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Private Banking 101


One of the more common inquiries we receive is regarding how to open an offshore, private bank account to protect assets.

Many offshore private banks are open for business and looking for new depositors. Once only for the very wealthy, the past decade has seen significant changes in the offshore banking industry, thus making new private banking relationships more cumbersome to establish.

How you go about creating these new banking relationship today is now more important than ever before. Yet still, many of the best offshore banks are actively looking for new business.  

But even so, do you really need a private banker to protect or diversify assets offshore? Or will any run-of-the-mill local bank do? And is it really that difficult to open an offshore bank account?

Our focus today is on Australia’s private banks, rated AAA. A great place to protect or diversify assets. However, much of what we cover today applies to offshore banking in other jurisdictions.

Do you Need Your Own Private Banker?

Private banking was first founded in Europe generations ago. Globally, today, private banking can be found almost everywhere, except rarely do the U.S. banks fit the traditional model or offer the same level of service as found offshore. But in Australia, with its AAA rating, the private banking sector is strong and growing, and looking for good banking customers.

Best of all, bank deposits are government insured up to AU $250,000 per depositor per bank, currently equal to approximately US $180,000.

While it helps to be an Australian resident or citizen to access these banking services, it’s not always necessary. And naturally, customers with larger deposits are more welcome than small depositors.

Unlike in the traditional European banking countries – Switzerland, Austria, UK, etc – the Australian banks often accept customers with lower account balances.

If you have AU$ 1.5 million (about US$ 1 million) worth of loans or AU$ 2 million (US$ 1.4 million) worth of investable assets, you'll be welcomed by most private banks in Australia with open arms. And with increasing competition among the largest banks, there is great discretion to take on new business at much lower amounts.

For example, young professionals are said to be welcome at the CBA and other private banks with lower deposit levels, if they have a higher income earning capacity, or intentions to borrow large amounts for local investments.

Westpac and the other banks typically welcome new private bank clients with AU$ 1.5 million (about US$ 1 million) worth of investable assets without the requirements for new lending. As is generally the case, the more money you have, the more attention you receive in the private banking world.

Eight Private Banks

In the top tier, there are eight private banks in Australia. The top four Australian banks are Commonwealth Bank of Australia (CBA), Australia and New Zealand Banking Group (ANZ), Westpac Banking Corporation (Westpac) and National Australia Bank (NAB).

The top four banks fit into the ‘four pillar’ Australian Government policy to maintain the separation of the four largest banks by rejecting any merger or acquisition between the four major banks. 

The other four Australian private banks are the global investment firms Deutsche, Macquarie, UBS and Credit Suisse. In addition to the eight private banks, there are a number of other smaller, local and regional banks offering customary banking services.

How Private Banks Operate

There are important differences in how private bankers are paid, and the type of advice and service you receive. And in turn, the rate of return on your money is dependent upon the cost for the advice and service.

For example, private bankers at UBS and elsewhere are remunerated based on commissions, while private bankers at the other firms are remunerated through a combination of salary and bonus, with the bonus based on targets at the group level. UBS announced recently the spin off of its wealth management unit, which contains its private bank, to be separately named 'Crestone'. The spin-off will probably be similar to other independent wealth management companies with ties to other investment firms.

At the private banking entry level your private banker might have 100 customer relationships with individuals like you. For those with higher net worth - $10 million or more in investable assets - private bankers will often maintain fewer than a dozen relationships to provide around the clock personalized service. Some private bankers claim to be literally at their clients' beck and call, making themselves available around the clock, 24/7.

These banks and financial institutions also provide tiered offerings like credit card providers, so you can look and feel like part of this exclusive club.

But beyond a new credit card and bragging rights, most of the benefits at the entry level could probably easily be replicated by a good local financial planner. Many potential private banking customers don't see a difference between what the private banks offer and what they can get through their local suburban financial planner.

What’s really important is a good financial adviser who can take money and invest it wisely within the scope of your risk profile, lifestyle objectives, and financial goals. The biggest service private banks really offer is efficiency and the ability to save time – your time.

Entry level deposits at private banks usually only offer a few basis points better rates on loans and deposits. However, for higher net worth individuals, a private bank can often offer superior service and better returns through investment diversification. 

Australia is a small country with a population of 24 million, and is approximately the geographical size of the U.S. Overall, there are fewer than three people per square kilometer, but 90% of the population live in urban areas making Australia one of the most urbanized countries.

Australia is young, and is mostly an untapped market for private banking services. Fewer than half of the some 400,000 high-net-worth individuals currently have a relationship with a private bank. And most of the wealth is new wealth (first or second generation), compared with global wealth, which in most developed markets is multigenerational.

Commission payments to private bankers is becoming a relic of old banking models, and appears to be phasing out in Australian too. The salary and bonus structure better aligns you and your banker because their remuneration is not determined by the size and frequency of transactions that are made. This means churning accounts is less of a concern. It takes the transactional component out of the client advice being offered.

But the downside of commissions being phased out is that talented private bankers have moved on to find bigger pay elsewhere in larger investment companies where their income is based upon how many and the size of financial transactions made .

The strength of the big-four private banks - CBA, Westpac, ANZ and NAB – is that they have financial stability.  They each have market capitalization of between $95 billion and $155 billion, and each bank has their own private bank offerings. They generally have a stronger global reach and direct access to investments that smaller banks miss out on.

But the smaller, local and regional banks often better understand their local markets, and better nurture the client relationship. Leaving aside the deposits and mortgage rates, the smaller banks are often more customer-focused and small deposits are more often accepted. And clients of smaller local banks are often able to benefit from their local extensive domestic experience, which might suit the average investor who is more interested in local or regional opportunities.

By comparison, private bank customers at the larger global investment firms usually end up with structured products containing global securities and fixed-income debt, while clients of domestic smaller private banks will end up with off-the-shelf investment products. In either case, these investment products are generally better suited to individuals with a more sophisticated understanding of financial markets, and not just with large deposit balances.

A big challenge today that private banks face is how to deal with multigenerational wealth, as baby-boomers begin to transition to the next generation and beyond. In response, some private banks have created a specialized family business and intergenerational wealth unit to serve the needs of the increasing number of business owners facing retirement and seeking a succession plan.

Protecting Your Assets

What's really important about offshore financial diversification - whether in Australia or elsewhere - is that you can protect your assets from real-world threats at home. Whether concerns about litigation, government intervention, currency devaluations, missing out on investment opportunities, or just planning for a better retirement and estate planning, offshore banking holds open the door for better security.

And combined with an international LLC and International Trust, you can have the best of all worlds.

And remember that deposits in Australia are insured AU $250,000, and you can easily increase the amount of insured funds. With accounts held in the name of limited liability companies (LLC), the LLC can hold up to AU $250,000 fully government insured (similar to FDIC in the U.S.), per account, per bank.

For example, with four LLCs at one bank, you could insure to AU $1,000,000 with AU $250,000 in each LLC. And if looking to insure more, then multiple LLCs at multiple banks can provide for more government insured deposits.

Where Money Goes

As an international lawyer, for many years we have designed and supported the implementation of International Trusts for asset protection and succession planning (and for many other purposes). Yet, at the end of the day, the money still needs to be invested somewhere.

And while private banks globally have built a strong offering around asset levels and lending, the question still remains as to whether they are able to retain clients based upon service and their investment advice. In other words, if they are too big and too rigid, then even finding a good private banker will have limits in what and how they perform service for you. Money always goes to where it is treated best.

One of the more important features of offshore private banks is supposed to be their willingness to listen to what the customer wants, instead of fitting round pegs into square holes. But finding a good fit between you and the right individual banker still requires some homework on your part. Nothing beats a face to face discussion on the important issues, and establishing a high level of confidence in the relationship.

And seeking out the correct level of service from a private banker is also important. Decide first if you prefer no advice, limited advice, or full service so an understanding of a good banking relationship starts off on the right foot. Many customers fail to clearly initiate a good understanding of what’s expected from their private banker, or articulate what they want.

How to Create a New Banking Relationship

Gone are days of picking up the phone or sending an email to open up an offshore bank account across the globe. Building a rapport is certainly an important first step. And if you are a local resident and/or large asset depositor, establishing new financial accounts is certainly easier.

But if you are not currently a local resident or investor - or don’t have large deposits to offer the bank - some one-on-one creativity to establish a new banking relationship will be worthwhile. If not a local - particularly if only limited funds available to invest - this means greater effort is required to establish why you have local banking needs, i.e. either because you are currently personally transitioning into the local community, part or full time, or intend to in the near future.

In the book Offshore Living & Investing, 2nd edition (found here), there are two chapters designated solely to moving money offshore and offshore banking. This includes tips and suggestions on how to go about offshore banking. And naturally, banking and investing offshore is a common theme that runs throughout the entire book, hence the title.

Other important topics include foreign currencies, currencies and border controls, investing through an International Trust, second passports, how to legally exclude offshore income from taxes, how to become a sovereign individual, and much, much more.

For U.S. citizens, creating an offshore banking relationship has its own unique factors to consider. But a world of global investment opportunities and offshore banking awaits you too. And yes, offshore banking is still legal (the topic of Chapter 7), but there are increasingly more U.S. border and currency restrictions to consider (Chapter 2).

What’s important for U.S. tax payers to know - as of this writing – that you and your money don’t need to be locked away at home. There are wonderful global diversification opportunities offshore just waiting for you. And there are banks looking for your business. But it’s important when you go offshore, to get it right (Chapter 18).

Find the table of contents at this link if you wish to take a peak.

And whether you and your money stay at home, or go offshore, there are superior international asset protection planning strategies found in the book How to Legally Protect Your Assets, 2nd edition. See why here.

The good news is that both of the books are now available in either quality softcover or in eBook formats, meaning either Kindle or pdf, at reduced prices. To learn more go here.

And if you wish to start now and learn how to proceed with a personal, confidential consultation to review your situation to accomplish your objectives, then contact me here.

But whatever you do, don’t wait until it’s too late.

Until next time ……