Ask HN: Why would I use private banking?
27 comments
Just use US index ETFs. However, my brother worked in that space. In case you are wondering, you are missing some things that you might want:
1. preferred rates in mortgage space and others. These rates can sometimes be 0.25-0.5% lower than your best open market rate.
2. borrow against your portfolio. Your pay some points over SOFR rate. This way, you don't trigger tax event or liquidate your portfolio.
3. access to structured products that have upside and downside protection. this is something you most likely don't care about.
#1 & #2 are very useful when you have decent assets. #3 is very useful when you have sizeable assets.
1. preferred rates in mortgage space and others. These rates can sometimes be 0.25-0.5% lower than your best open market rate.
2. borrow against your portfolio. Your pay some points over SOFR rate. This way, you don't trigger tax event or liquidate your portfolio.
3. access to structured products that have upside and downside protection. this is something you most likely don't care about.
#1 & #2 are very useful when you have decent assets. #3 is very useful when you have sizeable assets.
He can do #2 at IBKR pretty cheap.
0.5% cheaper loan while you're paying 1% more compared to Vanguard etc.
0.5% cheaper loan while you're paying 1% more compared to Vanguard etc.
My financial advisor is a Harvard educated investment banker who got out of the game to have a better lifestyle. Her advice: Index funds. That’s all I need to know. Obviously age and risk appetite will change your allocations but a company like Vanguard makes that really easy and affordable to do.
I'm not a client of a private bank, but I have friends in the industry so i have a little bit of familiarity.
For <1,000,000, you would not be eligible for what is generally called "private banking". Usually, that's for 8 figures in liquid assets or more, although exceptions are made for people likely to be there in the next few years (e.g., non-liquid startup founder of a unicorn).
With a "private bank", you'll have access to financial experts well-versed in the tax consequences of your investments. They'll be familiar with trusts and other things like that. They might give you access to exclusive deals. And you'll have a phone number that you can call any time of day and speak to someone intelligent (at least compared to the person answering the phone at your local Chase branch). Most importantly, you'll have people who can make you customized deals. For example, when Jeff Bezos wants $500m to spend on a yacht but doesn't want to sell his Amazon shares, his bank will happily give him a loan on good terms for that. If you own a Picasso and want to get a cash loan with that as collateral, your banker will at least consider that request. For most people, the only asset they can borrow against is their home. But at the private banking level, they are more likely to consider other assets. They will at least humor the request to look into it.
What you are talking about is more of a "financial advisor". 1% is typical. If you are simply interested in investing in index funds and have the discipline to not touch your funds when the market has ups and downs, then you may not need/want one. But I would pose the question to a financial advisor and see what services they offer that might make the fee worthwhile for you. Typically, things like tax planning start to get more important when you cross the $10m mark and inheritance tax becomes a thing.
With regard to investing, an "all-world passive index tracker" may not be what you want. I'm not sure where you are located, but assuming it's the US, you might want to allocate a good amount of your money to US indices. The problem with all-world is that you are most likely not located "all over the world". You are most likely tied to the US and so you probably want assets closely tied to the US economy, which is where you will probably be spending most of your money.
For <1,000,000, you would not be eligible for what is generally called "private banking". Usually, that's for 8 figures in liquid assets or more, although exceptions are made for people likely to be there in the next few years (e.g., non-liquid startup founder of a unicorn).
With a "private bank", you'll have access to financial experts well-versed in the tax consequences of your investments. They'll be familiar with trusts and other things like that. They might give you access to exclusive deals. And you'll have a phone number that you can call any time of day and speak to someone intelligent (at least compared to the person answering the phone at your local Chase branch). Most importantly, you'll have people who can make you customized deals. For example, when Jeff Bezos wants $500m to spend on a yacht but doesn't want to sell his Amazon shares, his bank will happily give him a loan on good terms for that. If you own a Picasso and want to get a cash loan with that as collateral, your banker will at least consider that request. For most people, the only asset they can borrow against is their home. But at the private banking level, they are more likely to consider other assets. They will at least humor the request to look into it.
What you are talking about is more of a "financial advisor". 1% is typical. If you are simply interested in investing in index funds and have the discipline to not touch your funds when the market has ups and downs, then you may not need/want one. But I would pose the question to a financial advisor and see what services they offer that might make the fee worthwhile for you. Typically, things like tax planning start to get more important when you cross the $10m mark and inheritance tax becomes a thing.
With regard to investing, an "all-world passive index tracker" may not be what you want. I'm not sure where you are located, but assuming it's the US, you might want to allocate a good amount of your money to US indices. The problem with all-world is that you are most likely not located "all over the world". You are most likely tied to the US and so you probably want assets closely tied to the US economy, which is where you will probably be spending most of your money.
Came here to say this, so just echoing.
A private banker and their team become problem solvers long term also almost like a modern butler servie. Have a kid that needs picking up across the country, they'll make it happen, or solutions to college applications, holidays planned, they're there to help.
A private banker and their team become problem solvers long term also almost like a modern butler servie. Have a kid that needs picking up across the country, they'll make it happen, or solutions to college applications, holidays planned, they're there to help.
I worked at a major private bank once in tech and we had a presentation from the client advisor funds sales guy. He did a big presentation and then ended it with "But that's just what we tell the clients. You should just buy index trackers."
I was never sure if that was because the clients needed more sophistication, or because there was more money in it for the bank.
I was never sure if that was because the clients needed more sophistication, or because there was more money in it for the bank.
Some of the 'private banking' offers include asset backed mortgages which can be very competitive. But at 6-figures, I don't think you're getting anything but a target on your back for sales droids. Index funds scale pretty well from single figures to at least 8-figures, probably 9-figures too.
Not very exciting, but as long as you have a concept of enough, 7-8 figures should be enough, and you don't need anything exciting. With high 6-figures, it may or may not be enough, but it should be enough to let you choose what you work on and how; and there's no sense gambling that away or paying 1% fees, either. Somewhere between 20/80 and 80/20 stocks/bonds should work well enough (and if it doesn't, there's likely a much bigger problem).
Not very exciting, but as long as you have a concept of enough, 7-8 figures should be enough, and you don't need anything exciting. With high 6-figures, it may or may not be enough, but it should be enough to let you choose what you work on and how; and there's no sense gambling that away or paying 1% fees, either. Somewhere between 20/80 and 80/20 stocks/bonds should work well enough (and if it doesn't, there's likely a much bigger problem).
There might also be profit in using some of it for day to day expenses then putting all your income into a pension (if possible). Effectively reducing tax. Maybe you can borrow against it so you keep it invested. Talk to tax expert.
Private equity can be a good place to put the money, but that doesn't sound like what was suggested to you. Usually to get into private equity funds you need to be a "sophisticated investor" (aka mid 7 figures). The reason private equity can be good is that it unlocks access to companies that are not traded publicly.
Index funds are probably a good idea. It wouldn't hurt to put 10-20% in something more active, blue chip, etc. Some of the online brokerages offer various levels of advice for very small fees (30ish basis points maybe). They could help you select appropriate index funds and other investments based on macro trends etc.
Index funds are probably a good idea. It wouldn't hurt to put 10-20% in something more active, blue chip, etc. Some of the online brokerages offer various levels of advice for very small fees (30ish basis points maybe). They could help you select appropriate index funds and other investments based on macro trends etc.
In order for this service to make sense, they would need to deliver returns that are at least 1% in excess of say the S&P 500 index performance. One quick way to verify is to test it. Put some amount of money in their care and see if their performance (minus fees) exceeds what you can get in a passive index. Also keep in mind the compounding effect of the fees towards your returns over time so the excess return required will likely need to be much higher than 1%. I'm too lazy to calculate it right now but you should be able to easily model the impact over 5 to 10 years.
You cant test it or back test it in any statistically significant way. If you have a way to tell if they have Alpha then you don’t need them.
Couldn't you just look at their historical performance and compare against an S&P500 index? It would be trivial to see if their performance justified the fees. It may not be statistically valid but if they can't demonstrate a benefit over the last 5 years, I wouldn't put any stock in them.
See if they have Omega ;)
But as you say, if you know what Omega is you're probably not their customer.
But as you say, if you know what Omega is you're probably not their customer.
You are right. Your friends are wrong. Index fund and chill.
> have it available for me in 20 years when I retire.
Just 1 random person's superficially informed advice: I bet a US index is going to do better than all-world over the next 20 years.
> have it available for me in 20 years when I retire.
Just 1 random person's superficially informed advice: I bet a US index is going to do better than all-world over the next 20 years.
One source to back up this prediction (obviously this is another opinion, albeit more informed than the average person).
https://en.wikipedia.org/wiki/The_End_of_the_World_Is_Just_t...
https://en.wikipedia.org/wiki/The_End_of_the_World_Is_Just_t...
Some possible reasons might be to access tax loss harvesting / other tax optimization strategies (which depend on your location, carried over losses, etc), or to access discounts / relationship pricing on mortgages or other loans and lines of credit (which can also be useful to avoid selling assets and paying capital gains taxes).
It's true that you can't really beat the market before tax, but it might be worth optimizing for your own after-tax outcomes instead.
It's true that you can't really beat the market before tax, but it might be worth optimizing for your own after-tax outcomes instead.
Private banking provides personalized service, exclusive investment opportunities, risk management, convenience, and legacy planning. Despite higher fees, it offers tailored advice and access to specialized products. If you prefer low-cost passive investing, using a basic index tracker through an online brokerage might be a better fit.
You're right. Most of the brokers, "fund managers" and other b2c intermediates are nothing but elaborate fraud.
They don’t bring any value on the table beyond what index funds can possibly give you longterm.
And why those rare anecdotal exceptions would bother managing some random dude’s money if they know how to beat the market themselves?
Don’t you see it’s almost obvious?
And why those rare anecdotal exceptions would bother managing some random dude’s money if they know how to beat the market themselves?
Don’t you see it’s almost obvious?
Fees would probably eat away a lot of your hard earned money. Take a look here: https://www.bogleheads.org/wiki/Managing_a_windfall
Not just only fees, but inflation rates too.
Interest earned needs to be above the inflation rate, otherwise your money evaporates away.
Interest earned needs to be above the inflation rate, otherwise your money evaporates away.
Nothing. No evidence suggests that actively managed funds beat indexes.
Your friends are no bogleheads, are they? (:
Mistake - I meant high 7 figures, too late to edit.
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Too bad this is at the bottom, as many of the comments would be different if they saw this first. You can probably get by without private banking, but there might be some ideas you'd miss out on ("real estate is about to go on a tear" or "get out of oil/gas" that would be well-known in certain circles before they are well-known the general public.
If you are in index funds that's great, but the question of which index funds you're in is also important. With high 7 figures, you can allocate a decent chunk to various different verticals (in a way that you really can't with under a million.
If you are in index funds that's great, but the question of which index funds you're in is also important. With high 7 figures, you can allocate a decent chunk to various different verticals (in a way that you really can't with under a million.
Congrats :)
I don't want to get involved in deals and private equity etc, I just want to invest the money and have it available for me in 20 years when I retire. Since the fees have such a significant impact on the performance long-term I'm wondering why would I go the private banking route, what am I missing?