Private capital is critically important because it is progenitor of all other forms of capital. Governments possess capital, but only because they tax it away from private individuals. Corporations possess capital, but only because individuals have voluntarily invested their capital in corporate stocks and bonds.
The banks and other institutions who advise wealthy families certainly take the business of advising private capital seriously. It spends lavishly in building its investment management business and spends heavily to market it.
For a bank/other institutions, a large wealth management business offers important advantages. The problem for banks is that lending is sometimes a good business and sometimes a bad business, depending upon the interest rate and economic conditions. Shareholders of the bank don’t like earnings volatility, so a bank that generates its earnings mainly from its credit activities will sell at a relatively low price/earnings ratio.
A healthy wealth management business, on the other hand, provides a bank with an annuity-like stream of revenue and earnings, which shareholders prize. Such a bank will sell at a higher multiple of earnings. Therefore, for the bank’s senior management, building a strong wealth management business makes a lot of sense.
The problem is that banks don’t take private capital itself seriously. A bank and its advisors view wealthy families essentially as prey. The idea is to hunt these families down, get them to engage with the bank as their advisor and then sell them everything they could sell and charge fees as high as they could get away with. In short there is no alignment of incentives.
This lack of respect for private capital virtually ensures that any client of the bank that began to go off the rails would continue to go off the rails. These institutions simply fail to understand the nature of private capital and the crucial role it plays in the economy and way of life.
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