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How Coutts provides a much more accurate benchmark for the portfolio returns required by the rich to maintain the integrity of their wealth
24/05/2018 , Ian Orton

On 25 May Coutts will launch the latest edition of the Coutts Luxury Price Index (CLPI), which attempts to estimate the price inflation experienced by the rich over the past twelve months.

One wonders whether it will attract anything like the volume of comment and analysis that the latest monthly estimate of inflation, as measured by the Consumer Price Index (CPI), from the economists and market strategists employed by banks, investment managers and wealth management firms.

The probability is that it will not.

Which will no doubt provide relief for e-mail inboxes recovering from the avalanche of “informed” comment provoked by an unexpected fall in the CPI during April.

From a wealth management perspective, however, the CLPI is far more important. For it provides a benchmark of sorts for wealth managers charged with maintaining the purchasing power of clients’ wealth.

The reality is that the CPI is not a very accurate indicator of the inflation experienced by the typical wealthy person. It excludes many of the costs and services consumed by the wealthy.

The CLPI attempts to incorporate these to provide a more realistic estimate of inflation experienced by the wealthy.

According to previous editions of the CLPI the rich experience a much higher level of price inflation than the rest of the UK population.

The CPI increased by 2.9 percent for the year to May 2017. The CLPI increased by 6.2 percent. Assume that a typical rich persons expenditure is split evenly between items encapsulated by the CPI and CLPI and the resultant inflation figure would amount to 4.8 percent. 

In other words anyone dependent upon their stock of financial assets to live would have to generate a nominal return of five percent from their portfolios. And this would move them further along the risk curve.

Of course it could be argued that a focus on inflation tells only half story. A significant proportion of rich people will not be totally dependent on their financial investments to generate an income.

Furthermore, the “average” income earned by a typical rich individual will almost certainly have increased much more than the CLPI.

But for those that do have to live on accumulated wealth, such as retired people, the CLPI together with similar measures, provides an indication of the sort of return they should expect their wealth managers to generate. 

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