With stagnant demand and overcapacity in so many businesses, regional bankers have been wisely looking to private banking - personal trust and investment management, estate planning, customized credit, and high-yield deposits for the affluent-for earnings growth.

But beware. The attractiveness of private banking has not been lost on brokerage firms and investment boutiques. Over the past decade, these able competitors have cherry-picked one profitable banking business after another, and private banking is their next target.

However, this time the story need not have the all-too-familiar ending. Bankers can compete and perhaps even dominate the private banking business if they follow a few simple rules.

First, know your strengths against competitors. Brokerage firms like Merrill Lynch and Charles Schwab and mutual fund families like Fidelity and Vanguard have taken much of the affluent market away from banks in recent years.

In recent months, Merrill Lynch announced that it has stepped up efforts to lure personal trust business-the most profitable area of affluent banking-away from the banks that dominate the market today.

Yet banks have some natural competitive advantages in the private banking business. Banks are good investment managers. Bank trust departments have stodgy images, but in fact their average investment performance in equities and fixed-income securities has outpaced that of investment advisors and mutual funds in recent years.

Even more crucial, banks have a latent asset in the form of existing relationships, and, almost uniquely, they "touch" a large number of affluent customers through a range of departments.

These relationships are established via the branches, small business, middle market, mortgage lending, or credit card activities, and can provide a rich stream of internal referrals.

Segmenting the Market

The second tip, is know your own economics. Any regional bank that seriously wants to pursue the emerging affluent must break its products and services into distinct tiers that truly reflect the costs of account service and the realities of competitive pricing.

The best banks set staffing levels on accounts according to how profitable each account is. They price their products and set fees to reflect the real economic costs of delivering products and services, not just to win business. They make the most of shared functions such as investment management and credit underwriting.

Similarly, leading private banks overcome fears of product cannibalization, one of the big hindrances to effective cross-selling. These fears result from a poor understanding of the economic trade-offs.

The better banks clearly understand the trade-offs of moving funds from one instrument to another, such as from in-branch certificates of deposit to mutual funds or agency accounts. They also understand the impact on customer retention and the increased likelihood that the customer will consolidate assets into the bank over time.

Cultivating Referrals

Third, encourage internal referrals. But this is easier said than done. The best institutions adopt one of two approaches-market-focused or product-focused-with both approaches having the identical goals of building a strong flow of internal and external referrals, and fostering greater account penetration.

The market-focused model supports the seamless delivery of the full-range of private banking services, and relies on generalist relationship managers supported by a team of banking and trust product specialists.

Product-focused institutions aim to achieve rapid growth within each product line (with trust products and lending/deposit products in separate areas) and do so by building a strong sales culture and incentives for referral flow.

The better institutions have a seasoned sales force of proven closers, with bonus as much as 50% of base and total compensation often exceeding $100,000. Individual and profit-center incentives for lead generation are usually very powerful, especially when coupled with rigorous tracking.

What does not work-and what happens all too often at the average-performing institutions-is a product-focused structure, with each of the product departments operating as independent "silos".

The stakes are high. At many regional banks, the affluent market can represent as much as 15% to 25% of the value of the institution. Banks are well-positioned against the Merrill Lynches and the Fidelitys of the world in serving the affluent market. They simply have to recognize their unique strengths and capitalize on them.

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