American economist Milton Friedman famously said in 1976: "Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless." Friedman's musings on the dangers of a debased currency are ringing true again. Nearly six years after the financial crisis, central banks around the world are turning to the printing presses in ever-greater vigour.
Recently, news of the Bank of Japan's commitment to radically expand the nation's monetary base, in what some economist detractors have labelled a dangerous experiment, underscore the new era of policymaking.
Whether global policymakers can pull off what amounts to a high-wire act remains to be seen, but the risks that something could go badly wrong are rising as the stakes grow higher.
In a nod that pays homage to Friedman's words 37 years ago, the importance of protecting one's assets from the dangers of monetary debasement have never been more important, wealth managers say. Data released in June by Swiss bank Julius Baer shows that a broad measure of the real cost of living for wealthy individuals is on track for an 8 per cent rise in 2013, outpacing the standard measure of inflation by a wide margin.
In Shanghai, costs are heating up at an even faster rate, as luxury lifestyle inflation jumped 10 per cent from a year earlier, or 11 per cent when based in US dollars, according to figures from the bank. The rate marks a moderation from a year earlier thanks to cooling in luxury property prices, but is still outpacing China's official consumer price index of 2.1 per cent in May on year. Still, the Julius Baer report spotlights other areas of spiralling price inflation, including university education costs, which are up 30 per cent from a year earlier, while high-end wine prices leapt 16 per cent, and room tariffs for a hotel suite have risen 15.7 per cent.
"The spectre of inflation remains very real," Julius Baer chief executive Boris Collardi writes in the wealth report, in reference to the individual constituents of the luxury lifestyle index.
Hedging against rising inflation is an important component of portfolio management. Private banks, or those which cater to individuals with at least US$1 million to invest, say one of the big challenges is to secure income flows while shielding the underlying assets from undue volatility.
J. P. Morgan Private Bank highlights analytical research and institutional expertise as selling points that come into play for its portfolio management.
"Return is one of the key parameters people consider when it comes to investment, but risk management is in fact of paramount importance, if not more, for the long-term success of an investment portfolio," J. P. Morgan's market manager Kwang Kam-shing in Hong Kong says. She added that the bank has an arsenal of portfolio-management tools which include institutional-grade resources, research, and a history of proven management stretching back 160 years.
Coutts' general manager Asia Michael Blake highlights what he says is a disturbing track record in family cultures that practice avoidance when it comes to professional financial guidance.
"History has shown that wealth rarely lasts beyond three generations," Blake says. "It's never too early to start thinking about succession planning, especially for a family business."
"If you want to achieve a double-digit return, then you have to be able to take a double-digit risk," says Jean-Claude Humair, UBS Wealth Management's deputy chief executive in Hong Kong.
Humair recommends clients spell out their investment objectives, addressing issues such as whether they have specific goals such as retirement or supporting a child's university education.
Coutts' Blake says meeting and talking with clients is important in garnering insight into what they are seeking. He indicates that it's a process of listening, but also interacting with clients.
"Are you having intelligent and memorable conversations with your banker, where you exchange stimulating and sometimes challenging ideas? Are you confident that your banker has a detailed understanding of your needs? Is she or he able to help you translate these requirements into an appropriate, tailored solution?" Blake says.
These days, many new clients of private banks are entrepreneurs seeking to strike up long-lasting relationships. In some instances, that means tapping services to help aid businesses that are growing and in need of capital.
Barclays' wealth and investment banking market head Rickie Chan says there's interest among this affluent, self-made generation for specialist advisers and investment banking-style services. Often that means assistance with fund raising activities involving debt or capital markets activities, but also can be extend to mergers and acquisitions, he says.
UBS' Humair agrees that many of today's new clients, of which about two-thirds are successful entrepreneurs, are seeking some sort of help with fund raisings.
"Clients may need to raise cash, may to want to list the company, may want to sell or buy companies," he says. "I definitely see the attractiveness of this business model."
To paraphrase economist Friedman's thinking 38 years ago, seeking out specialist advice probably isn't a bad idea given the potential for things to go wrong in an era of low interest rates and other unorthodox policies.
"One of the great mistakes is to judge policies and programmes by their intentions rather than their results," Friedman said in 1975.