Insight into the So-Called World of Private Banking

By Sebastian Elliot, FRM, CAIASM

Before entering the profession, I have to admit to being slightly enamored and more than a little intrigued by what I thought was the seemingly mystical and exclusive world of private banking. But having worked in the industry for five years, I would say, there really is no mystique about it. It’s a field that is simply trying to enhance the wealth of its clients by producing suitable recommendations and, in some cases, actually managing high and ultra-high net worth clients’ money with the appropriate amount of risk and within an ever more complex and onerous regulatory framework.

You would think that people who have amassed a fortune would not need any help making more money.  But, making and generating money is not the same as managing money. Managing money can be a full time job in itself, and for Bank Leumi USA, it literally is. Our job is to focus on our clients’ needs, risk tolerances, and constraints, in order to help them avoid financial pitfalls, whilst enhancing their wealth in the long term. 

Bank Leumi USA has over 110 years of experience in the world of private banking; it has evolved with different industry investment theories—which have given shape to its philosophies—for the betterment of its clients. For example, the meaning of investors being risk averse has been transformed from a perception that they would prefer no risk to some risk; to the idea that investors expect to be appropriately compensated for bearing such risk. In English, this means a risk-averse person wants more for taking on risk than someone who is more risk-loving.

The investment world has come a long way from looking at a stock or bond in isolation, the so-called and outdated “Prudent Man” rule. It has given way to the Prudent Investor rule, which considers the portfolio’s components holistically. For example, one volatile stock or bond may seem less risky if it is seen within the total framework of a balanced portfolio, as opposed to looking at it in isolation. This lends itself to looking at “risk and return” very differently than professional money managers have done in the past.

The industry has also come a long way from just deciding which stocks and bonds to place peoples’ money into. Now, thanks largely to hedge funds, mutual funds, and exchange traded funds/notes (ETFs/ETNs), clients can invest in equities around the world, distressed bonds, high yield bonds (“junk” bonds), alternative strategies, currencies, real estate, REITS and commodities as easily as they have always invested in stocks.

Measuring risk and performance of these investments is one of the responsibilities private bankers take on; only then can they determine the appropriate mix of investments that match clients’ profiles. So understanding clients’ needs is just as important, if not more important, than understanding the investments themselves.

Bank Leumi USA, through its wholly owned subsidiary Leumi Investment Services Inc., is moving towards expanding the Registered Investment Advisor (RIA) platform to offer new investment possibilities. The major difference is that clients’ money will now be managed by highly skilled and qualified money managers rather than by brokers. This will allow much more specialized teams of strategists to work on developing investment ideas and market strategies and will free up brokers’ time to enable them to better understand their clients’ needs.

Not only do I believe ETFs and ETNs have started an investment revolution, but I feel that in the future, most people will be able to invest in all sorts of alternative investments such as vintage wines, art, stamps, exotic collectibles and even pop groups. Right now, these are only open to an exclusive club, but the investment world is opening up in a big way.