Definition
of Private Banking |
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As
a phrase, the term 'private banking' is becoming
so over-used that it is close to losing the cachet
that once attached to the intensely secret dealings
between a banker in his Zurich parlour and his
wealthy visitors.
Almost
every bank with any pretensions to being international
offers special rates of interest to wealthier
private depositors under the heading of private
banking. Minimums have fallen to $10,000 (or lower)
in many cases, although some firms still maintain
more traditional entry levels of $100,000 or higher
before offering special treatment to their clients.
The
truth is that there are vast numbers of banks
competing ferociously to capture the admittedly
even vaster numbers of clients with money to invest.
The customer with $20,000 dollars of spare cash
today is worth the time of a 'relationship manager'
in the hope that he will have $200,000 or $2m
of spare cash tomorrow. It's a marketing exercise.
Also,
the expression 'private banking' is nowadays more
to be seen as a gateway into investment management
in the broader sense than as offering a confidential,
almost family relationship with a man to whom
you entrust your money. Those relationships still
exist in the traditional places, but they apply
more to extremely rich people than to moderately
wealthy or well-off people who want more personalised
treatment than they can get from their high street
branch, or their regional 'personal banker'.
Here,
'private banking' is taken to mean investment
management offered on a personalised basis by
the bank to an individual (or indeed his company)
with disposable wealth of more than $100,000.
'Private banking' is obviously not synonymous
with 'offshore', but the costs of a personalised
relationship begin to be worthwhile at the $100,000
level in the light of the superior gains to be
realised from offshore investment.
Some
care is needed when approaching a 'private banker'
or a bank offering customised relationship management
(there are lots of expressions all amounting to
the same thing). What matters is the structure
of the bank. This is not to say that one kind
of bank is necessarily more reliable than another,
just to understand why the bank is offering personal
attention, and what it hopes to gain from it.
Some
banks are little more than front ends for investment
funds. They may be safe enough, but are they objective?
Perhaps it is best to look for a bank that is
trying to make money out of private banking as
an activity in itself, rather than just using
it as a scoop for customers for its financial
products.
Private
banking doesn't just mean investment: banks like
to lend money, and especially to richer people.
This raises the question of how a private banker
is going to get rewarded. Depositing money with
a bank is reward enough, of course, whether into
the bank or into one of its financial products,
but private banking when it has an advisory nature
and is not accompanied by lending or borrowing
may be fee-based. Provided the sum involved is
large enough to justify the fee costs, an advisory
private banking relationship is probably a good
way to go. The bank will get the benefit from
time to time of being able to offer bridging finance,
or of holding large amounts in transit etc. It
can hope for more substantial involvement with
you in future. But the immediate relationship
is between financial adviser and client.
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Residential
Rules For Private Banking
Offshore
banks, or the offshore branches of banks based
in 'high-tax' countries, may apply some residence
tests when you approach them. The situation is
odd: there are hardly any countries which make
it illegal for their citizens to have offshore
accounts (there used to be plenty, but the abolition
of exchange controls has changed all that).
The
illegality comes if you don't declare the account
(in some cases) or if you don't declare the income
from it (other cases). In addition, the EU Savings
Tax Directive, introduced in 2005, has meant that
savings interest received in any of the signatory
countries will likely be subject to a withholding
tax, or to information exchange, in order to ensure
that it is taxed in the EU resident's home country.
However,
the offshore bank may well not be allowed to offer
you the account in the first place if it is not
regulated and licensed in your home country. The
publicity of such banks normally puts the onus
on you to abide by the regulations of the country
you are in; their practise is variable when it
comes to accepting your business.
The
Internet has of course sharpened the banks' dilemma.
If a bank is not licensed in a territory, it clearly
can't mail leaflets into it, or advertise on television
locally. But the Internet jumps these barriers,
to the extent that a bank cannot (and of course
doesn't in fact want to) prevent a prospect in
a regulated country from seeing its publicity.
If the prospect then approaches the bank of his
own accord, is the bank to turn him away because
he found their publicity on the Internet? The
answer to this question probably depends on the
regulatory regime applying to the offshore bank
in question.
See
Regulation of Alternative Investment
for more details of the regulatory regime in different
countries. The licensing regime for offshore banks
is explored in www.lowtax.net
under Law of Offshore for a number of jurisdictions.
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How
To Find A Private Banker
Given
the snowstorm of advertisements and mail-shots
which surrounds richer people, the problem might
seem to be more one of avoiding private bankers
than finding them. But most of the offers are
from banks wanting to sell their own services.
As explained above, a 'private banker' is probably
best approached as an objective financial adviser
rather than as an investment-provider, and may
also not be the most effective choice for a reasonably
sophisticated investor who wants to play an active
role in the management of his investments.
Many
people may have contacts or advisers who will
be able to recommend a particular bank, but assuming
a blank sheet of paper, then the first step is
to decide between an onshore or offshore bank.
This will depend on an individual's residential
situation, but if you either already have residence
in a low tax area, or plan to have it in future,
or want to explore trusts and other 'distancing'
techniques which can legitimately reduce your
exposure in high-tax areas, then you are probably
going to choose an offshore bank.
See
the investorsoffshore.com
DIY investment selector for investment guidance
based on specific residential and investor profiles.
The
choice of an offshore bank is in itself a difficult,
and to some extent a circular task. You will not
find it easy to distinguish between the merits
of different offshore jurisdictions, or the banks
they offer, until you have got to know them quite
well. This is the point at which you might think
that an onshore adviser in your own home country
can help you - and it may be so, but remember
that only a very skilled, knowledgeable and above
all, objective, adviser is going to be useful.
Such a person is hard to find.
www.lowtax.net
is designed to help people who do not have access
to the perfect adviser we just described. www.lowtax.net
is not an investment adviser, and is no substitute
for professional advice, which is an absolute
necessity for anyone planning a move offshore.
But the www.lowtax.net
site does contain a wealth of information
about 26 offshore jurisdictions, which is designed
to help you to make a preliminary choice of one
or a few offshore jurisdictions suited to your
circumstances, which you can then explore in depth.
Assuming
that you have been able to choose a particular
offshore jurisdiction in which to establish your
investment base, you now face the problem that
people in that jurisdiction are quite likely to
be anything but objective when it comes to planning
international investment structures. It is therefore
likely that the best choice will be a bank which
has an international network, with a well-established
branch in the jurisdiction you have chosen. It
may even be that the head office of such a bank
can have assisted you in the choice of jurisdiction.
But beware: if a Zurich bank has just one branch,
in the Cayman Islands, which jurisdiction do you
think they will recommend?
Purely
as a factual guide, here is a list (in aphabetical
order!) of those offshore jurisdictions offering
a reasonably wide choice of banks:
Bahamas
Cayman Islands
Isle of Man
Jersey
Hong Kong
Monaco
Panama
Switzerland
Once
you have chosen a jurisdiction, it is quite easy
to find the names of the banks which operate there.
A number of banks will be available in the Private
Banking Providers Plaza; and our section Gateways
To Offshore Information Providers will lead
you to further sources of such information.
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