I read with some amusement today’s article in The Malaysian Insider on plans by the Royal Bank of Scotland to target rich women in Singapore as clients for its private banking arm. Granted, I’ll never have enough money to even be considered as a client for a private bank, so I’m open to charges of writing out of spite and envy, but in general, my impression is that private banking is getting a lot of bad press at the moment.

First, read this article from The Atlantic to understand why financial companies are so eager to push their private banking businesses:

“Throughout the late 1990s, investors were firing their brokers and money managers because they didn’t own enough tech and Internet stocks, so everybody got loaded up at the tech party right before the cops came,” Gellman said. “Most of them were busted and never even got a drink. Some of them got lawyers and came after their brokers. So the brokerage firms all came away saying, ‘Never again.’

“If the head of Merrill Lynch and every other investment firm had their way,” he continued, “no individual broker would ever recommend an individual stock or bond to a retail client again. They have essentially gotten out of the brokering-and-advising business and gone all in on the ‘wealth management’ business. The new model is to gather assets from wealthy people and then place those assets with a whole bunch of managers who will manage different pieces of it in diversified styles so you don’t lose it all at once. And by the way, people with less than $10 million need not apply.

“People like you are in a sort of purgatory because no one would ever come out and tell you that he doesn’t want your business anymore,” he said. “You had to figure that out by yourself.”

It seems that the big financial groups have all decided that taking in lots of low value retail investors opened them too much to abuse when their advice backfired and it was too expensive to actually provide individualized and useful investment advice to so many small investors. Essentially, they made too many mistakes when doling out advice, so they’ve decided to offer it only on a personalized basis to people rich enough to afford it. But are private banks in fact providing a good service even for these clients?

Probably not, according to The Economist in this article:

Unfortunately for all concerned, the industry tends to promise more than it can deliver. Last year was disastrous for financial markets, with the MSCI World index of equities falling 42%. Moreover, many clients, having been persuaded of the benefits of diversification in recent years, had bought alternative assets, such as hedge funds and private equity, which supposedly offered absolute (positive) returns uncorrelated with the stockmarket. But when the crisis came, those assets turned out to be highly correlated to the mainstream and lost value as well.

The final straw came at the end of last year when the extent of the Madoff scandal was revealed. Bernard Madoff pleaded guilty to running a Ponzi scheme in which he was paying early investors consistent returns by taking the money from later ones, with potential losses in the tens of billions of dollars. Just what were wealth managers doing to earn their fees if they could not spot the scam?

So there is now fairly widespread dissatisfaction with the industry. “The old wealth-management universe is not just broken, it’s been broken and tossed away,” says Russ Prince of Prince & Associates, a market-research firm. “Nobody believes anything anybody is saying any more.” A survey by his company showed that 15% of the wealthy had left their main adviser last year and a further 70% had pulled some of their money away.

So the rich who are being targeted, women or not, should probably think twice before deciding to entrust their money to private banks. Then again, they unquestionably do offer a sense of exclusivity and of being part of the elite. Browsing through this thread on LYN, it seems clear this part alone is seductive to many.