Private banks "kidnap" your wealth
Private banking is a big, global business, they generally make their money from multiple revenue lines - transactions, lending/credit, managing the liquid assets of their clients and product fees. Many private banks are extremely popular with the less-informed expat who perhaps lacks a comprehensive framework, the skills and experience for evaluating the services, expertise and value on offer.
It is not uncommon to see relationship decisions made upon 'tangibles' such as the associated prestige of holding an account and having the 'red-carpet rolled out', without regard to the 'intangibles' such as the potential conflicts of interest, product range, competency, charges, access or terms on offer. An ability to ask the right questions at the outset of a private banking relationship and the ability to avoid having to actually become a client and 'discovering through experience' is therefore critical to avoid future surprises and keeping yourself on a wealth-building trajectory. For wealthy individuals, there is no choice but to be extremely critical about how many private banks charge and to consider - where one has negotiating power given the level of assets involved - not signing the standard documents that banks put in front of you, but rather to set out your own terms, mandating your advisers to work in a way that makes sense for the expat himself. Even when the amount of wealth involved is not enough to dictate your own terms to the banks you work with, our suggestion is to agree in writing about the actual service you expect to receive and to make it clear what your expectations are. You must understand what you can and cannot get from your private bank, in order to reap the full benefit.
There is arguably far more to professional wealth planning and asset management than a private bank can and should provide. What's important for expats from one country and living in another, is that some local retail banks have set up 'private banking' divisions. These are typically staffed by young, inexperienced salespeople, employed to sell certain products that earn them bonuses, and maximise their companies' profits. This misalignment of incentive means the client experience and outcome is therefore a second priority - if even a priority at all. An expat typically needs a trusted adviser/steward that is not only able to take charge of asset management in relation to liquid assets, but who is able to help the expat with investments in property and anything else he is interested in. There may also be a family business in the picture and certainly asset protection, succession planning, and tax minimisation will be topics of interest to the expat. But the structure of a private bank typically means the salespeople (given they are typically less qualified than professional advisers) are entirely incentivised by the private bank to focus on income in terms of funds under management, discretionary management services and loans. Not only do the products of private banks often match up poorly against those offered from the wider marketplace, but they may confine advice to products rather than the expat's entire balance sheet/holistic position.
What clients of private banks really need before committing to a relationship is a trusted family adviser and continuity in relationships that avoids the expat having to re-educate relationship managers given the turnover and staff suffered (or encouraged) by the industry today (50% of private bankers quit within 21 months). Expats need to understand how parts of the banking industry often works (mercenary private bankers incentivised by numerous other private banks to flip their client relationships and churn their accounts for golden pay-outs) and the inability of those within private banking to align their businesses with the interests of their clients. You only have to Google 'private-banking scandals' to find 93.3 million results. The repeated high-profile failings of private banks have led to the creation of an asset management profession and both the multi-and single-family office, as ways for those with significant wealth (and awareness) to attempt to obtain better long-term outcomes.
Potential risks within private banking
- Pricing abuse
- Poor performance/churn
- Conflicted advice due to internal sales quotas/incentives
- High turnover of relationship managers
- Low professional qualification/skill and experience of individuals
- Misalignment of focus (inability to be holistic or independent)
- No actual 'planning' services
- Poor service generally
The above issues have resulted in many well-informed expats fleeing the private banking sector, turning to individuals to offer them what they do not get from banks. The independent wealth adviser, private asset manager, single family office, multi-family office and family business advisers are all products of the failings of the private banking and wealth management industry to serve the real needs of expats.
Conflicts of interest - everyone has them
Private banks typically have many conflicts of interest, and one of the challenges this industry faces is that clients are increasingly becoming aware of them. If you have an account with a private bank, they likely have a clear interest not only in managing your money but also in directing you to invest in products they have a financial interest in. These may include internal investment products from which the bank earns further fees, or third-party products from which the bank gets some form of benefit, whether through a retrocession (i.e. earnings kick-back) or something else. Transactions may give rise to revenue for the bank, and this may create an incentive to churn the account. If you use a trust company that is owned by a bank, does the trust company have an incentive to keep AuM (assets under management) with the bank as a means of enhancing overall revenue? For some banks, the trust function has traditionally been a cost centre, specifically for the purpose of expanding AuM. This lack of basic fiduciary duty or ability to act in the best interest of the client has decimated the private banking industry in more highly regulated and developed financial centres. However, if you turn to an independent investment adviser or independent trust company, or to an independent lawyer or accountant, can you be assured of freedom from conflicts of interest? In our view, the answer is always NO! Everybody has a conflict of interest of some kind. For the expat, the best thing is to accept this, and to be aware of what the exact conflicts of interest are, so they can be well managed. There is no replacement for the expat truly understanding how the private banking or wealth management industry works. The expat needs high-quality independent advice and this is initially typically best sourced from someone entirely independent. A trusted adviser - one who is not measured by what proportion of your assets they place into their internal products, but someone who is valued for objective advice and always having the client's interests at heart! This is a fiduciary, nothing less.
Questions for further reflection
- Do you understand how your advisers are compensated and what that compensation is? (This includes the individual relationship manager). Do these compensation arrangements suggest conflicts of interest or risks that need to be managed?
- Do you have a clear, documented investment policy statement? Does this explain a coherent reason why products popular with private banks should be best avoided?
- Do you have the right advisory resources available to you, allowing you to obtain the holistic input you need? Hallmarks of good advisers include:-
i. Starting with a documented financial plan.
ii. Acknowledgement of what they do not know, in a complex world where no one has all the answers. Do you have advisers who know the right questions to ask, and who can help you obtain the specialist needed to find the right answers?
iii. Independent certification as registered fiduciaries.
For the new generation of expats, paying a bank to simply preserve and manage their money is becoming less attractive considering low interest rates, government deficits, public spending cuts and growing global environmental concerns. Expats, conscious of these global challenges, are looking for organisations that can help them reach their financial goals while keeping a keen eye on what's happening in the world around them and helping them manage their responses to these events - on a behavioural and emotional level. This, however, was never the role of the traditional private bank. While expats do not expect their wealth managers to be perfect, they want to know their bankers and advisers understand and respect their desire to align their wealth with their values. For these expats, advisers are almost always necessary, but it is critical for expats to understand the role, and to manage their advisers the right way. Finding the right adviser requires that expats know what they need and know who they are looking for. In essence, a good adviser is one who has the interest of their clients at the forefront, and positions themselves as a true, trusted fiduciary. Innumerable instances exist of family wealth being devoured by banks. Bad investments, bad loans and bad advice. This is perhaps not surprising given many private banks are jack of all trades and masters of none. Letting a private bank "kidnap" your wealth can be detrimental without detailed thought. There are many situations of private bankers becoming the gatekeepers to your wealth, using your wealth that is not theirs to benefit themselves. It pays to keep an eye on the detail.
If you have questions about international pensions, savings, insurance, investment or you want to preserve, grow and transmit your assets/wealth or you are unhappy with the level of service/advice and the performance you have been receiving from your (private) banker/financial adviser, please contact us without any commitment - firstname.lastname@example.org - to discuss your options.