Private Banking Definition - Investopedia

Private banking consists of personalized financial services and products offered to the high-net-worth individual (HNWI) clients of a retail bank or other ... Wealth WealthManagement WhatIsPrivateBanking? Privatebankingconsistsofpersonalizedfinancialservicesandproductsofferedtothehigh-net-worthindividual(HNWI)clientsofaretailbankorotherfinancialinstitution.Itincludesawiderangeofwealthmanagementservices,andallprovidedunderoneroof.Servicesincludeinvestingandportfoliomanagement,taxservices,insurance,andtrustandestateplanning. Whileprivatebankingisaimedatanexclusiveclientele,consumerbanksandbrokeragesofeverysizeofferit.Thisofferingisusuallythroughspecialdepartments,dubbed"privatebanking"or"wealthmanagement"divisions. KeyTakeaways Privatebankingisanenhancedofferingforthehigh-net-worthindividual(HNWI)clientsofafinancialinstitution.Privatebankingconsistsofpersonalizedfinancialandinvestmentservicesandproductsfromadedicatedpersonalbanker.Privatebankingclientstypicallyreceivediscountsorpreferentialpricingonfinancialproducts.However,therangeofproductsandinvestmentexpertiseofferedbyaprivatebankmaybelimitedcomparedtootherproviders. HowPrivateBankingWorks Privatebankingincludescommonfinancialserviceslikecheckingandsavingsaccounts,butwithamorepersonalizedapproach:A"relationshipmanager"or"privatebanker"isassignedtoeachcustomertohandleallmatters.Theprivatebankerhandleseverythingfrominvolvedtasks,likearrangingajumbomortgage,tothemundanelikepayingbills.However,privatebankinggoesbeyondCDsandsafedepositboxestoaddressaclient'sentirefinancialsituation.Specializedservicesincludeinvestmentstrategyandfinancialplanningadvice,portfoliomanagement,customizedfinancingoptions,retirementplanning,andpassingwealthontofuturegenerations. Whileanindividualmaybeabletoconductsomeprivatebankingwith$50,000orlessininvestableassets,mostfinancialinstitutionssetabenchmarkofsixfigures'worthofassets,andsomeexclusiveentitiesonlyacceptclientswithatleast$1milliontoinvest. AdvantagesofPrivateBanking Privatebankingoffersclientsavarietyofperks,privileges,andpersonalizedservice,whichhasbecomeanincreasinglyprizedcommodityinanautomated,digitizedbankingworld.However,thereareadvantagestoboththeprivatebankclientsaswellasthebanksthemselves. Privacy Privacyistheprimarybenefitofprivatebanking.Customerdealingsandservicesprovidedtypicallyremainanonymous.PrivatebanksoftenprovideHNWIswithtailoredproprietarysolutions,whicharekeptconfidentialtopreventcompetitorsfromluringaprominentcustomerwithasimilarsolution. PreferentialPricing Privatebankingclientstypicallyreceivediscountedorpreferentialpricingonproductsandservices.Forexample,theymayreceivespecialtermsorprimeinterestratesonmortgages,specializedloans,orlinesofcredit(LOC).Theirsavingsormoneymarketaccountsmightgeneratehigherinterestratesandbefreeoffeesandoverdraftcharges.Also,customerswhooperateimport-exportventuresordobusinessoverseasmightreceivemorefavorableforeignexchangeratesontheirtransactions. AlternativeInvestments Iftheyaremanagingaclient'sinvestments,privatebanksoftenprovidetheclientwithextensiveresourcesandopportunitiesnotavailabletotheaverageretailinvestor.Forexample,anHNWImaybegivenaccesstoanexclusivehedgefundoraprivateequitypartnershiporsomeotheralternativeinvestment. One-Stop-Shop Inadditiontothecustomizedproducts,thereistheconvenienceofconsolidatedservices—everythingunderonefinancialroof.Privatebankingclientsreceivedenhancedservicesfromtheirprivatebankerthatactsasaliaisonwithalloftheotherdepartmentswithinthebanktoensurethattheclientreceivesthebestpossibleproductofferingsandservice. AssetsandFeesforBanks Thebankorbrokeragefirmbenefitsfromhavingtheclients'fundsaddtotheiroverallassetsundermanagement(AUM).Evenatdiscountedrates,theprivatebank'smanagementfeesforportfoliomanagementandinterestonloansunderwrittencanbesubstantial. InanenvironmentwhereinterestratesintheU.S.haveremainedlow,bankshavebeenunabletochargehigherloanratestogrowtheirprofits.Asaresult,feeincomehasbecomeanincreasinglyimportantfinancialmetricinhelpingbanksdiversifytheirrevenuestream.Bankshavemadestridesinexpandingbeyondtraditionalbankingproducts,suchasloansanddeposits,tomoreservice-orientedandfee-basedofferingslikeprivatebanking. Pros One-stopshoppingforfinancialaffairs Conciergeservicesanddedicatedemployees Favorablerates,discountedcharges Perksandprivileges Cons Lessinstitutionalexpertise Optionslimitedtoproprietaryproducts Highstaffturnover Possibleconflict-of-interestforemployees DisadvantagesofPrivateBanking Althoughtherearemanyadvantagestoprivatebanking,drawbacksdoexisttothisexclusivity. BankEmployeeTurnover Employeeturnoverratesatbankstendtobehigh,evenintheeliteprivatebankingdivisions.Theremayalsobesomeconcernoverconflictsofinterestandloyalty:Theprivatebankeriscompensatedbythefinancialinstitution,nottheclient—incontrasttoanindependentmoneymanager. LimitedProductOfferings Intermsofinvestments,aclientmightbelimitedtothebank'sproprietaryproducts.Also,whilethevariouslegal,tax,andinvestmentservicesofferedbythebankaredoubtlesslycompetent,theymaynotbeascreativeorasexpertasthoseofferedbyotherprofessionalsthatspecializeinvarioustypesofinvestments.Forexample,smallregionalbanksmightprovidestellarservicethatbeatsoutthelargerinstitutions.However,theinvestmentchoicesatasmaller,regionalbankmightbefarlessthanamajorplayersuchasJPMorganChase&Company(JPM). RegulatoryConstraintsforBanks Lucrativeasprivatebankingcanbe,itcanposechallengesfortheinstitution,aswell.Privatebankshavedealtwitharestrictiveregulatoryenvironmentsincetheglobalfinancialcrisisof2008.TheDodd-FrankWallStreetReformandConsumerProtectionAct,alongwithotherlegislationpassedintheU.S.andaroundtheworld,hasresultedinahigherleveloftransparencyandaccountability.Therearemorestringentlicensingrequirementsforprivatebankingprofessionalsthathelpensurecustomersareappropriatelyadvisedabouttheirfinances. RealWorldExampleofPrivateBanking UBS,MerrillLynch,WellsFargo,MorganStanley,Citibank,andCreditSuisseareallexamplesoffinancialinstitutionswithsubstantialprivatebankingoperations.AnotherbankthatoffersprivatebankingisTDBank(TD),withitsTDWealth®PrivateClientGroup. Availabletoclientswithatleast$750,000inassets,itoffersmanyservicestoitsclients.Servicesincludemoneymanagement,strategiesforbusinessowners,realestatefinancing,andcustomlendingsolutions.Theprivatebankingteamalsooffersretirement,succession,andestateplanning,whichhelpreducetaxes. TheTDwebsitepromisesthatbeyondtheproductofferings,eachprivateclientwillreceivealocalrelationshipmanagerthatwilldeliverexceptional,customizedserviceasoutlinedinthequotebelow. Webuildacustomizedfinancialstrategythatalignstoyourindividualand/orfamilygoals. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. TDBank."TDWealth® PrivateClientGroup."AccessedAug.30,2020. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms WhatIsAssetManagement? Assetmanagementisthepracticeofincreasingwealthovertimebyacquiring,maintaining,andtradinginvestmentsthatcangrowinvalue. more UnderstandingCommercialBanks Acommercialbankisafinancialinstitutionthatacceptsdeposits,offerscheckingandsavingsaccountservices,andmakesloans. more WhatYouShouldKnowAboutUniversalBanking Universalbankingiswhenfinancialinstitutionsofferawidevarietyoffinancialservicesfortheircustomersasaone-stopshop. more High-Net-WorthIndividual(HNWI) "High-net-worthindividual"(HNWI)isafinancialindustryclassificationtodenoteanindividualwithliquidassetsaboveacertainfigure. more RelationshipBanking Relationshipbankingisastrategyusedbybankstostrengthencustomerloyaltyandprovideasinglepointofserviceforasuiteofproductsandservices. more RetailBanking Retailbankingconsistsofbasicfinancialservices,suchascheckingandsavingsaccounts,soldtothegeneralpublicvialocalbranches. more PartnerLinks RelatedArticles CheckingAccounts 10CheckingAccountstheUltraRichUse CareerAdvice PrivateBanker:CareerPathandQualifications Banking WhichAretheWorld's10LargestPrivateBanks? 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