Private banking – an exclusivity without fair value?

Private banking consists of personalized financial services and products offered to the high- net-worth individual clients of a retail bank or other financial institution. The approach of banks to their clients based on their creditworthiness is nothing new.

Private banking has not always been as affordable service as it has become today. In the last two decades we can see the difference mainly in the budget of the client to be able to receive above standard services. Nowadays, in some banks, even the capital of € 10,000 is enough for you to get to such a private service.

In Slovakia, this service is most likely provided by every retail bank. There are also banks that explicitly specialize mainly in creditworthy clients. They also live on clients' money, and where there are many, there will naturally be better ground for revenue for these institutions.

These can also take the form of not small fees for investment management, safekeeping of securities, physical gold, and the provision of services of various kinds associated with private banking status.

Services for a ´better´ life

The most creditworthy clients can enjoy the services that this segment offers. In many cases, it is not explicitly just about financial management. These can be the most comprehensive services for instance tax optimization, legal advice, help with buying a property, or even planning a vacation. In such cases, the banker already becomes a partner of the family with immediate confidence.

The biggest substance, however, should remain the above-standard asset valuation, compared to conventional retail products. Services provided to creditworthy private banking clients should not be routinely available to the public.

In retail banks, however, they are often mutual funds in which the public is usually able to invest through financial agents. These funds are characterized by multiple fees and not just a staggering performance. It is a classic way that must in any case rely on the growth of markets.

So the question is, is the private banking attractive enough at the expense of average returns, that even a regular retail client can secure? Is the added value in the form of other services worth the client sacrificing theoretically more attractive income at the expense of someone planning a holiday, helping with the purchase of real estate, or advising on the issue of taxes?

It should be kept in mind that these services also cost money but they can be also provided by a wide range of other professionals.

Private banking in practice

In terms of business model, we can use the example of an unnamed client of an unnamed bank. Just about 40% of the portfolio was intended to protect assets from inflation and invested in bonds. The rest was intended to enhance the assets. After 10 years under the supervision of a personal banker, the total capitalization of investments reached a valuation of 3.8% p.a..

The first purpose was thus fulfilled, and the property protected. But is it enough though? Sure, it depends on the individual needs of the client. In general, I would personally expect that having the privilege of managing assets by private bankers would be more efficient after 10 years.

However, when we look at this from the point of view of a retail client holding money in current accounts or term deposits, we must agree that there is still a difference. Ordinary banking products certainly cannot protect assets even from inflation.

On the other hand, the ´prestige´ of having a personal banker is not worthy that we were potentially cut off by more attractive returns.

The alternative way

The recent results of the Citigroup Private Bank study showed that therefore wealthy people with assets worth millions of euros are increasingly focusing on alternative financial products and entering partnerships outside their bank.

Due to their flexibility, hedge funds are becoming a popular alternative or complement to asset capitalization. They can also protect assets with proper management and at the same time do not have to struggle with the unsatisfactory situation on the markets.

One disadvantage that closes the gates of entry to small investors is precisely that they must have capital in the order of hundreds of thousands of euros. There is an alternative way for smaller investors in participating in the benefits of hedge funds in this case it is the Salus Populi, cooperative.

Jeho charakter dovoľuje svojim členom využívať výhody kvalifikovaných investorov bez toho, aby disponovali kapitálom k tomu potrebným. Toto podielové družstvo využíva moderné nástroje finančných trhov na to, aby svojim podielnikom zabezpečilo ochranu majetku v turbulentných časoch a zároveň prinieslo efektívne zhodnotenie.

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