What is private banking? (2024)

What is private banking?

So, how does private banking work, and what does it entail?

These are by far the two most frequently asked questions.

In essence, private banking is an elite financial service that connects clients with a personal advisor to help them manage their money.

This makes it easier for them to stay on top of their wealth and investments.

Instead of going to a branch and talking to a standard teller, clients can go straight to their private banker for advice.

Some of the most prominent institutions offering private personal banking services in the US include:

• Morgan Stanley

• Bank of America Merrill Lynch

• JP Morgan Private Bank

• Citigroup

• Goldman Sachs

Private bankers are clients' first contact points when they want to speak with their bank.

They advise on investments and financial plans and can also offer important services that are attractive to clients because of their exclusivity.

There are certain unique rates, services and wealth management options available to people who bank privately, like:

• Access to savings and checking accounts with special features (such as high interest rates)

• Lower interest rates and better terms for loans and lines of credit

• Financing for luxury purchases or other services outside of the bank’s usual remit

Though these services sound attractive, they alone don’t necessarily point to private banking as the right option for you.

You may benefit just as much (or more) from wealth management services.

This leads us nicely into another FAQ...

private banking is an elite financial service that connects clients with a personal advisor to help them manage their money

What is the difference between private banking and wealth management?

To some, it may seem like the private banking vs wealth management debate is splitting hairs.

But although the services overlap, there are clearly defined differences.

You should compare options from several firms before deciding which one to use, as this will be the most reliable way to determine what best suits you.

Private bankers operate more in the realm of advice. They’re particularly useful during significant life changes or unstable market conditions because they can provide sound knowledge about investment risks.

They can also explain potentially attractive options regarding borrowing needs and financial goals.

Private bankers sometimes offer wealth management services but are more focused on helping clients decide their plans and goals.

Wealth management services, however, go a little further. Like private banking services, they’re usually reserved for high-net-worth individuals.

Wealth managers are primarily concerned with optimizing a client’s financial portfolio and managing and making the right investments on their behalf. They can also help with tax planning, estate planning and trust administration.

How much money do you need for private banking?

It’s no secret that private banking is the domain of the wealthy.

Private banking minimum requirements are generally around $250,000 in investible assets, though some banks will set the bar higher than others.

For example, the minimum to open a private banking account with HSBC in the US is $5 million, while the minimum for banks like JP Morgan and Bank of America in the US is $10 million.

It’s not unusual for larger private banking institutions to require eight-figure sums from their clients.

In some cases, private banks will make exceptions. For example, if you’re the child of a high-net-worth individual, a private bank may want to show loyalty by keeping that account open for you.

Similarly, if a young professional is on a career path that will see them meet the minimum requirements in time, banks may agree to open an account before they do.

One more thing to bear in mind if you’re considering private banking services is the money you’ll need to set aside to cover them.

Private bank fees apply and are usually charged at a specific rate of an individual’s annual income (commonly around 1 per cent), but this rate can change between companies and clients.

The advantages of private banking

1. The dedicated representative – One of the most significant benefits of private banking is that you get consistent service from a person/team with an understanding of your financial situation. This removes the need to repeat yourself every time you go to the bank and makes it easier to carry out things like wire transfers and check deposits.

2. The perks and discounts – Every private banking package comes with some attractive private banking benefits, from better foreign exchange rates to other conversions for clients in particular industries. Private banking clients may also receive higher annual percentage yields on their savings accounts.

3. High investment returns – On average, returns from private banking investments are between 7 to 13 per cent. Banks assign their highest-performing staff members to become clients’ private bankers, and these talented experts are well equipped to help their clients get higher investment returns each year.

The disadvantages of private banking

1. The impact of employee changes – Staff turnover at the bank could impact you. If your private banker leaves the bank, it could cause problems and force you to make a decision you don’t want to: Do you stay with the bank and reintroduce your situation to a new banker not familiar with your financial needs, or do you move to your existing private banker’s new place of work?

2. Variation in expertise and intention – Small banks offering these services may claim to provide the same level of knowledge as more prominent firms but be unable to deliver. Plus, private bankers might not have specialist expertise in the area you need them to. And, because they’re not fiduciaries, they may not always be committed to your best interests over making sales.

3. Higher administrative costs – The management fees and associated costs of private banking and wealth management are high. Private bankers often charge a flat rate of 1 per cent or thereabouts as a commission in the US. Be sure to shop around and compare prices before committing to any particular option, paying attention to the administrative and financial fine print.

If you found this article useful, you might also find our article on hidden bank fees and how to avoid them informative, too.