Private Bankers: The SEALs of the Investing World

The financial services industry has historically beef fond of military analogies.  Private bankers are the SEALs of the investing world.  They are considered an elite bunch, somehow different from rank and file agents and advisors. Why is that? How does it work?

Who Are These Folks?

Private bankers often work for companies ending in the word “Trust.”  Imaginary names might be: “Abundance Trust” and “Prosperity Trust.”   These trust companies are often owned by a larger bank with a totally different name.  Private bankers often have minimums or $3-5 million for starters.  They are essentially relationship managers. Super wealthy people have “Family offices.”  It’s a “Catch 22” situation.  These are effectively their own “mini financial services firms.”  The overhead can be high.  Private banking might be described as a “halfway house” between financial services firms and family offices. As an example, the Glenmede Trust company was founded in 1956 to administer the Pew Memorial Trust. (1)   Over time, it branched out to provide wealth and investment management services to families and institutions.  It’s an example of how what we call today a “family office” transitioned into a firm servicing a slightly larger clientele.

Where Does Their Business Come From?

The private banker's job might sound like a fantasy for financial advisors.  Business often comes via referrals from the local bank branches.  An established client with a longstanding banking relationship has recently sold his company.  The bank might longer have the payroll, checking, loan and cash management business, but they had the client off to the “private bank” behind the mahogany paneled door. Private bankers are increasing required to find their own clients.  These logically come from referrals through current clients and expanding the relationship to other family members.  It’s been said some private banks require their bankers to serve on at least one charity board, with some of the bank’s charitable resources backing them up.  It puts them in the right crowd.

How Do Private Bankers Do Business?

Financial advisors seek to develop relationships with professionals who can refer business.  Ideally, they enter into a reciprocal referral relationship.  This makes sense.  The advisor doesn’t do accounting and the accountant doesn’t sell securities.  The advisor seeks to grow the relationship by consolidating diverse holdings under one roof.  As a senior executive in the financial services industry once said: “People say ‘don’t put your eggs in one basket.’  It’s OK to put all your eggs in one basket, if you watch the basket.”  The advisor seeks to increase “share of wallet” by attracting insurance, lending and other business the client would likely do elsewhere. Private bankers often work from the reverse direction.  The money comes in.  A wall if built around it.  After the wall is completed, the moat is dug.  Everything the client needs is supplied in house, if humanly possible.  How?  They’ve got that big bank in the background.  They can offer insurance products through their inhouse captive insurance firm. Like an attack by a SEAL team, you don’t want to be on the receiving end.  Although they can’t forbid a client to maintain outside relationships, they use a different approach popular in banking circles: “The more you do, the cheaper it gets.” Their clients get a nice addition to their lifestyle as a “dividend.”  Trust companies often sponsor charitable events.  you might be a guest at their table at a charity gala.  They hold parties.  This supports client appreciation.  It also provides an opportunity for private bankers to mingle within their client’s social circle and get introductions.

How Does This Apply to Financial Advisors?

Here’s another contradiction.  Financial services firms want to move upmarket, yet they are often competing in the mass market space.  People often feel once they’ve got some money, it’s time to trade up.  The most obvious example might be Sears 1981 purchase of Dean Witter. (2) People at other financial services firms derided as “Stocks and socks,” implying investors would not want to invest their money in the same place they shopped for ordinary items. Here’s one more contradiction.  RIA firms might be best suited to compete with private bankers because they can make the exclusivity case with posh surroundings and high minimums.  However, they usually don’t have the depth of products, expertise and services available to private bankers.   Who does?  Large banks that own brokerage firms.  However, they can fall into the “stocks and socks” category unless they segment their market.  This is often done with UHNW divisions with slightly different names.

How to Fight Back

Experienced financial advisors know it’s all about establishing relationships.  People need to trust you.  Like you.  Feel you have their best interests at heart.  Most advisors do have a big firm with extensive products and services in the background.  When it comes to accounting and legal services, the advisor often has referral relationships with respected local professionals.  The client may have been sent in the advisor’s direction by that person. When you look at the above strategies used by private bankers, there’s nothing proprietary.  Financial advisors can host client recognition events.  They can socialize with clients, meet the next generation and mingle with their friends.  It’s an investment of time and money, but it’s achievable. Advisors may not be able to pry clients away from private banks, but they can make the case why their longtime clients should not “trade up” and leave the known for the unknown. Related: You’ve Got Your Friend as a Client: Now What?