Do advisors need to understand collectible luxury markets to serve HNW clients?
Luxury collectibles as assets, emotional goods
Some of the advocacy for the purchase of luxury goods focuses on their role as a portfolio diversifier. The argument goes that the market for wine and vintage cars bears almost no correlation to equity or bond markets, making these items a valuable store of wealth. When clients put that argument to him, Warner offers a note of caution. The markets for these items is extremely inefficient and while portfolio theory posits that you can make the most money in inefficient markets, it’s hard to pull off. Certain luxury goods like works of art and bottles of wine also struggle with a market for forgeries, adding in high appraisal costs, custodial fees, and auction house commissions into any attempt to liquidate these assets.
Works of art, specifically, can come with a cost advantage for clients if they are worthy of display in a public gallery. A gallery might take a piece of art on loan, covering the costs of storage and insurance while the owner of that piece sees it appreciate in value over time. The art could also be donated outright to generate a significant tax receipt, though a number of specific CRA rules apply.
Other luxury collectibles are both assets and consumable goods. Wine is the most obvious example, as owners are forced to choose between drinking or storing something that could be worth thousands. Cars, too, might be worth less the more they’re driven. Warner says these kinds of goods can put clients in a state of guilt, where the value of the asset interrupts a client’s capacity to enjoy it. In those cases he suggests to clients that they have to choose between the asset as a store of value or a source of joy, because sitting between the two leads nowhere.
A growing class of investment funds out of the United States are now offering access purely to the asset performance side of these items, without the emotional attachment. ETFs that offer exposure to a cellar of fine wine, for example, are aimed at investors who want the diversification without the temptation to crack open a bottle. When facing those products, Warner takes the same quantitative approach he would with any other investment fund, showing clients how it would impact their portfolio behaviour and construction and if it offers anything that their existing diversification does not.
Managing collectible assets in an estate
Warner says that one of the most complex aspects of these assets comes from their eventual dispersal when the owners pass away. Works of art, he says, tend to have the most difficulty because they are entirely unique, have usually appreciated in value, and have emotional meaning for the owners’ heirs. Inheritors can suddenly incur a significant capital gains tax bill on the receipt of a work of art. Sometimes siblings can come into serious legal conflict over who gets the Emily Carr original that hung over their parents’ fireplace.
