As the year draws to a close, those who watch and work the private banking market are expecting 9% growth, to $23.5 trillion, in the wealth of people with more than $1 million of investable assets.
Though that might seem like a healthy gain - especially to average folks with considerably less in the bank - it is a far cry from the 24% jump that occurred in 1998. "There was spectacular growth in the equity markets in 1998," says John Rolander, a vice president with Gemini Consulting in New York. This year, for better or for worse, the seven-year-old bull market has returned to a brisk, but not galloping, pace.
The outlook for next year is similar. Few are predicting a recession, let alone worldwide economic collapse, but the increase in wealth among the high-net-worth crowd is not expected to exceed single digits in percentage points. Five years from now, it's likely the rich will look back on 1998 as a peak experience.
Leslie Bains, who runs the U.S. private bank for Republic New York Corp., hastens to point out that long-term trends in the business are much more significant than any one- or two-year jump in the numbers. She and others identify five themes that have emerged in private banking over the last five years - segmentation, use of the Internet, a focus on philanthropy, globalization, and the intergenerational transfer of wealth - and she expects them to continue well into the next millennium.
First, segmentation. As the number of wealthy people has grown, so have the differences in their needs and the ways they like to invest. Ms. Bains says the smart private banks have responded by dividing the market into many categories and gravitating toward the clients they can serve best. Such banks "are looking for their natural niches," she says.
Some, like Republic, Bank of America Corp., and Chase Manhattan Corp., are concentrating on entrepreneurs, the "new" rich, or those with net worths of $45 million or more. "Because of the tremendous growth in dot-com companies, I'm seeing a lot of people in their 20s and early 30s," Ms. Bains says. "My private banking clients used to be bald or have gray hair. Now, they have hair, and it's not gray. I also see a lot more women."
Companies such as Northern Trust Corp. and Bank of New York Co., meanwhile, have zeroed in on in what private bankers call Tier 2 customers - typically, senior corporate executives with assets of $1 million to $10 million.
Both sets of clients, regardless of how they make their money or how much of it they have, are using the Internet to get information, and also want to use it to communicate with their private banks. Lee Wortham, who left Chase last month to run worldwide private banking at Bank of New York, says the result is "a much greater level of sophistication among our client constituencies."
That may seem threatening to the traditional private banker who prefers to play the role of investment guru to the needy and naive client, but Mr. Wortham says it is actually an advantage. "The extraordinary amount of information available through the Internet and other media positions us to sit back and have a heart-to-heart conversation, a strategic discussion, with customers about their plans."
Because clients now often ask to view their account information electronically, private banks will have to spend more to upgrade their systems, Ms. Bains says. "Technology will be an enabler."
Another important trend she and others identify is a different approach to philanthropy. Wealthy baby boomers are far more active than earlier generations in their giving, she says. "They believe in hands-on participation. They give to causes more than institutions, and they avoid giving to large organizations." In addition, she says, the new rich are definitely not into perpetuating the family name.
"We've seen these changes in the way our clients give over the last two years," Ms. Bains says, "and we expect it will continue for at least a decade."
Globalization is perhaps the most important recent wave to course through the private banking industry. With Japan making a comeback after a long period of dormancy, a move toward real economic reform finally occurring in China, and a rebound in Southeast Asia from the emerging-market crisis of two years ago, the East has become "a significant contributor to equity portfolios," says John Colas, a managing director with Oliver, Wyman & Co., a New York consulting firm. "The European markets have been pretty frothy" as well, he added.
Ms. Bains says that, on average, 20% of her clients' portfolios are in international stocks now, compared with less than 3% five years ago. "Investors have started thinking way beyond the Atlantic and Pacific," she adds.
The interest in global investing is part of the younger generation's bigger appetite for risk, experts say.
"In Europe, as wealth passes from the generation who created it after the Second World War to those who came afterward, there's no memory of the sorts of terrors people saw 50 years ago," says Peter Keuls, director of market planning for Merrill Lynch International Private Clients. "Younger people see a much more benign world" and are more willing to move their money all over the place, rather than keep it in Switzerland, which "had been perceived during the war as an island of stability where you could keep your money safe."
This experimentation among the young wealthy, both geographically and in the range of vehicles they are attracted to, has played to the advantage of the investment banks, says Mr. Rolander of Gemini.
"With the creation of derivative markets and other private equity placements, we're seeing a move from low-yield to high-yield instruments," he says. Rich Germans, for example, who had been totally fixed-income-oriented, are now putting their money into riskier investments, he says. The wealthy throughout Europe are willing to take more chances, Mr. Rolander says.
The same change is taking shape in the United States. Security is much less of a concern than performance, and there is a demand for more sophisticated instruments and service. High-net-worth clients want the same kind of asset management expertise that is typically reserved for institutions. This has given rise to the "fund of funds" phenomenon, in which a private bank acts as an institutional investor on behalf of a group of its clients and puts their money in well-known hedge funds such as those run by Tiger Management LLC and Warburg Pincus Asset Management Inc.
"The intergenerational disposition of wealth is a huge thing going on right now," says Mr. Wortham of Bank of New York. "Our parents' generation has to sell the company to a strategic buyer or pass it on to the next generation. This is creating liquidity of formerly illiquid assets."
Figuring out how to structure those assets is one of the biggest jobs private bankers now have, he says.