Art Boom Forces Wealth Advisers to Develop an Eye
For many advisers, brushing up on their knowledge of Andy Warhol prints, vintage Corvettes and Patek Philippe watches should be all in a day's work.
About 20 percent of affluent Americans - those with more than $1 million to invest - have collections they consider valuable enough to be considered an investable asset, according to a Northern Trust survey of 1,700 well-off investors released on Tuesday.
Wealth managers interviewed by Reuters say many more clients collect rare or expensive objects that they don't consider investments.
Even if collections are more like hobbies, financial advisers to the rich can't ignore the power that those beautiful and rare objects can hold over their clients - or the damage they could do to a client's financial well-being.
Buying another first-edition book or vintage Rolls Royce can drain wealth and carry unforeseen costs such as for insurance or storage.
Advisers should know what their clients have and encourage them to have items inventoried, valued and insured, experts said. Estate planning discussions are also vital, as are conversations about how to pay for upkeep and future purchases.
What's more, sincere interest in a client's collections can generate loyalty and even drum up new business, said Kemp Stickney, chief fiduciary officer for the wealth advisory services group at Wilmington Trust Company.
Stickney, who has been fascinated by cars since he was four, owns a 1986 Bentley Continental drophead Coupe and a 1998 Bentley Continental R Coupe. He's an upscale auto show regular, often attending the prestigious Concours d'Elegance. Some fellow enthusiasts who got to know him there later became clients.
"(They) understand we have the same passion," he said.
But amid that camaraderie, advisers should be prepared to head off any income-endangering purchases - not an easy task with wealthy clients who aren't used to hearing 'no'.
"When you do hit that limit, it can be a little jarring," said Darell Krasnoff, managing director of Bel Air Investment Advisors in Los Angeles.
There are some easy ways to start the conversation with clients, beginning with a casual inquiry about what they own. If nothing else, this can provide an interesting topic of conversation that can build amity and loyalty. Explain how these collections can impact a client's financial picture and when you do, request an inventory of items.
Next, insist on insurance, if needed. A $10 million umbrella policy costs between $1,200 to $1,400 per year, depending on the state and the insurable assets, said Daniel Glunt, senior vice president at Fort Point Insurance Services, a division of HUB International Insurance Services.
"If your client doesn't have adequate liability coverage, they - and you - risk losing everything," Glunt said.
One wealth manager learned the hard way about six years ago when he and his art-collecting client ignored a recommendation to increase liability coverage, Glunt said.
Two years later, the Carmel, California, collector was at fault in a car accident that left another person disabled. A resulting near-$4 million judgment wiped out about half of the client's investable assets. He had to sell his art collection to pay for living expenses and the wealth manager lost the client.
Nailing down the value of collectibles is also important for planning, said Onofrio Cirianni, a managing member of EisnerAmper Insurance & Financial Services.
After a New York client of Cirianni's learned a collection of her father's paintings was worth much more than she expected, she sold some pieces for about $1 million, which helped fund bequests to her children.
DEATH, TAXES AND SAYING NO
In inventory of collections becomes even more valuable when helping clients plan for the inevitable - death and taxes.
"All assets of all clients should be taken into consideration from a tax standpoint," said Cirianni.
Careful planning around transactions can minimize taxes. Capital losses from a stock portfolio can offset capital gains from a profitable art sale, for instance.
Consider having clients put the assets into a limited liability corporation, Cirianni advised. This can protect assets from creditors, or allow the owner to jointly hold the assets with family members, which can help minimize estate taxes.
Make sure clients name beneficiaries for tangible collections. And discuss how to pay for storage, upkeep, appraisals and trust administration. Map out plans to fund future purchases and encourage clients to stick to the plan.
For most collectors, the cash value of an item can be an afterthought.
"Some (clients) treat it as an investment, but for many others, it goes well beyond that," Northern Trust executive vice president Steve MacLellan, said in an email.
That can make the task of trying to convince a client to hold off buying more items particularly sensitive. The trick is do not say no outright, Bel Air's Krasnoff said.
"We're going to tell them, 'here's what it's going to cost you if you do it," Krasnoff said.
His colleague, Bel Air senior managing director Todd Morgan, says a more direct approach is in order if, say, a new painting purchase hurts client liquidity.
"I've got to give them a little slap and remind them it's expensive wallpaper," Morgan added.