Industry experts often sound a bit like worried parents when they talk about banks' efforts to serve wealthy customers with trust and private banking services.

Sure, banks are doing well, they say, but they aren't living up to their potential.

"Banks have the foundation from which they can be tremendously successful," observed Charlotte B. Beyer of the Institute for Private Investors in Summit, N.J. "It's really a question of whether they have the leadership and vision to pull it off."

These days, financial services companies of all stripes want a bigger share of the upscale market, which is rapidly becoming larger and richer. But while banks are benefiting from strong growth in trust and lending, the industry has been losing ground to nonbank competitors in providing investment management services. The market is seen by everyone - from giants like Goldman, Sachs & Co., Merrill Lynch & Co., and Fidelity Investments to asset management boutiques - as the great growth opportunity.

All of which raises the question: In such a crowded, competitive field, where and how are banks realistically going to find new business among the wealthy?

No one answer is adequate, of course, and efforts to tap the affluent market more effectively are a work in progress at many banking companies.

But there is widespread agreement not only on the most promising ways to expand private banking and investment management businesses but also on the dead ends.

The rich are getting richer. Michael P. Kostoff, managing director of the VIP Forum of Advisory Board Co. in Washington, D.C., said the "power alley" for banks is customers with investable assets of $500,000 to $5 million.

Those below that threshold tend to be steered toward more standardized products and turnkey asset allocation models. Those who are wealthier generally don't look to commercial banks for investment management. "Most banks will not have the product and service set to appeal to those clients," said Mr. Kostoff.

"If you really want to spend a lot of time with a very sophisticated financial planner, somebody's got to pay for it," said John C. Hover 2d, executive vice president at U.S. Trust in New York. "Over $2 million, you really have the right asset level for individual management."

The wealthiest segment of the population also happens to be growing at the fastest rate. The number of households with at least $1 million of investable assets grew 15% last year, to 2.7 million, according to Payment Systems Inc. The Tampa research and consulting firm also found rapid growth in the number of affluent households, defined as those with annual incomes exceeding $100,000 and-or $500,000 of assets in addition to a home. That segment grew 10% last year, to 11.2 million.

And while it is often observed that baby boomers will be on the receiving end of the largest generational transfer of wealth ever, bankers expect earned fortunes to be a vastly more significant source of new business than inheritance.

John J. DeMarco, senior vice president at Payment Systems, said much of the baby boomers' inheritance will be spread out thinly among 70 million people, many of whom will spend it.

"Inheritance will be important; it always has been," he said. "But probably no more so than it has been in the past. About one in five - 20% - of affluent consumers benefit substantially from inheritance. We don't see that going up."

For their part, bankers say they aren't expecting inherited wealth to produce a new-business windfall.

"An awful lot of the inherited wealth has either been taxed or spent, quite frankly," noted a Union Bank of Switzerland spokesman.

Looking for new wealth. Many financial services companies are targeting two key customer types: business owners and senior corporate executives who have stock options and other deferred compensation plans.

Banks are especially optimistic about entrepreneurs who find themselves newly rich after selling a business or bringing it public.

Experts agree that, while these people have been successful in business, they often need handholding when it comes to managing their money.

"They are very often ill-equipped to understand portfolio management," said a private banker who asked not to be identified. "All entrepreneurs are pretty much control people. They still want to control something, but they are ill-equipped to handle it because they never had money."

Mr. Hover of U.S. Trust observed that entrepreneurs tend to be conservative investors once they've cashed out their businesses. "They've taken their risk," he said. "Now their real goal is wealth preservation."

U.S. Trust, like many other banks, is also targeting senior corporate executives. "We want to work with them as they climb the corporate ladder," said Mr. Hover. "And when they retire, we are there for important financial planning, estate planning, asset management."

But because much of their wealth is tied up in company stock, he conceded, "they don't really become interesting from a money management point of view until they retire."

There's no place like home. Affluent and wealthy Americans have never had so many investment choices. And while banks have been part of the growth - 20% last year in trust assets managed by the top 100 banks - the industry has been losing ground.

In 1995, banks controlled just 40% of all personal trust assets managed by institutions, down from 42% in 1994 and 54% in 1993, Payment Systems found.

With all that competition, bankers regard their existing customer bases as the most promising seedbed for growth. That means turning a lending relationship into an investment management relationship and graduating prosperous retail customers to the private bank.

To better reach the affluent market, many banks, including National City Corp. and LaSalle National Corp. recently, have been tearing down the walls separating trust and private banking departments. That's in part because bankers have seen that one historical strength - lending - goes against the demographic tide: Older, more affluent people are more in need of investment management services than loans.

But redrawing lines on an organizational chart does not ensure success, noted Mr. DeMarco of Payment Systems. "It's one thing for senior executives to sit down and put boxes on a piece of paper," he said. "It's another to take two or three different departments that have been separate for a hundred years and get them to act like one cohesive unit."

And even making those organizational changes may not be enough. David R. Palmer, managing director of David Ross Palmer & Associates in New York, observed that trust and private banking at most banks are organizationally separate from retail banking.

"They report up through separate parts of the organizations. So it's two separate silos," said Mr. Palmer, who has long advocated merging trust and private banking areas.

Separating the business units creates competition for both corporate resources and customers when retail bankers ought to be helping direct their more affluent customers into the private banking group. While some banks offer incentives for retail bankers to do this, these rewards are rarely generous enough to compensate for the loss of profitable clients who have been cultivated for years, said Mr. Palmer.

Obstacles remain. One oft-cited challenge banks face is the perception that their investment management performance lags behind nonbank competitors'.

Bankers are quick to discount the criticism; they point to studies that show they are anything but underachievers. But the perception lingers.

Some industry observers say that banks need to do a better job of hiring, rewarding, and retaining good employees.

"Private banks have got to upgrade their personnel," said Payment Systems' Mr. DeMarco. "There are never enough of the right kind of people."

An executive recruiter, who asked that his name be withheld, said some talented investment managers he has represented aren't interested in working for a commercial bank because of the industry's reputation for conservatism, its poor investment performance and service quality.

While these bumps are well known, banks say they are willing to tough it out to gain share in this tantalizing market.

"The smarter banks are looking at in a more holistic way," said Ms. Beyer of the Institute for Private Investors. "I don't count them out by a long shot."

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