in liquid assets. If you do, congratulations, you are considered a High Net Worth Individual (HNWI). When you fall into this category, you are eligible for private banking services to help you manage your investments, estate, taxes, etc.
But what exactly is private banking? Well, it’s much like having preferred status with an airline or a Las Vegas casino. You enjoy concierge-style service and perks not offered to regular folks. However, there are always costs and risks in exchange for enhanced service and perks. And, of course, the bank is making money off of you or they wouldn’t offer these services. Keep reading to see who qualifies and what they get from the banks that you don’t.
What is Private Banking?
Private banking is the term used to describe financial (and legal) services offered to high net worth clients. HNWIs have accrued far more wealth than the average person. They have the means to access investments not feasible for other people, like hedge funds – aggressively managed portfolios that require a very large minimum initial investment. The objective of a private bank is to match HNWI with the most appropriate options based on their financial goals.
Financial institutions that offer private banking have a full staff of professionals and advisors to help HNWI manage their wealth. The bank assigns a relationship manager that acts as a liaison between the client and various financial and legal affiliations. They also facilitate the use of the bank’s products and services. When acting on behalf of a client, the relationship manager must uphold contractual and ethical obligations, maintaining privacy and confidentiality. In addition to the relationship manager, private banks have a team of specialists including mortgage lenders, loan underwriters, full-service brokers, investment managers, trust managers, and financial planners.
Products, Services & Perks
Products and services offered to private banking clients are far more extensive than those offered to regular customers. Here is a short list of services banks offered to high net worth clients.
- Asset management – trusts, investments, brokerage, etc.
- Cash management – checking accounts, bill payment, overdraft services, etc.
- Custody services
- Financial planning services
- Funds transfers
- Lending services
- Mail services
- Wealth advisory services
Being a private banking client comes with perks from a higher level of concierge-style service and no waiting in lines to higher interest rates and negotiable fees. In exchange for convenience and perks, the bank makes money off of the interest from your loans and assets and fees assessed for using their products and services.
Who is Eligible for Private Banking?
Simply stated, HNWI are millionaires. They rarely have to seek out private banks and advisors; banks and advisors come to them. They are invited to take advantage of private banking services.
Financial institutions have different thresholds for who they consider eligible. The threshold is based on the amount of liquid assets you own, excluding personal assets and property, and the products and services the bank thinks you will buy. The fee structure is based on this threshold and the products and services you actually use.
The numbers vary a little from source to source, but the classifications of HNWI are as follows:
- High Net Worth Individual (HNWI) – At least $1 million in liquid assets.
- Very High Net Worth Individual (VHNWI) – At least $5 million in liquid assets.
- Ultra High Net Worth Individual (UHNWI) – At least $30 million in liquid assets.
If your liquid assets are less than $1 million, but more than $100,000, you are considered to be affluent or sub-HNWI.
Characteristics and Behaviors of HWNI
The more money you have, the more time, effort, and risk is involved in managing your financial life.
HNWI typically look for advice in the following areas:
- Maintaining their current lifestyle and planning for retirement
- Funding their children’s college educations
- Protecting their current level of wealth and Increasing their wealth
- Leaving an estate for their heirs
- Giving to charity
- Minimizing income and capital gains taxes
- Improving cash flow
- Managing market risk
When it comes to investing, HNWI are savvy, aggressive investors. They have highly diversified portfolios, which takes a lot of proactive management.
Risks & Risk Management
High net worth clients have a greater risk of falling victim to financial crimes than regular folks; this is why privacy and confidentiality is so important. Financial crimes, like money laundering schemes, can result in sanctions and fines, litigation, loss of business and loans, frozen assets, and reduced liquidity for the client. Financial crimes may also cost the bank a lot of money and damage to their reputation.
In order to protect themselves, banks create risk profiles for private banking clients. They collect information about each client and the client’s assets. Banks are primarily concerned with the following details:
- Client’s current relationship with the bank.
- Public information about the client that may impact their relationship with the bank.
- Origin of the client’s wealth.
- Origin of the client’s business and geographic location.
- Client’s corporate business structure.
- Client’s account information, including size, purpose, type, and anticipated account activity. Banks also have effective policies, procedures, and processes in place to help protect themselves and their clients.
There are some banks that offer private banking services to affluent and sub-HWNI clients, but for the most part, they target millionaires. Even in a bad economy, banks will make money off of the HWNI. While the majority of us stop spending during hard times, the they continue to focus on increasing their wealth.