assets is a complex process. An effective conversation with your private banker, leading to a value-adding investment service offering, requires at least a basic appreciation of this process.
In Part Three, we elaborate on credit, a second area where the private banker adds value. Generally speaking, lending is one of the key banking activities. Apart from providing some basic overall insights in the world of lending and borrowing, we explore and discuss the reasons why rich individuals borrow. We separately highlight the risks involved in borrowing as well as some technicalities with regard to the relationship between lender (i.e., the private bank) and borrower (i.e., the client).
In Part Four, we discuss a third area where most private bankers play a valuable role: life insurance. We take the view that a basic understanding of the life insurance industry – what is the general use of life insurance, and what are the available types of life insurance? – is useful before exploring and understanding the rationales for using life insurance by the rich. As the average private banker is not an insurance specialist, we also look at which role they usually play and how they add value with regard to life insurance.
Through life insurance, people intend to create some level of future certainties in an otherwise uncertain world. The same applies to wealth structuring, which we discuss in Part Five in terms of the various purposes of wealth structuring as well as the various wealth structuring tools and vehicles. We also discuss which value-adding role you may expect from your private banker.
A final topic we discuss, in Part Six of this book, concerns the psychology of wealth. Raising children in a wealthy environment has proven to be challenging. We explore these challenges and provide some specialist insights into this intriguing topic. And once again, we discuss how private banking specialists may be of added value with regard to the psychology of wealth.
It is essential to get the most out of your relationship with your private banker. For the industry to be truly value-adding, it is on the one hand important that clients are open and receptive to the services of the private banks, and on the other hand that the private banking professionals have the passion and the drive to excel and provide the service that their clients need. This book aims to increase your knowledge level, thus implicitly increasing your (knowledge-based) trust in the industry and motivating your private banker to shine.
Part One
Conclusion
The private banking industry has tremendous potential to add significant value to the lives of the rich. Ignorance and skepticism, among other factors, create a dense fog, blurring our ability to recognize this potential.
In this introductory part we have explained how increasing knowledge about the value-adding potential of a private bank helps to unlock this potential. That also explains why this book has been written and why in the remainder of this book we elaborate on investments, credit, life insurance, wealth structuring, and the psychology of wealth, that is, the areas where private banks typically add value.
Are you rich? Don’t worry; help is near!
Part Two
INVESTMENTS
Once you have money, you have to invest. It seems almost as evident as “if you want to live, you’ll have to breathe.” Private bankers are lining up to help you to invest your money wisely. Unfortunately, there are so many service providers, so many different approaches to investing, and so many different financial products to choose from. And then there are these annoying cocktail parties, where you have to listen to those wise Midas-type guys who seem to transform everything they touch into gold. It is confusing. What am I missing? What am I doing wrong? Climbing Mount Everest seems so easy compared with crossing the jungle of the investment world.
In this part, we follow a step-by-step approach to unmask the secrets behind investing. This approach doesn’t make investment necessarily an easy thing to do, but it will help you to be much better prepared for your meetings with investment advisers.
The first step is to begin with the right question. Rather than asking, “How should I invest my money?” we recommend you to first spend some valuable time understanding why you should invest. As long as you don’t know why you invest, don’t invest.
We assume that everyone agrees we should not invest just for the sake of it, nor just to amass as much wealth as possible or to legitimize the existence of our banks. Investing should have a purpose for you. Why would you invest? We address this question in Chapter 2.
Only once you grasp the rationale of investing does it make sense to have a closer look at the investment process itself. It should be noted that with regard to investments, it is not sensible to take a one-size-fits-all approach. As you can’t approach investments in generic terms, the second step in the process toward investing is to define your personal financial situation as well as your investment personality. The more accurate this definition, the higher the likelihood that you will invest in a manner that really suits you and your situation. This second step, better known as risk–return profiling, is the subject of Chapter 3.
The main objective of the risk–return-profiling step is to understand how much risk you are able and willing to take, and how this relates to the expected return. As a rule, the more risk you are prepared to take, the higher the expected return. However, the reverse also applies: The more risk you take, the higher the potential loss. This explains why it is essential to have a basic understanding of investment risks as well as of the ways these risks can be mitigated. That is why in Chapter 4 we focus on investment risk.
We are still not ready to invest. Chapter 5 addresses the importance of discipline. To ensure investment decisions are not dependent on your mood or on the mood of your investment manager, you agree on a certain approach. These are effectively the rules and principles guiding the investment process, thus making it more transparent and predictable.
As an investor you have different options. You can make your own investment decisions or rely to a greater or lesser extent on the expertise of specialists. Whatever you decide, you’ll have to select an institution to work with. In Chapter 6 we share considerations with regard to deciding on your desired level of involvement in the investment process, as well as on the selection of the most suitable service provider.
Once you have walked through these steps you should be well-equipped to get the most out of the investment management relationship with your private banker.
Chapter 2
Why Should I Invest?
It is often taken for granted that one should invest as soon as one has the cash to do so. But why is that so?
Based on experience, we know that inflation, spending, and taxes reduce (the purchasing power of) our wealth faster than we often realize. Through investing we compensate for these unavoidable wealth-diminishing effects.
Mr. Jones recently inherited US$5 million in cash and already owns a fully paid-up house, currently worth US$1 million. He is 35 years old and married, with two boys, aged 3 and 7. As the money arrived at a time that he happened to face serious difficulties at work, he took this windfall as an opportunity to say farewell to his not-so-beloved boss.
But now Mr. Jones has to plan for the future. He is still young. He wants to continue his lifestyle, only do the work he likes, become a healthy old man, and, upon his demise, pass on substantial wealth – preferably US$2.5 million – to each son. This should be feasible.
