Private banking is a concierge service offered to high-net-worth bank customers and is designed to provide custom personal services to bank clients. It is provided by a dedicated team of specialists, spearheaded by a private banker who has intimate knowledge of the client’s financial situation.
Private banking can include everything from enhanced banking services to access to financial professionals, like investment advisors, tax professionals and estate planners.
What is private banking?
Sometimes referred to as relationship banking, private banking is designed to provide a big-picture view and management of a client’s entire financial life. That can include everything from paying bills to wealth management, to planning for the future.
A private banker is a financial professional, generally certified by the Financial Industry Regulatory Association (FINRA) or another regulatory agency. If you are a private bank client, nearly all your dealings with the bank will be through your private banker, who will coordinate the various financial services provided by the bank and its affiliate organizations. That means you will be able to initiate financial activities with a phone call or an email to your private banker.
How does private banking work?
When you become a private bank client, the private banker will meet with you and perform a full evaluation of your finances. That will include reviewing your liquid savings, taxable investment positions, retirement assets and taxes. The private banker will also discuss longer-term strategies, like estate planning and funding higher education for your children or other individuals.
The private banker will arrange subsequent meetings, often at regular intervals, to maintain a personal connection and to exchange updates on financial positions and planning. That will include an ongoing assessment of the overall risk in your financial portfolio, as well as tax planning.
Private banking pros and cons
Pros:
- Direct access to a private banker, who will not only handle your banking needs but will also connect you with any other bank services.
- Access to a team of financial professionals, including estate planners and tax professionals.
- Preferred pricing arrangements on both deposit and loan accounts.
- More extensive fee waivers including no fee for a safe deposit box, out-of-network ATM fees and overdrafts.
- Some banks may make nontraditional investments available to their private clients, such as private equity deals and hedge funds.
- An opportunity to keep multiple accounts and services at a single financial institution.
Cons:
- Available only to wealthy customers. Private banking requires holding a lot of assets at a bank, often more than $1 million and sometimes many millions.
- Participants are limited only to products and services offered by the bank. It’s unlikely any bank will provide the best service in every banking category.
- Private banking sometimes involves paying additional fees, such as attorney fees for estate planning. You may even be charged a fee based on the assets you hold at the bank.
- Fee structures can be incredibly detailed, making it difficult to assess upfront how much you will pay for the service.
- While independent certified financial planners usually have a fiduciary responsibility to you as a client, a private banker will represent both your interests and those of the bank.
Private banking costs
Fees for private banking are not as standard as ordinary banking services. Private banking may come with fixed account fees that will be higher than those charged to regular bank customers. They may be waived, but you’ll need to maintain either a certain minimum balance in the specific account, or in all accounts held with the same institution.
The difference with private banking is that the minimums for fee waivers are usually a lot higher. While an ordinary checking account may waive monthly service fees with a minimum average balance of $1,500, a private client checking account may require a minimum of $50,000.
On the asset management side, which is the core of private banking, the fee structure may look a lot like it is for traditional investment advisors.
For example, the bank may charge a percentage of the assets under management you hold with the bank. If the fee is, say, 1%, you will pay $10,000 per year for the management of a $1 million portfolio.
Other banks may not charge a management fee and may instead rely on commissions for the assets bought and sold within your portfolio. The private banker may earn a small commission each time a trade is made in your account. While this will avoid a seemingly large flat fee, an account that’s traded frequently can result in a higher annual cost than would be the case with a percentage fee. Moreover, you might be on the hook for extra capital gains taxes.
Private bankers may also use a sliding scale. For example, you may be charged a fee of 1.25% to manage a $1 million account, dropping to 1% for a $2 million account, then 0.75% at $3 million, and so on.
There can also be additional fees paid for special services, like estate planning and tax advice. Those fees may be incurred if the private banker needs to go outside the bank for qualified professionals. If so, those fee structures will be completely different than those charged by the bank.
Should you switch to private banking?
Your ability to qualify for private banking will depend on the minimum asset level required by the bank, which will vary from one institution to another. One may require a minimum of $500,000 in investable assets, while another may set the minimum at $1 million or more.
Investable assets, or assets that are in liquid or semi-liquid form, are essential to the private banking arrangement. . That includes bank deposits, certificates of deposit, stocks, bonds, investment funds and retirement accounts, and excludes personal and investment real estate and other tangible assets.
If you do qualify, you’ll need to decide if you want to have your entire financial life managed by a single institution. If you do, you’ll then need to analyze the cost of private banking, compared with the alternatives.
The alternative is to engage the services of separate providers. For example, you may use an investment advisor to manage your portfolio, then hire a CPA to handle your taxes, and a financial planner to help you design an estate. The combined fees for the various professionals may be more or less than the fee structure that a private bank will charge.
Finally, there is your own personal financial temperament. If you prefer engaging in self-directed investing, you may not find private banking to be an attractive option. Similarly, if you have a high level of financial literacy, and prefer to make your own financial decisions, you may not have the need for private banking.
Private banks examples
Many banks offer private banking services. Exactly which services they offer and what their fee structures are varies between banks. The largest banks typically offer the most extensive private banking services.
J.P. Morgan Chase private banking provides investing and wealth planning and advice, in addition to banking and lending. On the investment side, they provide managed portfolio strategies, brokerage services and alternative investments, which include private equity and private credit as well as hedge funds. The bank has a high threshold for private banking, with a minimum of $10 million.
Citibank Private Bank offers the service to ultra-high-net-worth individuals. That includes those with a minimum total net worth of $25 million, and at least $10 million to invest. Services include investment management, with extensive alternative investments, like private equity, real estate and hedge funds. They also offer financial planning, treasury management and legal services.
Morgan Stanley Private Wealth Management offers its services for individuals with at least $5 million. That includes alternative investments, like real estate, private equity, private credit, digital assets and hedge funds. They also have Family Office Resources, providing trust and estate planning, wealth education, philanthropy management and even private banking and wealth planning for art and collectibles.
Frequently asked questions (FAQs)
How much money do you need to use private banking?
The minimum varies from one bank to another, but you can generally expect the minimum to be at least $500,000 in investable, or liquid assets. This is different from your net worth, which is likely higher due to tangible assets, like real estate or business equity. And as you can see from the private bank examples above, some can have minimums of $10 million or more.
Can anyone use a private bank?
No, it’s a service designed for high-net-worth individuals. Not only will you need to meet certain minimum financial standards to qualify, but you’ll also need to be fully prepared to transfer your funds to the private bank. That can include accounts currently held or managed by investment advisors, investment brokers and even other banks.
How do private bankers make money?
Private bankers make their money through various fee structures. A flat percentage fee of your total assets under management is common, but they may also charge commissions for trading securities in your investment accounts.
Because private banking tends to be comprehensive, it has a lot of moving parts. You’ll need to pay close attention to the fine print in a private banking agreement, be aware of what all the fees are and get an approximation of what they will be for your own financial profile.
Is private banking expensive?
This is an evaluation that you will have to make on your own. Private banking can be either more or less expensive than if you were to acquire similar services à la carte. If private banking will cost less than the combination of fees charged by independent financial planners, CPAs, attorneys and investment managers, you may not consider private banking to be expensive.
