Private banks have been around in the UK since at least the 18th century. They tend to offer discreet services to very wealthy individuals, hence there are some names unfamiliar to many of us, such as Leopold Joseph, Arbuthnot Latham and Butterfield Bank.

Others, such as Coutts & Co, famous for being the Queen’s banker, have a rather higher profile. Clients have typically needed assets in excess of £1 million to be considered by private banks. In return, they will be assigned a private banker who is a single point of contact for all their financial requirements.

Substantial assets
More recently, the ‘big four’ high street banks have got in on the act. They have either set up or acquired private banking arms and some of their offerings have less stringent criteria than traditional private banks. Lloyds TSB, for example, offers two tiers
of services, one for those with more than £100,000 worth of savings and investments and another, more akin to those offered by the private banks, for people with savings and investments of £1 million or an annual salary of over £250,000.

Nick Gill of Coutts & Co says the bank has three core offerings. The first is its day-to-day banking service and includes a team called Coutts 24, which is based in the office and on call 24 hours a day. The second core offering is its investment service, providing assistance in investment management, including hedge funds. Thirdly, it offers trust and tax services.

Natalie Merrens, Kleinwort Benson’s head of product advisory, says it has a broad spectrum of clients: ‘We look for clients with £1 million of investable assets.’ The bank
also has smaller clients. Younger investors, for example, with a few hundred thousand pounds and the potential for growth.

‘We are one of the private banks that takes clients on the smaller side if we think there’s potential. That person may be worth £2 million or £3 million in a few years’ time,’ says Merrens.

Coutts adopts a similar policy. ‘A rough guideline is that we are looking for people with about £500,000 worth of investable assets,’ says Gill. The bank will, however, take on clients who do not yet meet these criteria but have the potential to build their assets over time.

A variety of approaches BDO Stoy Hayward Investment Management is an example of
a firm that, although not strictly a private bank, operates in this space. It sets no particular entry barrier on the size of a client’s assets. ‘You have to provide a structured service, but that’s really a “door opener”,’ says Matthew Phillips, investment director.

‘It needs to be permeable. For clients with £50,000 to £250,000 you might offer a discretionary fund of funds as a one-off service then maybe a retainer. At £250,000 to £2 million, you would offer a discretionary service, which is much more proactive, with an annual management charge.’

It is not feasible to offer private banking services to clients with portfolios that are any smaller, in Merrens’s view: ‘It is very hard to offer a client of that size a spread of investments without the costs having a significantly detrimental effect. On some of the retail hedge fund products, the upfront charges are quite high if you are a small investor. It is only as you get larger that you get the benefit of institutional-type fees.’

Says Phillips, ‘We are looking at the so-called “mass affluent”. We find that people are inheriting from their parents, or they have a tax-free cash sum from a pension, or they are selling a small business. Traditional routes for those people to get high-quality advice when they come into this money have been closed off. The high street bank is not offering that sort of service, so they’re stuck somewhere in the middle.’ In his view, this is the space that is being filled by wealth managers.

Banking or wealth management?
The term private banking has become almost interchangeable with wealth management, a term which originated in the US in the 1990s as a description of services provided by broker dealers, banks and insurance companies.
Both offer a highly personalised service aimed at preserving and growing their clients’ assets. The major difference is that a private bank also provides banking facilities. Private banks tend to be regarded as more exclusive than wealth managers.

‘The old, traditional private banker was very much a relationship manager,’ says Phillips. ‘The private bank took hold of your assets and dealt with your financial side. It was seen as very, very top tier; part of a suite of advisers that included your lawyer and your accountant.’

Wealth management, opines Phillips, has evolved more from the independent financial adviser (IFA) side: ‘It is much more about looking at the client – not just their bank account but areas such as tax and estate planning. This is along the lines of what a traditional IFA would do. The commonality is relationship management.’

Kleinwort Benson accesses the entire market to find the most appropriate solutions for its clients. ‘Between five and ten years ago, “best-of-breed” platforms started
to appear,’ says Merrens. ‘Banks saw this as saying, “We are good at some things and not so good at others. We should be able to source expertise and products.” This even applies to banking facilities. [Private banks] can invest with whichever bank is offering the best interest rates. It works across the board. If there is a product or service that [private banks] think is cutting edge, we will use it.’

The best of the best
Barclays Wealth adopts a similar approach in its private banking and wealth management service. While it is keen to tap into the expertise and resources of the Barclays Group, sourcing products and services from Barclays Capital and Barclays Global Investors, it is not tied to them exclusively. Its aim is to source the best investment opportunities in each category and deliver objective and independent advice.

‘Most private banks sprung up out of clients’ need to have more than just a stockbroker,’ says Merrens. ‘Clients’ circumstances have become financially more complicated. They want to invest in alternative asset classes but they also have banking and tax needs.’

To service its clients effectively, Coutts has designated a number of specific client groups to cater for varying requirements. ‘A professional may have different needs to a landowner,’ points out Gill. ‘And a sportsman may have different needs again, as
they may earn large sums over a relatively short period.’

As clients become more sophisticated and demanding, private banks have to work harder to meet their needs. ‘High-net-worth individuals tend to know other high-net-worth individuals,’ says Merrens. ‘It is important to be as transparent as possible. We have a broad spectrum of clients. A lot have been with us for many years and they want an old-fashioned banker. They tend to be less demanding. They have seen a number of crises and are not fazed by them.’

Equally, however, the bank has other investors who have made money in financial markets and are very sophisticated. She adds, ‘We have entrepreneurs who pick up buzzwords and key ideas and get a level of comfort from this. Our job when we talk to the client is to work out their level of understanding.’

Developing new services
Gill says that Coutts’s offering has evolved with its clients: ‘We are using hedge fund products that fit in well with clients’ objectives. We are also doing a number of other things due to client demand. For example, we have set up a philanthropy team that works with a number of charitable intermediaries.’

Charges for private banks vary enormously, and many are negotiated on an individual basis. Kleinwort Benson’s clients, for example, have a range of options in terms of how they are charged; through an annual management fee, an upfront charge or advisory fees.BDO, too, is flexible in its charging structure. ‘Where we like to start with clients is on a fee basis. For example, a pension transfer piece of work would be judged on time,’ says Phillips.

‘But investment management is ad valorem. It is important to set that out at the beginning; that the client is paying for advice, not for a product.’

At Coutts, clients are asked to maintain a balance of at least £5,000 in their current account in order to avoid banking charges. For its investment services, Coutts charges a one per cent annual management fee, and underlying fund charges are levied. ‘From time to time we also do normal things on a chargeable basis, such as a trust fund,’ says Gill.