The terms “private banking” and “wealth management” (or “financial advisor” or “Registered Investment Advisor”) can be confusing. The services they provide may overlap, which sometimes makes it difficult to decide which one is optimal. You may need the services provided by both.
Defining terms
What is Private Banking?
Initially, don’t confuse “ personal banking” with “private banking.”
We are all familiar with the services provided by personal (or retail) banking. These services are given to individuals rather than corporations and institutions. They include providing checking and savings accounts, debit cards, personal loans, access to ATM machines, mortgages, and related services.
“Private Banking” refers to highly customized services provided to high-net-worth individuals. These services may include wealth management, tax, insurance, and estate planning.
Banking institutions may offer private banking services in an effort to capture the more lucrative investment advisory business from their wealthy clients.
Clients of private banks enjoy concierge-like privilege for all their banking needs. In addition to highly personalized service, they may be offered higher rates on savings, a waiver of some banking fees, better terms on loans, and access to “exclusive” investment offerings.
What is Wealth Management?
Some private banks offer comprehensive financial planning and wealth management services, putting them in direct competition with wealth managers for this business.
“Wealth management” refers to services customized for clients with a minimum amount of investable assets (often $250,000 or more). “Wealth Managers”, who are often called “financial advisors” or “registered investment advisors”, commonly provide services more comprehensive than simply managing a portfolio. These services can include comprehensive financial planning, coordination with tax and estate planning professionals, Medicare planning, social security planning, and review of insurance coverage.
Wealth managers may elect to serve all clients with a required minimum in assets. They may also specialize in a particular niche, like limiting their service to physicians or technology employees. They may limit their practice to those with particular issues, like investors who are citizens of one country but work (or temporarily reside) in another.
Assess your needs
The services required by someone living paycheck to paycheck are obviously different from the needs of a high-net-worth investor.
As a general matter, some of the services offered by private bankers may be a good choice for investors with a net worth of $1 million or more. Those with assets under this amount will find their banking needs well-served by retail banks.
Private Banking vs Wealth Management: How to choose
If you meet the qualifications for both private banking and wealth management, it may not be necessary to make a choice. You could use a private banker for your banking and a wealth manager to manage your portfolio and provide comprehensive financial planning.
As a practical matter, this may not be possible. Your private bank may insist on managing your assets as a condition of providing the balance of their services.
If you are deciding between a private bank and a wealth management firm, here are some issues to consider.
7 Pros and Cons of Private Banking vs Wealth Management
1. Financial Services
Does your private bank offer comprehensive financial services, including investment management, tax planning, estate planning, and comprehensive financial planning? If so, having one place where all your financial issues are centered can facilitate communication.
2. Specialized Requirements
Do you have highly specialized requirements, like a special needs trust? If so, you may be better served by a wealth manager with specialized expertise.
3. Fees
Are you concerned about fees? Private banks may have higher fees than wealth managers. If that’s the case, expected returns on your investments may be lower.
4. Investment Options
Do you need access to a wide array of financial products? Check to determine if your private bank or wealth advisor limits recommendations to a small number of investment options. Wealth managers often offer a wider range of investment options, and these options may be more customized than those recommended by private banks.
5. Investment Philosophy
Are you committed to a particular investment philosophy? Ask your private bank and wealth advisor to explain their investment philosophy so you can determine if it’s consistent with your views.
In recent years, investors have pulled significant funds from actively managed mutual funds (where the fund manager attempts to “beat the market” by engaging in stock picking and market timing) and put them into index funds, exchange-traded funds, and passively managed funds (where the fund manager tracks an index or selects securities to match part of a market).
6. Size of the Firm
Is the size of the firm important to you? There are large and small private banks and wealth advisors. Even the smallest bank is likely to be larger than a small wealth management firm, which may have only one or two advisors serving your needs. You may find that a wealth manager offers more personalized advice than a private banker, who may have institutional constraints.
7. Working Relationship
Is personal chemistry important? You should feel comfortable with whoever you retain to deal with your financial issues. Interview private banks and wealth advisors. Who do you feel most comfortable with? Who do you believe would best serve the needs of your family members or other heirs after your death? While you are not legally required to remain with a private bank or wealth advisor for any period of time, it’s often optimal to have a long-term relationship.
Make the Choice
Whatever you decide to do, choosing a private bank, or a wealth advisor (or both) is a critical decision with broad ramifications. It should be made deliberately, with appropriate due diligence. Know more about wealth management through our expert wealth advisors. Set up a call →
