Lifting the Lid on Private Banking in Australia

I read a comment that you need $50 million just to say hello to a private banker in Geneva Switzerland or New York, but Australia’s considerably younger private-banking industry is rolling out the red carpet to new clients for much less.

So from a prestige sense, have you ‘financially arrived’ when you receive an invitation to join an Australian private bank, do you actually get an invitation or is it all just a bright ribbon wrapped around a standard bank offering?

Is the service offering worth the additional fees and charges?

Brief History of Private Banking¹

The history of Private Banking started as early as 2000 BC and flourished in Babylon. The first record of a ‘private banking system’ was the IGIBI Bank of Babylon. Some two centuries later (in Greece) private bankers and government specialised in money lending, changing of coins, letters of credit and paying interest on deposits.

More recently (17th-18th century) European banks (Coutts formed in 1692, Ferrir Lullin formed in 1795 & Lombard Oldier and Cie formed in 1798) have tended to be the home of private banking.

Interestingly, the term ‘private’ also alludes to banking secrecy and the minimisation of taxes through careful planning and the allocation of assets, or by hiding assets from taxing authorities. The Swiss and other European Private Banks have long been criticised for this practice alongside individuals and the evasion of taxes.

It is worth noting that tax fraud is a criminal offence in Switzerland, tax evasion however is only a civil offence. This means the banks are not required to notify taxing authorities!

In Switzerland, the term "private bank" refers to a specific definition in the Swiss Banking Law. It applies to private banks whose legal status is one of sole ownership, registered partnership, limited partnership or limited partnership with shares. The specific status of private banker is justified by the presence within the bank of at least one partner with unlimited liability for the bank's commitments.

For many of us, Private Banking  evokes images of free enterprise, independent personalities and thinking, long standing (mahogany) tradition, discretion, an open attitude and above all the mastery of a profession, that being asset management and securities trading.

But do these same virtues apply to Private Banking in Australia?   

A study undertaken in 2012 by the CoreData Group² would suggest that Australia’s private banks have a long way to go to achieve the status of their European counterparts! The study also concluded that there was no clear market dominance by any one bank in the private banking arena.

The study provided one typical example as to what might explain the lack of market dominance or a rush into private banks by wealthy Australians. An existing and wealthy private banking client was looking to place cash ($500,000) on deposit for several months before requiring the use of these funds again to use in his business. This client decided to call upon five separate private banks to obtain a simple quote to compare with his existing bank. One private bank called back in two hours (and got his business) while the others took 12, 36, 46, 48 and 72 hours (or 3 days) before responding to his request. In this example, the client’s existing private bank had lost his business as they had not remained competitive, had not provided a ‘best of breed’ interest rate and had not kept abreast of his affairs.

The writer did a quick ring around to two private banks more recently to test this theory, requesting the best at call rate for $500,000 if he was to place his business with them. Interestingly, he was able to secure a considerably higher rate, as much as 0.70% higher by simply applying online with the bank(s) or even walking into one of their branches!      

The study also went on to explain that private bank customers were dissatisfied with the high level of multiple fees, they were unimpressed with the overall services provided and many were upset with the performance of their substantial investment portfolios for the fees charged.

The ironic twist here is that the (perceived) added sophistication of private banks was unable to soften the negative returns to their clients during the recent Global Financial Crisis, although more sophisticated tools were available to these bankers that could have softened the blow to their clients saving them many millions of dollars!     

What is happening then?

The big four banks are comparatively recent entrants to private banking. Private Banking in Australia was born off the back of a solid banking foundation. All the big banks have since spread their services into the Funds Management, Wealth and Investment Management and Insurance areas.

But based on many of the results of the study referenced above, they don’t appear to have developed these new areas with the same ‘tradition’ as their banking and lending services.

Several examples to consider;

1. Australian Private Banks promote their ability to source new investment opportunities not generally available to the general public i.e. share floats or most recently Hybrid offers. Two out of the big four private banks that were researched for this article had heavily promoted  their client base with ALL of the major Hybrid offers over the last two years, offering them to invest as a ‘valued customer’ of the bank.
   
   
2. Australian Private Banks offer the full suite of banking related products, including term deposits. The Treasury departments of each private bank will advise the private bankers what is the maximum rate (known as pricing transfer) that they can offer a client. It is then up to the private banker to offer an interest rate that they think their clients will accept. In other words, as a private banking client, you are not guaranteed the best market rate from your banker. In fact, you may be able to get a better rate from the same bank at the local branch, depending on what the private banker was willing to offer you.
   
   This is because whatever margin (under the maximum interest rate) the banker can achieve, this amount will be added to his/her bottom line, determining whether or not they will receive a bonus at the end of the specific reporting period. So the banker is definitely conflicted, if they offer their client the best rate available, they may get a lesser bonus!
   
   
3. With respect to home loans, the manner in which a private banker operates is again under question as being best of breed for their client. The size of a client’s mortgage is not really an issue to them as long as it meets the bank’s minimum entry criteria, the main focus is how much of a discount to the standard variable rate they need to offer to “hold onto the business”. If a more active client that had time to compare other interest rates on offer, then they might challenge their private banker to match or better a competitor’s loan rate.
   
   If however the client is time poor (the very client that Private Banks promote that they assist) then they will generally not be aware that they are getting a higher loan rate than other clients, with potentially much smaller debit balances.
   
   
4. Generally speaking, if a private banker is dealing with a time poor executive who works in the finance sector they are more likely to offer a more competitive rate than say a doctor who may be less skilled in areas relating to finance.
   
   
5. If you receive advice from an adviser that the private banker has referred, as part of that bank’s program to grow their respective wealth management business, the adviser will generally promote the home brand.
   
   For example, a WBC private bank adviser is more likely to promote BT and WBC in their recommendations, CBA, more likely to promote CBA and Colonial First State, NAB, more likely to promote NAB and MLC and ANZ, more likely to promote ANZ and ING. Again this practice tends to conflict with the modus operandi that you would generally want from the higher fee model private bank, independent thinking and free enterprise.    |
   
   
6. A final example is probably the purest of them all. The client and private banker / adviser relationship. In order to provide the client with best of breed services, the private banker and private bank adviser must build up a strong and communicative relationship. Once this bond has been established, then ANY relationship should be more successful. The problem with private bank clients is that given the very nature and size of their wealth, in my experience, they can be very protective against providing all their personal information quickly or early in the relationship.
   
   While everyone is entitled to pursue their own careers in a manner in which they choose, when it comes to the traditional ‘swiss’ private bank model, the structure in Australia as we have explained above is different.
   
   Bankers and advisers in Australia are employees. They are not owners of the business nor do they have equity ownership that allows them to make meaningful or structural changes to the business. When the banker / adviser leaves to further their career, seek a higher remuneration, change professions etc, then the private bank client can be left without their trusted relationship and then must start the process again with their new banker / adviser.
   
   To some extent, the writer can personally acknowledge this having worked inside four of Australia’s private banks!     

The internal machinations of the private banks are many and varied. They are indeed comprised of many very high net worth individuals, some who are time poor and some who are also unsophisticated in many areas of finance. These clients ultimately rely on the professionalism and integrity of their private bank advisers, to do the right thing by them.

All the Australian domestic private banks are owned by the general public through shareholding, who seek a return on their invested capital. Maybe the best thing for private bank clients is to invest back into the very bank that provides services to them and obtain a refund on the fees paid to the private bank through the receipt of your six monthly dividend cheque.

Consider this one final point - if (for example) private bank no.1 had the best mortgage product, private bank no.2 had the highest term deposit rates and number one investment portfolio and private bank no.3 had the number one credit card facility AND at this time, private bank no.4 was going through a restructure and was falling behind the other three, which loan, term deposit, investment or credit card facility would the adviser from private bank no.4 recommend to you, their highly valued customer…………………there is NO independent thinking. They MUST recommend products from private bank no.4! 

The writer was a senior adviser and strategist for several Australian private banks over the past decade.

1 www.finanzinfo.ch – History of Private Banking
2 CoreData Group, Andrew Inwood, Managing Director, Core Data & The Australian Newspaper also featured excerpts May 15 2012 (Andrew Main reporter)