Private banking and wealth management are terms that overlap. However, the financial services offered through private banking and through wealth management differ slightly.
Wealth management is a broader category that involves dealing with the optimization of a client's portfolio, taking into account his aversion to, or comfort with, risk, and investing financial assets according to his plans and goals. Wealth management can be practiced on a portfolio of any size (though, as the name implies, it's geared toward the well-off: There must be some money to manage in the first place). Private banking, by comparison, typically refers to an envelope solution for high-net-worth-individuals (HNWIs) wherein a public or private financial institution employs staff members to offer high-net-worth clients personalized care and management of their finances.
The Primary Difference
The primary difference between private banking and wealth management is that private banking does not always deal with investing. Private bank staff may offer clients guidance on certain investment options, but not all banks will be involved in the actual process of investing assets for their clients. Most clients utilizing private banking services open deposit accounts of one kind or another.
Wealth management employees, including financial advisors, provide advice to clients to help them improve their financial standing and assist clients in investing assets with the goal of generating high returns. In general, private banking can extend to encompass wealth management, but wealth management firms cannot provide clients with private banking facility services.
In general terms, private banking involves financial institutions that provide financial management services to HNWIs. In some instances, an individual may be able to obtain these services with assets less than $100,000, but most private banks (or private bank divisions) set a benchmark of at least six figures. Private banking tends to be exclusive and is reserved for clients with substantial amounts of cash and other assets to be deposited into accounts and to be invested.
Private banking provides investment-related advice and aims to address the entire financial circumstances of each client. Private banking services typically aid clients in protecting and maintaining their assets. Employees designated to aid each client work to provide individualized financing solutions. These employees also help clients plan and save for their retirement and structure plans for passing accumulated wealth on to family members or other indicated beneficiaries.
There are consumer banks of every size with private banking divisions. These divisions offer considerable perks to HNWIs to obtain them as clients. Private banking clients with large accounts generally receive enviable rates and concierge-like service, guaranteeing them instant access to the employees working with their accounts. Private banking clients never have to wait in line or use a teller for services. A private banking client can contact the lead advisor working with his account and complete just about any transaction, from cashing a check to moving large sums of money from one account to another.
These perks are all part of the banking institution’s plan to benefit financially. Banks pursue wealthy clients because their business generates significant sums of money in profit for the bank, guarantees repeat business and brings in new business. Private banking clients, specifically the ultra-wealthy, discuss the specialized and elite treatment they receive with other wealthy individuals. These are new potential clients. Often, these new potential clients are mentioned to private banking divisions by current clients. The divisions then send out invitations to potential clients and often acquire their accounts through such invitations.
Private banking divisions also find new clients through the course of completing normal lending activities. The banks can access tax returns and additional personal documents and discover other potential clients through this information. Invitations are also extended to these individuals, and often private banking divisions acquire clientele by doing so.
Banks draw a line when it comes to individuals who are pursued and contacted to become potential clients, and this line rests in different places for different institutions. The mass-affluent market is the major target, meaning individuals with investable assets in excess of $250,000. Some banks set a much higher bar, targeting only those individuals who have minimum amounts of investable assets in the millions.
Clients utilizing private banking services pay for the specialized treatment they receive. The bank that wealthy clients use has a guarantee of a large pool of money, in the form of the clients' substantial checking account balances, to lend and utilize. The bank also makes money from the steeper interest charges on larger mortgage and business loans taken out by rich clients. The real money maker for these banks, though, is the percentage earned on assets under management (AUM), which is generally quite large with HNWIs. Charging even a very small percentage fee for services that involve huge sums of money generates substantial income for the bank.
Specialized treatment by private banking divisions can’t completely hide some of the drawbacks, however. The turnover rate at banks tends to be high. A client may have built a relationship with an employee managing his account, and then the next month that employee is gone and replaced by someone the client likely doesn't know. The client's experience with the new employee may or may not be what he is looking for, and many private banking divisions lose clients over this.
These divisions may offer many services, but they may not be a master of all of them. Banks are not experts at everything, so the level of expertise the client receives is likely to be lower than if he had used a specialist in a particular area. Finally, private bankers are paid by the bank, so their primary loyalty is to their employer and not to their clients.
Private wealth management generally involves advice and execution of investments on behalf of affluent clients. Firms that specialize in these practices are the primary sources for clients looking to invest in a variety of funds and stocks. Wealth management advisors also help with financial planning, manage client portfolios and perform a variety of other financial services in relation to a client’s private financing choices.
Private wealth management services are provided by larger financial institutions, such as Goldman Sachs, but they may also be provided by independent financial advisors or portfolio managers multi-licensed to offer multiple services and who focus on high-net-worth clients.
A wealth management advisor sits down one-on-one with each client and discusses goals, comfort levels with risk, and any other stipulations or restrictions the client may have in regard to the investment of his assets. The wealth management advisor then composes an investment strategy that incorporates all information gained from the client to help the client achieve his goals. The advisor continues to manage the client’s money and utilizes investment products that coincide with the client's stipulations.
Wealth management advisors cannot always offer clients the same specialized and concierge-like services that private banking offers. However, in most cases, these financial advisors spend a great deal of time with clients. These advisors also cannot open banking accounts for clients, but they can assist them in determining the right kind of accounts to open at the bank of the client's choosing.
Neither private banking nor wealth management is the same as private equity investing – though the latter often deals with the same target clientele.
Categorized as an alternative asset class, private equity is defined vaguely as a pool of funds raised from investors or borrowed from other financing sources used to obtain equity ownership positions in small, high-growth companies. It's called "private" because the stock in these companies does not trade on public stock exchanges. Although some large investment banks do it, these funds are typically put together by specialist firms, known as private equity firms: Some of the better-known include The Blackstone Group, Bain Capital (founded by Mitt Romney) and TPG Capital.
Along with institutional investors, private equity investment is most commonly offered to extremely wealthy individuals – known as accredited investors – as minimum investments often start at $250,000. It's an attractive option because of its potential for higher-than-average returns. But, because there's also a high degree of risk, low-net-worth investors who are assumed to be less sophisticated are not able to participate directly in private equity offerings.
In recent years, however, the popularity of private equity investment has spread across a wide range of investor classes, including those who may not be able to acquire the common $250,000 minimum to participate in a private equity offering. They might be able to purchase stock in publicly traded private equity firms, for example. Alternatively, some mutual funds are available to less-wealthy investors, focusing on pooling the shares of private equity firms and the funds those firms manage. Typically, the minimum investment is not as restrictive in a private equity mutual fund, but very few exist and most have short track records. Some separately managed funds offer investors entry into the private equity world with a minimum investment as low as $50,000, but those are also difficult to find.