Difference Between Wealth Management and Private Banking Explained

Introduction

It is evident that ‘wealth management’ and ‘private banking’ are two terms that can be used interchangeably when referring to finances or investments.

Although both the terms look similar, both terms are entirely different with respect to the scope of functionality. Wealth management focuses on a holistic approach to managing an individual’s or family’s financial assets whereas investment management is all about managing investment portfolios to achieve specific financial goals through buying and selling securities.

So, the difference between wealth management and private banking explained in the next section.

What is Wealth Management 

Wealth Management is a personalized form of clientele services a wealth management company or an independent contributor does to optimize a client’s specific portfolio. 

This is in terms of helping his wealth basket grow over the years and also helping him plan other major financial goals that lie on the trajectory. This is in terms of:

1. Education planning
   
2. Tax planning
   
3. Retirement planning
   
4. Estate planning
   
5. Optimization of a client’s investment portfolio by choosing products that yield a steady rate of returns by stashing off investments that can be of a loss-making stature and so on.
   

Wealth management therefore refers to providing ultra-rich or wealthy clients with a comprehensive range of financial services.

As far as the compensation is concerned, an independent wealth manager might take service charges or a percentage of profits the wealth basket of the client earns over the quarter, 6 months, or annually.

In a wealth management firm, salaries or compensation packages are given to wealth managers, and each wealth manager is assigned a client to oversee throughout the year or extend beyond the same. 

What is Private Banking 

Private banking provides generalized and advanced forms of banking and financial services for high-net-worth individuals and retail investors on the whole. 

However, private banking services are reserved for those clients who have substantial levels of cash cum bank balances. 

Here, an investment banker or a financial advisor representing the bank assesses the assets the clients have before they are deemed eligible to receive private banking services from leading investment banks or financial conglomerates on the whole. 

For an investor to be eligible to receive private banking services, he/she must own assets worth $100,000 and above. Usually, the overall benchmark for investors to be eligible to receive private banking services is a 6-digit figure by most private banks and private financial institutions. 

The services that come under the scope of private banking services are as follows:

1. Provide investment-related advisory services to its clientele
   
2. To access the financial circumstances of individual investors to build investment portfolios right there from scratch
   
3. To help retail clients protect and maintain their assets
   
4. To plan customized financial services like retirement planning or education funding
   

Key Difference Between Wealth Management and Private Banking

Let us unveil key points of differences covering private banking and wealth management :

1. Scope of Operations

In wealth management, the services that are offered are more comprehensive to the ultra-wealthy institutional and retail investors. These services include tax planning, estate planning, portfolio maintenance, and education funding, to name a few. These services are provided by wealth management firms or by independent wealth managers on the whole.

Whereas, with respect to private banking, these are transactional services private banks offer to high-net-worth individuals and retailers. The services provided under private banking include investment selection, banking services of transactional cadre, financial management services, and family office planning services on the whole.

2. Eligibility Criteria

In the wealth management sector, the investors are usually chosen based on how much their assets weigh. The acronym for this is Assets under Management or AUM. These assets must at least be worth $500,000 and above to be eligible to receive a whole range of wealth management services.

For private banking, the services are provided to high-net-worth retail investors whose assets under management or AUM start from US $100,000 and above. 

3. Service Providers

Wealth management services are provided by some of the best investment and asset management banners worldwide. These are:

1. Fidelity
   
2. JP Morgan Asset Management
   
3. Vanguard
   
4. Blackrock and
   
5. Citi Group to name a few.
   

Top-grade private banks and investment biggies across the world provide private banking services. These brands are:

1. Morgan Stanley
   
2. JP Morgan Private bank
   
3. BNP Paribas and
   
4. HSBC to name a few
   

4. Asset Allocation Services

Wealth managers actively choose assets or investment portfolios on behalf of their clients. Specific assets are chosen and managed by wealth managers to meet the tailormade requirements of ultra-rich institutional and posh retail investors towards specialized goal objectives like retirement planning or estate planning.

On the other hand, private banking advisors only choose investments for their clients and cannot add portfolios. They provide advisory services after spending a great deal of time with their clients. The financial advisors who take care of clients in the private banking sector also cannot open accounts on behalf of their clients. However, they provide advisory services on are right types of bank accounts they can choose aimed at achieving their financial objectives in a streamlined and hassle-free manner.

5. Degree of Customization Involved

Wealth managers book personal appointments with their yet-to-be clients and discuss their wealth management objectives on a detailed and comprehensive note. This way, they assess the risk tolerance ratios of their clients one-on-one and then assess their wealth management objectives. Therefore, a higher degree of customization is involved in the creation of wealth management baskets according to the tailor-made requirements of the specific client or individual.

On the other hand, private banking refers to concierge banking or relationship banking services that are offered to high-net-worth individuals or retail investors who have complex financial needs. Private banker reaches out to their clients periodically to suggest the latest banking services or investment products that can specifically be tailored to their investment portfolios. However, these services as provided by a relationship manager are more of an advisory nature and it is up to the individual discretion of the investor as to whether he should opt for them or not. 

6. Compensation or Fee Structures

In the case of wealth management, the fee structure as designed for wealth managers equals a percentage of total assets under management. The wealth management firm decides this percentage and only then appoints a wealth manager to take complete charge of your investment portfolio. The percentage can be a massive amount because as the investment portfolio improves, the compensation structure of wealth managers keeps increasing.

On the other hand, concierge advisors or relationship managers who take care of private banking clients are paid salary packages by banks or financial institutions that appoint these financial advisors to provide high-scale services to their high-net-worth banking customers.  

Sometimes, if the portfolio for private banking clients improves, the banks or financial institutions can provide incentive-based packages to relationship managers to provide these clients with exemplary investment and financial services on the whole.

How are Wealth Management and Private Banking Complementary to One Another?

In a way, you can utilize wealth management and private banking services almost simultaneously. This is because both of them are complimentary to one another. 

Let us further find out how private banking vs wealth management are complimentary to one another:

1. Shared Objectives
   

Both wealth management and private banking services offer investment and financial advice to clients who are either top-tier institutional or high-net-worth retail investors. Therefore, both wealth management and private banking curate investment portfolios for clients to help them achieve their financial goals on a short-term, medium-term, and long-term scale. 

2. Building Healthy Investment Portfolios
   

Both wealth management and private banking aim to build healthy investment portfolios for their clients right there from scratch. While relationship bankers help choose between investment products like exchange-traded funds or ETFs, bonds, stocks, hedge funds, equities, and so on, wealth managers build portfolios on behalf of their clients. The asset allocation is done by wealth managers after assessing the level of risk tolerance an individual investor is capable of handling under his belt. 

Therefore, wealth management and private banking offer a fleet of banking services aimed at the healthy building of investment portfolios right there from scratch.

3. Investment vs Financial Goals
   

Wealth management and private banking aim to provide the right investment options to help their clients attain their financial goals in a systematic and well-planned manner. While wealth managers build investment portfolios aimed at customized investment management solutions like estate planning or education funding, relationship managers provide a more holistic approach to clients by providing advisory services in lieu of how their clients can build the right investment portfolios so that they achieve their financial goals seamlessly. 

Suggested Reads: Difference between financial planning and wealth management

The Bottom Line

You can choose between wealth management or private banking based on specific investment goals you have in mind. These are comprehensive solutions that are provided to retail and institutional investors to help them achieve their financial objectives and under each wing, you have a set type of services you choose from.

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