Understanding Higher APYs with Your Private Banking Accounts

March 27, 2024

Private banking services offered to high-net-worth individuals come with benefits and advantages, including wealth management services, investment management, and dedicated service from a team of financial professionals who have taken the time to review your particular needs.

Another benefit is the higher average percentage yield rates that typically come with private banking. Understanding what higher APYs mean and how they apply helps manage personal wealth in a way that ensures it provides maximum benefit.

Personal Wealth Management

When someone has at least $1 million in liquid assets, the financial industry classifies that person as a high-net-worth individual or HNWI. Generally, when someone has accrued this much personal wealth, they require certain services from financial institutes that most people do not need. Banks exclusively offer these services, usually referred to as private banking or wealth management, to HNWIs.

People who use private banking are granted certain privileges or advantages that reflect the bank’s special relationship with them. These privileges may include free access to a safe-deposit box, a lower annual percentage rate on home equity or mortgage loans, and a higher annual percentage yield, or APY, on any savings account or certificate of deposit made with that institution.

Understanding Annual Percentage Yield

Annual percentage yield determines how much interest someone may earn on the money deposited into any APY savings accounts or other interest-bearing accounts they may hold with a bank or other financial institution. A higher APY indicates more interest will be paid out on the total balance of an account.

Though APY savings accounts are popular with HNWIs, APY can also apply to things like certificates of deposit (or CDs), interest-bearing checking accounts, and money market accounts. Some online brokerages even offer APY interest on cash management accounts.

Calculating APY

A formula is used to calculate the annual percentage yield on applicable accounts. Using this formula, bank professionals or account holders can measure how much interest an account will earn over time, which helps track progress toward financial goals or determine the best way to utilize private banking services to manage personal wealth.

The formula is APY = (1 + r/n)n +1, where r represents the rate of interest earned on an account, and n represents the number of periods over which interest is compounded. Though it’s helpful to know the formula and understand how it is applied, it is generally much easier to use an APY calculator, of which there are many freely available online. Of course, those with access to private banking services can usually call on bank employees to answer any questions or give exact figures.

How APY Differs from Interest Rates

Any interest-bearing account may have both an APY and an interest rate. Where the APY measures the percentage of yield an interest-bearing account will pay over a year, interest rates mean different things. The interest rate is a direct representation of the percentage of interest a bank will pay on deposits.

Interest rates don’t reflect compounded interest, whereas the annual percentage yield considers and represents the total amount of interest a deposit holder could earn with compounded interest. Compound interest is the interest earned both on the principal or the money deposited into the interest-bearing account and on the interest earned by that account if the interest remains in the account over an entire year.

APY and Variability

An annual percentage yield can be either fixed or variable depending on the type of deposit account it is applied to. A variable APY may rise or fall depending on what benchmark rate it is tied to. Benchmark rates are explicitly used to set other interest rates, and what benchmark a specific financial institute might use can vary.

An APY savings account may have a variable rate tied to, for instance, the Standard & Poor’s 500, widely used as a benchmark in investing. If the S&P 500 rises, the APY connected to it will also increase. If it falls, the APY will also reflect that. The use of the S&P 500 is simply an example here, and typically banks will tie rates for APY savings accounts to the Federal Reserve.

Fixed APY Accounts

Fixed APYs apply to other forms of deposit, such as CDs. A CD is a specific kind of account that pays interest on a lump-sum deposit amount provided that money is untouched over a specified amount of time, typically six months, one year, and five years.

A CD account is a one-time deposit, and it cannot be added to, and banks will generally charge specific fees or penalties if the money is withdrawn early. CD and other fixed-rate accounts are more attractive to people who prefer avoiding the risk associated with variable-rate accounts.

Accounts Offering APY

Different kinds of accounts may pay an APY. The APY accounts offered by private banking or wealth management services pay a higher rate than typical APY accounts. While the national average APY on savings accounts is only 0.07%, a private banking savings account may offer an APY as high as 0.40%.

Various kinds of deposit accounts and other banking products may offer an APY, such as:

• Certificates of deposit
• High-yield savings accounts
• Interest-bearing checking accounts
• Money market accounts
• Traditional savings accounts

The APY earned by each type of account can vary significantly across financial institutions and banking services. The APY of an account can be used to quickly determine how much a deposit could grow over a year. Higher APY rates for interest-bearing accounts are almost always better, making APY a critical consideration when choosing banking products.

Earn More with Private Banking APY Accounts

Knowing what the APY of a given account represents is essential to ensuring a deposit provides optimal returns. It is also crucial to keep the compounding frequency in mind. An APY that is compounded daily can pay significantly more than one compounded annually.

Investing in a high APY account through private banking services is an excellent way to earn interest on personal wealth while safeguarding it from the risks associated with other kinds of wealth management, such as investing in stocks and bonds. The team at First Western Trust specializes in helping HNWIs through a holistic view of your needs, combined with personal attention and support tailored to help you meet your objectives. We welcome the opportunity to speak to you about private banking accounts, or any other issue pertinent to your financial wellbeing.