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Having investable assets of $5mm or more will likely qualify you to start a Private Banking relationship. See our appendix for an introduction to Private Banks.
But what are the advantages of setting up a Private Banking account?
Difficulty: Moderate
Do note that this article may be most relevant for Priority/Private Bank clients.
1) To Widen Investment Options
- Initial Public Offerings & Private Placements. Private Bank clients could get preferred access, as well as more flexible funding arrangements (e.g. no upfront payment required)
- Private Equity. Private Bank clients are granted access to private equity opportunities at smaller bite sizes (e.g. US$200-500k, instead of US$25m)
- Structured Notes or Derivatives. Let’s say you think the market will go up, but not by very much. Or you want to buy Alibaba at a lower price, but earn a yield in the meantime. These instruments can help clients to express a very specific market view or to achieve a preferred investment payoff.
2) To Lower Costs
- Streamline Estate Duties. Did you know that up to a 40% estate duty applies if you own >US$60k of US assets like stocks or property? This applies to our Singaporean readers as well.
- Lower Borrowing Costs. Private Bank clients generally get better loan spreads. In addition, they also have the option to cheapen their loan costs via a synthetic loan, or lock in a fixed interest rate using Interest Rate Swaps.
3) To Raise Cash (i.e. Borrow)
- From Existing Properties. Private Bank clients can draw loans against residential property without Total Debt Servicing Ratio (TDSR) restrictions.
- From A Concentrated Stock Position. Private Banks may be able to lend against a concentrated stock position.
4) To Distribute Wealth
- Ring-fence Your Assets. Private Banks can aid in the process of setting up trust structures to ring-fence assets, which ensures that assets intended for clients’ children are kept safe in the event of a subsequent creditor or marital disputes.
- Splitting Indivisible Assets. Let’s assume that a business owner is keen to distribute his/her wealth equally among three children, while passing the business down to only one child. The Private Bank can help to propose solutions for these kinds of scenarios.
5) Other Reasons
- Invites to Coveted Events. Bank of Singapore (BOS) clients had the opportunity to meet former US President Barack Obama in 2018. During the annual HSBC Women’s Golf World Championship, HSBC Private Bank clients may get access to the Hexagon Suite and dine with golfers.
- Research Access. As a Private Bank client, you can request for the bank’s research publications and in some cases, to meet with investment banking research analysts.
- Philanthropy: Private Banks have experience drafting philanthropy plans that are sustainable and impactful.
- Lower Fees. Private Bank clients will typically get more competitive fees than Priority or Retail Bank clients.
InvestQuest says: This article is to help categorize the several services Private Banks may offer to clients. It is not intended to provide any advice on whether you should set up a Private Bank account, on which of their services you should use, on how you should use their services, etc.
1) To Widen Investment Options
Initial Public Offerings: Flexibility, Preferred Access
For the Singapore general public, subscribing to IPOs require full upfront payment for the shares or bonds you are subscribing for. Assuming you do not get full allocation, the residual cash will then be deposited back in your account.
For Private Bank clients, no upfront payment is usually required during the IPO subscription phase. The implication is that these clients may choose to oversubscribe, especially if an IPO is in high demand. This will allow Private Bank clients to get an allocation that is closer to their desired amount.
In addition, IPOs may at times have separate share allocation categories for the general public and institutions. Private Bank clients may sometime qualify for the institutional tranche, which may potentially offer a better share allocation.
Private Placements: Preferred Access
Private placements refer to the issuance of new shares by a listed company, typically at a discount to the prevailing share price. Many REITs have raised funds through this avenue in 2019 to partially fund new acquisitions, including but not exclusive to Keppel DC REIT, SPH REIT, Mapletree Industrial Trust, Mapletree Logistics Trust and Mapletree Commercial Trust. You can press the links to see what discount these private placements were conducted at.
Such opportunities are typically made available only to high net worth or private banking clients of the banks that are part of the fundraising syndicate.
Private Equity: Access at Smaller Bite Sizes
Some of the best investment opportunities are derived from pre-IPO deals, when a company is still privately owned. Such opportunities are typically not available to the general public but may be accessible by Private Bank clients via Private Equity Fund offerings. As seen in the chart below, returns for US Private Equity Buyout Funds (red line) have been relatively consistent at 10-20%, often outperforming publicly traded stocks (grey line).
Note: US Public Market Equivalent uses the S&P 500 Index
For direct investment into a Private Equity Fund, the minimum investment amount could be as high as US$25 million, according to Investopedia.
For Private Bank clients, such opportunities may be offered at more palatable investment amounts, typically starting from US$250k to US$500k. Investing through a Private Bank at a smaller investment size allows an individual to diversify his/her Private Equity investments for better risk management. In addition, Private Bank clients may potentially enjoy more consistent returns and/or lower risk, assuming the Private Bank’s manager selection and monitoring process is effective.
In recent years, some Private Banks have also started pooling 8-12 of their highest conviction Private Equity Funds into a single investment vehicle each year, accessible at just US$250k for a diversified portfolio.
Structured Notes & Derivatives: Customized Payoffs
Let’s say you think the market will go up, but not by very much. Or you want to buy Alibaba at a lower price, but earn a yield in the meantime. Structured Notes and Derivatives are instruments available to Private Bank clients that allow them to express a very specific market view or to achieve a preferred investment payoff.
For example, assuming Alibaba stock is trading at $210 now and an investor is keen to buy the shares at a lower price of $190. As an alternative to waiting for the share price to fall to the desired level, a Private Bank client could consider an Equity-linked Note (ELN), with a strike price of $190 on Alibaba shares.
An Equity Linked Note (ELN) is a popular Structured Note that offers the investor a “yield” (commonly in the range of 8-12% per annum) for the length of time invested in the note. On maturity of the note:
- If Alibaba trades below the strike price of $190, the investor is obligated to buy Alibaba shares at the $190 strike price. The actual breakeven for the investor will be below $190, if you include the “yield” from investing in the ELN.
- If Alibaba trades at or above the $190 strike price, the investor’s return will be the “yield” of the ELN.
Meanwhile, an Equity Swap is a type of Derivative. Consider the following. Some individuals have bulk of their wealth tied to the shares of a single listed company, perhaps due to their role as a C-suite executive or as the company founder. To reduce the economic risk exposure of the concentrated stock position, without the individual having to sell the shares, Private Banks sometimes suggest Equity Swaps. Entering an Equity Swap would allow the individual to “pay” the future performance of the shares, in return the individual “receives” a fixed interest rate over a predetermined time period.
There are many other types of Structured Notes and Derivatives offered by Private Banks. You may find the mechanics and payoffs of the most commonly traded ones in this article.
2) To Lower Costs
Streamlining Estate Duties
Estate Duty (or Estate Tax) is a one time tax that is imposed on the estate of a deceased. For more info, read this article.
Singapore has no Estate Duties. Singapore has abolished Estate Duties since 15 February 2008. This is perhaps an important factor why celebrities such as Jackie Chan, Jet Li and Gong Li have taken up permanent residence here.
However, being a Singapore tax resident doesn’t mean that you are totally clear of Estate Duties.
Individuals who own foreign assets may still be subject to the Estate Duties of foreign countries when they pass on. The most common example would be Singapore tax residents holding US stocks and property at the time of passing. An estate duty of up to 40% will apply to such assets (a more comprehensive list may be found in the table below) that are in excess of a US$60k tax exemption.
For example, if I owned US$10 million of Apple stock in my personal name and passed on, I would be liable to pay almost US$4 million in estate duties to the US tax authorities!
Tax law is complex and continually evolving. It may be worthwhile to get advice from a wealth advisor within the Private Bank to find an appropriate structure for optimal tax efficiency. This may involve setting up a Personal Investment Company (PIC) or a Trust structure to hold specific assets. As a PIC and Trust do not technically “die”, they may be effective tools for streamlining estate duties in some cases.
Lower Borrowing Costs
Access to relatively attractive loan rates
Private Banks commonly charge a loan spread of approximately 1% above a benchmark rate (which could be the bank’s cost of funds or a transparent benchmark rate like Libor) for investment-backed loans (also known as lombard loans). This 1% loan spread is typically lower than what is available to retail or priority clients.
This low loan spread allows Private Bank clients to borrow cheaply and take advantage of market downturns to invest.
Note that the actual loan spread charged by a Private Bank client may be lower/higher depending on factors such as the account size and trading activity.
Locking in a fixed interest rate using Interest Rate Swaps
Loans offered by Private Banks are usually floating-rate. However, Private Bank clients may fix the cost of these loans using an interest rate swap (IRS).
At the time of writing, it is possible to fix the USD 3-month Libor rate at 0.35% per annum for the next five years. Assuming a loan spread is 1%, this implies that a Private Bank client is able to fix his/her USD loan cost at 1.35% per annum for the next five years.
There are many applications to such a strategy, which could include fixing the cost of your mortgage or fixing the cost of debt for investment into a bond portfolio.
Lowering the loan cost of EUR, CHF and JPY loans
Loans in certain currencies are floored at 0% + loan spread. While Central Bank rates for EUR, CHF and JPY have turned negative, it does not make sense for banks to be paying interest to borrowers, so loan costs for these currencies are typically floored at 0% + loan spread.
Assuming a loan spread of 1%, the all-in cost for borrowing in those currencies will be 1% per annum.
However for Private Bank clients, it is possible to further cheapen the loan cost via a synthetic loan.
For example, at the time of writing, it is possible to lower the cost of a CHF loan down to 0.21% per annum, implying annual savings of 0.79%.
I have detailed the steps involved in the Appendix, which can be used for other negative yielding currencies as well.
As a sidenote, Private Bank clients may tactically use FX swap markets to structure synthetic Fixed Deposits that offer a higher interest rate than a Fixed Deposit for a particular currency.
3) To Raise Cash (i.e. Borrow)
Borrow Against Existing Properties
Property investments are common among high net worth individuals.
However, there are instances where such individuals may find it difficult to apply for a mortgage, due to total debt servicing ratio (TDSR) requirements. Possible reasons below.
- Paperwork. Many high net worth individuals have multiple sources of income and liabilities. Compiling the paperwork for each is very cumbersome.
- Might not meet TDSR requirement. Some high net worth individuals are asset rich but income poor, which may result in them failing to meet TDSR requirements.
- Sensitive. Some high net worth individuals are sensitive about disclosing their assets and income, which is required for TDSR.
According to MAS, TDSR requirements may be excluded for property loans that are secured by a pool of collateral, where the market value of property in the collateral pool is less than 50% of the credit limit of the loan.
A Private Bank customer can use his/her assets in the Private Bank as the pool of collateral mentioned, to draw a property loan without the need to meet TDSR requirements.
Borrow Against a Concentrated Stock Position
Some individuals have bulk of their wealth tied to the shares of a single listed company, perhaps due to their role as a C-suite executive or as the company founder. In many cases, they do not want to sell the stock. At the same time, they’d like to raise cash.
Private Banks may be able to lend against a concentrated stock position in a listed company. This will provide flexibility to the client on potential liquidity needs. In return, the Private Bank client could use the proceeds to build up a more diversified investment portfolio for him/herself.
4) To Distribute Wealth
Ringfence Your Assets
Wealthy parents may want to protect their child from potential creditors (which could include the child’s future spouse…) after their passing. In Singapore, prenuptial agreements may not be enforceable (see this link for some details).
Private banks can aid in the process of setting up trust structures to ringfence assets, which ensures that assets intended for their child is kept safe in the event of a subsequent creditor or marital disputes.
Splitting Indivisible Assets
For many high net worth individuals, the bulk of their wealth is tied to their operating business.
Let’s assume that a business owner is keen to distribute his/her wealth equally among three children, while passing the business down to only one child.
There are ways to pass the shares of the company to that one child for ease of future business operations, while ensuring that the remaining two children inherit assets of a similar amounts.
One possible way is to use a Universal Life Policy, which distributes a payout to the two children to equalize the inheritance, without having to break up the company.
Others Reasons
Private Bank Events
Client events may include educational seminars as well as events catering to clients’ interests. These events provide an opportunity to get to know other clients with similar concerns and interests. I have listed some notable examples of Private Bank events below.
- Bank of Singapore (BOS) clients had the opportunity to meet former US President Barack Obama in 2018, when he was invited to be a speaker at a BOS event. The event was reportedly wildly oversubscribed.
- HSBC Private Bank clients typically have the opportunity to access to the Hexagon Suite during the HSBC Women’s World Championship. The top-tier clients may even be invited to dinner with the golfers.
Research Access
As a Private Bank client, you can request for the bank’s research publications and in some cases, to meet with investment banking research analysts. Some banks may offer their top-tier clients access to the bank’s institutional research portal.
Philanthropy
Private Banks have experience in drafting philanthropic plans that are sustainable and impactful. Many wealthy individuals do already give back to the community via one-off donations. However, to ensure continued support to a particular cause, it might make sense to consider longer-term sustainable alternatives. Where appropriate, Private Banks can propose structures such as Foundations or Endowments and provide a network of contacts to achieve such goals.
Lower Fees
Private Bank clients will typically get more competitive fees than Priority or Consumer Bank clients. This could be in the form of better Fixed Deposit rates, lower sales charges on mutual fund investments and lower margin financing fees.
InvestQuest says: This article is to help categorize the several services Private Banks may offer to clients. It is not intended to provide any advice on whether you should set up a Private Bank account, on which of their services you should use, on how you should use their services, etc.
APPENDIX: What is a Private Bank?
Private Banks cater to the wealthiest segment of clients. The criteria to open an account typically starts from a minimum of US$5mm of investable assets (consisting of cash and liquid investments). Every year, Asian Private Banker compiles a list of banks with the largest Private Banking presence in Asia (excluding onshore China), which I have included below.
Do note that the 2019 AUM for Citi, DBS and Morgan Stanley’s are inflated compared to the other banks due to either the inclusion of consumer banking AUM or loans.
*Note: Citi includes its Consumer Banking AUM in its 2019 AUM figures. DBS includes its Priority Banking AUM in the 2019 AUM figures. Morgan Stanley includes loans in its 2019 AUM figures.
Minimum account size for each bank varies by region and the bank has discretion to approve account openings below the stated minimum account size.
Private Banking services go beyond what is offered by the Retail/Priority Bank. Do a quick Google search on what Private Banks can offer and you will see terms such as “legacy planning”, “investment solutions” and “credit solutions” being used frequently. We covered some of these solutions in the earlier sections of the article.
APPENDIX: Lowering the loan cost for EUR, CHF and JPY
As at the time of writing, the below steps detail how an investor can structure a synthetic CHF loan that costs 0.21% per annum, which provides quite a bit of savings compared to borrowing directly in CHF which would cost 1% per annum.
- Draw a 6-month USD loan. The all-in USD loan cost is 1.37% per annum, comprised of:
- USD 6-month Libor rate of 0.37% per annum
- 1% loan spread
- Execute a USDCHF FX swap for the 6-months to match the loan maturity. Based on current spot and forward FX rates for USDCHF, the annualized FX carry for USDCHF is approximately 1.16%. The FX swap works as follows:
- [At spot] Sell the USD loan proceeds to buy CHF at a USDCHF rate of 0.9473.
- [6 months forward] Sell CHF, buy USD at a USDCHF forward rate of 0.9418. USD purchase proceeds will be used to pay off the USD loan.
- All-in cost of synthetic CHF loan: 1.37% – 1.16% = 0.21% per annum
Do note that the FX swap transaction cost (roughly 0.1%-0.2%) has been excluded from the above calculation for simplicity.
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