private banking industry. By proactively increasing their knowledge of the typical private banking service offering, they will understand much better what to expect and therefore will be better prepared to deal with a private bank in such a manner that they can get the most out of the relationship.
The areas of expertise where private banks typically add value are:
● Investments
● Credit
● Life insurance
● Wealth structuring
● Psychology of wealth
“Only three more levels, and I am done.” Thirteen-year-old Tom is playing his favorite computer game. For the past two months he steadily worked his way up from level 1 to level 22. The game ends when the player successfully completes all 25 levels. Tom is excited. He is so close. None of his friends has yet reached this far. Imagine how cool it would be to reach the last and final level.
Two weeks later, Tom achieves the impossible. He is now officially a master of the game. With some smart moves and a healthy dose of logical thinking, he has conquered level 25. He feels proud of himself, and experiences a euphoric high.
Another week later, Tom feels a bit down. By successfully finishing his game, he effectively lost his favorite pastime. His feelings of pride and euphoria have given way to a sense of emptiness. The immense satisfaction of being the “King of the Game” lasted a remarkably short time. What can he do now?
This paradox of achieving a dream, followed by the realization that normal life then returns, is like a sobering hangover. Achieving a dream does not grant you eternal access to a dreamlike world. Instead, the bitter truth is that by achieving your dream you lose a source of inspiration.
Becoming wealthy is another such dream. To become financially independent and be able to do whatever you like appears to be a commonly shared goal. The entire lottery industry, for example, is built on this premise. But then, when one day your dream comes true, life goes on. More often than not we see how gradually the euphoria of financial success gives way to serious wealth-related concerns, worries, and even anxieties, such as:
● The fear of losing money by (over)spending, paying taxes, making the wrong investments, divorce, and so forth
● Being sure of having enough money to financially support you for the rest of your life
● The fear of looking or feeling stupid by missing out on obvious investment opportunities
● Transferring wealth and the business to the next generation
● Being able to raise kids in a way that they are inspired to live a purposeful life and are motivated to excel
● How to protect and keep up the reputation that has come with the wealth
● How to distinguish between real, sincere friends and phonies
● How to go about achieving philanthropic goals, being involved in charity in a “right” way, and making sure every dollar has the greatest impact
● Maintaining maximum privacy so as to avoid feeling uncomfortable when too many people know about this financial situation
● Theft, robberies, blackmail, kidnappings – the rich being obvious targets
Dealing with these and similarly difficult concerns is a consequence of being rich. To really enjoy your wealth and lead a happy, fulfilling life it is first and foremost important to make yourself aware of the concerns, worries, and anxieties that, generally speaking, come with wealth. And you will need to address the causes of the concerns, worries, and anxieties that keep you restless.
That is easier said than done. Fortunately, there is an industry specializing in addressing your wealth-related concerns: private banking.1
Over the years the private banking industry has built tremendous knowledge on every aspect of managing wealth. Based on experience with thousands of other rich families, it has the knowledge to help you protect, grow, share, transfer, and enjoy your wealth. Problem solved: For most of our wealth-related concerns, worries, and anxieties, there are private banking professionals to help you cope. They can help you to continue to live your dreams.
Or not: Haven’t we learned from the financial crisis in 2008 and its aftermath that private bankers are nothing but “wolves in sheep’s clothing”? To what extent can I genuinely trust that my private banker will help me to cope with my wealth-related challenges?
Shaken Confidence
The financial crisis has been explained by many critics: Encouraged by technological developments radically shifting the paradigm of efficiency and scalability, by a continuously increasing competitive environment, by a global trend to focus on profitability and short-term shareholder value, and by excessive bonus pay structures, the interests of clients gradually moved to the background, and in their place, unwarranted, irresponsible risks were taken instead. As a result, the entire financial system was on the brink of collapse.
It is not our intention in this book to explain the crisis. A lot has been said and written already. What is important to us is what the crisis meant for the clients of private banks.
Instead of the private bank being the safe harbor, the place to address the various concerns of HNWIs, the sector seemed to turn into a source of even more concerns and anxieties. How sure can you be that your bank has the ability to survive? How much can you rely on the advice of your private bankers? Are their recommendations serving their interests or yours?
We all know the stories. Take Mr. Melvin Connaly. In 2005, at age 68, he sold his company. He made US$3.5 million from the sale. He invested most of this money with his private bank. The bank then invested this in options and futures. The bank encouraged him to take a loan to be able to invest even more in these financial instruments. Mr. Connaly trusted the bank and followed the advice.
It took precisely four years for his money to evaporate, while the bank had made a few hundred thousand dollars in revenue from what were effectively gambling activities. Luckily for Mr. Connaly, the Court ruled in his favor and the bank had to compensate him in the amount of US$3 million.
Many Mr. Connaly–type stories have discredited the private banking industry. In addition, everyone knows about subprime mortgages, is familiar with Madoff, and has been shocked by the Libor fixing scandal. So how can we uphold trust in the financial sector?
In old movies, it might have appeared rewarding to rob a bank. Now that there is hardly any physical money left in the banks, the only way to rob the bank is through employment, it seems. The clients are merely sources of revenue: As a banker, the more you milk them, the more effective you are. By excessive focus on the upside, most bankers don’t even realize how lethal their products might turn out to be for their clients. This pretty much summarizes the public sentiment toward private bankers.
The crisis, followed by all these kinds of stories and experiences, has severely undermined the confidence in the financial sector.
In an article published in the Public Opinion Quarterly, Lindsay A. Owens describes how confidence levels in the United States have plummeted, reaching levels that we have not seen in the past 40 years.2 In 1970, approximately 40 percent of the respondents of the financial confidence poll indicated having a great deal of trust in the financial sector. This dropped to below 10 percent
With
Lindsay A. Owens, “The Polls – Trends: Confidence in Banks, Financial Institutions, and Wall Street, 1971–2011,”
