Private Banking vs. Wealth Management: What Is the Difference?
Private banking offers investment advice and seeks to address each client’s whole financial situation. Wealth management typically entails providing investment advice and carrying out transactions on behalf of wealthy clients.
An Overview of Private Banking and Wealth Management
Private banking and wealth management are similar phrases. Private banking and wealth management offer slightly different financial services.
Wealth management is a larger term that refers to optimizing a client’s portfolio while taking into consideration their risk aversion or comfort level and investing financial assets by their objectives and goals. Wealth management can be used on any size portfolio, but it is mostly aimed at the wealthy.
In contrast, private banking often refers to an envelope solution for high-net-worth individuals (HNWIs) in which a public or private financial institution employs staff members to provide high-net-worth clients with individualized care and financial management.
The Key Takeaways
- Private banking is the practice of offering financial management services to high-net-worth individuals.
- Private banking offers investment advice and seeks to address each client’s whole financial situation.
- Wealth management typically entails providing investment advice and carrying out transactions on behalf of wealthy clients.
In general, private banking refers to financial organizations that offer financial management services to high-net-worth individuals. In rare cases, an individual may be able to get these services with assets under $100,000, although most private banks (or private bank divisions) require at least six figures. Private banking is typically exclusive and intended for clients with significant sums of cash and other assets to deposit and invest.
Private banking offers investment advice and seeks to address each client’s whole financial situation. Private banking services often help clients preserve and manage their assets. Employees are assigned to assist each client endeavor to create customized finance alternatives. These personnel also assist clients in planning and saving for retirement, as well as structuring arrangements to transfer earned wealth to family members or other designated beneficiaries.
There are consumer banks of all sizes with private banking units. To attract HNWIs as clients, these divisions provide significant benefits.
Exclusive Benefits and Perks
Many private banks also provide exclusive bonuses and incentives, such as unique event invitations, discounts from linked organizations, and concierge services. In addition, they may enjoy priority access to financial products and services.
- Private banking clients with substantial accounts typically enjoy amazing rates and concierge-level care, ensuring immediate access to the professionals working on their accounts.
- Private banking clients are never required to wait in line or speak with a teller.
- A private banking client can contact the lead adviser assigned to his account and accomplish almost any activity, from cashing a check to transferring significant quantities of money from one account to another.
All of these benefits are part of the bank’s financial plan. Banks recruit rich clients because their business creates considerable profits for the bank, ensures repeat business, and attracts new business.
Pursuing Private Banking Clients
These are new potential customers. Current clients frequently refer new potential clients to private banking divisions. The divisions then send out invites to potential clients, and many of them open accounts as a result.
Private banking divisions also find new clients while carrying out their regular lending activity. Banks can use tax returns and other personal papers to identify other potential clients. Invitations are also extended to these individuals, and private banking divisions frequently obtain new clients as a result.
When it comes to individuals who are sought and approached to become potential clients, banks set a threshold that varies depending on the organization. The mass-affluent market is the primary focus, which includes people with investable assets of more than $250,000.
The Nielsen company. “Mass Affluence in America,” page one.
Some banks set a far higher hurdle, targeting only those individuals with the minimum amount of investable assets in the millions.
Clients who use private banking services pay for the specific treatment they receive. The bank that wealthy clients use guarantees a vast pool of money, in the form of the clients’ substantial checking account balances, to lend and use. The bank also profits from the higher interest rates on larger mortgages and business loans taken out by wealthy clientele.
Assets Under Management and HNWIs
The true moneymaker for these institutions, however, is the percentage earned on assets under management (AUM), which is typically relatively high among HNWIs. Charging even a tiny percentage fee for services involving large sums of money creates significant revenue for the bank.
Private banking divisions’ specialized treatment cannot conceal some of the disadvantages. Banks have significant turnover rates. A client may have developed a relationship with an employee managing his account, only to have that employee leave the next month and be replaced by someone the client is unlikely to know. The client’s experience with the new employee may or may not meet his expectations, and many private banking departments lose clients as a result.
Although these divisions may provide a wide range of services, they may not be experts in all of them. Banks are not specialists in everything, thus the level of expertise provided to the client is likely to be lesser than if he had engaged a specialist in a certain area. Finally, private bankers are paid by the bank, thus their primary loyalty is to their employer rather than their clients.
Private Banking Minimum Requirements
Not all private banking is the same. Banks such as JPMorgan Chase, HSBC, and Wells Fargo advertise enhanced service-based checking accounts under the names “private client” or “premier accounts.” However, these accounts do not constitute true private banking.
The eligibility requirements for legitimate private banking differ from bank to bank. However, the services are mainly reserved for high-net-worth clients, whom the Securities and Exchange Commission defines as those with at least $750,000 in investable assets.
Investable assets are any liquid or nearly liquid assets you own, such as cash in your checking and savings accounts, CDs, money market accounts, stocks, bonds, mutual funds, retirement accounts, and trusts. The minimum amount for private banking eligibility varies, however $1 million is a common baseline criterion.
However, some private banks require $5 million or $10 million in investable assets to accept an account. Even within those banks, those assets do not provide you access to the bank’s most exclusive offerings.
The Cost of Private Banking
There are several charge systems for private banking. Some banks rely on commissions from products sold to private banking clients. Clients of these private banking services pay nothing out of pocket, but they should be aware that the products are commission-based.
Banks may also charge fees to cover the cost of private banking, either instead of or in addition to commissions. Fees for private banking may be set or variable. Fixed costs are similar to the account maintenance fees charged for a checking account. You may be able to avoid costs by keeping a minimum balance, but the fees may be unavoidable.
Some banks charge a sliding fee rather than a fixed cost to private banking customers, based on their assets under management. This amount is typically approximately 1% of AUM.
Wealth management is a complete service focusing on taking a holistic view of a client’s financial picture, comprising services such as investment management, financial planning, tax planning, and estate planning.
Wealth management is often seen as a “high-end” service, and certain wealth management businesses may require a minimum amount of investment assets or net worth. Clients who want this level of service may benefit from consolidating all sorts of financial advice with a single firm.
Private wealth management typically entails providing investment advice and carrying out transactions on behalf of wealthy customers. Firms that specialize in these practices are the principal providers for clients seeking to invest in a wide range of funds and stocks. Wealth management advisers assist clients with financial planning, portfolio management, and some other financial services related to their private financing options.
Private wealth management services are supplied by bigger financial institutions, such as Goldman Sachs, but they may also be delivered by independent financial advisers or portfolio managers who are multi-licensed and focus on high-net-worth customers.
Wealth management firms typically offer the following services:
- Investment management and advice
- Comprehensive financial planning
- Tax planning and accounting services
- Estate planning
- Philanthropic planning
- Legal services
- Retirement planning
However, some of these services may be provided in collaboration with an external partner. Legal services are an excellent example.
Key wealth management objectives
The aims of wealth management will differ based on the investor. Each client’s needs and circumstances vary, and skilled wealth advisors will adjust their counsel accordingly.
Some important wealth management goals for clients include:
- Setting financial goals and developing tactics to attain them
- Assisting customers to maximize their total worth.
- Assisting clients to maintain their riches
- Manage their investments and finances.
- Reducing the tax burden of wealth accumulation
- Developing measures for transferring their money, often known as estate planning
Wealth management strategies
Wealth management solutions differ depending on the client’s demands. Overall, the goal of hiring a wealth management business is to find solutions to assist you in maintaining and enhancing your entire wealth. This can be interpreted differently by different people. Some people are more concerned with preserving their wealth than with increasing it, thus the wealth manager would devise safer techniques to achieve that goal.
In general, wealth management means integrating all aspects of a client’s financial position into a holistic wealth strategy. This may include the client’s tax condition, investments, and retirement plans.
Examples of wealth management strategies are:
- Creating a comprehensive investment strategy that includes all of the client’s different forms of investing and retirement accounts.
- Integrating an optimal tax planning technique into their financial planning.
- Ensure that the client’s estate plans reflect their preferences.
- Creating a succession plan for our business owner clients.
Alternatives to wealth management
If the costs or asset minimums demanded by most wealth management businesses appear to be prohibitively high for you, you are unlikely to benefit from the services of a wealth manager. For people whose position may not be ideal, there are additional avenues for seeking financial advice:
- Empower is an online consulting and wealth management organization that provides a variety of services at lower minimums and fees than traditional wealth management firms.
- Vanguard Personal Advisor Services is a Vanguard service that provides clients with advice and financial planning.
In recent years, several alternative online financial consulting firms and apps have emerged, providing a wide range of services ranging from very basic financial advice to some parts of asset management. Robo-advisors have increased in popularity in recent years and may provide a lower-cost alternative if you are not yet in a financial position to use the services of a traditional wealth management organization.
How much money is required for wealth management?
There are no hard and fast rules on how much an investor needs to receive wealth management services. Individual wealth managers and their firms will determine any minimums for investable assets, net worth, and other measures.
However, it only makes sense to employ the services of a wealth management business if you have at least $2 million to $5 million of assets. Much below that, it may be difficult to justify the cost of this type of service.
Again, the minimal levels will differ for each firm. They may also change slightly depending on your specific circumstances. For example, wealth management may want to take on the offspring of some of its current larger clients to ensure that the wealth they inherit remains with the firm. They may also wish to build strong ties with younger professionals, such as doctors or lawyers, to keep their business after they begin to earn significantly more money.
What a Wealth Management Advisor Can and Cannot Do
If you’re unsure what to do, they can help you weigh your options and make a decision, but they can’t make it for you. Your financial advisor can provide you with all the advice you need on how to save money, but they cannot force you to do so.
A wealth management advisor meets with each client one-on-one to discuss their goals, risk tolerance, and any other conditions or limits they may have about the investing of their assets. The wealth management advisor then develops an investment strategy that combines all of the information gathered from the client to assist the customer in achieving his objectives. The advisor continues to handle the client’s money and uses investment solutions that meet the client’s requirements.
Wealth management advisors cannot always provide the same specialized and concierge-style services that private banking does. However, these financial advisors typically spend a significant amount of time with their clients. These consultants cannot open banking accounts for customers, but they can help them determine the appropriate accounts to open at the bank of their choice.
What is a private banking account?
A private banking account is often an account or group of accounts with at least $1 million in assets. Because of the specific needs of these high-net-worth individuals, financial institutions provide a variety of financial services in one place, known as a private bank. These services include investment and portfolio management, trust and estate planning, insurance, and tax preparation.
What Is a Private Banker?
Private bankers are financial specialists who offer concierge banking services. They are professionals in the benefits that a private bank may provide. They also know how to negotiate channels and advocate for clients as needed.
Most financial institutions only hire qualified private bankers who have been licensed by the Financial Industry Regulatory Authority (FINRA) or the North American Securities Administrators Association.
A private banker, like a resort concierge, helps you get the most out of your banking experience while minimizing stress. They offer advice and recommendations based on the financial institution’s products and partnerships. They may also receive incentives or commissions for the financial goods they promote.
How to choose a wealth manager
When picking a wealth manager to work with, you should consider several factors.
First, does the wealth management organization serve clients like you? Some wealth managers may specialize in working with specific types of clients. If your situation does not align with that type of customer, that wealth manager may not be a good fit for you.
Second, look into the manager’s qualifications. Some criteria you could consider to choosing a wealth manager include:
- What professional designations do they have? Examples could be CFP (Certified Financial Planner), CPA (Certified Public Accountant), and CFA (Chartered Financial Analyst).
- What is their level of experience in the wealth management industry?
- What services does the firm provide?
- How frequently do you expect to communicate with them?
- What kind of fees do they charge?
- Are they independent or part of a larger company?
How to find a wealth manager?
Once you’ve decided that you need a wealth manager to assist you with your financial needs, you’ll need to speak with a few organizations before picking which one to hire. Finding a money manager can be a challenging undertaking. Some places have dozens of firms to pick from, making it difficult to narrow down the list; others may not have any firms nearby.
Here are some suggestions for locating a wealth manager in your area:
- Check with friends and family to see if they have a financial manager and can recommend one to you. They can also give an honest review of their company’s service.
- Financial newspapers occasionally publish annual lists of the finest wealth management businesses in a specific area. Consider using these websites to find a highly-rated money manager near you.
- Bankrate’s financial adviser matching tool can also help you find advisors who can offer wealth management services.
How Private Banking Works?
Private banking takes a comprehensive approach to your finances. Whether you are an executive, an entrepreneur, or the owner of a family business, private banking analyzes the options that best meet your specific requirements.
Which private bank is best?
The finest private bank, like retail banking, is determined by your specific demands. Silicon Valley Private Bank features a team of private bankers who understand the demands of business owners. However, it may fall short of your expectations if you require assistance with succession planning. The Digital Banker ranks the finest private banks in a variety of categories, including the top private banker for specific demographics.
What is the difference between commercial and private banking?
Commercial banking offers financial services to businesses, governments, non-profit organizations, and other institutions. Individuals and families can receive personalized services from private banking. Private banking may offer business services such as succession planning and commercial loans to private clients who own a firm.
Is Private Banking Right for You?
The minimal requirement for private banking is $250,000 in investable assets. Even if you have that much money, this service may not be suitable for you. There are some major caveats to the benefits provided by private banking.
Consider the cost of private banking vs similar services from other suppliers. Make sure you understand how your institution’s private banking fees stack up. Consider whether a licensed financial planner or investment advisor will charge you a lower proportion of assets under management than your private banker.
Similarly, knowing how much you can anticipate paying for a CPA and an estate attorney will help you determine whether hiring a private banker is more expensive or less expensive than assembling your team of professionals.
What Does a Private Banker Do?
A private banker assists in developing a financial strategy and reducing friction when linking you to other banking options. Private bankers should be knowledgeable about your financial condition and understand your short- and long-term financial goals.
Private bankers regularly monitor the performance of your accounts and educate you about investment risk. During major life upheavals and market turbulence, private bankers explain your options and collaborate with you to enhance your strategy. Your private banker may also help you with any borrowing needs, including preferential interest rates and customized terms for various loans.
Private bankers can help business owners with credit expansion, succession planning, risk mitigation techniques, and cash flow management. They may also notify you of changes in tax legislation or connect you with other legal advisers.
A private banker’s responsibilities also include developing new businesses and promoting financial services. While a trained private banker manages your accounts, they also consider the bank’s and their financial interests.
The major distinction between private banking and wealth management is that private banking does not usually involve investing. Private bank employees may advise clients on specific investment possibilities, but not all banks will participate in the actual process of investing assets for their clients. Most clients who use private banking services open one or more types of deposit accounts.
Wealth management employees, especially financial advisers, advise clients on how to better their financial situation and help clients invest assets to generate high returns.