Private banking: the myth and the reality

These days nearly every financial institution offers some kind of private banking service. But with most, the result is high charges and poor advice, says Merryn Somerset-Webb.

There is apparently a "great private banking myth" out there. According to a press release put out by private bank Cater Allen, "one in four people would switch to private banking if they had the money" but most of them also think that they don't have the money: on average they think you need to have around £450,000 to make the switch.

I suspect that this will come as news to anyone with an income over around £70,000. These days pretty much every financial institution out there offers some kind of private banking service and they certainly aren't shy about offering it to members of the mass affluent: if you're a target household you'll be as used to getting offers to join one exclusive' banking service or the other as you are to getting pre-approved' credit card offers.

Earn £75,000 a year? Then you can get private banking from most of the big players in the market from NatWest to HSBC. Earn less? Not a problem. You can still get private banking from HSBC as long as you have £50,000 worth of savings or a £250,000 mortgage. Can't even manage that? Then try Barclays which will offer you its private banking service for £25 a month or perhaps even Cater Allen itself, which wants you to know that it will take almost anyone on as a client: all you need to do is keep a minimum of £5000 on deposit with them.

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The 'benefits' of private banking services

So what do you get if you take this lot up on their offers? In the past private banking was all about giving the very rich a very personal service a reasonable clued up personal banker (a cross between a genuinely independent financial adviser and an old fashioned bank manager) to talk to at any time of the day for example, along with professional advice on everything from mortgages to pensions. Basically a very polite and personal all round service and a very smart looking chequebook.

Today you can still get just that from the real private banks Hoare & Co for example. But the rest of them aren't quite so grand. At the bottom end of the market you might not even get to talk to the same person every time you ring. Instead you'll just go through to a call centre: it might be an "exclusive" call centre in that it is in the UK and will be better staffed than you are used to, but it will still be a call centre.

A little higher up the tree, you will get someone nice to talk to but odds are he won't have that much time to shoot the breeze with you about your retirement plans: several other hundred people will know his direct line number too.

You'll also find that your free' private banking doesn't come cheap. There are the fees levied by the likes of Barclays but those aside the private bankers have just as many money grabbing wheezes to their names as ordinary bankers.

The classic is interest, as Laura Starkey points out on the Motley Fool. NatWest offers you 1.0% on balances over £25,000 and Cater Allen 1.27% on over £10,000. This is very poor indeed given that some perfectly ordinary accounts pay over 5% on balances. And don't think you won't get charged if you bounce a cheque. Modern private banking is not a benevolent gentleman's club: you will.

Private banking: why banks offer the reasonably well off these special accounts

Then there is the up selling. Why is it that you think banks want to offer the reasonably well off special accounts? Kindness of their heart? Hardly. It's because they want to up sell you their other products. A current account is just the beginning. Once they've got you feeling all loyal to them what with the call centres, the special chequebook and the nice manager in the smart suit, they hope that you'll come to them with all your other money needs your mortgage, your insurance and all those other lovely commission paying products.

And lets not forget "wealth management." It isn't for nothing that many of the high street banks look not at income but at savings when they define private banking client criteria (a minimum of £100,000 at Lloyds and £50,000 at HSBC); you see it's the savings they want. Once they've got those they can shift you over to their wealth management departments who can then channel your cash to their underperforming in-house investment funds.

Result? If history is any guide, underperformance for you and huge fees for the banks. Cater Allen's MD has a go at suggesting that private banking is somehow attractive because it "still retains a mystique." But who wants mystique from a bank for heavens sake? Wouldn't we all just prefer transparency and value? I would.

Private banking: the one reason why you may want to switch

So is there any reason to take your account private? One, says William Kay in the Sunday Times. "They are about the only lenders still comfortable offering mortgages of more than £500,000 - £1m" something that might make it worth stomaching their "high charges and poor advice." I can't imagine why anyone would want to take out a £1m mortgage at the moment but if you do it is a reasonable point. Otherwise, I can't really think of much reason to make the switch.

This article is taken from Merryn Somerset Webb's free weekly personal finance email, Money Sense

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.