Should you hire a private banker?

For centuries private banks have been considered the exclusive domain of the rich and famous.

That still holds true, but you don't have to be a billionaire to use them. Far from it. You can access private banking services with just a few million in investable assets.

Indeed, for investors who can't afford the costs of running a family office (see Investor lessons from Australia's rich listers), which is only feasible for those with more than $50 million in investable assets, a private banker is the next best thing.

There are dedicated private banks with operations in Australia, and across the globe, but keep in mind our major banks also have their own private banking divisions.

What does a private bank do? Private bankers help clients build strategy, manage money and protect wealth. They can handle everything from day-to-day banking to more complex tasks, including facilitating access to alternative investment markets, and also advise and work on estate and philanthropic planning.

Those with annual incomes of more than $400,000 and investable assets of at least a few million, or roughly more than $5 million of net worth outside their primary residence, should be getting serious about private banking.

Isn't a financial planner enough?

Mike Norfolk, head of ANZ Private Australia, says a difference between private banking and financial planning is that clients are given an opportunity to depend entirely on private bankers for asset allocation.

“It's almost impossible for financial planners to diligently assess the performance of all the different types of funds out there, so they tend to self-limit over time,” says Norfolk. Therefore, he adds, “the private banker is the conduit point for somebody coming into their money”.

Norfolk, and NAB Private executive general manager, Christine Yates, both believe small business owners nearing the stage of selling should consider appointing a private banker to prepare for the windfall.

From her experience with clients who have transitioned up, Yates says many investors plateau at the retail bank level simply because they haven't had time to evaluate other options. As such, busy C-suite level executives and partners in professional services might be the best positioned to benefit from private banking. In addition, the self-employed, or investors with more complex financial affairs, perhaps with a cross-border aspect, can benefit.

The private banker can readily connect clients to relevant niche specialists, with both Yates and Norfolk highlighting this as a key opportunity for investors ready to beef up their wealth team.

“We find trust is a problem in the broad banking and wealth system, and when a person has a trusted relationship with their private banker, they are much more comfortable getting a referral to an advisor that way,” says Yates.

“Everyone needs a banker, but that's transactional. If you are a busy professional, your private banker will start with the simple things like your family home and mortgage. It helps you navigate.”

Yates describes transactions as a byproduct of private banking. At its core, she says private banking is about brokering partnerships. She concedes this comes through open architecture, “but that's also really hard to bring to life”.

Opening the books

Private bankers have traditionally offered proprietary products, but increasing competition has created a need to offer platters of pre-screened products and services. This is facilitated through open architecture — when the private banker evaluates all investment options, not just funds or products managed by its own firm or related parties.

Naturally, that's easier said than done.

“We call what we do ‘light touch' open architecture,” says Yates.

“In the perfect world, I have a group of clients who want to play in the US commercial real estate market, and I find the best fund with that type of portfolio for our clients to participate in. Then you have to say, hand on heart, you completely understand that fund, because if something goes wrong, people turn to you. That's the hard edge of open architecture.”

Investors shouldn't expect private bankers to keep keys to every door of opportunity, and that's where, invariably, a solid team of financial advisors can lend a hand.

But today's low-yield environment does seem to have encouraged private bankers to crack open windows to alternatives, such as venture capital, where clients can try squeezing out a higher yield.

A recently formed partnership between NAB Private and Israeli equity crowdfunding platform, OurCrowd, is an example of this, introducing Australian clients to early-stage startups.

“We had a lot of feedback from our most sophisticated wholesale clients that, in low-yield environments, they like to keep most of their wealth safe in a holding pattern, and then put about 10 per cent into something that's very high yield,” says Yates.

“When you look at tech companies, like Facebook, they have driven enormous wealth in North America. Not much of that has come from these companies floating, but people investing in them privately as they grow.

“This is democratising an early stage equity investment opportunity. People know how to value real estate, because they know bricks and mortar, but they want to participate in other spaces. When it comes to our events which get the highest turnout [of NAB Private's investment events], it's absolutely anything venture capital-related.”

An opportunity for mums and dads

For those still unsure if private banking is for them, Norfolk says the typical client falls along the continuum of three categories: discretionary, advisory and self-directed. The scale goes from discretionary clients, who appoint private bankers to find “best in class for asset classes” and make decisions on their behalf, all the way to self-directed clients who want to engage in discussion, but execute decisions themselves.

Norfolk suspects about 50 per cent of private banking clients in Australia have some level of self-direction, which may reflect the infancy of the domestic sector, as well as the infancy of wealth in Australia. Here, the sector is very young, when you consider the richest people in Babylon were private banking as early as 2000 BC.

Rothschild, established in the 1760s, says on its website that “clients typically appoint us to manage a portfolio on their behalf”. In many parts of the world, only ultra-high net worth individuals can afford private bankers, or those with investable assets of at least $50 million.

How much does it cost? There's rarely a clear fee structure, and a private banker will generally charge on allocation of capital and time, with the volume of transactions also coming into play.

Wealth in Australia is still largely first-generation and creeping into the second, reminds Norfolk, and has mostly been created through the domestic equity and property markets in recent decades.

Private banking is accessible to those who have who have made their money on this well-worn path — the mum and dad investors of Australia — not just the 1 per cent.

And speaking of 1 per cent, even if that's the only icing private banking can spread on top of your traditional returns, that could make for a feast in a low return environment.