Private banking
Private banking is banking, investment and other financial services provided by banks and financial services firms primarily to high-net-worth individuals with high levels of income or sizable assets and increasingly the Mass Affluent market as well.
Private banking forms a more exclusive subset of wealth management. The term "private" refers to customer service rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers. It does not refer to a private bank, which is a non-incorporated banking institution.
At least until recently, it largely consisted of banking services, discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by a single designated relationship manager.
Overview
Private banking is the way banking originated. The first banks in Venice were focused on managing personal finance for wealthy families.Private banks came to be known as "private" to stand out from the retail banking and savings banks aimed at the new middle class. Traditionally, private banks were linked to families for several generations. They often advised and performed all financial and banking services for these families. Historically, private banking has developed in Europe. Some banks in Europe are known for managing the assets of some royal families. The assets of the Princely Family of Liechtenstein are managed by LGT Group. The assets of the Dutch royal family are managed by MeesPierson. The assets of the British Royal Family are managed by Coutts.
Historically, private banking has been viewed as a very exclusive niche that only caters to HNWIs with liquidity over $2 million, though it is now possible to open private banking accounts with as little as $250,000 for private investors. An institution's private banking division provides services such as wealth management, savings, inheritance, and tax planning for their clients. For private banking services, clients pay either based on the number of transactions, the annual portfolio performance or a "flat-fee", usually calculated as a yearly percentage of the total investment amount.
"Private" also alludes to bank secrecy and minimizing taxes through careful allocation of assets, or by hiding assets from the taxing authorities. Swiss and certain offshore banks have been criticized for such cooperation with individuals practicing tax evasion. Although tax fraud is a criminal offense in Switzerland, tax evasion is only a civil offence, not requiring banks to notify taxing authorities.
In Switzerland, there are many banks providing private banking services. Switzerland has remained neutral since the Congress of Vienna in 1815, including through two World Wars. After World War I, the former nobles of Austro-Hungarian Empire moved their assets to Switzerland for fear of confiscation by new governments. During World War II, many wealthy people, including Jewish families and institutions, moved their assets into Switzerland to protect them from Nazi Germany. However, this transfer of wealth into Switzerland had mixed and controversial results, as beneficiaries had difficulties retrieving their assets after the war. After World War II, in eastern Europe, assets were again moved into Switzerland for fear of confiscation by communist governments.
Today, Switzerland remains the largest offshore center, with about 27 percent of global offshore wealth in 2009, according to Boston Consulting Group. Offshore wealth is defined as assets booked in a country where the investor has no legal residence or tax domicile.
In England, private banks were established in the 17th century, in parallel with the development of agriculture, managing the assets of the royal family, nobility and the landed gentry.
The United States has one of the largest private banking systems in the world, 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. Some American banks that specialize in private banking date back to the 19th century, such as U.S. Trust and Northern Trust.
Recent developments in private banking
The internationalization of the economy, technological developments such as the Internet and mobile phones ensure that banks have to innovate their value proposition and look for new markets. For example, the growth of HNWIs is low in traditional private banking markets like Europe, compared to Asia where the number of millionaires has grown to 3.6 million.Banks also provide a sampling of the private banking services at a lower price point than traditional private banking. These are called premium banking or priority banking services. They are meant for mass-affluent customers. The accounts do not generate as much revenue as traditional private banking, but given the number of customers, they amount to a sizeable revenue to the bank. The products offered to premium banking customers are the same as that for private banking customers with the exception that they do not include hedge funds or facilities to manage one's own business accounts. In short, it is wealth management at a much smaller scale.
In 2016, Credit Suisse and UBS replaced the word "private banking" with wealth management; private banking has faced reputational risk as an area for tax avoidance or even tax aversion.
Wealth minimums
In 2016, JP Morgan began requiring a minimum of $10 million in assets to qualify for their private banking, with those with less being moved into their Private Client Direct program.Private banking rankings
Results from Euromoney's annual private banking and wealth management ranking in 2018, which consider, amongst other factors, assets under management, net income and net new assets.This table displays results of one category of the private banking ranking, "Best global private banking services overall 2018".
| Rank 2018 | Company | Rank 2017 |
| 1 | UBS | 1 |
| 2 | JPMorgan | 2 |
| 3 | Credit Suisse | 3 |
| 4 | Julius Baer | 5 |
| 5 | Citi | 4 |
| 6 | Pictet | 6 |
| 7 | BNP Paribas | 7 |
| 8 | HSBC | 10 |
| 9 | Goldman Sachs | 13 |
| 10 | Vontobel | 11 |
The top three banks in 2017 retained their ranking position in 2018.
UBS Global Wealth Management took the top spot in Euromoney's 2018 survey for "Best private banking services overall 2018."
UBS Wealth Management announced in January it would be merging its Americas wealth management with its overall wealth management business to create a combined global division with $2.3 trillion in assets under management – $1 trillion of which comes from ultra-high net-worth clients.
J.P. Morgan & Co. Private Bank saw its assets increase 21% over 2017 and added 100 new wealth advisers.
Credit Suisse Private Banking & Wealth Management's profitability has increased 40% for the first nine months of 2017 compared to the same period two years before. In the first nine months of 2017, AuM per relationship manager had increased 17% and revenues by 12% compared with the same period in 2016.
Scale
In terms of AUM, the world's 25 largest private banks, as of end-2016, are:| Rank | Bank | Country | AUM |
| 1 | UBS Wealth Management | 1737.5 | |
| 2 | BNY Mellon Wealth Management | 1600.0 | |
| 3 | Bank of America Global Wealth and Investment Management | 1444.8 | |
| 4 | Morgan Stanley Wealth Management | 1,439.4 | |
| 5 | Credit Suisse Private Banking & Wealth Management | 687.3 | |
| 6 | RBC Wealth Management | 620.9 | |
| 7 | Citi Private Bank | 508.5 | |
| 8 | J.P. Morgan & Co. | 437.0 | |
| 9 | Goldman Sachs Private Wealth Management | 369.0 | |
| 10 | BNP Paribas Wealth Management | 357.3 | |
| 11 | Deutsche Asset & Wealth Management | 311.4 | |
| 12 | Julius Baer Group | 297.5 | |
| 13 | BMO Wealth Management | 287.0 | |
| 14 | HSBC Private Bank | 261.0 | |
| 15 | Pictet Wealth Management | 541.0 | |
| 16 | Northern Trust Wealth Management | 227.3 | |
| 17 | Wells Fargo Wealth Management | 225.0 | |
| 18 | ABN AMRO Private Banking | 217.4 | |
| 19 | Santander Private Banking | 204.8 | |
| 20 | Bank Vontobel | 275 | |
| 21 | China Merchants Bank | 192.9 | |
| 22 | Crédit Agricole Private Banking | 165.0 | |
| 23 | ICBC | 154.1 | |
| 24 | Lombard Odier Private clients | 133.6 | |
| 25 | CIC | 133.3 |
Value proposition
Most private banks define their value proposition along one or two dimensions, and meet the basic needs across others. Some of the dimensions of value proposition of a private bank are parent brand, one-bank approach, unbiased advice, strong research and advisory team and unified platform.Many banks leverage the “parent brand” to gain a client’s trust and confidence. These banks have a strong presence across the globe and present private bank offerings as a part of the parent group. “One Bank approach” is where private banks offer an integrated proposition to meet clients personal and business needs. Since private banking concerns understanding a client’s need and risk appetite, and tailoring the solution accordingly, few banks define their value proposition along this dimension. Most modern private banks follow an open product platform, and hence claim their advice is unbiased. They believe there is no incentive to push proprietary products, and the client gets the best of what they offer. A few banks claim to have a “strong advisory team” that reflects in the products they offer the client. A couple of banks also define their value proposition on their unified platform, their ability to comply with all regulations, yet serve the client without restrictions.
Product platform
Open architecture product platform is where a private bank distributes all the third party products and is not restricted to selling only its proprietary products. Closed architecture product platform is where the bank sells only its proprietary products and does not entertain any third party product. These days the needs of the clients are so diverse that it is practically impossible for a bank to cater to those needs by its proprietary products alone. Clients today demand the best of breed products and most banks have to follow an open architecture product platform where they distribute products of other banks to their clients in return for commission. Products offered to private banking clients include equities, fixed-income securities, structured products, foreign exchange, commodities, deposits and real-estate investments.Fee structure
Different banks charge their clients in different ways. 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. There are other private banks that follow a hybrid model. In this model, the bank charges a fixed fee for certain products and advisory fee for the rest. Some of the other banks are totally advisory driven and charge the clients a percentage of AUM.A few banks offer both a transactional model and an advisory model. The clients choose what suits them. A recent industry trend is towards the advisory fee model, because margins on commissions may go down in the future.