Private Banking - Zero-Beta, or Not?

The widespread belief that private banking business is downturn-proof may be incorrect, according to a London-based wealth management consultant.

The consultant, Scorpio Partnership, released its latest report on global wealth managers' asset growth and size rankings last week. It shows that assets under management climbed 14 percent in 2006 while operating profits climbed 24 percent for the median private banking entity among 180 "benchmark" firms surveyed. Although still healthy, median asset growth slowed from 2005's 18 percent pace.

However, the sector could prove vulnerable if financial markets turn downward, says Scorpio managing partner Sebastian Dovey.

"There is a strong correlation between assets under management and global market indices, and this will eventually test the stickiness of these assets,...." Dovey said in an announcement summarizing Scorpio's Private Banking Benchmark 2007 report. "When the markets eventually turn south, clients will not necessarily see private banks as the safest option."

That warning flies in the face of perceptions that clients feel more need for wealth managers to guide them when markets are falling. Among Wall Street's varied businesses, "High net worth was the one field between 2000 and 2004 that did well" while the markets didn't, remarks Dave Tomer, president of Tomer Search Group, a Boston-based recruiting firm.

Recruiters in the both the U.S. and U.K. report healthy demand to hire bankers who advise high-net worth and private wealth clients. The flip side is that the industry may be doing too little to attract the right kind of people into private banking careers.

"Private banks are constantly buying each others' assets and staff, but there is a need to get more bankers trained. There are not enough private bankers around to cope with the amount of assets available," said Olivier Lachambre, a Scorpio research associate, as quoted by Financial News.

UBS held the top spot in the Benchmark 2007 survey with $1.608 trillion assets under management in high net worth divisions, up 13.1 percent for the year in Swiss franc terms. Citigroup was second with $1.438 trillion and Merrill Lynch third with $1.209 billion.