Many new millionaires have been created in recent years by the immense growth of corporations such as Microsoft and Intel and by the surging stock market. Others are inheriting their wealth at an unprecedented rate. Economists estimate that as much as $20 trillion will be passed between generations over the next two decades.

That should be good news for private banking, but it has been a major headache instead. The newly wealthy are so much more aggressive and savvy than the preceding generation that many are managing their wealth themselves.

As a result, assets in trust or investment management accounts of affluent U.S. households have shrunk by about 5% in the last three years even with the strong stock market and while their number has grown by 14%, according to PSI Global, a Tampa-based research group. At the same time, the money these households have invested directly in stocks, bonds, and mutual funds has surged.

The changing demographics are presenting challenges to traditional U.S. private banks, which must work harder to hold onto their old customers and innovate to attract new ones as competition grows. The eager new competitors are vying to lure the new millionaires away from direct investment. And of course, both the old-line banks and the upstarts must operate profitably.

"It's a huge market, but there's a lot of competition," said David Lamere, an executive vice president at Mellon Bank, Pittsburgh, who heads Mellon Private Asset Management. "Private banking hasn't been sold in the past as much as it's been bought. There's been a change of focus to a sales mentality, consequently we've become a lot more focused on distribution efforts as well as looking to relationships with other organizations."

"The problem the traditional private banks have had is in getting their share of new business," said William R. White, practice leader for affluent market consulting at Tampa-based PSI Global. "The growth of their assets has not kept pace with new assets pouring into the industry."

He also noted that the private banks have not been able to charge the kind of prices that mutual funds and other charge for management services.

"Asset management services have historically revolved around trust services," Mr. White added. "Fiduciary skills were the reason to buy the trust service. In the more recent past, the growth engine has been asset management skills, not fiduciary skills, and that's where the banks have been weak.

Brian Berris, a partner at Brown Brothers Harriman, New York, says the new generation of inheritors, mostly middle-age, wants to be much more involved in the investment process and is likely to challenge returns less than those of the market indexes. He also points out that the new generation includes self-made women and minorities, which he refers to as "emerging market segments."

Indeed, some market participants have redefined their targets to include the merely affluent as well as the decidedly rich, swelling the number of potential targets dramatically. While $1 million in investable funds is still the most common minimum account size, a large minority of U.S. private banks now have minimums below $1 million, some as small as $100,000.

This broad market has encouraged aggressive competition by brokerage houses, mutual funds, and even insurance companies. It also includes many banks that previously did not cater to the carriage trade. Indeed, 41% of community banks plan to offer trust services, one corner of private banking, in the next five years, compared with 26% that offered such services last year, according to a survey by Grant Thornton, the Chicago- based accounting firm.

Despite the influx of competitors, though, the 10 biggest participants handle more than 60% of the shrinking managed assets of U.S. high-net-worth individuals, according to the newsletter Private Asset Management.

Part of the shrinkage in managed assets may be attributable to deteriorating service quality, said Mr. Berris of Brown Brothers. "Consolidations have resulted in a loss of identity, the dilution of corporate cultures, and general confusion for clients," he said.

Mr. Berris also noted that productivity pressures and technological improvements have led to substantially larger client loads for trust administrators and portfolio managers.

Mr. Lamere of Mellon suggests, however, that lackluster performance may be the key factor in the shrinkage of the industry. "High-net-worth individuals have become much more focused on investment performance, rather than on service delivery," he said. "You have to have great investment performance to be considered."

Mellon itself has been expanding its business at a rapid rate, with $60 billion of high-net-worth assets under management, up from $42 billion two years ago. And it has expanded its number of marketing executives to 50 from 10 in just a few years.

Another big challenge for private banks, Mr. Berris said, was to develop skills in tax-efficient investing. He said some institutions have a head start, but "the learning curve remains steep" for the industry at large. Mr. Lamere also reported a growing sensitivity to tax considerations by his company.

Mr. Berris believes clients will be increasily demanding alternative investments as their families grow and they seek higher returns to prevent dilution of assets. And he suggests private banks will have to tailor such investments to smaller commitments by individuals.

Brown Brothers has recently added an alternative investment to its product offerings in the form of a private equity fund. This fund takes large but not controlling positions in midsize companies and works with them to improve their businesses.

Some large companies may be struggling, but given the huge size of the domestic market for investment management, there appears to be plenty of room for niche players to grow.

One such player is Bank Leumi Trust Co., New York, which has been building a private banking business by cross-selling to executives of companies with which it has a lending relationship. It is offering managed accounts that use mutual funds from Goldman, Sachs & Co.

"Our offering is mainly investment and deposit driven," said Nancy Eiden, who heads private banking for Bank Leumi. "We also provide needs- based financial planning, asset allocation, and a full range of investment products."

Like other parts of the banking business, private banking is depending heavily on technology to bolster profits. But, like the others, it faces the same dilemma: you need profit to afford the technology, and volume to generate the profit. Many players simply cannot afford their own in-house technology.

Mr. White of PSI says technology plays a critical role in private banking, but a less visible one to customers. "Customers are looking for the credibility and quality of the people they deal with," he said. "The technology dollars are spent on building the abilities of these people."

But he points out that small shops - of three to five people - can buy that credibility by buying services from Charles Schwab & Co. and other providers. "There are a lot of successful low-tech firms," he said.

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