Most full-service investment firms have a division referred to as private banking. Over the past few decades, we have sat in on various presentations regarding private banking and the services this division offers.
In the earliest days of private banking, the services offered differed from today. For example, many services had both a financial and a concierge-type offering. Examples of services offered were assistance with paying household bills, consolidating different types of debt, transportation when needed (to and from the airport, etc.), assistance with tickets to special events, arrangements for travel, dinner reservations at a nice restaurant, and even walking your dog.
Private banking today
We find many misconceptions based on the earlier service offerings, and many are unaware of the services that this division offers today. To help provide clarity on what private banking is today, we summarize the main service offerings, some of the side benefits of private banking, and illustrated some examples of how this division integrates with us at ScotiaMcLeod.
High level of customized service
Private banking differs from institution to institution. For purposes of this article, we will outline how private banking is used at Scotia Wealth Management.
Private banking combines a comprehensive day-to-day banking package with high customer service and specialty lending.
Unlike regular banking channels, private banking has a dedicated banker assigned to every relationship and an associate to support the specific financial service needs of the clientele. They limit the number of clients they serve so clients are able to reach their banker and associate whenever they need anything.
Inclusive banking and borrowing package
Our clients enjoy an inclusive banking package for both their personal and business banking and borrowing needs. What sets private banking apart is access to strategic financing through their Total Wealth Credit Solution.
In addition, unlike the retail branch banking counterparts, private banking can create pools of collateral that span across asset classes. For example, they can combine the value of residential property, commercial property, ScotiaMcLeod investment portfolios and the cash surrender value of life insurance policies.
This amalgamation of assets allows private banking to lend larger dollar amounts for borrowing on very flexible and attractive terms.
Borrowing off of a single line of credit
Traditional banks are often siloed around financing solutions for different wealth asset classes, making credit complicated and inefficient with multiple loans and relationship managers.
With Scotia Wealth Management, a private banker can set up a loan that allows you to borrow against a combination of asset classes, all in one place with a single investment line of credit and, importantly, a single point of contact.
Leverage investing
Lending for investment purposes (leveraged investing) is a core component of private banking.
For those comfortable assuming risk and looking for flexible borrowing arrangements, private banking combines their knowledge of wealth management, transactional banking, and valuation to provide lending guidance customized to each client’s situation and unique assets.
In addition, they coordinate with the client’s tax, Wealth Advisor and Portfolio Manager to help you avoid unnecessary trade-offs when raising capital for acquiring new assets.
Borrowing can be strategic and opportunistic
Some affluent investors borrow to invest as part of a comprehensive wealth management strategy. They use a customized line of credit to create liquidity against various wealth holdings, allowing them to act quickly to take advantage of opportunities.
Borrowing to invest is not for everyone, and suitability is paramount as it can add risk. Any investment strategy should be discussed with the client’s investment and tax advisors and should consider long-term and personal circumstances.
Flexibility of repayment
Perhaps the greatest utilized benefit of private banking is the flexibility of repayment. Many debt facilities are locked-in and have limitations for repayment without penalty.
For example, repayments on a traditional mortgage may have limited annual repayments, without penalty, at 10 or 20 per cent of the original principal amount borrowed. However, the private banking lending facility is typically structured as a line of credit, and it is flexible concerning repayments. 100 per cent of the line of credit can be paid off at any time.
Concierge service a side benefit
The concierge and travel management services are offered exclusively to private banking clients as part of its service offering. They will curate travel, dining, and entertainment experiences based on clients’ unique preferences and profiles.
In addition, they offer expert travel advice to plan clients’ dream vacations — arranging delicious dining experiences in top-rated local restaurants or securing a booking at some of the best tables wherever you are in the world. In addition, privileged access to special events, award-winning theatre to prime-time seats in international stadiums, to name a few.
Access to financial planners
The reasons to borrow are always different, but private banking clients are comfortable using credit to be strategic and grow their net worth. And the private banking process is not without guidance.
Clients enjoy access to a comprehensive financial planning process where private banking works with a lead financial planner and partners within Scotia Wealth Management. Combined, an in-depth financial plan is created to help clients reach their goals and manage risk.
One of the best ways to understand private banking services is to provide examples of how they have helped clients on Vancouver Island. Below we will outline the client’s unique situation, some main facts, and the private banking solution.
Illustration #1 – Investment Properties
Client situation
A couple has come across a great opportunity to purchase a revenue property; however, the traditional retail bank requires a large down payment for this revenue property, which they don’t have.
Client facts
The clients own their home but have limited equity as they only purchased their residence a few years ago. They are busy professionals and on the advice of their accountant, they have kept retained earnings inside their professional corporation and have been investing the excess funds into publicly traded securities with ScotiaMcLeod.
If the clients were to withdraw the cash/investments from the corporation, they would face a large tax bill for the income taken from the company and realize capital gains on selling the equity investments.
Client solution
Create a collateral pool that holds the new property and the corporate investment portfolio as security for the lending. With both pieces of collateral, the limit on a new line of credit is greater than 100 percent of the purchase price of the revenue property, allowing the client to unlock the value in their portfolio without redemption and adverse corporate tax consequences. In this scenario, the clients purchased the new property within the holding company; however, they could have set up the lending facility in either personal or corporate name.
Illustration #2 – Avoiding the Construction Mortgage Process
Client situation
Clients own their home and would like to build another; however, they don’t like the mortgage and construction mortgage process.
Client facts
Clients’ existing ScotiaMcLeod portfolio has a book value of $1.4 million and a market value of $1.8 million. Clients’ personal residence has an assessed value of $800,000. They would like to have time to build a larger new personal residence on a vacant lot they are looking to purchase.
The traditional bridge financing will not work, and they want to reside in their existing home until the new home is complete. Investments are primarily registered, or have unrealized gains, triggering tax consequences if sold.
Client solution
Private banking creates a lending facility with a limit of up to $1.75 million. Clients use the limit to fund both the lot purchase and new home construction. With this, clients do not need to touch investments to fund the construction, and when the new home is completed, they will sell the first house and use the proceeds to pay down the line of credit.
The clients will then convert the remainder of the line of credit for the recently built house into a traditional mortgage when complete, freeing up the line for other uses, such as investing in the market to diversify their portfolio.
Illustration #3 – The Lump Sum
Client situation
A client received a large sum of money from an inheritance. She and her partner realized this would allow them to buy a home, but do not want to commit all the money to a home and would like to set up some investments at ScotiaMcLeod.
Client facts
The client receives a significant amount via a lump sum inheritance of $2 million. They have never had this kind of capital before. They have been renting and would like to buy a residence.
They currently do not have any investment accounts and would like to set some up to diversify and not put all their money into real estate. In addition, clients have a decent income and can service debt.
Client solution
In conjunction with private banking, we have mapped out two options or solutions for the client because of receiving the lump sum inheritance:
1. The first solution is to find and purchase the home they want with cash. We then set up a mortgage or private banking lending facility using the home as collateral. They borrow up to 65 to 80 percent of the funds to invest, and we assist with the investment component at ScotiaMcLeod. As this is technically a borrow-to-invest strategy, we engage their accountant to ensure tax deductibility of the borrowing strategy.
2. The second solution is we assist the client with purchasing investments within ScotiaMcLeod; they can then set up a private banking lending facility against the investments and borrow back, usually up to 70 percent of the value, and use the funds as they please, in this case for purchasing a home.
Illustration #4 – Immediate Financing Arrangements
Client situation
Client is interested in purchasing a permanent life insurance policy without drawing down his investment portfolio to do this.
Client facts
He has been generating great returns in the investment portfolio but seeks an alternate investment to help enhance his estate.
Client solution
In this situation, we can offer an Immediate Financing Arrangement (IFA), where the client purchases a permanent Life Insurance policy, creating a Cash Surrender Value (CSV). The client pays the first annual premium from their resources; the policy and other assets (if required) are pledged as collateral for the loan. After that, the client can borrow back up to 100 per cent of the premium payment and use the loan proceeds to replenish the funds they used for their annual premium. Finally, as the policy continues, it builds a higher CSV within the policy, and the process is repeated annually until the permanent insurance policy is fully funded.
Illustration #5 – Intergenerational Wealth and a Debt Swap
Client situation
The client has a very predictable high income. She is seeking a long-term strategy to create intergenerational wealth for her children.
Client facts
The client is a physician with $1.5 million in investments at ScotiaMcLeod, and she also owns a home worth $1.8 million with an outstanding mortgage of $300,000.
Client solutions
The $300,000 mortgage outstanding on the family home is creating interest expense that is currently not tax-deductible.
Private Banking can support the client with a “debt swap” strategy, redeeming the $300,000 of investments to pay out the existing mortgage, then readvancing $300,000 for investing purposes, creating a separate tax-deductible loan. Finally, leverage the $3,000,000 asset base to create a $1,000,000 private banking lending facility for investments to increase market exposure.
The clients’ Portfolio Manager can deploy funds over time investing an additional $1 million with ScotiaMcLeod to bring the portfolio to $2.5 million.
Illustration #6 – Business Opportunity and Foreign Exchange
Client situation
Our client is a successful business professional with a sharp eye for the cost of borrowing. He can invest south of the border; however, his investments are in Canadian dollars (CAD). If he redeems his investments, he still needs to convert from CAD to United States dollars (USD) and the exchange rate is currently unfavorable.
Client facts
This client runs several successful businesses, including dealings in the United States. His assets include residential properties, commercial properties, and ScotiaMcLeod investment portfolios in both personal and corporate names.
Client solutions
Private banking is engaged to lend against a collateral pool of property and investments and can set up and advance the lending facility in USD. Our client can pledge CAD assets to borrow in USD, avoiding exchange. He receives an income stream in USD that he can use to make the interest-only payment on the borrowing until such a time that he chooses to convert some of his CAD assets to pay down the USD lending facility.
These illustrations show that Private Banking can service our clients with borrowing needs in tax efficient and cost-effective ways. As Portfolio Managers we are deeply engaged with our clients’ investment opportunities and assets management; however, having a team of experts collaborating with us opens the door to various possibilities suited for different life stages and client priorities. Private banking may be suitable for clients looking to use borrowing and leverage to diversify their overall asset portfolio and wealth creation.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email [email protected], or visit .
