Definition of Private Banking

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.