Account management

In the era of online banking and mobile financial technology apps that all but replace traditional bank accounts, the idea of a human banker feels downright quaint. 

Yet human bankers still play an important role in the banking ecosystem. They’re especially important for affluent people with extensive assets and complex financial needs. Many of these folks use human-led private banking services that come with bespoke wealth management, tax planning, trust and estate planning, lending, and access to financial products and investment opportunities unavailable to the rest of us.

Private banking isn’t for everyone. But you don’t have to be a multimillionaire to take advantage of it, either. 

What Is Private Banking?

Private banks provide customized financial products and services for wealthy people. Private banking encompasses multiple aspects of clients’ financial lives, including traditional bank accounts, investment accounts, insurance, tax management, and estate planning.

Some banks’ wealth management divisions provide the same scope of services as others’ private banking divisions. However, wealth management more often refers to a narrower set of services focused on managing clients’ investments. That said, financial institutions sometimes use the terms “private banking” and “wealth management” interchangeably. 

How Private Banking Works

Private bankers work individually or in teams, usually within much larger financial institutions that also operate retail banks and investment management firms. Private banking teams can include lending specialists, investment managers, alternative investment specialists, and bankers who specialize in managing complex financial situations.

Many private banking teams or the wealth management teams housed within them operate as fiduciaries. That means they’re legally obligated to act in their clients’ best interests, which extends to recommending investments they believe are the best fit for their clients (rather than the most profitable for the institution). Before signing with a private bank, ask if its team acts in a fiduciary capacity, and reconsider if the answer is no.

Even if the client has access to multiple financial professionals on a private banking team, one banker typically serves as the main point of contact for all financial matters covered by the private banking agreement. This person is often referred to as the client’s relationship manager. 

For help with more specialized client needs, such as tax and estate planning, the relationship manager or others on the team may coordinate with outside lawyers or accountants.

Private banking clients may get discounted pricing on loans and lines of credit, bank accounts, safe deposit boxes, investment products, and possibly other financial products and services. They may also get higher interest rates on interest-bearing checking accounts, savings accounts, and CDs. 

To cover ongoing services like investment and cash account management, private banking clients typically pay a percentage of the assets the bank is managing, aka assets under management. If the bank charges it in place of all other fees, it’s known as a wrap fee. 

Private banks’ asset management fees typically range from 0.5% to 1.5% of assets under management and often decline as total investable assets increase. Wrap fees may be a bit higher because they encompass the institution’s entire range of services.

Private Banking Services

Private banks cater to high-net-worth people. Some also cater to a broader group of clients known as “emerging affluents,” who are typically younger, high-income people poised to build significant wealth.

Depending on the institution and the mix of clients they serve, private banking teams provide some or all of these services:

• Core banking services. Private banks always fill core banking functions. Like retail banks, they offer checking and savings accounts, CDs, money market accounts, and other types of deposit accounts. Often, they pay higher interest rates than retail banks, though typically not on par with the best online banks. 
• Higher FDIC insurance limits. Retail banks’ FDIC coverage is typically limited to the FDIC’s minimum of $250,000. That’s inconvenient if it would cause you to open multiple accounts to have all your money insured. So private banks often (though not always) provide deposit insurance above the standard.
• Budget and expense management. Particularly when working with very wealthy clients and those with complex financial situations, private bankers help with daily tasks like paying bills and managing household budgets.
• General lending. Lending specialists help clients secure common loans and lines of credit like mortgages, auto loans, and unsecured personal loans with lower rates than retail banking clients have access to. That’s important because on a million- or multimillion-dollar mortgage, shaving even a few hundredths of a point off the interest rate can save you tens of thousands of dollars over the life of the loan.
• Specialized lending. Private banking teams also help clients secure less common types of credit retail banking clients can’t access, like jumbo mortgages and lines of credit secured by business assets. 
• Financial planning. Private banking teams may include or work with certified financial planners who draw up long-range plans covering major life events.
• High-value insurance. They may also coordinate with outside insurance brokers to procure high-value life, property, and liability insurance coverage.
• Investment management. Private banking teams either directly manage clients’ investment accounts or coordinate with wealth management teams employed by the same financial institution. Wealthier private banking clients may have access to alternative or specialized investments unavailable to the general public, such as syndicated real estate deals that can return well above historical stock market averages, though not without considerable risk.
• Tax planning. Private banking teams may refer clients to outside or in-house tax professionals who can help them reduce their tax liability within the bounds of the law. 
• Estate planning. Private banking clients may get access to estate planning attorneys who can draw up customized wills and trusts to reduce probate costs and ensure smooth asset transfers from one generation to the next. 

Each financial institution has its own unique approach to private banking and may offer different mixes of services. And some peripheral services, like tax and estate planning, may involve out-of-pocket fees. Before opening accounts with a private banking team and moving your life savings, ask exactly what it can do for you and how much it costs.

Eligibility for Private Banking

Every financial institution sets a minimum asset threshold it requires to qualify for its private banking services. Some institutions make exceptions to their asset requirements on a case-by-case basis, but the easiest way to qualify for private banking is to exceed the threshold.

Private banking asset thresholds can range from as little as $50,000 or $100,000 to more than $2 million. Many private banks set the threshold at $1 million in investable assets, including cash held in deposit accounts and cash or securities held in investment accounts. Funds held in tax-advantaged retirement accounts typically count toward the asset threshold but less liquid assets like real estate don’t.

Some private banks have multiple service tiers that also depend on investable assets. For example, clients with less than $1 million in investable assets might qualify for a relatively basic set of private banking services without a dedicated relationship manager. Clients with between $1 million and $5 million might get a higher level of service and personalization along with a dedicated relationship manager. And clients with more than $5 million might qualify for the bank’s highest level of service and personalization.

Pros & Cons of Private Banking

Private banking has some clear upsides it’s difficult to argue with. But it has some hidden downsides as well and definitely isn’t right for everyone who qualifies.

Pros

Private banking offers a level of personalization and access that retail banks and DIY brokerages can’t match. It’s an excellent fit for affluent (or downright wealthy) individuals and families who don’t have the time or interest to directly manage every aspect of their complex financial lives.

1. Personalized financial services. Private banking clients enjoy personalized financial plans and customized financial services not available to retail banking or DIY brokerage clients.
2. Access to alternative investments. Some private banks offer alternative investments, such as direct exposure to specific real estate developments, that aren’t available to the general public.
3. Dedicated teams. Private banking clients have on-demand access to a dedicated relationship manager, possibly along with other members of their private banking team.
4. Access to multiple financial and legal experts under one roof. Private banking teams typically have or work closely with financial planners, wealth managers, tax professionals, estate planners, and other experts. It’s much more convenient than seeking out each professional individually.
5. Better pricing on loans and deposit accounts. Private banking clients usually get preferential rates on loans and interest-bearing deposit accounts. These rates aren’t guaranteed to be the best on the market but are generally better than what the institution’s retail banking clients get.

Cons

Private banking clients are captive to a single financial institution, reducing their ability to shop around for better deals and potentially increasing their all-in costs. And though private banks hold team members to basic professional standards, they’re not always world-class.

1. Potentially limited choice of products and services. At many private banks, you have access to a financial product and service menu that’s a mile wide and an inch deep. You can’t shop around for the best home loan rates or the highest savings yield; you’re limited to whatever your financial institution offers.
2. Preferential pricing could still be worse than the alternatives. Preferential pricing doesn’t mean the best available pricing. As with your menu of available products and services, you’re at the institution’s mercy.
3. Private banks may not be fiduciaries. Every private bank pays lip service to putting their clients’ interests before their own, but that’s meaningless unless the bank’s investment management division follows the fiduciary standard. If not, they may recommend investments and other financial products with an eye to maximizing their own profits rather than growing clients’ wealth.
4. Can be surprisingly expensive. Compared with commission-free online brokerages and free checking accounts, private banks can be expensive. If your private bank offers wealth management, expect to pay at least 1% of assets under management each year. Robo-advisors are cheaper and typically offer comparable returns, so they make more sense if you’re comfortable using them.
5. Private banking staff comes and goes. Like anywhere else, staff turnover is a thing at private banks. It’s often surprisingly brisk, as private banking teams often employ relatively junior employees who see the role as a stepping-stone to bigger and better things. This is the case at retail banks as well, but private banking clients tend to have more complex financial needs and expect a higher level of service, so turnover can be more disruptive.
6. Relationship managers aren’t experts. Private bank relationship managers are generalists, not experts. They serve as gatekeepers for legitimate experts, but you may find that they can’t give detailed advice or answer complicated questions to your satisfaction.

Do You Need a Private Bank?

You don’t need a private bank just because you have $1 million or more in liquid assets. If you’re a seasoned DIY investor and have the time to manage your money on your own, you might not need help from any financial professionals at all. 

On the other hand, if you’re not a confident investor or financial manager and don’t have the time or interest to learn, private banking could make sense for you. Specifically, it could be a good fit if:

• You have an existing positive banking relationship. If your current financial institution has a private division and you already have most of your money there, moving to its private side is clearly the most convenient option. But you should always look at other options.
• You’re uncomfortable managing your own investments. One of the biggest benefits of private banking is access to an investment manager who can build a diversified, risk-appropriate portfolio for you. 
• You don’t trust a robo-advisor. Robo-advisors can make quality investment decisions — even tax-loss harvesting. But they don’t consider the full picture of wealth management or your taxes like a human investment manager can, which is more important (and complex) the more money you have.
• You have or anticipate complex borrowing needs. If you’re planning to buy a million-dollar home or borrow against business assets, you may need customized solutions your retail bank can’t offer.
• You need to get your affairs in order. If you’re ready to put together a long-term financial plan, set up an estate plan, and get serious about reducing your tax liability, a private banker can handle the details more efficiently than you can on your own.

Private Banking FAQs

The idea of private banking is simple enough, but novices can get bogged down in the details. These are answers to some of the most frequently asked questions about it.

Is Private Banking Only for Rich People?

It depends on your definition of “rich,” but the short answer is no. Some private banks accept clients with as little as $50,000 in liquid assets. Chase Private Client, which offers a full range of financial services, requires $150,000 in liquid assets.

That said, many private banks set the asset floor at $1 million, which meets any reasonable definition of “rich.” And some banks have multiple relationship tiers that reserve the highest levels of service and choicest financial benefits for clients with more than $5 million or even $10 million.

How Do You Qualify for a Private Banking Relationship?

The easiest way to qualify is to meet the bank’s asset minimum. An entry-level private banking relationship could be yours for as little as $50,000 to $100,000, though many banks require much more. 

Some private banks make exceptions to their asset thresholds for young, high-income “emerging affluents” expected to amass considerable wealth in the near future.

What Is Private Banking vs. Wealth Management?

Private banking and wealth management are often used interchangeably and can mean different things to different people. 

Some define private banking narrowly, as only core deposit and lending services, but the more common definition is broader and encompasses investment management, financial planning, tax and estate planning, and risk management. 

Wealth management is narrower but still quite broad, encompassing wealth management and long-range planning. The difference is that wealth management excludes the deposit and lending services at the heart of private banking.

How Should You Choose a Private Bank?

If you think you’re ready for a private banking relationship, you should shop around. As you would if you were in the market for a new independent financial advisor, investigate several private banks that operate in your area. For each, consider:

• Whether its wealth management team is sworn to act in clients’ best interests (called a “fiduciary duty”)
• What financial services it offers and how those services change depending on assets under management
• How much you pay for those services
• The minimum assets required to qualify for a relationship
• Whether you have a dedicated relationship manager
• How much access you have to your relationship manager and others on the private banking team 

It’s especially important to understand how much you can expect to pay your private bank and whether the team members have a fiduciary duty to you. Be very cautious about working with non-fiduciaries or with private banks that are significantly more expensive than the competition, even if they claim to offer more or better service.

Final Word

Most Americans don’t have $1 million sitting in the bank waiting for white-glove management. Most don’t have $150,000, for that matter. And not everyone who does is a good fit for private banking, anyway. Some are perfectly capable of managing complex financial situations on their own — they might even prefer to.

But while private banking isn’t exactly mainstream — which would defeat the purpose — it’s an important component of the broader financial system. 

For better or worse, a disproportionate amount of American wealth is controlled by individuals and families who easily qualify for private banking relationships, and many of those folks take full advantage. It’s helpful to understand how they stand to benefit and the tradeoffs they accept in return.