How did I come up with this idea? Well, it twas all twanks to a tweet I tweeted twast tweek. This is what I tweeted:
“Winding down of wealth management businesses by big private banks and laying off of private bankers. The consolidation in PB & WM has begun.”
I received one, particularly, interesting reply:
“IB is no longer an industry. It is and has been for ages just a vehicle to employ and then make redundant #UBS etc etc.”
All offer the promise of fulfilling your financial fantasies: Investment banking, retail banking, corporate banking, and private banking. Yeah, baby, yeah! Me love you long time.
In actual fact, they're same same but different, where the clue tends to be in the first word.
This misconception of all banking somehow being the same is completely understandable, hence my little flashing light bulb. It was a reminder to me how differently those inside the business view the world from those outside the business.
So, now I’m going to do what I should’ve done at the beginning of the blog. Take you into the nitty gritty of private banking: how we private bankers make money.
No one on this planet is as good at layering fee upon fee upon fee as us private bankers, and then spinning it around to make it as confusing as possible for the client.
Imagine walking into a café one morning and ordering toast with butter, but instead they bring you a full English breakfast. It has toast, doesn’t it? So, you got what you ordered plus extras—plus a larger bill.
That full English breakfast is your private bank. Some of it is nice (like the bacon as everybody loves bacon) and some is not so nice (like those nasty English sausages as no one but the English likes English sausages), but one thing that we can all agree on is that a full English breakfast is a lot of stuff!
So without further ado, let's get started, and we'll start with the most important one.
Assets Under Management
This is the main driver for private banking revenue, also referred to as AUM (for rather obvious reasons). This is what makes private banking such a coveted business. If you attain enough of this stuff, you can just sit about on your backside with your feet up on the desk, shut off your Reuters and/or Bloomberg and surf the web for pictures of bikini-clad lovelies or Puerto Rican pool boys, depending on what takes your fancy.
You can do this until it’s lunch time when your second hardest task of the day begins, navigating the wine list. The hardest task of the day is to stay awake at your desk in the afternoon.
Now you know the secret why private banking executives are so keen on “inflow” and increasing AUM. More inflow = more wineflow.
On a private bank's price list, it will most likely be called a "custody fee" or if they are feeling particularly lavish, "safe custody fee."
This is how AUM works: you place a portfolio of stocks, bonds, and cash in a private bank, and they will charge you custody fees based on those assets. Basically, you pay for the privilege of keeping your money in their bank. The fee is normally a percentage, possibly with a fixed minimum (to keep out the poor people).
The amount of custody fees depends on the underlying asset. The custody of bonds tends to be cheaper than the custody of equities. Custody fees vary greatly between banks, and they are described in the price list differently depending on the bank. A bank can charge monthly, quarterly, semi-annually, or annually. This, of course, makes it a little harder for the average client to compare prices between banks.
Unlike in certain other things (as we men are so often told) size really does matter in private banking. The bigger your wallet, the bigger the reduction in fees you can haggle for yourself. It’s, therefore, very difficult to give an exact percentage as to what you should be paying.
But you want a percentage figure from me, don’t you?
Okay, okay. As a rule of thumb aim to be paying closer to 0.5% than 1% per annum for custody fees.