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Banks go upmarket

"STRATEGICALLY, I THINK in terms of millionaires and billionaires," says Jürg Zeltner, the head of wealth management at UBS, a Swiss bank. It is a claim that many big banks would like to make about their clients. Few can. With a squeeze on revenues from banking services for more down-at-heel folk, many of the world's biggest banks, as well as some smaller ones, hope to plump up their profit margins by serving the very wealthy. Yet margins in private banking and wealth management are also being squeezed, and new competitors from outside banking stand a good chance of breaking into this market.

Self-evidently, the big attraction for banks is that rich people have more money to invest and spend on advice than poorer ones. Definitions of rich customers vary from bank to bank and region to region, but there is a rough pecking order. Customers with financial assets above $1m (not counting their homes or businesses) are generally classified as high-net-worth individuals, and those with assets of $10m-30m as ultra-high-net-worth. The Boston Consulting Group puts the total investible assets of the world's wealthy at around $122 trillion last year, almost enough to buy all the shares traded on the New York Stock Exchange ten times over. Capgemini and Merrill Lynch come up with a more modest estimate of about $43 trillion. Whichever number is right, the market is certainly big enough to be interesting; and everyone agrees that it is growing quickly. The rich world is still home to most of the world's money: about a third is in America and another third in Europe. Yet the fastest growth is in Asia, where the assets of the rich increased by almost a fifth in 2010

Rich people are more demanding and cost more to serve than the poor. Most private banks or wealth managers try to strike a balance between cost and revenue by giving different clients different amounts of service. The extraordinarily rich get extraordinarily good service, with expert advice on anything they could possibly want, from help with finding a yacht broker to information on the best boarding schools. Such advice generally does not come cheap and is difficult to scale up. The very best private bankers tend to be well educated and well versed in financial markets--the sort of people who might be chief investment officers at fund-management firms. It helps if they have gone to the right schools, are over 50 and perhaps play polo. "Wealthy clients want relationship managers who are just like them," notes one private banker. At the same time banks do not want their star managers to get too close to their most lucrative customers, because they are worried that if the managers leave they might take their clients with them. The very best employees are disproportionately well paid, as in investment banking.

In Asia and Latin America, the fastest-growing markets for private banking, these problems are magnified by a shortage of experienced bankers, particularly older ones. "In Asia seniority is incredibly important," says Christian Edelmann of Oliver Wyman. "You just can't have a 30-year-old banker servicing a 50-year-old entrepreneur."


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