The high net worth market is one of the most promising areas for banks to generate revenues and fee income.

But despite stepped-up efforts to target private banking services to the wealthiest Americans, the banking industry has been losing ground to brokerage firms and other nonbank rivals.

The numbers can be startling. Payment Systems Inc., Tampa, Fla., estimates that banks' share of the market fell from 44% in 1992 to 24% last year.

"The neighborhood is filling up," said J. Terrence Murray, and executive vice president at Northern Trust in Chicago, which has about $90 billion of assets under management. "There are fewer and fewer vacant stores."

Some industry experts say the industry as a whole is missing out on vast revenue opportunities from the fastest-growing, and most profitable, segment of the population. The number of households with $1 million or more in investable assets - about the level where banks will begin to offer private banking services - has been growing in the double digits in recent years. According to Payment Systems, the number of such households increased from 1.3 million in 1992 to 2.1 million in 1994 - an increase of nearly 70% in just two years. Similar growth is expected over the next few years. Further, the baby-boom generation, which has been accumulating wealth on its own, stands ready to be on the receiving end of the largest generational transfer of assets ever.

The battle between banks and nonbanks for the privilege of offering private banking services to the privileged is occurring at a time when retail bankers remain saddled with extensive - and expensive - branch networks. Competitors like Merrill Lynch and PaineWebber have the advantage of a lower expense base.

Banks, of course, are now moving in a headlong rush to boost profitability by shedding and downsizing branches and migrating more consumers to alternative delivery methods like telephones and automated teller machines.

But the dynamics of the high net worth market are different. Wealthy customers are, for the most part, already highly profitable. And, of course, the hallmark of private banking is personal, and highly professional, delivery of products and services.

How can banks get and keep a bigger piece of the pie?

Bankers and industry experts say the industry needs to focus more on building relationships and less on pushing products. Banks, they say, should do a better job of targeting the emerging affluent - the high- income, lower-asset group - who might be tempted to move their assets elsewhere. They should match their rivals by increasing their sales forces. Observers are also applauding the industry's efforts to break down the institutional barriers between traditional private banking, trust, and investment sales.

"Banks have recognized that there is a lot of money out there," said Richard Scheide, a senior consultant with David Ross Palmer & Associates in New York. "(But) I think a lot of banks are taking a product sales approach. They aren't building relationships with these people. And as long as that happens, they are just going to be another purveyor of products as far as the customer is concerned. They won't build any kind of loyalty. And they can lose those people just as fast as they got them."

David R. Palmer, managing director of the firm that bears his name, said: "The brokers today are driving from a financial planning base, and they are coming across as very professional."

Mr. Palmer contrasted that professionalism with an anecdote about his experience helping a rich friend choose a bank. Soon after the friend selected a bank, his $20 million portfolio was assigned to a "27-year-old kid who was not a professional." A year later, the friend, wanting to move his money elsewhere, visited three other banks. At the same time, he was interested in taking out a substantial loan.

"Two out of the three spent roughly 45 seconds giving lip service to the concept of the total relationship," said Mr. Palmer. "And then, bingo, right on to the loan transaction."

An officer at the third bank, which Mr. Palmer's friend ultimately chose, had a different approach. He spent time with the client, according to Mr. Palmer, and asked, "Can you please take some time and explain to us at some length what you are interested in, where you come from, what you are trying to accomplish?''

"The banks can do it, but they haven't got the people yet to do it," said Mr. Palmer. "They haven't got the mentality, they haven't got the training."

Apart from the professionalism of private banking staffs, Mr. Palmer also noted that quantity is important too.

He said that Merrill Lynch has more brokers targeting the affluent in two Southern California counties - Los Angeles and Orange - than all of the banks in the entire state combined.

"What banks fail to do, and what the brokers and many others do, is market-size their sales force" by hiring staff at a level that matches the growth of the market segment.

To be sure, a number of banks are pursuing this strategy. In July, Cleveland-based Keycorp announced it would quadruple the size of its private banking staff over the next four years. And other banks have been expanding their private banking businesses into markets with a large concentration of affluent people. For example, Chemical Banking Corp. and NationsBank Corp. said recently they would open private banking offices in California and New York, respectively.

Observers also suggest that banks could follow the example of institutions that have long specialized in trust and private banking.

"We don't have the sort of resource tussle that you have in other banks where this side of the business is really just beginning to develop," said Mr. Murray of Northern Trust. "This has been our lifeblood for 106 years."

At Northern Trust's Chicago operation, the term private banking narrowly refers to deposit and credit products offered to affluent customers. The private banking, trust, and asset management divisions are technically separate.

Mr. Murray noted that the bank's Florida operation is organized slightly differently. "Whether it's asset management, or private banking, or trust, they have that entirely under the umbrella of the private bank," he said.

But in both markets, Mr. Murray said, "our objective is to ensure there is a close interaction between those three areas. It's not unusual for a client to actually work with relationship people from each of the three areas."

Still, he added, "Have we got all the hurdles broken down? I don't have the courage to say that."

To help reduce the potential for turf battles, Northern Trust developed incentive programs six years ago.

"Traditionally, there have been compensation programs in banks that fought with each other. If you compensate a branch manager for developing deposits, that branch manager is unlikely to refer his most substantial depositors to the trust function" and lose his incentive pay based on deposit levels," said Mr. Scheide of David Ross Palmer. "There has to be compensation for referrals."

At U.S. Trust, which specializes in trust and private banking, wealthy customers are served by several bankers - the portfolio manager, tax expert, administrative expert, and so on.

"We tend to approach families or individuals with a team of experts, one of whom will be the lead relationship manager depending on the nature of the relationship," said John C. Hover 2d, executive vice president of personal asset management and private banking.

Bankers and observers say breaking down distorted incentives schemes and other barriers between traditional banking services, trust, and investment sales, is a key to reaching the affluent market.

Wachovia Corp., based in Winston-Salem, N.C., is among those banks trying to bring the three areas closer together.

"Ours is still separate at this point in time," said Tom Hills, the Atlanta city president for Wachovia Bank of Georgia who founded the private banking group 12 years ago. "The private banking group, the investment management group, and the investment sales group are still distinct groups as far as their line reporting."

While the bank has taken steps to integrate how the various services are delivered to its affluent customers, work remains to be done, said Mr. Hills. "We're looking from a strategy standpoint at ways to increase that integration. But we haven't, I guess, determined the exact correct answer for us yet."

In January, Wachovia's chief executive, L.M. "Bud" Baker Jr., told Management Strategies that private bankers were spending too much time on tasks other than selling. The best practices in the Atlanta office, he said, needed to be expanded to cities in the Carolinas.

Wachovia is not alone in wanting to have staff devote more time to selling. According to Mr. Palmer, a typical private banker may spend about 15% of his day on proactive sales compared to 40% to 50% for brokers.

"We're really just beginning that process," said Mr. Hills, adding that the business is growing. "We're selling more investments than we did before, we're doing more in investment management that we did before, and we're selling more credit than we did before."

Wachovia has also been working to attract the "emerging affluent" market, often professionals with six-figure incomes but investable assets below the $800,000 to $1 million that is the typical threshold for private banking services.

The bank offers three programs for the emerging affluent: one for professionals, another for corporate executives, and a third, offered through the branch, for other upper-income customers.

Mr. Murray said Northern Trust is also looking at the emerging affluent. "It is a feeder group for the asset management side," he said. "We have become convinced that it is going to be important for us to establish relationships people with these people early in their financial life cycle."

While Mr. Palmer applauds such efforts and attitudes, he said most banks have not done nearly enough to market to the emerging affluent.

"They have almost been somnambulant in that market," he said.

But there are signs that is beginning to change. Mr. Palmer noted that a mutual fund wrap account originally offered by Smith Barney has been emulated by Wells Fargo & Co. and First Chicago Corp.

"It's the first significant step I've seen the banks begin to take at this end of the market," he said. "There are some changes, but they are so woefully behind."

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