Private Banking vs. Wealth Management: What's the Difference? (2024)

Private Banking vs. Wealth Management: An Overview

Private banking and wealth management are terms that overlap. However, the financial services offered through private banking and wealth management differ slightly.

Wealth management is a broad category that involves dealing with the optimization of a client's portfolio, taking into account their aversion to or comfort with risk, and investing financial assets according to their plans and goals. It can be practiced on a portfolio of any size, though, as the name implies, it is geared toward people with a substantial net worth.

Private banking 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.

Private Banking

Private banking is a financial management service offered to HNWIs and other clients by financial institutions. Private banking tends to be exclusive and is reserved for clients with substantial cash balances and other assets to be deposited into accounts and to be invested. In some instances, individuals may obtain these services with assets less than $100,000, but the benchmark for most private banks or private bank divisions is at least six figures.

Private banking provides investment-related advice. The goal is to address the entire financial circ*mstances of each client. Services help clients protect and maintain 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 Benefits

• 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 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 profits for the bank, guarantees repeat business, and brings in new business.

Pursuing Private Banking Clients

Financial institutions often rely on their clients, specifically the ultra-wealthy, to provide them with referrals. They may talk about the services they receive from their bankers with people in their network. Banks may then send out invitations to (these) potential clients and acquire their accounts.

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 as to who they pursue to become potential clients. Eligibility varies by institution. The mass-affluent market is the major target, meaning individuals with investable assets over $250,000. Some banks set a much higher bar, targeting only those individuals who have minimum amounts of investable assets in the millions.

Clients who use 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 a larger mortgage and business loans taken out by rich clients.

Assets Under Management and HNWIs

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 cannot 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 does not 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 particulararea. Finally, private bankers are paid by the bank, so their primary loyalty is to their employer and not to their clients.

Wealth Management

Wealth management is offered by larger financial institutions. It generally involves advice and investing for affluent clients. Firms that specialize in wealth management are the primary sources for clients looking to invest in a variety of funds and stocks. Advisors also help with financial planning, manage client portfolios, and perform a variety of other financial services about 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.

Most wealth management firms tend to work with ultra-wealthy clients. This means these financial institutions tend to seek out and service clients who have at least $250,000 to $500,000 in assets and higher.

What a Wealth Management Advisor Can and Cannot Do

A wealth management advisor sits down individually with each client and discusses their goals, comfort levels with risk, and any other stipulations or restrictions they may have about their investments.

The advisor then composes an investment strategy that incorporates all information gained from the client to help theclient achieve his goals and manages the client’s money using investment products that coincide with the client's stipulations.

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.

Key Differences