So thanks to Irk Hudson for this guest blog post on a very interesting subject. Title says it all really.
Take it away Irk.
Are Private Banking Clients Lazy...
I know a few individuals who reside comfortably (more or less) in the 'high net worth' category, defined as people with 'investable finances in excess of US $1 million' (thank you Wikipedia). Some of these individuals make use of private banking facilities and others do not.
The question is: why do some well-heeled people consider private banking a necessity of life up there with oxygen and antique motors, while other similarly well-heeled people manage to do for themselves what private bankers do?
One of the biggest deciding factors when an individual is contemplating how to manage all of their ill-gotten wealth is their pain threshold - 'pain' in this context referring to the time and effort required to ensure their wealth's wealth creation potential is maximised at all times.
One only needs the most basic understanding of financial markets before they will gain an appreciation for the complexity of those markets and the speed at which they change. Volatility in markets makes it possible to build up wealth, but that same volatility is what makes self-management extremely tricky - if you don't have the time or the inclination to put in the effort.
Sometimes things wouldn't go as planned. A1 is now well and truly into retirement and can look with pride at the results of his wealth-building prowess. But he would be the first to say that, after a long and successful career as a mechanical engineer, he had to embark on a second career as a financial guru in order to achieve the investment results he has.
Tell me what you want, what you really really want
Another question to ask yourself when deciding if private banking is a necessary evil is, very simply, 'What am I trying to achieve?' This is so important that you can't properly assess your pain threshold until you answer this question. In my experience people with the least will run from risk as a snowball runs from hell.
If you have more modest wealth, and modest expectations, and a desire for stability above all else you will most likely be able to hack the pain of managing your assets yourself. This is because you will be more likely to make relatively simple, relatively long-term decisions that do not require constant revision.
The opposite holds true for those with greater assets. These individuals will have greater appetites for risk and consequently more time and effort will be needed to ensure their assets are working at full potential (as well as ensuring their assets don't disappear altogether!).
Key point: As sure as day follows night and JFK was not killed by a lone gunman, as your wealth grows your expectations and appetite for risk will grow. The smart investor will have clear objectives and will recognise when their pain threshold has been reached. When it has, it's probably time to say goodbye to DIY investment management.