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Investors more cautious, still keeping private banking industry robust

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The fortunes of the San Diego wealthy have not escaped the world's economic woes -- but short of stuffing their mattresses, the members of this elite population still need their bankers.

The local private banking industry remains robust and poised for continued growth, industry players say.

The presence of small-cap and mid-cap companies -- which historically have led returns during recessions -- and San Diego's consistent entrepreneurial support both create an ideal environment for the creation of wealth, according to regional private bankers.

And abundant money means private bankers get to keep their jobs.

The trend isn't isolated to San Diego.

According to global consulting firm Capgemini, in 2007 there were more than 10 million high net worth individuals, or HNWIs, holding at least $1 million in financial assets worldwide, with total global HNWI wealth exceeding $40 trillion.

There's no question that the numbers have come down recently, but steady growth is still expected, said Stephen Horan, head of Professional Education Content and Private Wealth with the CFA Institute, in an e-mail.

Global consulting firm Scorpio Partnership estimates that assets managed by wealth managers were just $17.4 trillion in 2007, so there's lots of room for private bankers to move in.

The term "private banking" tends to be loosely applied, often depending on the size of institution and the region of the world. For many large institutions in the United States, the phrase describes their wealth management services for high net worth individuals. ("High net worth" is another loosely applied term, differing from institution to institution, but typically refers to individuals with $1 million or more in investable assets. "Ultra high net worth" refers to individuals with more than $20 million in investable assets.)

For some boutique firms, private banking means a customized suite of services, in which an institution often shops around for products it does not offer.

The high-flying years prior to the financial crisis made the wealth management sector an attractive one. In 2007, chief executive officers surveyed by PricewaterhouseCoopers saw 30 percent growth as an achievable projection.

"The growth story came to a screeching halt in 2008," wrote the authors of PricewaterhouseCoopers' 2009 survey of the global private bank and wealth management industry. "Assets under management have shrunk considerably."

Fifty-eight percent of survey participants said the financial crisis was responsible for asset attrition at their organizations, although the survey did not specify numbers.

Regardless, private banking is a lucrative industry, even in a downturn.

Bank executives acknowledge their clients have lost money in the last year but point out that most high net worth individuals have the wherewithal to withstand market gyrations -- particularly if the funds were managed prudently to begin with.

"I believe our clients have been less impacted by the downturn," said Joseph Lobe, regional private banking manager for Wells Fargo's (NYSE: WFC) wealth management group. "We've not been impacted like some of the other areas of the bank."

Still, wealth declines do result in some pressure on revenue and profit margins for private bankers.

"We didn't lose clients ... but clients would decide they'd prefer to be in cash," said Mary Curran, executive vice president of Union Bank's wealth management group. "Some (cash instruments) you don't charge a fee on and some you charge a lower fee on.

"For most institutions, the fee revenue is down. That's just a natural consequence of what's going on in the market."

The most fundamental change has been in the clients' mindsets, executives agree.

The adjective "aggressive" has been relegated to the reckless, and even savvy investors are far more cautious and reluctant to get back into equities.

"Higher net worth clients aren't looking to grow their wealth at this time," Lobe said. "They're looking to maintain and preserve their wealth."

Private banks focused purely in investing are struggling more than some of their more comprehensive counterparts, noted Brian Wineke, market executive for the Pacific Southwest market for Bank of America's (NYSE: BAC) private banking division U.S. Trust.

Trust in financial institutions remains tenuous. Clients continue to more closely examine the trustworthiness as well as the safety of their banks -- and shift or spread their money when doubts arise.

"People are not putting all their eggs in one basket," said Steven Crosby, senior managing director with PricewaterhouseCoopers.

In response, banks have moved to bolster their private banking services in hopes of gaining market share.

Union Bank, for example, created a legal specialty group last year to better serve its law firm clients. The bank offers products tailored to law firm needs and builds up client relationships through partnerships with local firms, said Dave Jochim, senior vice president and manager of Union Bank's legal specialty group.

Jochim said medical services, accounting firms and "anywhere we can add value from a products and services standpoint" will be next on the list.

San Diego Private Bank, which was founded in 2006, takes a different approach by either creating or shopping around for customized, optimal solutions for its clients.

"We only focus on relationships, and the numbers come with that," said Chief Executive Officer Robert Armstrong III.

The increasing focus on the personalized, client-oriented approach has resulted in the emergence of what PricewaterhouseCoopers calls "nouveau classic" banking, in which clients depend on trusted, independent advice as well as simplicity and transparency.

Large, trusted brands and small independent firms stand to benefit from this trend, PricewaterhouseCoopers survey authors said.

Most executives interviewed for this article agreed and projected growth for their firms, with larger institutions touting their stability and breadth of services and smaller firms highlighting their agility and open architecture models.

"I'm pretty excited for the prospects for the independent boutiques," said Trevor Callan, who left Merrill Lynch in 2007 to found multifamily office Callan Capital in La Jolla with his two brothers. "We're well-positioned for the next cycle."

The challenges will continue to include navigating the market, sticking to the core business and hanging on to client trust. Also, the growing role of the federal government will add increasing regulatory and fiscal pressure, with some experts wondering how the cost of compliance will affect the business model of private banking.

"It's a very tough time because of the rate and pace of change," Crosby said. "The economics in the industry have changed profoundly. Client demand and commitment has changed. In the old days, if you were tactically nimble you were fine. Now, you have to be tactically nimble and you have to be really insightful about the business."

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