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The Secret World of Private Banking





I’ve read more personal finance books than I care to admit. I’ve had more conversations about money with people than I’ve had about most other subjects. I enjoy getting a new perspective on money. There always seems to be something new to learn. Recently I found out about a side of banking I’d never heard about before.

I was chatting with a someone I’d only just met. She mentioned that she use to work at a bank which naturally got my attention. “What was your job at the bank?”, I asked. She explained that she worked in private banking. Thinking she meant that she worked for a private bank or credit union I asked her, “What’s private banking?”

I confess, I’m no economist. Nor have I ever worked in the financial sector. I have an interest in personal finance. I do a lot of volunteer work helping people with the basics of money management but I have no formal training on the subject. I can’t be the only one who has never hard of private banking.

She explained that private banking is for people whose balances totaled more than a million dollars. At first I thought, “Of course. That makes sense. They have so much invested at the bank so the bank gives them special VIP treatment to show their appreciation.”

“Not quite”, she clarified “They pay more in service fees, not less. Clients meet with us on a separate floor of the bank that is only accessible to people with a large net worth but they often pay in excess of $100 a month in bank fees.”

This is where I got confused. These individuals keep massive amounts of cash at banks who then lend that same cash out to other people for a profit and they charge them for it? At this point, I’m really curious. I thought the road to wealth was paved by saving money not by paying more. This goes against everything I learned in the Millionaire Next Door (link).

Millionaires are doing banks a favour by trusting their money with their bank. They should not have to pay in excess of $1200 a year in bank fees to keep it there.

“They get excellent customer service”, she explained. “They never have to wait in line. Our job is to show them how valued they are.”

I can see the argument that it’s a bit like first class airline tickets. If people want better, faster service in a more comfortable environment and they are willing to pay for it, who am I to question their reasoning? Yet there doesn’t seem to be the same conflict of interest when it comes to airlines.

“I really enjoyed my time there”, she said. “The people were really nice and I always met my sales targets.”

“Sales targets? You mean to tell me that not only does the bank charge them in excess of $1200 a year in yearly bank fees but they also had to promote products the clients might not need in order to reach sales targets?”

She laughed when I told her I’d be no good at that job. I’d keep trying to talk clients out of products they didn’t need.

What I wondered but didn’t get a chance to ask was could I as a regular customer with a net worth of well under a million dollars pay the extra bank fees in order to get the VIP service. If the answer was yes, then I’d argue that private banking is simply paying more for better service. If the answer is no, as I suspect it is, then I can’t help but wonder if there are some serious conflict of interest issues that need to be addressed.

Anyone in the world of banking who care to shed any light on this? Is it in fact available to anyone who is willing to pay the fees or is it restricted by total bank balance?

Kathryn has been a staff writer for MDJ since January 2009. During the day she works in an office. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Kathryn, along with her husband and two children live in Ontario.





20 Comments, Comment or Ping

  1. 1. NHT

    It has both a fee and net worth component, one thing about the “world of private banking” is that it typically appeals to the groups that will hold family trusts etc where the fee’s become tax deductible and it can and does become a one stop shop including a estate planning department, legal etc. Plus they tend (in Canada) to be global in their network, giving one access to the same level of service in Miami say as one received in London On without needing a lot of communication on the part of the client. If your interests are far flung, complicated by family scenario’s or businesses it can actually be helpful to have access to such a service level. (and all and any areas have service targets, with wealthy clients the biggest target would be around making sure one brings as much of their business in house vs say selling another visa card)

  2. I don’t know the statistics, but I would venture a guess that the vast majority of financial services resources are concentrated on high net worth clients. I’ve lamented for a long time the lack of resources available to low net worth individuals, who represent a much larger proportion of the population.

    Most folks need help with basic personal finance issues rather than choosing the right place to park piles of money. The challenge is to find a business model that works. We need a system where personal financial advisors are adequately compensated, but their services are still affordable for most people.

  3. 3. ashby corner

    One of my friends does this…I think he pays ~80/month. I know for sure he ain’t a millionaire or anything. He has a nice house in a nice hood, makes a good salary (as does his wife), but they are “just normal folks”.

  4. @Kathryn,
    Yeah, private banking or private asset management has been around for a long time and basically, you’re paying the institution for a “seasoned professional” who can provide you with “expert advice” and solutions on a broad range of personal financial subjects. These professionals will also work with your lawyer or accountant, or other professionals you’ve hired (as you wish) to provide you with estate, tax and other financial strategies for you to execute on to achieve your financial goals. These professional services come at a cost, and although you would expect VIP treatment and low costs for these services, at the end of the day everyone wants to get paid :) Does make you think though eh?

  5. 5. Bryan Sr

    Very interesting post. I once worked at a bank as a side job when off from regular law enforcement job. I knew of multi millionaires that would come in and have ease of access around the bank but never knew this was why. I am sure they make up the fees through interest they get in return. Just a hunch. Enjoyed this and learned something, great.

  6. 6. Canuckabroad

    It comes down to service as said by NHT and structuring ones affairs as said by Financial cents (especially with regard to taxation). You also may get banking confidentiality which applies to spouses as well as governments. Security of accounts (your money may be segregated from other bank assets and in some private bank might not used to fund the commercial bank’s balance sheet or used in their risky investment banking activities) Finally if you live and work in, say, the middle east, keeping your cash in a private bank abroad is appealing.

    That being said, I think the appeal is largely in the banking confidentiality and the taxation benefits (either illegal or perfectly legal). Private banking is also far more popular in Europe than in North America (where Americans are taxed on global earnings and brokerages are far more competitive and full-service) and is growing quickly in Asia especially Singapore and HK which can be explained by political risk elsewhere in the region.

  7. 7. Sarlock

    You have to think of it in context of their net worth, what they are getting for this additional fee and whether it is worth it to them. For many people with large fortunes, time=money and their time is worth hundreds of dollars per hour. So being able to step in to an elevator, get off on the private floor and have instant banking attention is worth $100/month – not to mention the access to investment products that us regular mortals cannot access. $1,200/year on $2,000,000 in assets is only 0.06%. Considering what lawyer and accounting fees can add up to (I pay about $500-$1,000/year to consult with my accountant about tax strategies) this is just a drop in the bucket.
    I’d also argue that there is just as much financial illiteracy in the millionaire club as there is in any other net worth group. A lot of inherited money that is left in the hands of others to invest and the owners want little to do with allocating their resources directly. And, sadly, they still manage to earn a much higher return to most of us do.

  8. There are no conflict of interest issues if you have less than a million dollars for a net worth and can’t pay for the private banking treatement. Private banking is definitely a specialized service for those that qualify and have complex financial needs. Just because an individual wants a service and willing to pay for it, they still need to qualify for the service.

    For instance, a client with just a million dollars in GIC deposits may not necessarily qualify for the Private Banking service because their needs are quite simple and can be managed at the branch level. However, an individual with a million dollars in GIC’s but wants to explore other options in terms of private money managers or has complex lending and business needs will definitely be a candidate as their needs are beyond what the average branch level employee can offer.

    Looking to avoid this preceived “conflict of interest” build a net worth with investable assets greater than 1 million.

  9. I can see how it could appeal to some. Far too many times I found my self letting poeple ahead on me in the line so that i don’t end up with that incompetent teller who is going to have to go ask another teller how to do this and that.

  10. 10. Dana

    $1mm in net worth sounds like a low threshold for private banking services. I was in this industry for most of the 90′s and our threshold back then was $1.5mm of investible assets (as in not including real estate holdings).

    Client fees were based on a percentage of funds managed. Clients were given more than just exclusive access to banking reps and the option to skip branch line-ups. Fees often included, estate planning, trust management, access to investment research used by the portfolio managers, access to pooled funds and managed asset products not made available to retail investors, tax planning services including CAs and accounting firms and other such services.

    Some clients even had their mail directed to the bank where it would be opened and their bills paid on their behalf (from their accounts).

    There is an entirely different banking reality for ‘ultra-high net worth clients’ (that is what we use to call them) than the banking reality most of us are accustomed to.

  11. 11. Kathryn

    Great comments. Hearing another perspective has helped me understand private banking much better. I see now that it is much more than faster, better service. I didn’t realize there was so many other issues involved, including wills, executors, paying bills, managing trusts, etc. For someone who uses the full services, the fees suddenly seem like a great deal.

  12. 12. MD from Alberta

    Great comments.

    As a customer, I should clarify a few things.

    The cost typically is $100 / mth for services. This usually gives you those access perks, an account manger, preferred rates on loans and USD exchanges, etc. There are also some fringe perks such as waiving of credit card annual fees, no charges for safety deposit boxes and I’m sure more.

    While there is no official net work minimum (that I’m aware of), they usually do recommend having $1 million in assets. Note that this different from the more exclusive accounts that require $1 million in investable assets to start.

    Lastly, they can be quite helpful for helping out with some team coordiation. Someone else noted about inhouse lawyers, accountants, insurance, etc and I agree these are all good.

    Hope that helps

  13. 13. Ed Rempel

    Hi Kathryn,

    From our experience in the financial industry, ‘high net worth” products for wealthy people are mostly snob appeal. Private bankers we have talked to don’t offer any service or advice that your should not be able to get from a decent financial planner (that works with a lawyer and accountant).

    For people with some money, often just being treated special, not having to wait in line, having the same banker, getting nice statements, and being invited to meals or entertainment gives them a feeling of importance. Special services and advice are generally a minor part or not part of the appeal.

    “Estate planning, trust management, access to investment research used by the portfolio managers, access to pooled funds and managed asset products not made available to retail investors, tax planning services including CAs and accounting firms and other such services” are all available from many sources and are essentially all commodities today.

    For example, in the investment industry, the products designed for people with $500,000 to $10 million are generally lower investment quality than those for the masses. These products are almost always 95% show and 5% quality.

    Pooled funds and wrap accounts with high minimums so they are not available to retail investors usually have lower quality fund managers and far less selection than retail mutual funds. Usually they involve being restricted to fund managers from one company or that have relationship with one bank – but they have very nice, pretty statements.

    We have looked at quite a few pooled funds and wrap programs and have yet to see any with fund managers as good as you can get with mutual funds with top fund managers.

    Pooled funds usually are mutual funds with a minimum of $25,000 or more all from one company with only fund managers from that company that you can buy as a package possibly with marginally lower MER – and nice, pretty statements.

    Wrap programs are usually portfolios of a bunch of mutual funds with fund managers either all from one fund company or from a short list that one company has a relationship with possibly with slightly lower MER – and nice, pretty statements.

    Personally, I have not yet seen a pooled fund or wrap program in Canada that rivals a selection of mutual funds with top fund managers. Only when investors get up to $10-15 million do they often go back to selecting from close to the full universe of fund managers to individually select the top fund managers – which is what retail investors can do.

    Generally, any financial service available to the moderately wealthy ($500,000 to $10 million) for extra fees are also available to the masses for little or no cost if you know where to look.

    Ed

  14. 14. Future Money-Bags

    Its not a matter that ‘average income people’ don’t have access to better offers, but that these people are pretty much never offered it; But its still available on a basic level for sure. This depends on the bank, and on the value of your funds of course, but if you ask or talk to a manager, you have a lot more chance at getting what you want.

    The way I see it, if you have over $100k-200k, than you ‘may’ get offered better products. By better; I mean stocks, mutual funds, equity, etc. I am not old and havn’t been banking all my life but here is my experience.

    -under $1000 – they dont care and won’t ask questions
    -under $5000 – Still they don’t care, they can’t make more than a few dollars off you
    -over $10,000 – They may ask if there is anything else you need because they figure if you have that much money sitting there, you want the bank to keep playing with it and for you to not touch it?
    -over $25,000 – They may start to recognize you, even though you have been coming there for a few years, NOW they notice you.
    - Over $50,000 – Now they offer a GIC or a TermDeposit, instead of their checking or savings account
    - Over $100,000 – Oh did anyone mention to you we have a mutual fund that averages 8-10%?

    Always trying to push credit cards, lines of credit, and never mentioning that you could be getting a seriously higher return. Do I want them to offer me more? No I don’t care because I can do more with my money than any bank will ever offer me, no matter how much I have there.

    **DISCLAIMER** This is my opinion only, I am not claiming to have superior knowledge on this subject; only stating what I think.

  15. Sounds like for $0/month ($5k balance), TD Select service offers pretty much the same perks. Waive annual fees on their premium credit cards, safety deposit box, preferred USD rates, free cheques.

  16. This is an interesting post! I’m intrigued. I’d never heard of private banking either but I’m definitely going to look into it now. Honestly, these multi-millionaires aren’t stupid and they aren’t just paying in excess for nothing. There’s got to be something valuable to them in order for them to request this service. Thanks to everyone who commented- your comments helped me understand also.

  17. 17. Dana

    I just want to say that I agree with Ed Rempel completely. Most of the products and services that are offered *exclusively* to private banking clients and HNW individuals are avaialable cheaper/free elsewhere.

    Financial Institutions don’t want private banking clients who manage their own investments and want to negotiate fees and services. We use to call these “order only accounts” and we tried to avoid them as they are not very profitable. Private Banking is for people who don’t want or are not able to manage their financial affairs. Many affluent people just aren’t very financially literate – they are knowledgeable about their own business/career and outsource their money management.

    Anyone who is a shareholder of a bank and/or ETF/MF/Pension fund that invests in banks should be thrilled with this service as it is often one of the most profitable lines of business for financial institutions. This is because private banking clients are steered into proprietary products within lines of business owned by the bank (conflict of interest?) and all the fees and profits are kept “in the family”.

    Most of the private banking clients I dealt with were either business for self (and focused their energy on their business, not their money) or elderly people who were consolidating and arranging their financial affairs to make the management of their estate easier.

    Private banking is probably not suited to a fiancial do-it-yourselfer.

  18. 18. Ed Rempel

    HI Dana,

    Well said. I have 3 main issues:

    1. The minimums could be $million, $100,000, or zero. Minimums are arbitrary and not enforced. They are a common marketing ploy in the financial industry to give a false impression of quality. Some specific investments have a legitimate reason for a minimum, but advice and services, especially banking advice, rarely have any reason or benefit from a minimum.

    2. You are right that the products offered are usually in-house products. In general, nobody should buy in-house products. If the person advising an investment is from the same or connected company to the investment itself, that should be reason alone to not consider the investment. For example, how can a bank employee recommending a bank-owned wrap program, a bank mutual fund, or a service by another bank employee be considered independent advice? Or even advice at all?

    3. Private banking advice is generally only a small subset of financial advice, since it normally excludes advice on tax, insurance and independent investments.You are probably right that private banking is not really suited to DIYers, and it is also generally not suitable for people with a good financial advisor or accountant.

    Ed

  19. 19. BC_Doc

    Interesting article. In another setting, wouldn’t the high net-worth clients be called the “mark?” $100/month fee plus a percentage of total assets under management plus commissions and brokerage fees plus special access to hedge funds and other esoteric products (think Bernie Madoff). Hmmm…. I think I’ll manage my high net-worth myself! ;)

  20. 20. Houska

    For those interested in dabbling their toes in this, HSBC Premier offers a “private banking lite” service for free if you have a minimum of $100k investable assets. Of course they would like for you to invest those on their own high margin products, but you can also stick them in an HSBC Investdirect account and so self-directed investing at $10/trade. The lack of fees on banking and greater international travel savings and convenience make it worth it.

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