- Private banking is provided by financial institutions to offer a more customized concierge service, typically to high net worth individuals (HNWI), in regards to traditional banking functions such as loans and depository accounts.
- Wealth management is more comprehensive and often involves handling things like investments, taxes and estate planning.
- In practice, private banking and wealth management services often overlap and are more alike than they are different.
If you are looking for personal finance help and aren’t sure how private banking and wealth management differ, you are not alone. Simply put, a lot of similarities exist between the two, and it can be hard to differentiate between them.
What’s more, many financial institutions offer a combination of these services and don’t always draw a hard line between them. However, understanding the technical differences can help you determine which service you need or want and decide if a particular financial institution’s offering is right for you.
What Is Private Banking?
Private banking is a higher-level banking service than what is typically offered to the general public. Its basic function is to provide the common products and services of traditional retail banking but with some additional perks and features.
With private banking, customers typically have a dedicated relationship manager that serves as their point of contact for everything they do with the bank. In addition to checking, deposits and loans, private bank customers may have access to more in-depth services that cover a wider array of financial needs like investments, estate planning and insurance. As an example, HSBC offers aviation and yacht insurance to clients of its private banking division.
Private banking services are often reserved for bank customers that have larger sums of money or do a considerable amount of business with the bank. Many banks only offer private banking to high net worth individuals, defined as people who have a minimum of $1 million of investable assets. However, that isn’t always the case and some institutions have lower minimum deposit or investment requirements.
A wealth manager is a type of financial advisor that is typically associated with high-net-worth, very-high-net-worth and ultra-high-net-worth clients. Generally, high-net-worth clients have a net worth of at least $1 million, but less than $5 million. Very-high-net-worth clients have a net worth of at least $5 million, but less than $30 million. Ultra-high-net-worth clients have a net worth that exceeds $30 million.
Comparing Private Banking and Wealth Management
In practice, private banking and wealth management are often more alike than they are different. Some institutions don’t separate them at all and may even use a term like “private wealth management.” However, there are differences, and the two services may not be the same from one institution to the other.
Private banking always involves traditional bank offerings. It also often includes some elements of wealth management, but not always. Private bankers may help their clients with financial planning, investments and retirement planning, offer insurance products, or coordinate with other financial professionals like estate attorneys or accountants.
Wealth management on the other hand is normally investment focused, but also it incorporates comprehensive planning for taxes, retirement, and estate and wealth transfer. Wealth managers might also provide complete banking solutions to include deposit accounts and loans, but this is less common and many wealth management clients still use a retail bank for these activities.
Private banking clients have access to CDs issued by the bank, and they may be offered other investment products as well to include stocks, bonds and mutual funds.
Investment options provided to wealth management clients are very broad and include stocks, bonds, mutual funds and ETFs. Many wealth managers also provide access to alternative investments, such as precious metals, or insurance-based products like annuities.
In either channel, the available investments might be limited to the institution’s own products, or they could include products from a large number of investment firms. If your banker or advisor only recommends the firm’s own products, this may not always be in your best interest.
The costs for wealth management typically include a management fee based on the dollar amount of the client’s investment. This is called an assets under management or AUM fee. One percent is common, but this may fluctuate depending on the firm. The specific investments may also have associated fees such as internal management and administrative fees for mutual funds.
Private banking costs may also include an AUM fee if investment management is part of the offering.The bank may also rely on commissions from the products it recommends to clients or collect account or service fees.
The ideal client profile of wealth management and private banking are very similar. Both services are targeted toward those who have greater financial assets and want help with a broad range of complex financial needs.
Consider the Pros and Cons
A benefit of both services is that customers will likely have a single dedicated point of contact who will know them and their situation personally. Clients can contact their dedicated advisor or personal banker with questions and to complete transactions rather than speaking to a teller or call center. This results in more personalized planning guidance. In addition, private bank customers typically receive preferential rates on loans and deposit accounts.
On the other hand, the most significant drawback is the increased cost compared to what you’d pay for a lower-tier retail service.
- Personalized service with access to a dedicated relationship manager
- Better rates than retail customers
- Additional services that may include complete financial planning coordination
- Often requires a high minimum dollar amount
- More expensive than standard retail banking
- Personalized advice tailored to clients specific needs
- Comprehensive planning that covers all financial needs
- Can help coordinating other professionals
- More expensive than working with a less personalized service
- May not be necessary depending on how complex your needs are
How To Choose Which Is Right for You
The service you choose comes down to what you need and your personal preferences.
If you primarily want a greater level of service for traditional banking activities and products then private banking may be a better choice for you. Wealth management is going to be a better choice for you if you desire a personalized comprehensive plan. It’s also perfectly acceptable to use both, particularly if you keep their respective functions separate.
However, because the level and focus of service you may receive can vary between institutions, it’s important that you properly research your options and know what you are agreeing to before signing up for anything.