Chris Warner explains his approach to clients with wine, car, and art collections as well as his messages to clients who want in on these markets
Luxury collectible items can imply and denote status, they can also reinforce wealth as they appreciate, or so many proponents of these items would have potential buyers believe. Art collections, wine cellars, vintage cars, watches, and even collections of sneakers and pokemon cards can now reach astronomical valuations. HSBC Private Bank estimates that the global market for collectible luxury goods will be worth $522 billion (USD) by 2028. It’s a market that seems far removed from traditional, or even alternative, investment classes as items of beauty and even consumables are suddenly turned into appreciating investment assets. For advisors who want to serve high net worth (HNW) or ultra high net worth (UHNW) clients, the prospect of these luxury goods can make life complicated.
Chris Warner is a Wealth Advisor, Practice Management Lead, and Client Relationship Manager at Nicola Wealth in Victoria, B.C. He has served a few clients with collectible luxury items of considerable value, and seen firsthand how these items can appreciate and bring clients passion and joy, while also adding real complexity into their tax and estate planning process. He notes that most HNW or UHNW clients might not go deep into these collectible assets. Nevertheless, he says that advisors should understand the space to better serve the cohort of clients for whom these assets are an important part of their wealth and their lives.
“It’s an interesting space in general. Most of my clients probably don’t delve into this in a serious way, but there’s a few who do, and I think a lot of them recognize it’s driven more by the emotional dividendthat comes along with [these items] than it is the need for additional diversification because if they’re with us, they probably already have pension-style diversification,” Warner says. “But you can’t hang real estate on your walls. You can’t park stocks in your garage. You can’t age bonds in a cellar like you can with wine.”
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 taxbill 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.
Even if clients don’t care about artworks as a store of value, Warner says these assets are an essential topic of conversation when advisors talk to clients about their estates. There needs to be a discussion around the tax bill that comes with inheriting a work, as well as a conversation about who will get what piece. Letters of wishes can help with making those dispersals less conflict-driven, but Warner encourages open family discussions about who wants what.
With certain collectible assets, determining value requires expertise that Warner admits he does not have. His rolodex is full of specialists, though, who can help with broad legal advice and specific appraisals. Auction houses are often the besto clients that selling luxury collectibles at auction through Sotheby’s or Christie’s can come with commissions as high as 25 per cent
Engaging clients on their passion
Some clients may come to their advisor wanting to get into the market for a luxury good because they see watches or whisky as valuable assets. Warner says that it may be worthwhile to help focus the client on the emotional side of what clients get from these luxury goods. Positioning them as aectations
For clients who are driven to these items more by passion, Warner sees a conversation about luxury goods as a route to connection rather than a conversation about asset management. He’s happy to learn about wine, art, or luxury cars from a client, because it allows him to connect with and understand that client more deeply.
“It speaks to philosophy of wealth. How you want to be perceived by clients, and what kind of advisor clients are looking for,” Warner says. “I think it’s important that we just hear what our clients are trying to tell us, even if they’re not saying it with words.”
