ALL BANKS
Are not Created Equal

By James T. Berger

In serving the needs of certain high net worth customers, all banks are not created equal.

A new tier of financial institution has emerged in the banking landscape over the last 20 years.  These “private banks” serve the needs of the elite.  Many don’t have the look or feel of an ordinary bank although they might be housed within the same building as the normal commercial bank.

Most private banks serve a market strata whose entry threshold is a net worth of about a million dollars. The typically private bank customer has a net worth of between $1 and $30 million. Beyond $30 million, yet another door opens for even more sophisticated and elitist services. Some private banks also serve “emerging” customers, those still in the accumulation stage with a net worth of between a half million and a million dollars.

Ideally, private banks would like to focus on wealth management. However, the nature of the U.S. economy and the demographics of emerging wealth require the private banks to help business people in areas such as business and personal credit, cash management, trust services, mortgages and other more typical banking services.

Emergence of the Private Bank Concept

While the private bank appears to be a new concept, it really traces it roots back centuries. “In Switzerland, the private banks were legendary,” says David Kilbride, managing director of The Private Bank at Bank of New York.

The ‘private’ in private banking is based on the famed ‘secrecy’ of Swiss banks.  These banks grew out of the post-Napoleonic era where rich sought to protect assets from the prying eyes of often hostile governments.

Dennis L. Klaeser, chief financial officer of Chicago-based The Private Bank and Trust Company, explains how the bank’s chairman and founder, Ralph B. Mandell, discovered the concept when he traveled to Switzerland about 25 years ago to set up an asset distribution plan for a deceased customer. In the process, Mandell had to work with a local Swiss private bank.

“At that time private banking was not used very much in the U.S. although it is very old European concept that goes back centuries,” according to Klaeser. “European private banks focus on wealth management, but the key to the European business model is very high touch service that allows the client to do business with an experienced banker where the relationship rests with that banker. It is a flatter organizational structure employing very experienced people who have a permanent relationship with the client as opposed to your typically bureaucratic organization with new people getting promoted and assuming client relationships. It’s more on the lines of how a law firm operates as opposed to a traditional commercial bank.

“Mandell became intrigued with the concept and decided to modify the model for the United States – particularly the Chicago market,” Klaeser continued. “Here we have a lot of successful entrepreneurs and business owners who may not presently be candidates for wealth management services. The thinking is that when the bank maintains relationships with this category of client over a number of years, the client will eventually sell the business or pass it on and at that point become candidates for wealth management services.”

Kilbride also pointed out that Bank of New York uses a historical perspective in marketing its private bank services. “We have a new advertising campaign that reminds people we are the nation’s oldest private bank — established in 1784.”

Demographics of Private Banking

The concentration of wealth among the relatively few is the major reason why private banks have flourished over the last 10 years. The 2004 annual Wealth Report produced by Merrill Lynch and Cap Gemini Ernst & Young reports that an estimated 7.3 million individuals world-wide control some $27.2 trillion in liquid assets. The 10 leading worldwide players in private banking, in order, are: UBS, Merrill Lynch, Credit Suisse, Deutsche Bank Private Wealth Management, HSBC Republic, JP Morgan Chase, Morgan Stanley, Goldman Sachs, Northern Trust, ABN Amro. Goldman Sachs plans to “dramatically” grow its private banking services globally by targeting individuals with $10 million or more in assets, according to Douglas G. Grip, managing director and head of Goldman’s international private wealth group.

Zachary Lazar, Illinois regional president for Chicago-based Harris Private Bank, sees a generational rationale for the emergence of private bank services. “We are seeing a significant wealth transfer taking place today that will continue to take place over the next 10-15 years, said Lazar. “The transfer is taking place between baby-boomers and their parents.”

Lazar also sees a need for private banking from the “time-starved” market segment. “We see many business owners, professionals and senior executives that are all time-starved. While most of these people have the wherewithal to manage their own assets, they simply don’t have the time to do so and they seek the services of a private bank to coordinate their financial needs.”

Private Bank Business Models

While all private banks essentially provide the same types of services, they take different approaches.

Chicago-based The Private Bank & Trust Co. has its headquarters on the 10th floor of a Loop office building. Its suburban offices are store fronts in affluent areas. It also has offices in Milwaukee, suburban Detroit and St. Louis. A fast-growing organization, it currently has $2.7 billion under management.

“We don’t have customers per se. We call them clients,” said Klaeser. “Our bankers are ‘managing directors.’ Each customer has a primary managing director and a back-up. Our offices are set up like an executive office suite with a receptionist and individual, private offices.”

Bank of New York, with headquarters in Manhattan, sees the market as three tiers. The “emerging affluent” have $500,000 to $1,000,000 in investable assets. Its core market are those with assets between $1 million and $30 million and its “Ultra high net worth” tier are those with more than $30 million in assets to invest. The executive working with the customer is called a relationship manager. Bank of New York currently has $60 billion in assets under management in its private bank.

Harris Private Bank prides itself on a “holistic” approach to private banking. While housed in a Harris Bank office or building, the private bank is separated from the regular bank. Its private bankers work like a quarterback or primary care physician. The Harris private banker manages the relationship and brings in appropriate professionals to serve the client’s specific needs. Harris is one of the major banks in the Chicago area with more than 220 total offices, many of which have private banks, and has private bank offices in Florida, Arizona and Washington State.

Reprinted from
EXECUTIVE DECISION
September/October, 2006

James T. Berger is a Chicago-area marketing consultant.

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