in an effort to reduce internal fraud through guidelines, rules, and regulations.
● To bolster the soundness of banks, they are forced to hold more and better-quality capital. A greater loss-absorbing capacity should provide greater confidence in the ability of banks to survive periods of stress, whenever they occur (e.g., Basel III).
The regulators have responded to the financial crisis with great resolve. The public may expect the banks to implement all the new rules and regulations, as otherwise substantial penalties may be imposed on the banks or even their license to conduct their business may be at stake. This is why we consider this “deterrence-based” trust: Banks will comply out of fear for the consequences of not complying.
In a way, this is a negative way to foster trust, which to a certain extent explains – together with the high levels of skepticism of the general public – why the morale in the private banking industry has been low since the crisis in 2008.
A second important contributor to higher levels of deterrence-based trust is the legal system. The more the public can rely on the courts that private bankers will be disciplined in case clients are victims of fraudulent, insincere, and (blatantly) incompetent behavior, the higher the public expectation that private bankers will undertake all possible endeavors to provide a fair, honest, and high-value-adding service.
Knowledge-Based Trust
The second level of trust is knowledge-based trust. The idea is that trust increases with the increase in knowledge about the other. In other words, the more knowledge you have about the other party, the better you know what you may – and may not – expect.
The main actor with regard to the development of knowledge-based trust is the client. The importance of this trust level is illustrated by the results of the previously mentioned 2013 Edelman Trust Barometer (see footnote 3), where it appears that the informed public scores higher on trusting the financial services industry than the general population.
The main benefit of increasing knowledge about private banking and the added value that a private banker is supposed to deliver is that it improves your ability to assess the credibility of potential service providers, thus reducing the overall time needed to develop a trusted relationship. As an aside, it is appealing and morale-boosting for professionals to work with informed clients, which further improves the overall service levels.
It might sound somewhat unfair: The client is the main victim of the trust and confidentiality crisis in the financial services sector, so why would we expect the client to work to help restore this trust and to contribute to boosting the morale in the industry? This is a good question, and one that forces us to repeat: because it is in the best, personal interest of clients that they are able to have a high level of confidence and trust in a passionate, highly motivated financial services industry, as this sector does have the capability to deliver high-level, high-value-adding services.
Identity-Based Trust
The final level of trust concerns identity-based trust. This is the level where you dare to become vulnerable, knowing that the other party won’t take advantage of you. This type of trust takes time to develop. During that time, the other party has to demonstrate a consistent ambition to be honest, fair, responsible, and transparent.
The main actor “responsible” for developing higher levels of identity-based trust is the financial services sector itself: no more bank scandals; a problem-solving attitude instead of a narrow product focus; no hidden charges or fine print. The private banking industry has to consistently demonstrate it has a sincere resolve to accept its fiduciary responsibility, which refers to the acceptance that the interests of clients must never be compromised by the self-interest of the private banker. In the words of The Trusted Advisor, private bankers can contribute to increasing trust levels by higher levels of credibility, reliability, and intimacy, and by reducing the level of self-orientation.
Table 1.1 combines the three levels of trust with the four ingredients of trust in a single table.
Table 1.1 Three Levels and Four Ingredients of Trust
Why This Book?
Everybody has a role to play in restoring and improving trust levels. This book is primarily written for private banking clients and their children, with the intention of contributing to an increase of knowledge-based trust levels. That is the only level of trust where clients have a (proactive) role to play. Sufficient basic knowledge about the potential added value of private banking service providers helps rich families to perform their duty to increase overall levels of trust in the private banking sector.
To be rich is a blessing. But to really enjoy this blessing in the long run, professional help is usually indispensable. The dilemma here is that to rely on professional support, you first need to be able to trust the professionals. Regulators and the private banking sector play a crucial role here. Although essential, that is not sufficient.
We firmly believe that the more knowledge you have about the service offering of a private banker, the more you will be able to benefit from the relationship. Knowledge deepens your understanding of what to expect and makes you more aware of the opportunities that a healthy relationship with a private banker represents. As a rule, knowledge tends to improve – usually over time – the value received from a product or service. The more you know about cameras, the higher the likelihood that you’ll find the camera that suits you best, from both a functionality and a cost point of view. The more you know about cameras, the higher also the likelihood that you will be able to discern between the competent and the incompetent camera salesperson. The same applies – and probably even more so – to private banking.
After having read this book, you should not only have a better appreciation of what a private banker could mean for you, but you will also be able to have a meaningful, more engaged conversation to ensure that the service provided is really the service you need.
In a way, it kick-starts – or, if you already have a relationship, deepens – the relationship, which is in the interest of both your adviser and yourself as it enhances the likelihood that you’ll receive a service that truly suits you.
In other words, being more informed and prepared serves two purposes:
1. It enhances your knowledge, thus allowing you to get the most out of the relationship with your private banker.
2. It motivates and appeals to the professional, thus encouraging her to give her best to impress you.
Both are important to you.
When we talk about increasing knowledge, we refer to the areas where private banks typically add value:
● Investments
● Credit
● Life insurance
● Wealth structuring
● Psychology of wealth
These are therefore the areas that we will discuss.
We start in Part Two with the area of expertise that is generally perceived to be the core activity of private banking: investments. Step-by-step we guide you through the seemingly mysterious world of investing. Why would you invest in the first place? How do you invest in a way that suits you? What are the risks that the investment manager deals with, and how does he manage these risks? What are the asset classes and financial instruments that
