CNBC recently posted an interesting look at passion investments, including information from Knight Frank's Wealth Report as well as from other investment advisors. Fine art is up 9% over last year and up 158% over the past 10 years. Furniture is up slightly at 1% over last year, but down 32% over the past 10 years.
The Knight Frank Luxury Index
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CNBC reports on passion and luxury investments
Source: CNBC
- Collectibles are selling for ever-higher price tags, capturing the popular imagination. When and how should financial planners advise clients that art, wine, jewelry and other collectibles are good investments?
- Passion must lead the purchase, say experts. Appreciation comes in two flavors: aesthetic and financial.
- Interest in collectibles is hitting new heights.
“Rabbit,” a 1986 stainless steel sculpture by artist Jeff Koons, sold to Robert E. Mnuchin, father of Treasury Secretary Steve Mnuchin, this May for $91.1 million, making it the most expensive work ever by a still-living artist.
And a pearl pendant once owned by Marie Antoinette garnered nearly $36.2 million at auction last November. That same month, the most expensive whisky in history, a hand-painted bottle of The Macallan 1926 60-Year-Old single malt Scotch, went for $1.5 million at Christie’s in London.
Clearly, collectibles remain a hot commodity, if mainly among the jet set and the uber-rich, attracting ever-higher, record-setting bids. But just how viable are collectibles — from artwork and antiques to wines and whiskies — as an asset class for the average investor? Can and should the typical financial professional advise clients to sink hard-earned cash into hard goods as investments?
Perhaps, say financial advisors, but only if investors demonstrate an existing desire for the items they’re interested in and have sufficient knowledge and financial resources to make the investment practical.
Passion and practicality
Certified financial planner Kenneth Waltzer, managing director and co-founder of KCS Wealth Advisory in Los Angeles, said his stance has always been that if clients are going to invest in collectibles, they should do so out of passion.
“You shouldn’t do it purely from a money-making standpoint,” he said. “If you love art, you should collect art that you enjoy looking at.”
For his part, Justin Anthony, co-founder of Denver-based Artwork Archive, said he likes art as an investment class “because of the other value it brings, in addition to the speculative or potential financial gain.”
Artwork Archive, which provides art collectors with cloud-based tools to organize, catalog and protect their collections, has $2 billion of artwork under management. The firm can work with financial advisors to appraise and document art held as part of client portfolios.
“When you’re buying a stock, it’s not something you can enjoy on your wall [and] it’s not a physical asset that you control and care for,” said Anthony, adding that owning a painting doesn’t involve “trust issues you may have with an investment firm or company.”
“There’s an enjoyment value that comes with art that, at least from my perspective, buffers things on the financial aspect,” he said. “It’s usually passion that leads the purchase, and investment is just a perk.”
Indeed, the Wealth Report Attitudes Survey 2018 from Knight Frank ranks “joy of ownership” as the No.1 motivation for collectors, outranking capital appreciation, safe financial haven, portfolio diversification and social status.
Waltzer, a wine aficionado and collector, said that of the vintages he purchases for himself, most will be drunk while others will be saved with an eye toward appreciation — in the financial sense. “I actually did have quite a bit of wine that I sold years ago to fund my business,” he said. “So it is doable.”
According to the Knight Frank Luxury Investment Index rankings for 2018 (see chart below), collectible wines have appreciated by 9% on average in the past year and 147% in the past decade, making them the third most valuable luxury asset of 10 tracked. Rare whisky tops the list, appreciating 40% in a year and 582% in a decade, followed by coins at 12% and 193%, respectively. The worst performers? Stamps with 0% annual appreciation and jewelry at -5%.
Antique furniture is nearly flat year-over-year at 1% growth, and is down -32% over the past decade. That jibes with what CFP Susan John, director of financial planning at F.L. Putnam Investment Management Co. in Wolfeboro, New Hampshire, sees with her collector clients.
“A lot of people are not doing so well with disposition of their collections right now, because nobody wants the brown furniture,” she said.
CFP Douglas Boneparth, president and founder of Bone Fide Wealth in New York, says he does not normally present collectibles as an investment option to clients. When the topic does come up, it’s usually because a client already has a collection.
“If they’re collecting something of note or value that has a market, it can be considered part of their overall investment strategy,” he said. “I don’t think their Pog collection is going to make it,” said Boneparth, referring to the tradeable kids’ toy craze of the 1990s.
I learned a long time ago that you don’t say no to people’s passion. Unless, of course, it’s starting to interfere with other things that are important to them and their families.
John estimated that anywhere from 25% to 30% of her clients are avid collectors, thanks, in part, to New Hampshire’s lack of sales tax. “We’re home to a lot of guys who like stuff: classic cars, classic boats, art and even pianos and classical instruments,” she said. “Most of those who collect these things, of course, have a fair amount of money.”
For his part, Waltzer at KCS said clients not already collecting will sometimes broach the subject based on news events or trends.
“We tend to get interest in the ‘hot’ thing of the day,” he said. “A year or two ago, it was bitcoin and, more recently, it’s been cannabis stocks.”
“I’m waiting for the next one,” added Waltzer, who, like Boneparth, doesn’t bring up collectibles as an viable investment option unless the client already has expressed an interest.
“It has to be something you already enjoy and know a lot about,” he said. “You can’t just go out and start buying wines and whiskeys; you have to educate yourself.”
To that point, wine connoisseur Waltzer sticks to his area of expertise and is willing to advise clients on collecting specific vintages.
“Wine I can do,” he said. “I could guide you on wine. But whisky? No.”
Skipping the self-education component to collecting is unwise, says Anthony at Artwork Archive, who said there’s a lot of manipulation in the fine art market.
“One of the things we always advise people when they’re just starting out is doing your homework on the work and the artist,” he said. “But equally important is doing the same research on the dealer or source you’re buying from, if you’re not buying directly from the artist.”
How much is enough … or too much?
Many advisors and experts seem to agree that, whatever a client’s net worth, collectibles should usually comprise no more than 5% of a portfolio — and 10% at the very most.
“For people with average-sized portfolios, I’d say 5% is a good rule of thumb,” Waltzer said.
Boneparth agrees. “I don’t think you’re going to find too many financial planners who’ll go out on a limb and say ‘hey, let’s allocate a substantial sleeve of your portfolio to collectibles,’” he said.
Boneparth said he regards them as being in “the same vein as speculative assets or individual stocks, or what we deem to be an ‘opportunity portfolio.’”
Larger portfolios, usually owned by older clients, offer more room to speculate with all alternative asset classes, including collectibles, Boneparth said. “Typically for younger accumulators who are just getting started, we don’t necessarily find this being the case.”
There are many people … collecting various things that, quite frankly, have no value other than the value to them. How do you put a price on nostalgia, if you’re collecting keepsakes?
“In a $10,000 portfolio, to allocate 5% to collectibles? Okay, so you’ve got that one coin your grandfather gave you,” he said. “That’s versus someone with a $2 million portfolio allocating 5%.
“Boom — you’ve got $100,000 worth of collectibles, and that can span a couple of collections or be just one fantastic piece of art.”
For her part, John at F.L. Putnam said she won’t set normally set limits on how much an avid collector should invest. “I learned a long time ago that you don’t say no to people’s passion,” she said. “Unless, of course, it’s starting to interfere with other things that are important to them and their families.”
But CFP Sophia Bera, founder of Austin, Texas-based Gen Y Planning, which focuses on clients in their 20s and 30s — less likely to already own valuable collections — would recommend an extremely low allocation: just 1% or less. “I just don’t think it’s a good idea,” she said.
‘Passion investing’ in classic cars is gaining speed
“If you enjoy owning art, drinking expensive wine, driving a fancy car, do these things if you can afford them,” Bera said. “If they happen to appreciate in value, it’s a bonus, but it’s more important to enjoy these items because for what they are rather than hoping they’re investments.”
For sure, advisors like Boneparth and Waltzer also point to several drawbacks to collectibles as an investment class, for both financial planners and their clients.
First, on the advisor side of the equation, there’s the fiduciary responsibility to put clients’ interests above all else.
“We’re responsible for making sure that if we do make such a recommendation, it makes sense,” Boneparth said. “The last thing a professional wants is to find themselves dealing with is a lawsuit or arbitration around why they made a recommendation to put a substantial amount of money in a baseball card set.”
Caveat emptor
Then there are several barriers to recouping investments and associated costs on the client side.
When collecting wines and whiskies, “you’re generally buying at retail and selling at wholesale,” Waltzer said. “You’ve got the odds stacked against you early on, and it takes quite a bit of appreciation to overcome that difference.”
He said he bought most of his wine collection at wholesale cost, thanks to industry connections.
“If you have that ability, it’s more likely you’re going to succeed,” he said.
Boneparth cited “the pretty wide spreads in … asking bids” as another complicating factor.
“You think your wine collection is worth $100,000, while someone else thinks it’s worth $50,000,” he said. “It’s very different when it comes to publicly traded securities, where we’re talking within pennies, if anything.”
GI Woman looking at photographs in gallery, rear view
Stuart O’Sullivan | Stone | Getty Images
Which relates, of course, to collectibles’ collective liquidity.
“The joke about wine and whisky is that they’re ‘semi-liquid,’” said Waltzer. “Unlike with a stock or some other security, you can’t just sell it at a moment’s notice.” Collectible sales do tend to take time, and there are often associated costs, including commissions.
John agreed. “The market ebbs and flows for all of these different collectibles,” she said. “Sometimes they’re very hot and other times, you can’t get rid of them.”
Then, for certain classes of collectible, there are storage expenses. “You’ve got to put it somewhere, right?” said Waltzer. “Art, if it’s going to hang on your wall, probably only has a modest cost — you might have to frame it.
“But wine, in particular, you have to temperature-control,” he added. “Whisky much less so, but you still have to keep it in the dark.”
And masterpieces — art, furniture, jewelry and the like — will often require title insurance and other coverage.
On the plus side
So, when and how can collectibles actually work as an investment?
With charitable giving and estate and tax planning, Waltzer said. When it comes to appreciable assets, “technically you’re supposed to pay capital gains tax … so you should get a step up in basis if you leave it to your heirs,” he said. “And that avoids taxes.”
Clients can also be advised to donate heavily appreciated collectible assets and save on taxes that way, too.
“I have a bunch of wines I bought at wholesale back in the early 1990s and some of that stuff has appreciated 20 times, to be honest,” said Waltzer. “Now I donate it for a wine auction and take the current market value as a write-off, so I avoid capital gains and I get a substantial write-off that is far more than I paid.”
That way, even though Waltzer is not saving 100% of the much-inflated value of the wine, he is saving whatever his tax rate would be on it. “So that’s how I’m getting my money back — without having to put in on the market and deal with all of that.”
What price nostalgia?
Many of John’s collector clients in New Hampshire factor the disposition of collectible assets into their retirement schemes, she said — particularly if spouses and heirs don’t share their collector’s interest. “This is going to become part of your retirement paycheck, where you’re going to selectively sell one or two things from your collection every year,” John said she tells these clients. “That in itself becomes a real adventure, because they want to select the right place to sell it — they have a personal connection and it’s more than just a stock to them.
“Working with them toward figuring out that kind of strategy is really a lot of fun.”
In the end “a lot of time, collecting has nothing to do with money, although stereotypically we think it does,” Boneparth said. “There are many people … collecting various things that, quite frankly, have no value other than the value to them. How do you put a price on nostalgia, if you’re collecting keepsakes?”
“Even the stuff that is valuable: Wine collectors have cellars full of bottles that they’ll never enjoy drinking,” he added. “Their enjoyment comes from looking at the labels.”
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