Private-BankingEasy

4 min read · 641 words

What the seat actually does

A private banking seat looks after the money of an individual or a family rather than an institution. The difference is not size. An institution has a mandate, a horizon and a benchmark written down; a household has a tax position, a business it may still own, children, a mortgage, a currency it actually spends in, and its own tolerance for watching a number fall.

Both sides of the balance sheet are in scope, which is what separates this from asset management. A portfolio can be lent against; a property can be financed; a concentrated holding somebody founded can be hedged or borrowed against instead of sold. What the bank arranges is often a liability, and the assets are what stands behind it.

• Holding it — custody, reporting, and the plumbing behind every position. See clearing and settlement.
• Lending against it — credit secured on a portfolio, where the collateral moves in price every day. See margin and collateral.
• The concentrated position — one holding worth more than everything else, usually the thing the wealth came from.
• Access — funds and structures an individual account cannot reach on its own, which is a real service and also where the costs live.

A day, and where it goes

• Collateral values against loans outstanding, and which accounts are close to a level where more would be asked for.
• Cash. What is coming in, what is due out, and in which currency — the question that decides more than any allocation.
• Reporting. What each account actually returned, after fees and in the currency the client spends. See reading a broker statement.
• Conversations, which are most of it, and mostly about whether something that just happened changes anything.

What it is measured on

• Assets held and net new money, which is the commercial measure and openly so.
• Whether the record matches what was agreed: the suitability file, the risk profile, and the reason each holding is there.
• Retention across a generation, because the account that leaves usually leaves when it is inherited.
• Credit quality of the lending book, which is a banking measure sitting inside what looks like an investment business.

What it touches on this site

• What the wrapper changes — the same exposure in four containers, which is a large part of this conversation.
• The costs — costs and fees, and the plain version, what the fees actually cost.
• What protection exists — investor protection and what happens if a broker fails.
• The instruments that arrive here — structured deposits, unit-linked policies and capital protected notes.

How it goes wrong

• Borrowing against a portfolio in a falling market. The collateral and the loan move in opposite directions at exactly the wrong moment, and the sale is forced rather than chosen.
• The concentrated holding is never addressed. Everybody agrees it is too large and nobody wants to be the one who sold it early.
• Complexity that serves the seller. A structure with several moving parts is harder to compare, and harder to compare is where a fee hides.
• The record does not match the conversation. What was explained and what was documented are two different things, and only one of them survives.

Concepts to master

• A liability is part of the position. A portfolio with debt against it has a different risk from the same portfolio without, whatever the holdings say.
• Currency is not a detail for a household. The return that matters is the one in the money somebody spends.
• Concentration is a decision even when nothing is done — holding is a choice made again every day.
• Behaviour is part of the problem. The gap between what a portfolio returned and what its owner returned is real and measurable. See behavioural finance.