First signs that crunch is hitting private bankers

While colleagues in investment banking bemoan the fact that entertainment budgets have been slashed, private bankers are still smiling - with a flute of champagne in hand as they schmooze wealthy clients.

It may seem extraordinary, but until very recently the signs have been that the rich - that is high-net-worth individuals with more than $1 million (£500,000) in liquid assets - have been largely immune from the financial turmoil of the last year. As the newly published annual report by the Scorpio Partnership shows, the global wealth management industry saw assets under management grow by 12% during 2007.

Just in the last few weeks, Barclays Wealth has opened new private banking offices in Bournemouth and Liverpool to cater for the growing ranks of entrepreneurs in the regions; Kleinwort Benson launched in Cambridge and Leeds.

However, beyond the glister, things don't look entirely golden. As Sebastian Dovey of the Scorpio Partnerships points out about that 12% growth: "Those results came out halfway through the downturn.

"The real test of private banking will be at the end of this year after a 'market-negative' cycle."

The testing times have begun. The chief executive of one private bank admits that business has slowed. Referring to the possibility of job cuts in the London office, he says: "We are not having to do anything drastic - yet."

Since many of his clients work in the City for big investment banks, which have been culling staff at a rate of 300 jobs a week because of the subprime meltdown, it's a wonder wealth managers haven't seen fallout earlier.

The credit crunch has also damaged reputations. UBS, which topped the Scorpio survey as the biggest global wealth manager, has been slated after its investment banking arm wrote off almost $40 billion. This may have nothing to do with its standalone wealth management arm, but as a private banker at a rival firm says: "As a client, you're going to think twice."

Worse, the London office of UBS has been rocked by mass defections. Around 20 private bankers and 30 support staff quit for rival firms in May. The prospect of staying at UBS and being paid in shares that have slumped by two-thirds in a year can't have been enticing.

David Butters of recruitment firm GRS says several other big banks that have taken a subprime hit have imposed hiring freezes, which include jobs in wealth management. Even so, he says, private banking has been "one of the few buoyant areas" in the City.

It is highly profitable for the banks. And clients are keener than ever to have their wealth managed properly - with equities looking rocky, property in crisis and inflation eroding savings.

Jonathan Brownlow of Route Group, a small wealth management firm which caters for City high-fliers, says: "The people we look after still have considerable assets [despite the downturn]. But there is a fundamental shift towards looking at more secure assets."

So-called "alternatives" such as structured products (but not of the exotic subprime variety) and hedge funds are proving popular. "Because of who our clients are, they understand risks very well," says Brownlow.

There is anecdotal evidence that some clients are turning to smaller wealth management firms - because people feel they can have a closer relationship than with a big institution. Dovey at Scorpio says: "There is a certain element of complacency in the market."

The most interesting new development is overseas. According to the Scorpio survey, rich clients from Asia-Pacific now hold around 13% of the assets under management by private banks - up from around 7% a year earlier.

It is time to look East for the new rich.