Cashing In On Cachet
May 1 1992 by Joseph Mccarthy
By now, you’ve seen the ads in Fortune, The New York Times Magazine and other high-toned publications. Alongside pitches for Porsches, Neiman-Marcus, Rolex watches and hand-blown bottles of 21-year-old Glenlivet scotch, they typically feature a man in his mid-40s, dressed smartly in a pinstriped shirt and bright bow tie. He’s a private banker asking for roughly half a million dollars of your money. His message is simple: You don’t have time to manage your financial affairs. Let me do the job in style.
As automobiles, liquor, clothing and cars move upscale, banks are following suit. Stung by tough times and industrywide consolidation, they’re targeting the wealthy, predominantly chief executives and other nouveau riche spawned by the go-go 80s. This is banking for the busy; banking as brand. The aim is to offer a comprehensive package of financial services, including credit, trust, cash management and investment counseling. It’s a new twist on an old marketing approach to rank-and-file customers: the bundling of bank products. But this time, the stakes are vastly higher.
Truly, there’s gold in them there deep pockets. “We assume an average $10,000 in annual fees and spread income,” and loan defaults are microscopic, says Susan P. Haney, senior vice president of The Private Bank, Bank of Boston. Grabbing a piece of the action has been the vast majority of major U.S. commercial banks-including Security Pacific, Bank of America, Chase Manhattan and a spate of smaller, more specialized players.
To be sure, both banks and their nonbanking competitors offer a near-blinding array of customized financial management packages. How to pick a private bank? Do you need one at all?
“We don’t work with a private bank now, but as we expand our global focus, we may have to consider it,” says Thomas S. Haggai, chairman of IGA, a Chicago-based grocery products concern. “In some areas of the world, using these banks is an accepted way to do business.”
But sounding a more skeptical note is Peter G. Scotese, former chief executive at Springs Industries, a fabric and consumer products manufacturer in
“I was a private banking client in the late 70s and early 80s, but I was weaned away by the kinds of services my broker was providing,” Scotese says. With major brokerage houses now offering many of the same services as banks, he adds: “In terms of convenience and cost, the range of services that my broker gives me is far and away more diverse.”
Even so, business is booming for the nation’s private banks: At the end of 1989, according to the Los Angeles Times, the top 100 domestic and foreign players in the
The motif at private banks: service, service, service. The aim is to weave a seamless package of products and indulge clients (not customers, mind you) in the process. “A private banker is a point man who coordinates specialists from the trust, mortgage, and investment areas of a bank,” says M. Katherine Donohoe, manager of private banking for the Washington-based American Bankers Association.
Among corporate types, usually only the chief executive and his top two or three lieutenants have the kind of money a private bank is looking for. The investment threshold? At many, a minimum $100,000 is required to open an account, though some private bankers sniff at anything less than a million.
Let’s say you measure up, and you’re willing to take the plunge. How to select a private bank? You might first ask whether a bank offers products and services tailored for CEOs. Many do.
“The needs of a senior executive with Merrill Lynch, who is paid a significant bonus based on production, likely will be different than someone whose pay is more heavily weighted toward base salary.”
Citibank offers a program called “Personal Banking for the Overseas Executive.” “After you’ve been transferred to an overseas location, we can make sure your mortgage payments, insurance premiums, children’s college tuition and credit card bills will be paid on time,” says Robert De Rosa, a Citibank vice president and the program’s director. Charges for the program are levied on an a la carte, per executive basis. Many of those served are chiefs of corporate divisions and subsidiaries, De Rosa says, although Citibank’s private bank proper offers similar services to those higher on the ladder.
In general, private banks report that about half of their clients are heads of companies, one of the top three or four, or partners or their equivalents in management firms. Chase Manhattan assigns personnel to target individual CEOs and companies, says James W. Zeigon, executive vice president in charge of the Chase Private Bank. “We try to leverage off people that we know and to tap the expertise of our corporate finance people, who deal with CEOs and COOs on a regular basis.”
“This is a personal introduction business,” adds Bank of Boston’s Haney. “If you do it well, a chief executive will tell his colleagues. If we are successful in dealing with one executive, we’ll often find we are dealing with six within a year.”
BARTERING FOR BARGAINS
Can you comparison shop for a private bank? Some bankers, keen to emphasize “relationship building,” imply that shouldn’t be necessary. Anxious to peddle a package, many prefer a face-to-face meeting. But if you agree to come in, advises Haney, “you should be interviewing a private bank as much as it is interviewing you.”
In case of such a summit, here are some criteria to use as a measuring stick.
Financial terms: While the service fees at private banks tend to be about the same-roughly one percent of assets under active management-there’s likely to be some flexibility in terms of individual products, says David A. Hall, president of Financial Services Associates, a consulting firm in Niles, MI. In general, banks aren’t likely to shuck a jumbo CD sale for the sake of a quarter-point.
“Pricing services differently to private banking clients is one way of giving them special treatment,” notes a recent survey by Trans Data, a research and consulting company in Wayne, PA. The survey tallied 1,000 responses from individuals who earned at least $150,000 a year or had a minimum net worth of $500,000.
International capabilities: If you have substantial foreign investments or operations, a currency hedge might be valuable. Foreign banks in the U.S. may offer an attractive entree into high-performing overseas markets.
Track record: Don’t be afraid to ask for performance statistics, particularly those on a bank’s proprietary line of mutual funds. Some brokerage competitors maintain that as investment managers, banks aren’t up to snuff. Judge for yourself.
Amenities: Some perquisites are basic, while others border on the exotic. New York’s Commercial Bank recently offered a free weekend at the Waldorf Astoria to depositors purchasing 30-month, $100,000 CDs. At Royal Bank of Canada, computerized files track customers’ birthdays and favorite restaurants. Do you fit? What is the bank’s target market? Even in the high flying world of private banking, standards can differ considerably. At American Express Bank International in Beverly Hills, where Jaguars and Maseratis queue neatly at the curb, clients’ net worth averages between $5 million and $10 million, says manager Christian Groothaert. By contrast, at Providence, RI-based Fleet/Norstar, the private bank handles 30-to 50-year-olds earning more than $100,000 a year.
No doubt, these specifics beg the question of whether you want to deal at all with a private unit of a major commercial bank. Service commands a premium: Products offered by private banks are sometimes provided piecemeal by their parents-at far less cost.
Moreover, there’s stiff competition from new players, including some foreign banks and such private banking “boutiques” as Grand Bank in Grand Rapids, MI. Among the nonbanks taking their best shot are brokers and independent financial planners.
Banks argue that commission-hungry brokers are more prone to push products, thus blurring their judgment in charting financial goals. But former Springs CEO Scotese, a one-time customer of the Chase private bank, lauds a cash management account he opened with Merrill Lynch.
“I can access any of my assets by writing a check,” he says. “I can borrow money against my securities account, and take out a home equity loan based on my real estate holdings. I get all these goodies just by keeping $20,000 or more invested. What more could I want?”
What’s it come down to? The buzzword is service, and on that count, banks claim they are eager to take on all comers. “The key,” says the ABA’s Donohoe, “is chemistry.”