Are you getting the most from your bank?

Never before has there been such a wealth of banking services on offer, including private banking. So why aren't more of us taking advantage? Emily Hohler reports

Not so long ago, individuals had limited choice where banks were concerned. You could either deposit your cash in a current or savings account, or, if you were extremely wealthy and wanted a more personalised service that included everything from on-tap investment and tax advice from experts to a shoulder to cry on, you would have to fork out for a private banking service.

Today, you can get almost any level of banking service you require - depending on the depth of your pockets. The 1980s heralded an era of wealth creation, the like of which has not been seen since the mid-19th century. As a result, the ranks of the super-rich have swelled, as have the ranks of the simply rich, a group increasingly referred to as the mass affluent'. This is clearly illustrated by the changes to The Sunday Times Rich List. When Labour came to power in 1997, Britain's 1,000 wealthiest people were collectively worth £98.99bn. Today, there are 40 billionaires, and those 1,000 people own £249.615bn between them. According to last year's annual World Wealth Report by Capgemini and Merrill Lynch, there were 383,000 people in the UK with $1m to invest at the end of 2003, an increase of 8% on 2002, and more than 30,000 of these have more than $30m in assets under management. All this means that there is lucrative business out there for the banks, and they want your custom.

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Interestingly, they are not proving very adept at getting it. While the world's wealthy now globally own $28.8trn, private banks have just $4.6trn of that total under management, according to Scorpio Partnership. That represents a penetration of only about 16% of the market. Even in a sophisticated market like the UK, reports Tulip Financial Research, 32% of individuals with a minimum of £250,000 in liquid assets rely exclusively on their own investment skills, and those who do take advice, seek it predominantly from independent financial advisers rather than private banks. Perhaps surprisingly, Tulip also found that the wealthier you are, the more likely you are to eschew advice. In its 2004 survey, which sampled a cross-section of high-net-worth investors, the 32% who relied on their own investment skills owned an average of just under £1m in liquid assets, compared to an average of £647,000 owned by the remaining 68%. As John Clemens, managing partner of Tulip, told the FT, "If you are wealthy, you either make your own decisions or you use an IFA (independent financial adviser): if you are seriously rich you probably just use yourself These wealthy individuals are a mix of business owners, senior business executives and professionals - they have experience in finance and think their investment abilities either match or, in some cases, exceed the abilities of advisers."

Today's information-rich age may make the wealthy more sophisticated investors, but going it alone is not necessarily a good idea. JP Morgan Private Bank, which conducted a survey of the Forbes' Rich List, found that the rich are spectacularly bad at hanging onto their money. Of the 400 names on the original list, published in 1982, just 50 of them remain. One of the main reasons for this is that they fail to diversify, sticking instead with what they know - ie, what made them rich in the first place. They also tend to spend too much. Stanley Kogelman, an asset strategist at JP Morgan, says that during periods when single-digit returns are the best investors can hope for, the rate at which the super-rich spend matters more than they might think. If stockmarkets rise 7%-8% over the next seven to ten years, and inflation runs at about 2.3%, those living off fixed assets should spend no more than 4% of the current market value of their available assets.

So going it alone, however confident you feel about managing your hard-won cash, may not be such a good idea. The good news is that if you are seeking advice, the marketplace is now highly competitive. According to Datamonitor.com, there are now between 100 and 200 firms offering wealth management or private-banking services in the UK. Deciding between them isn't easy. The first decision to make is whether you want a private banker or a wealth manager, says Philip Coggan in the FT. The private bankers are selling a "full service", which means they provide tax and legal advice, advice on succession planning and education issues, and look after your money. At Citigroup Private Bank, they even offer an art advisory service. "Wealth managers, in contrast, just focus on handling your money."

Your choice will, to an extent, be determined by how rich you are. Aside from a minimum income of, say, £50,000-£100,000, you will need a minimum of investable assets. The private banks differ widely here. Natwest's minimum threshold is a mere £200,000 in liquid assets, but Investec is really only interested if you have a portfolio of £3m and above, and Morgan Stanley requires a minimum of $10m. Globally, the business is dominated by the Swiss, Americans and Germans. According to Scorpio Partnership, the three countries have nine of the top ten private banks by asset size (the exception is Hong Kong and Shanghai Banking Corporation). UBS and Merrill Lynch are the giants in the top ten, with with more than $2,000bn of assets under management between them. Six of the top ten banks have less than $200bn each. Out of the giants' league (the likes of UBS and the private-banking arms of high-street banks, such as Lloyds TSB or Barclays), there are the small, independent players, such as Charles Stanley and Tilney. Some of the latter still operate as independent businesses, even though they are owned by larger organisations. For instance, Coutts & Co, Adam & Co, Child & Co and Drummonds are all owned by, but run independently of, Royal Bank of Scotland (RBOS). The affiliation can be highly advantageous, not least because if there is a good reason for a client to use debt, the RBOS provides a bank balance sheet with which to do that. Larger organisations are also at an advantage when it comes to implementing and administrating complex new international standards in the industry. The downsides are that private banks linked to larger organisations may be encouraged to sell you products from that organisation.

And what can you expect for your money? A personal banker, with a range of staff at his disposal to service your needs. You might get a dedicated broker, says Lucy Warwick-Ching in the FT, and a team of investment bankers who keep you informed about the latest venture-capital and private-equity opportunities. They will be able to offer you hedge funds and structured products that are more like the products sold to investment institutions than those sold to private investors with less money to invest. If you have no wish to get involved in the day-to-day running of your financial affairs, private bankers will take control of everything for you. They will just ask for your signature and forward the cheques. Their services don't stop there: they can also work wonders with inheritance schemes and offer practical and spiritual advice, for instance, on how to avoid spoiling your children and how to keep a family business humming along if none of the children want to be involved.

The big question is, is it worth it? The (wealthy) public look as if they still need quite a lot of convincing. Even those who do use private banks do not tend to use them for investment advice. Tulip Financial Research found that only one in five private-banking customers uses their accounts for investment advice, and only one in 12 for tax and trust management. And certainly, viewed from the perspective of a retail customer, high-net worth customers look as though they're being ripped off. But statistics are not the whole story. Managing - indeed just hanging onto - a great deal of money is not easy, particularly if managing money is not what you do. Private banking is not just about poncey chequebooks. It's about someone knowing your financial affairs so intimately that they can guarantee a mortgage after a single phonecall; it's about getting an investment strategy that is exactly right for you; it's about structuring complex financial deals. It may be more, or it may be less. And that's the great thing. You choose.

How to choose a bank - and what to expect when you do

The flourishing of the private-banking sector has led to greater transparency, which is good for the consumer. The well-established annual PAM Directory publishes league tables based on assets under management (the most widely used benchmark of the health of private banks) and client numbers.Wealth management consultancy Scorpio Partnership has also been benchmarking private banks since 2002, using a methodology similar to PAM, and Euromoney magazine now publishes an annual survey of the best-in-class private banks, conducted on a peer-review basis (see tables, below and right).

Choosing a bank is a highly personal business. Word-of-mouth recommendation will very probably come into it, and you will have your own instinctive preference. You may be drawn by the old-fashioned, clubbable atmosphere of a bank such as Hoare & Co, or the discretion of a Swiss bank - or you may simply be after the scale and breadth of expertise offered by a huge global corporation such as UBS.

The basic process, whether you choose to go down the private-banking route or the wealth-manager route, will be much the same. The private banker (or wealth manager) is the fulcrum of the relationship with the client, and over time should get to know you extremely well. The initial assessment should take into account your complete financial position, from the overall risk-reward profile to the tax position, currency position and income requirements. The results of these first meetings can be surprising, says the Investors Chronicle. "Private bankers say customers often have wholly inappropriate asset mixes in their portfolios." This may be because clients have become unduly risk-averse because they have just lost money. Agreeing to an allocation of assets that suits your own personal needs and risk profile is called tactical asset allocation'. It is about where to invest, when to invest, and what to invest in.

Most private banks will expect you to hand over most, or all, of your portfolio to them, and they will manage it on your behalf. They will offer two types of service; discretionary and advisory. If you choose the discretionary service, once your strategy has been thoroughly discussed, the bank will take your portfolio off your hands. With an advisory service, your private banker will contact you when a new investment opportunity comes up and, if you agree, they'll then invest on your behalf. This service is more expensive as the client expects frequent phone calls. For this reason, there is a higher threshold of assets - Investec Private Bank, for instance, manages most of its portfolios on an advisory basis, which is why it targets clients with portfolios of £3m or more. Private banks vary widely in what they offer, but they will all offer a lot more than investment advice. Investec, for instance, offers private clients' treasury and banking services; specialised lending, structured property finance, trust and fiduciary services; and private client investment banking designed to meet the particular needs of clients whose wealth is tied up with their business. No bank can offer the best advice in every field, justas their investment products will not be the best on the market.A good private banker will be honest about his or her company's strengths and weaknesses and make sure that you play to their strengths.

Check that the fee structure is transparent. Clients should make sure that they are the only person paying their banker, so the latter is not receiving commissions from third parties. Very few private banks offer a service that will advise on overall strategic asset allocation for a flat fee, then leave it at that. Be wary of private banks that appear overly keen to steer you towards their own collection of funds and investment vehicles. They may be the best; they are probably not. It is vital there are no conflicts of interest.

Your initial choice of bank is important. Although your private banker will be keen to hang onto your business and keep you happy, if you do decide to switch, this may be easier said that done. Some strategies you have pursued may be hard to unwind - if, say, there is embedded capital gains tax in the portfolio - and changing banks may well mean new fees to set up the portfolio.

'A chance to show our mettle'

HSBC's private bank was deemed third best in western Europe in a Euromomey magazine survey. chief executive Marcus Gregson talks to MoneyWeek's Emily Hohler and explains why.

Marcus Gregson, chief executive of HSBC's private bank in the UK, is the sort of man you would instinctively entrust your money to. Charming, down-to-earth and bubbling with schoolboyish enthusiasm - everything is terrific', or super-dooper' - he has that particular skill of making you feel instantly that he's on your side. He also exudes experience - hardly surprising, given he has been in the business for more than 16 years. Gregson was hired in 1989 by Samuel Montagu, then part of the Midland, to set up a private bank. A few years later, HSBC bought the Midland, but Gregson has remained in his post to this day. "So I've been midwife, parent and now proud grandparent," he says.

He has good reason to be pleased. In Euromoney's 2005 survey, HSBC was deemed the third-best private bank in western Europe and the second best at relationship management. Not bad when you consider that the bank is competing with the likes of Coutts & Co, which has had a headstart of around 300 years.

However, Gregson is the first to acknowledge that such plaudits are no reason for complacency. Indeed, he says, there is a lot of client dissatisfaction around at the moment. "There is a hugely variegated market out there - you can take advice from stockbrokers, wealth managers, IFAs, private bankers - but expectations are not being met. This is partly because of the 2002-2003 stock-exchange slump, and partly because private banking is extremely difficult to do well."

Perhaps, I suggest, the perception that private banking is a bit of a rip-off, combined with the financial sophistication of today's wealthy elite, partly explains why, according to research, high-net-worth individuals resist paying for advice. "It is absolute nonsense that the wealthier you are the less likely you are to seek specialist advice," he says crisply. "We deal with a lot of extremely successful businessmen, and I don't underestimate them. They are a darned sight smarter than I am - otherwise I'd be sitting out there asking a private bank what to do with my money - but occasionally, we'll know far more about our specialist subject than they do, and that's where we can help."

Before that happens, a bank has to get to know its clients and their financial affairs in intimate detail. After all, he points out, if someone comes to you and says they've got £50m and they're going to give £5m to their son and leave the rest to the cats' home, you're not looking at the same investment objectives as those of a wealthy aristocrat whose sole aim is to preserve the family estate intact for generations to come. "Once you've established your client's DNA, the next thing is to establish the DNA of your investment vehicles. Then you've got a sporting chance of getting a match. Thirdly, you need to watch your strategy like a hawk. It's really pretty simple."

The theory may be simple, but in practice, private banking is far from straightforward. Clients expect help on every level - from major investment decisions to sorting out the teenager who has lost his wallet and passport in New York on the Friday before a Bank Holiday weekend. This level of personal service tends to be associated with the smaller private banks, such as Hoare & Co, but it shouldn't be, says Gregson. "If you dither on some matter, or tell clients you've got to send it up to group', they lose faith", Gregson says, going on to tell a story about a client who, along with his entire business, defected to HSBC from another bank because it refused to lend his son the money to purchase a house to live in during his time at Bristol University, which he was happy to guarantee. "I was able to tell him on the spot that he had the money, and that he would get a letter of confirmation in 24 hours. It was an expensive mistake for the other bank."

Delivering on these sort of levels is not cheap, but, from speaking to Gregson, it seems you can at least be sure exactly what you're getting. Firstly, while only too keen to promote HSBC's strengths (property, hedge funds), Gregson says it would be ridiculous to suggest that any bank, whatever the breadth of its expertise or geographic reach, can be the best at everything. Secondly, he is very keen on open architecture and avoiding conflicts of interests. "They can't be managed," he says. "So you have to avoid them. If you try to be a wealth manager and an asset manager, there is a conflict of interest, because as an asset manager you want to sell your product. In a retail environment, advisers are paid commission that also warps behaviour. Our loyalty is to performance, not a brand. That is why we agree a fee with our client and then go and strike the best deal we can for them."

To become a private-banking client of HSBC, you need a minimum of £1m in liquid assets, although the bank's footprint is the super-rich, who have considerably more, in particular entrepreneurs who have made a lot of money selling their businesses. The reason for this is simple, says Gregson: private bankers aren't paid by the hour, they're paid for the advice they give, and that means you need scale. But there is another criteria, he adds, and that is that your affairs are complicated. "If you can get all the advice you need at Bradford & Bingley, we're probably not right for you," he says. "We want a chance to show our mettle.