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Feature: The Bank and I: Living with Your Private Bank

For everyone, the realization comes differently.

“I know for me it was a strange feeling,” explains a California businessman. “I had just sold a company, and this fax came over the line telling me that X millions of dollars had been deposited into my account. I had always been concerned with running my business, and all of a sudden I realized that all of these numbers represented a new kind of responsibility—to my remaining employees, my family, my children, my children’s children.”

Wealth can be overwhelming. While members of families with multigenerational wealth grapple with decision making and the impact of those decisions on the next generation, newly successful individuals must protect the wealth they’ve built—no easy task, to be sure, when one considers that if it is improperly handled, their grandchildren may inherit only 25 cents on every dollar left to them as a result of taxes and fees.

Wealth must be managed, its power harnessed and placed in the service of both your financial goals and  your personal ones. And to assist you in fulfilling this lofty mission, you have your private bank. The method by which you consummated this relationship, only you know. The bank may have handled your family’s affairs for years. Perhaps a friend referred you. Perhaps your own bank, sensing a shift in the winds of your fortune, decided that, after so many years of your faithful patronage, their wealth management division should take you to lunch. Perhaps a dozen banks invited you to a series of lunches at which you nibbled salads composed of embryonic vegetables, sipped Montrachet, and finally chose, in a delirium of solicitousness, the right bank for you.

Or so you hope. Alas, the imperfections that try any relationship apply here as well. Still, clients are often reluctant to change private banks, in part because of the complexity of these relationships and the logistical inertia that ensues. “These can be very intricate relationships,” observes Doris Meister, executive director of Wealth Management Services and chairman/CEO of Merrill Lynch Trust Company. “Many of the clients who come to us from other companies do so after a lot of reflection, and more often than not, they feel they’re not getting [the] responsiveness they’re looking for.”

Gone are the days when the difference between a private bank and its retail counterpart could be measured in silver-bedecked executive dining rooms, corporate jets, and invitations to cultural events. Simplification, convenience, time savings, and realization of financial objectives—these are the aspirations of those who enter a private banker’s office. The bank’s team of specialists must then determine how its core competencies (investment and transaction expertise, estate planning, and knowledge of how to leverage assets) can best be applied to achieve these ends in a manner that’s consistent with the client’s own philosophy and lifestyle.

As private banking has become more sophisticated, the task of evaluating how well your private bank is serving you has become more increasingly convoluted. The following checklist summarizes what bankers, clients, and experts believe you should be getting from this most personal of financial relationships.

An Understanding of Where You Fit In

There are many sizes of private banks, just as there are many types of clients. Most private banks require a minimum of $10 million in liquid assets on deposit, though of course there are some that require less. Realistically, the level of service you receive depends to some extent on your net worth: At most institutions, the group handling clients in the $10 million–$30 million range will be a different one from that handling clients with over $100 million. While you may be tempted to consider smaller “boutique” private banks, the larger, brand-name banks command unrivaled resources, and the best of them will provide a level of service that will make you feel like their most important customer.

Private banks have become expert at delivering specialized service to large numbers of clients with a great variety of backgrounds. “While most of our clients used to be in their 60s and 70s,” observes Merrill Lynch’s Meister, “now they’re mostly in their 40s and 50s. They’re corporate executives or business owners who have sold or taken their companies public. But too often their wealth is concentrated in one or two securities. This can inhibit their ability to achieve as much diversification and liquidity as they may want or need, given their goals. This is one of the primary challenges we deal with.”

Meister notes that handling these types of clients has taught Merrill Lynch  to clearly identify the degree of involvement clients wish to have with the management of their portfolios: “Do it for me”—those who choose to delegate all responsibility to the institution; “Do it yourself”—those with lower asset levels and strong technology backgrounds who want to make the decisions themselves and have the bank execute them; and “Do it with me”—those who want to be involved in the decision-making process but choose to rely on the bank’s advice. For entrepreneurs and first-generation wealth earners especially, loosening their hold on the financial reins can be difficult. Be sure you’ve defined the parameters of involvement for your bank and discussed how these parameters might impact your long-term goals.

A Clear Definition of Your Goals

Establishing the goals for the private banking relationship is the client’s responsibility, though new clients may find it difficult to articulate them.

“When it comes to developing a strategy,” says Louis Chiavacci, vice president of Investments and Private Advisory Services for Merrill Lynch, “most clients come in not knowing what to expect. What we do with a client or family is have initial topical discussions before the client starts to open up a bit. As we talk, they begin to refine their objectives for us.”

Some of these are obvious to the advisers, if not always to the client. In the case of stock concentration, though, a whole field of specialization has developed around lim-iting clients’ risks and diversifying these concentrations using a combination of strategies such as exchange funds, derivatives, and prepaid forwards. Yet clients’ emotional attachment to their own stocks—usually companies they’ve built—can discourage them from taking advantage of these techniques.

“I was with a 28-year-old three years ago who had just graduated from his university with a Ph.D.,” recalls John A. Strauss, head of the U.S. Private Bank for J.P. Morgan. “His company went public in 1999, and he was worth $3 billion, with all of his wealth in that one stock. When we tried to persuade him to diversify, he said he wasn’t concerned if his worth went from $3 billion to $1 billion. He never contemplated in a million years that the stock could go from $250 a share to $2.50 a share. When it went from $3 billion to $100 million, he cared a lot.”

Yet, your objectives should reach beyond mere dollars and cents. Such discussions should drive to the heart of your relationship to your wealth, and its relationship to your family and to your community. This can be an uncomfortable process for some clients, exposing deep-rooted concerns, says Dr. Lee Hausner, a psychologist and author of Children of Paradise: Successful Parenting for Prosperous Families (Jeremy Tarcher, 1990), a study of the impact of wealth on multiple generations within families. “Estate planning can force parents to deal with issues they’re having with their children. They may have a daughter who manages her finances well, but their son is irresponsible with money. They may have to make separate arrangements for each, and that can take a huge emotional toll on the parent and the child.”

Contemplating death in the process of drawing up a will represents another troubling touchstone. “Some of the questions become very hard,” recounts a J.P. Morgan client. “You’re sitting in the room with your adviser and your wife, and you realize that, with the joint property laws in California, you have to decide what you want to have happen to your half of the money if you pass away. If she remarries, do you want her new husband to have access to that money? That’s a weird conversation to have—it makes you think of things you otherwise wouldn’t.”

Beginning with your own family, and extending to your interest in the community and in possible philanthropic undertakings, you should envision where you want to be at the end of your life. “The most important thing a private bank can do,” explains Merrill Lynch’s Meister, “is to help clients figure out what their life goals are, and then work backwards to decide how their financial goals can support them—now, and as those goals change. Life evolves; it’s not static.”

Integration with Existing Advisers

A private institution’s ability to assemble a capable team of experts is a critical measure of its quality; an even greater one is its readiness to integrate its efforts with those of the client’s existing financial and legal advisers. The chances are you already have at least one attorney, an assortment of accountants, and a brace of brokers. Assuming that these distinguished professionals have neither chiseled, embezzled, nor swindled you, respectively, you’ll want to continue to take advantage of their sage counsel. Your private bank should welcome them into the bosom, as it were, since their insights will not only inform future decisions by providing knowledge of your history, but also ensure that all of your retainers have an accurate “big picture” view of your present financial and legal status.

“I have a great personal attorney who I think is far better than anyone at Merrill Lynch,” explains one client, founder of a national chain of restaurants that went public. “But my team at Merrill works really well with him on personal and tax issues with no problems at all. In fact, it really strengthens their group when they learn something from an outsider. We were dealing with a sticky technical IRS issue, and my expert solved it. The experience has heightened the in-house team’s awareness of that issue.”

Service to Suit Your Lifestyle

All private banks deliver the full complement of financial services you look for—from private equity investments to insurance. Not all of them approach client service in the same way, however; nor do all clients want the same types of service.

The relationship teams assembled to serve a client usually consist of half a dozen representatives, experts in their respective fields, including investment strategy, estate planning, equity research, financial analysis, and client service. The latter can encompass functions from those as basic as preparing reports, to property management and personal errands. At Merrill Lynch, this level of service occurs through the Family Office Group, designed for clients with assets in excess of $100 million.

“There’s nothing the Family Service Group doesn’t define as their job,” says the restaurant chain owner and Merrill client. “We have one point person, and my family can go to her for anything. When my mother was ill and needed 24-hour care, they helped us hire a caregiver and cut the checks and so forth.”

Not all individuals require or desire this degree of personal involvement with their institution. “I don’t believe that a private bank is anything other than total wealth management,” says the media company owner who uses J.P. Morgan. “I know some private banks want to be lifestyle developers, to become an integral part of your life. Somehow the word ‘bank’ doesn’t let me look at it that way.”

Good Information

A frequent misconception on the part of private banking clients is the notion that private banks offer more in-depth, accurate information than, say, an investment brokerage. The true distinction lies in the fact that, while the brokerage will give you the same advice it gives an entire class of customer, the private bank furnishes an institutional perspective on investment opportunities, rallying its resources across a variety of disciplines to render a broad opinion that takes into account the priorities you’ve established.

“Clients want to know that, no matter what their question, there’s somebody there to answer it,” says J.P. Morgan’s Strauss. “So on our client relationship team, we have a private banker, a portfolio manager, an attorney, and a broker, and these four people will work as a team with the same clients day in and day out.”

Assessing the quality of advice can be tricky. One positive indication is the advisers’ willingness to disagree, as this suggests that they at least place your welfare above simple expediency.

As Strauss recalls, some J.P. Morgan clients became disgruntled three years ago when the bank recommended against technology stocks on the grounds that they were overvalued. “We would articulate a good case,” he says, “but day in and day out the market would prove us wrong, because Nasdaq kept driving prices higher.” Time, of course, has rendered its own verdict.

The Right People, the Right Bank

Banks, private or otherwise, are made up of people, and people inevitably succumb to their own biases. Some clients establish their own systems of checks and balances by retaining two private banks in order to compare input from each.

This approach is perhaps the best way for clients to judge the performance of an institution, though it requires that clients aggregate the information gathered from both.

The advantages, however, outweigh the negatives in the opinion of the media company owner in California, who works with two private banks. “I like having two private banks,” he explains, “because I get different subtle messages from each. If I have $10 million here and $15 million there, and both have the same instructions from me, one could do better than the other. I might transfer more money to the more successful bank. But either way, I gain a better understanding, and it happens to make me feel good.”

This peace of mind may be the best return of all. 

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