In the upcoming weeks I will do a whole series on how private banks make money. I will break down for you what you can expect from a private bank’s price list and how to read it so that you can compare it with competitors and how to spot if your potential or current private banker is charging you too much and taking what I believe Cockneys refer to as diabolical liberties.Part II Part III
How did I come up with this idea? Well it twas all twanks to a tweet I tweeted twast tweek. This is what I tweeted:
"Winding down of wealth management businesses by big private banks and laying off of private bankers. The consolidation in PB & WM has begun”I received one particularly interesting reply:
“IB is no longer an industry. It is and has been for ages just a vehicle to employ and then make redundant #UBS etc etc”“IB” stands for investment banking. One of those little cartoon lightbulbs lit up above my head. Of course! Why have I been so blind and stupid? Outside of finance most people think if it has the word “banking” at the end of it, then what comes before is irrelevant. They’re all a bunch of sociopath Banksters anyway, hang ‘em high and let’s have a party!
Investment banking, retail banking, corporate banking, private banking. All offering the promise of fulfilling your financial fantasies. Yeah, baby, yeah! Me love you long time.
In actual fact they're same same but different, the clue tends to be in the first word.
This misconception of all banking somehow being the same is completely understandable, hence my little flashing light bulb. It was a reminder to me how differently those inside the business view the world from those outside the business.
So now I’m going to do what I should’ve done at the beginning of the blog. Take you into the nitty gritty of private banking. How we private bankers make money.
No one on this planet is as good at layering fee upon fee, upon fee as us private bankers and spinning it around to make it as confusing as possible for the client.
Imagine walking into a cafĂ© one morning and ordering toast with butter, instead they bring you a Full English Breakfast. It has toast doesn’t it? So you got what you ordered for plus extras… plus a larger bill.
That Full English Breakfast is your private bank. Some of it’s nice (like the bacon, everybody loves bacon) and some not so nice (like those nasty English sausages, no one but the English likes English sausages), but one thing that we can all agree on is that a Full English Breakfast is a lot of stuff!
So without further ado, let's get started and we'll start with the most important one.
Assets Under Management
This is the main driver for private banking revenue, also referred to as AUM (for rather obvious reasons). This is what makes private banking such a coveted business. If you attain enough of this stuff you can just sit about on your backside with your feet up on the desk, shut off your Reuters and/or Bloomberg and surf the web for pictures of bikini clad lovelies or Puerto Rican pool boys, depending on what takes your fancy.
You can do this until it’s lunch time when your second hardest task of the day begins, navigating the wine list. The hardest task of the day being to stay awake at your desk in the afternoon.
Now you know the secret why private banking executives are so keen on “inflow” and increasing AUM. More inflow = more wineflow.
On a private bank's price list it will most likely be called a "custody fee" or if they are feeling particularly lavish "safe custody fee".
This is how AUM works: You place a portfolio of stocks, bonds and cash in a private bank and they will charge you custody fees based on those assets. Basically you pay for the privilege of keeping your money in their bank. The fee is normally a percentage, possibly with a fixed minimum (to keep out the poor people).
The amount of custody fees depends on the underlying asset. Custody of bonds tends to be cheaper than the custody of equities. Custody fees vary greatly between banks and they are described in the price list differently depending on bank. Some banks charge monthly, quarterly, semi-annually or annually. This of course makes it a little harder for the average client to compare prices between banks.
Unlike in certain other things (as us men are so often told) size really does matter in private banking. The bigger your wallet, the bigger the reduction in fees you can haggle for yourself. It’s therefore very difficult to give an exact percentage as to what you should be paying.
But you want a percentage figure from me don’t you?
Okay, okay. As a rule of thumb aim to be paying closer to 0.5% than 1% per annum for custody fees.
Next post regarding fees: Transaction costs in private banking.
HT: Abnormal Returns