RICH PICKINGS

The rich are getting richer. So are the bankers serving them.

On the 11th and 12th floors of JPMorgan Chase's private bank, overlooking Manhattan's Park Avenue, David Rockefeller keeps part of his private collection of modern art. Andy Warhol's Marilyn Monroe paintings hang on the walls; the gun fired by Aaron Burr that killed Alexander Hamilton sits behind a glass case next to objets d'art from Africa. Here, the private bank has its meeting rooms, into which only the most treasured of its clients are invited. Those that are receive white-gloved treatment from bankers who might otherwise be considered elite themselves. The private bankers aim to please: be that offering tricky investment advice to clients, or “summer reading” tips. The attention pays off. From San Francisco to Shanghai, Switzerland to Singapore, the merely rich are becoming super-rich.

Many of those come from emerging economies such as China, India and the Middle East, and particularly in America and Asia are more likely to be self-made millionaires (or billionaires), rather than inheritors of wealth. Their ways of dealing with money are entrepreneurial as well. Rather than parking it in bonds and property, they are increasingly likely to want it actively managed. For that, they face a panoply of new (and volatile) investment opportunities, from hedge funds and private equity to derivatives and currencies.

More assets to look after mean more management fees for the banks, and these are the sorts of stable, recurring fees that shareholders covet. But, as Midas discovered, a fixation with wealth has its hazards and investment banks should take note. With the credit crunch proving how painfully cyclical many parts of investment banking can be, many chief executives are looking towards their wealth management arms, perceived as a more stable business, to keep cash flowing. Yet the glitter of private banking is perhaps not all it appears.

There are some economies of scale. Central costs are spread over a broader base. Close relationships with oligarchs, for example, may generate corporate advisory business. But private banking remains very much a high service and, therefore, costly proposition. A single private banker looks after only about 50 clients.

The obstacles to scaling up show in the absence of significant margin improvement despite growth in client funds. Pre-tax profits as a proportion of assets under management for the listed private banks are typically between 60 and 120 basis points, and have remained largely static since 2002. Many cookie-cutter fund management houses are more profitable than that.

Stable margins mean that it is all about asset farming. The ranks of the wealthy, those with liquid assets of more than $1million, grew by 6 % last year, according to Merrill Lynch. On average, these 10.1million wealthy individuals now hold liquid assets of more than $4 million. America is still home to most of the world’s truly rich. High net worth individuals make up 1% of the U.S, population, with 3.1 million people claiming to be dollar millionaires, and 460 to be billionaires. Japan claims the next highest population of the wealthy, with 765,000 dollar millionaires, and then the U.K., where there are 557,000.

But competition for business is intense, particularly as the smaller private banks try to take advantage of the larger banks’ tarnished reputations. Fees are falling and trading activity – responsible for as much as a third of revenues – is also declining. Meanwhile, European tax authorities are becoming more aggressive in investigating offshore accounts, which generate about a third of pre-tax profits for the Swiss banks.

In the end, a bigger danger is that the industry becomes a victim of its own success. As banks scent fat, stable profits, more will move into the business. By definition, however, private banking is not a mass market and margins could shrink. Already, emerging centers such as Singapore and Dubai are chipping away at fees.

On the other hand, the growth of the industry – and the impression that it is becoming more of a game of financial sophistication than secrecy – is making it more respectable. According to a report compiled by Citi Private Bank and Knight Frank, the rate of growth of high net worth individuals has outpaced growth in both gross domestic product and GDP per head, which indicates that the rich are getting richer relative to their respective countries. And the very wealthy are “weathering the crunch” much better than institutional investors owing to the diversity of their portfolios, says the report.

As long as the rich get richer, the best private banks will, too.