Collectibles -- say, a mint condition Joe DiMaggio rookie card or a 1956 "bathtub" Porsche speedster -- have always been popular with the wealthy. But never more so than now, according to the annual "World Wealth Report," conducted by Merrill Lynch and consulting technology firm Capgemini, which examines world-wide wealth management practices for high net worth individuals. Indeed, CapGemini calls such assets "passion investments." A word of warning to advisors who want to advise clients on such investments: Outsource, unless you really know the world of collectibles inside out.
In 2006, the cost of luxury goods and services (as measured by Forbes’ CLEWI, or Cost of Living Extremely Well Index) rose 7.0 percent, almost twice as fast as the cost of everyday consumer products (measured by the Consumer Price Index), which rose 4.0 percent. That’s vastly different from the year before, when price inflation for the two categories was pretty much on par: the CLEWI rose 4 percent, while the CPI rose 3.6 percent.
The jacked up price increase for luxury goods "signals the demand for luxury goods is outpacing the demand for everyday consumables," wrote the authors of the report. And rising demand for these kinds of goods should bring increased interest from advisors, who, they suggest, may begin partnering with firms that specialize in so-called passion investments. (The report divides up passion investments into various categories: luxury collectibles like automobiles, boats and airplanes; jewelry; art; and sports-related investments, such as professional teams, sailing and race horses. And then, of course, there are the things like wines, antiques and coins.)
On the other hand, the report warns that the luxury goods market could get overheated, particularly if high-net-worth individuals begin investing in such items “primarily for the purposes of financial gain increase.” That could drive prices to irrational levels, possibly resulting in “a price correction in a historically cyclical market.”
To get a better idea of exactly where the wealthy are putting their money when it comes to luxury goods/passion investments, the report took a microscope to high net worth individual’s portfolio allocations. In 2006, luxury collectibles, such as cars, boats, airplanes, etc., ranked first and made up more than 26 percent of all high-net-worth spending on passion investments. Art came in second with 20 percent, followed by jewelry with 18 percent. Sports investments got 6 percent, and the remaining 14 percent fell into the “other” category. By comparison, the ultra wealthy spent a little bit more of their passion-investment money on art: 25 percent. But the other categories received similar allocations from ultra high-net-worth investors as from plain old high-net-worth investors.
Michael Mendelsohn, president of Briddge Art Strategies Ltd., a fee-based consulting service for collectors, as well as for those legal and financial experts who help collectors manage their assets, says advisors who want to do this kind of work should probably outsource much of the advice to other professionals. There’s simply a lot of expertise that is required to manage collectibles, he says.
Mendelsohn says the advisor can get started by adding questions about luxury investments to his initial intake questionnaire. Potential questions could include what, if any, luxury items the client owns, the cost basis of that investment, the recent market value and whether the item is promised to heirs or charity. Such questions not only help open a new area of business for the advisor, but can also give him a better handle on a client’s interests, and open a door to new potential clients—the heirs.
If you have your own interest in particular luxury collectibles, another way to add this dimension to your business is to share that interest with clients. Take Gary Rathbun, president of Private Wealth Consultants, which has about 85 high net-worth clients. Rathbun, who has been in the financial service industry for 27 years, says that about eight years ago he decided to share his passion for collecting antique currency with some of his clients, and he now helps them buy and sell their own antique currency collections. Obviously, Rathbun does extensive research before he buys or sells anything for a client, getting familiar with the auction process and the auctioneers and making background checks on the item to be bought to make sure it isn’t a fake, among other things.
“You want to be involved before the client spends the money,” Rathbun says. “The critical thing is that the advisor be truly interested in something. You can’t fake a passion. [Sharing that passion] will strengthen your relationship with the client, which is worth money.” A lot of wealthy clients who have these collectible passions simply want someone to tell them it’s ok to dump a bunch of money on the stuff, especially if they’re just starting out, he says. The client wants the advisor to say, “That’s cool, you’re worth one billion, so it’s okay to spend $500,000 on an antique shotgun,” he says. In addition, Rathbun says clients might like help looking at their investments from an, “Am I getting ripped off?” standpoint, which can require a lot of consulting work. Rathbun doesn’t make a lot of money directly from helping his clients manage their luxury collectibles, but it does improve the client relationship—and that can result in more business from the client, as well as client referrals.