Collectible Investments for the High Net Worth Investor

Stephen Satchell

• Publisher: Academic Press
• Year: 2009
• ISBN:
  9780080923055
• Topic: Personal Development
• Subtopic: Personal Finance

Many high net worth individuals are interested in diversifying their portfolios and investing in collectibles. A collectible is any physical asset that appreciates in value over time because it is rare or desired by many. Stamps, coins, fine art, antiques, books, and wine are examples of collectibles. Where does the financial advisor or investment manager for these high net worth individuals go to learn about these investments? There is no comprehensive resource from the financial standpoint--until now. Dr Stephen Satchell of Trinity College, Cambridge, has developed a book in which experts in various types of collectibles analyze the financial aspects of investing in these collectibles. Chapters address issues such as: liquidity challenges, tax ramifications, appreciation timelines, the challenge of forecasting and measuring appreciation, and the psychological component of collecting and the role of emotion in collectible investing.Key FeaturesFeature: Contributors are experts in collectible investing from around the worldBenefit: Gives financial advisors and wealth managers handy access to expert opinions to better advise clients interested in collectible investmentsFeature: Experts discuss the pros and cons of collectibles from an investment perspective in their area of expertise Benefit: One stop shopping, all expertise brought together in one volume, creating a handy reference guideFeature: Experts discuss art, stamps, coins, antiques, wine, from around the world in one global perspectiveBenefit: Wealth managers can gain information about a wide range of collectibles and learn about investing in these types with a global perspective

Part One

General Themes

1 The Role of High Net Worth Investment Managers in Collectible Investing for Their Clients

2 The Neuropsychology of the Collector

3 Collecting and Behavioral Finance

4 Collecting as Luxury Consumption: Effects on Individuals and Households

1

The Role of High Net Worth Investment Managers in Collectible Investing for Their Clients

Daryl Roxburgh, BITA Risk Solutions

This chapter discusses the role of the investment advisor in working with high net worth investors who are interested in or are already investing in collectibles. We examine the relationship between the investor and the investment manager in terms of the service provided, the breadth of investment offering, and the suitability of investments. Then we discuss the management of investments and the tools used in the process of developing a client portfolio, the role performed by investment managers regarding collectible investments, and the positive side of investing in collectibles.

High Net Worth Managers and Family Offices

The terms Private Bank and Family Office have lost some of their original meaning and ability to describe the services provided as they have been hijacked by the marketing teams of the large financial institutions. At the same time, stockbrokers have become wealth managers and asset managers. However, the distinctions are important when it comes to the issue of management and advice on collectible investments, as we will discuss later.

The family office has traditionally been an organization that looks after the interests of a family, whether investment, property, legal, or succession planning. The role has very much been ensuring the coherence and sustainability of the family and its fortune as well as managing day-to-day affairs, such as travel and staffing. In this guise, the management of art, wine, antiques, and other valuable artifacts was just one aspect of managing the family assets and ensuring that they were conserved and catalogued and, as required, that collections were rejuvenated. The expertise to work on these collections would have been partially accumulated within the family office, then augmented by external experts, and perhaps finally, as scale justified, expanded internally. Often, major collections would be left to the state as a philanthropic gesture or as an action with beneficial tax consequences to the family.

Today the status of collecting and collections has expanded within the family office. Through the use of modern technology, different branches of the family can access the family collections through a family portal, and can, for example, book assets such as pieces of art or properties for their use. Fundamentally, the family office is geared to bringing experts to bear on the collecting needs of the family and thus sustain assets and wealth through generations. As such, this new technology is very well placed to facilitate the pursuit of collectible investments for high net worth family situations.

High net worth managers serve a wider set of clients with the goal of generating investment return for the client. This is in line with the investment guidelines set out by the client, including their time horizon and propensity for risk. The managers will generally employ a set of investment vehicles that meet a simple set of criteria:

• The advisor understands the investments.

• The investments can be delivered economically to the investor.

• The investments are acceptable to the wide investor base.

• The investments meet the requirements of the manager’s regulator.

These criteria are often the hurdles that prevent most high net worth managers from investing in collectibles on behalf of their clients. We further discuss this idea in the section on methods of investment.

The type of service provided by the investment firm will be the most significant determinant of what the firm is willing to offer its clients in terms of advice on collectible investments. The conclusion could be drawn from the previous comments that such advice would come only from family offices; however, as the reader will see, this is not necessarily so.

The Nature of Relationships between Client and Manager

As we conducted research for this book, we spoke to many investment managers across the entire gamut of investment firms. The style of relationship differed widely among them. In this section we consider three aspects of the client/manager relationship: the service provided by the manager, how the manager determines what is suitable for the client, and where collectible investments fit in this context.

First, we consider the relationship in terms of investment service and approach. The services provided tend to fall within a matrix that can be defined by these parameters:

• First, the level of granularity of investment decision: stock picker through multimanager (fund selector) to asset allocator.

• Second, the type of authority given to the manager by the client: execution only through advisory, advisory managed to discretionary including trust status.

• Finally, the breadth of instruments used for investment: from traditional cash, bonds, and equity through to a broad asset mix.

Unfortunately, clients have not always been well served. The industry has seen a polarization of offerings, with the large investment managers moving away from direct “production” to manager and product selection.

This is sometimes in the context of a strategic asset allocation offering, with some degree of sophistication involved and that takes account of the individual clients needs. Unfortunately, often it is likely to be a model portfolio selected on the basis of a more perfunctory assessment of the client. In simple terms, this can be thought of as “one size fits all.”

In contrast, a number of medium-size management firms, along with boutique firms, have sought to distinguish themselves in the marketplace through a more tailored, “bespoke” offering and/or a higher degree of investment expertise provided directly to the client. In some instances this is reflected as structuring an asset allocation to the specific needs of an investor. In many cases, the family might have a large holding of assets in something that it cannot sell—perhaps a family business or a block of shares held in an endowment. So the asset allocation needs to complement this position. In mathematical terms, this is akin to a portfolio construction with constrained weights.

In this process, the firm might well be the trusted advisor and create not only an asset allocation but also appoint managers to execute the investments within different assets—an approach very much like that of the institutional investment world. Or they could specialize in direct company investment, building a portfolio of equities for the client. These firms are the most likely investment managers to provide access to collectible investments for their clients. This can take the form of a marketing differentiator as they seek to identify the firm with a special interest set, such as the horse or motor-racing fraternities, as something that the firm has been traditionally involved with or as part of a broad service aiming to meet their clients’ every requirement.

The second parameter in the relationship matrix is the type of authority given by the investor to the manager. At one end of the spectrum, “execution only” is precisely that: the manager undertakes the transaction on behalf of and on the instruction of the investor. The vast majority of collectible investment specialists work on precisely this basis because they are not authorized by a regulatory agency to give investment advice. They are willing to provide advice on providence and quality. Furthermore, they may place a potential purchase into the context of a collection, but they are unable to provide investment advice. Quite often an investor will run an execution-only portion of their collectible portfolio with an investment manager alongside the managed portion, allowing them to execute their own investment ideas.

Where an investment house has a specialty in a particular form of collectible investment, it will generally offer this as part of its advisory service, seeking the client’s agreement to the investment before proceeding. Alternatively, if the investment is managed on a discretionary basis, authority would be obtained when the client signs the investment mandate.

It might seem obvious that those companies that provide the widest range of asset classes will be the ones that are most likely to offer collectible investments, but actually this tends not to be the case, since these assets are considered to be outside the usual remit of investment. For that reason, collectibles are more often offered by companies that have a narrower range of offering within which they offer a specialist service. This can also be viewed in terms of what is meant by offering collectible investments. In this instance it is considered the investment in a collectible class through some form of unit trust or investment trust.

A key regulatory issue today is whether or not an investment is deemed “suitable” or not for a client, both as an asset in its own right and in terms of the client’s portfolio context. In the general course of portfolio construction, this is crudely done through presenting to a client a list of asset classes as the investment product offered by a firm and asking for restrictions. However, there is a growing trend to move toward a more sophisticated approach, with companies like Ibbotson and Risk Metrics providing a questionnaire that outputs a risk number that can be matched to a model portfolio. BITA Risk Solutions has produced a third-generation questionnaire and scoring algorithm that output a series of parameters on which portfolio construction can be based, including degrees of suitability of individual asset classes. This approach can provide a firm foundation for the relationship between the client and manager because it creates discussion around the central purpose of that relationship: investment.

Whether or not a questionnaire is used to derive the level of risk that a client is willing to sustain and to understand the suitability of investments, the investment manager must determine the purpose of the client’s investment. This purpose can have many parameters and is often described as the utility of the investor—meaning that which, when maximized, will give the investor maximum satisfaction. Often the utility is a balance or trade-off between various factors, such as risk and return.

The investment managers in our research gave their perspectives on the investors’ utilities with respect to collectibles. The following were deemed to be utilities of investing in collectibles. At the very top of the list:

• Personal control and involvement in building the collection

Then:

• Acquisition of rare artifacts that money simply cannot buy but that must be sought out and tracked down

• Ownership of a fine, exquisite, or unique item

• Completion of a series or collection

• Prestige, recognition, and sharing of the collection

• Participation in the social network of collectors and experts in the field

• Immortality through the posthumous persistence of the collection

• Acquiring an item at a good price

At the very bottom of the list:

• Seeking a commercial return over time

• Not missing out in the participation in a published rise in value

Now, remembering that these are the views of investment managers will explain the...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• Preface
• List of Contributors
• Part One: General Themes
• Part Two: Major Collectibles Related to Investing
• Index