Nowadays, it is much more popular and demystified than before. It targets high net worth individuals (HNWI) for better and more customized services ranging from 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 or private banker.
The United States has one of the largest scale private banking systems 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.
Asia is the second largest wealth market, just behind North America. China is driving most of the growth, according to a 2012 report conducted by Mckinsey and Minsheng Bank.
Here are the most common 10 myths and Mysteries for you to ponder:
- Mystery by the names: The terms and names in this industry may well be the most creative and confusing aspects for many. One great example is the job title of the person who provides private banking services. He may be named and called a financial adviser, investment consultant, relationship manager, and wealth strategist and so on. This industry can be named private banking, wealth management, and investment advisory and so on.
- Is private banking only for the wealthiest people? It is not quite true anymore. While a few high end private banks may still only open accounts for clients with assets over $10 million. The minimum is getting lower and lower. Now it is not difficult to find private banks which would accept investment assets as little as $250,000, open up the services to the middle income family as well. It is very similar to the situation in luxury products such as Gucci bags and Tiffany jewelries that have been purchased more and more often by the mass market consumers for personal use or for gifting purpose.
- Are private bankers kept by families over several generations? Well, it is the ideal model and situation all private bankers are dreaming of. In reality, with increasing competition, the loyalty and close bonding is much easy to break up by incidents such as fee competition, financial crisis, tighter governmental control, mis-management of family business and so on. Currently, it is very common to see one HNWI is having multiple private bankers to serve him.
- Is private banking the same as wealth management? It sounds similar but there are subtle differences. Private banking is actually a subset of wealth management, which covers a broader range of services, including but not limited to financial planning such as for retirement, education, investment, taxation, estate, insurance and so on.
- Privacy versus legality. Which one will win? Of course the government or legality will eventually win. For its own benefits, private bank has all the reason to ssist its clients to do whatever it takes to grow and protect the wealth. The classic example of course has to be the long legal fight between UBS (United Bank of Switzerland) and the US government. UBS tried its best not to disclose its private clients information on the ground of private secrecy while US taxing authority accused them of assisting in tax evasion. Eventually everybody knows UBS has to suffer severe penalties.
- Will a HNWI benefit a lots by having a much better investment choices provided by private banks? What is the product offering advantage in private banking? Well, studies indicated that HNWI is certainly expecting more than just mutual funds. It is especially true in China, where people like to take more risk and feel excited to have exotic products. Contrary to the norm, high risk and complicated products sell in China.
Therefore, we can always see victims fall into unbelievable or even ridiculous deals. In short, innovation in products such as lending/structured financing gets its sex appeal. However, pure advisory service is not getting too far in China. On the contrary, sound investment advice certainly has value and already fuel the market growth in North America.
The key differential factor of product offering in private banking is open architecture product platform, where a private bank distributes all the third party products in return for commission and is not restricted to selling only its proprietary products.
Clients today demand the best of breed products and most banks have to follow an open architecture product platform. This platform has a slow growth in China due to the fact Chinese don want to pay for the advisory part of fee. - Is the fee very high in private banking? Of course, most people cannot afford to pay the fees in dollar terms. However, in percentage wise, it is not too crazy. For regular investors who are buying mutual funds (front end loaded, back end loaded, management fees, 12b-1 fees and the likes) already, they may be surprised to find out that they are paying much higher rates, comparing with HNWI paying fee in open architecture product platform of private banking. It may not be fair to generalize in such a simple way because different private banks charge their clients in different rates on various products.
However, HNWI with higher investment amounts definitely is easy to command a higher bargaining power and enjoys lower institutional rates. 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. Some of the other banks are totally advisory driven and charge the clients a percentage of Asset Under Management (AUM, e.g. 1.5% of entire AUM).
However, a few banks offer both a transactional model and an advisory model. The clients choose whatever suits them. - How do they get the business lead? Do you know why the sons and daughters of so many super riches and the ultra-powerful officers always work for Goldman Sachs or other high end investment banks?
It is an easy guess that the connection is great for the future business generation for these investment banks. However, if these practices have been overly applied, it may get serious side effects, such as the recent problem encountered by Deutsche Bank which was accused of bribing Chinese officers by offering job opportunities for their children.
As any sales business, lead generation plays a vital part in the private banking business. Various banks go about in different ways such as cold calls, warm calls, seminars, luxury events, free gifts, family tie and even opposite sex charm to attract the attention of prospects. Gifting is a must in doing business in China while trust is highly valued in North America. 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 friends when he is satisfied with service provided by the private bank. - Is private bank business growing in China? Yes, but not too significant as everyone has expected. Why? The pie of wealthy Chinese is certainly getting bigger. However, the private banking business in China is still struggling. There are many reasons behind this abnormal outcome. First, a great number of Chinese HNWI are setting up their own investment companies such as private equity funds, trusts or even banks to manage their own investment assets. Trust is lacking. No trust simply means no business for private bankers.
They are confident or maybe skillful enough to manage the massive assets. Second, many other Chinese HNWIs are moving out their assets to Hong Kong, and other offshore jurisdictions to hide, diversify or search for better investment opportunities, leaving the private bankers with no much to play with.
According to the same Mckinsey reports, in China, about 40% of current private bank clients are not satisfied with their current service. Nearly 50% of HNWIs only allocate 20% or less of their investable assets. 60% of HNWIs have assets offshore. These certainly create both challenges and opportunities in private banking business in China. - Where does the HNWI make his money from? In China, HNWIs are predominately business owners such as Jack Ma of Alibaba or Pony Ma of Tencent. However, in North America, being an employee can also run a chance of becoming super rich. High level executives such as CEO, CFO, directors and vice presidents in successful public companies are very common on the prospecting list of private bankers. The mystery lies on the lucrative stock option compensation packages such as incentive stock option (ISO), non qualified stock option (NQSO), and non-cash free grand, which could be a thousand times of their basic salary. With billion dollar worth of stock option compensation, no wonder the legendary Apple CEO Steve Jobs was willing to take the symbolic $1 annual income as salary.
