The Truth About Private Banking

“Private Banking” should not be confused with “Private Banks”.  The latter are banks that are not incorporated and are owned by individuals or families. Often these terms are used interchangeably because each is involved with high net worth individuals (HNWIs).

Many banks offer “Private Banking” services. This segment of the market has high profit margins. HNWIs are great credit risks for lending services. They keep significant amounts of cash on deposit and have capital available for investment management services.

“Private Banking” services offered by Retail Banks are abysmal. A Retail Bank teller will inform you that establishing a checking account in the name of a revocable living trust (RLT) is not permitted. Many times when asked to establish a checking account for an intentionally defective grantor trust (IDGT) or a Wyoming Limited Liability Company, they give you “a deer in the headlights” look.

“Private Banking” services offered by an Investment Bank raise issues of independence and objectivity. Unquestionably, an Investment Bank is well versed in estate planning and the unique needs of HNWIs. However, the potential for conflicts of interest are present as evidenced by all the regulations surrounding investment banks. An Investment Bank may recommend a security for a HNWI’s investment portfolio, which the Investment Bank created. This generates compensation on both the buy and sell side of the transaction.

“Private Banking” services are also offered by institutions, which are neither Retail nor Investment Banks. Two fine examples of this type of institution are: BNY Mellon and Northern Trust. These corporations address the client’s entire financial situation focusing solely on the key areas of wealth management: investment, tax and estate planning. Opening an account for a client’s RLT, IDGT or LLC is a daily occurrence for them. Individuals are assigned a “personal banker” who coordinates their activities throughout the institution. These institutions also provide trust services, often acting as a corporate fiduciary.

Lending is a strong point for these institutions. The application process for credit is streamlined and straightforward. Securities backed lending is often used. In addition, these institutions retain the loans they originate, thereby offering greater flexibility as it relates to account registration, terms, restrictions and requirements.

Finally, on my last Google check for “Private Banking” the paid ads, which appeared at the top of the page were from retail and investment banks. This perfectly illustrates my point!

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