March 21, 2011

Four Ways to Help Clients Avoid Wine-Futures Scams

There are steps that advisors can take with clients to navigate the wine-futures market successfully.

Wine-futures season is approaching once again.

Given the sterling reviews the 2009 Bordeaux vintage received and the subsequently high prices the wines have commanded, it’s likely there will be significant interest in the 2010 vintage among oenophile-clients.

Unfortunately, it’s also the season for wine-scam artists to trap the unwary.

Last year at this time, the wine media reported on an alleged futures-scam in China, where demand for top-quality wines has been booming. Reports indicated that some merchants in Shanghai were taking customers’ money for the top Bordeaux futures with no plans to deliver the wine.

Timothy Clew, a managing partner of the Wine Trust, a wine investment firm and wholesaler in Ridgefield, Conn., offers the following advice to help wine-futures buyers navigate the market successfully.

One, minimize the counter-party risk. Stick with established and reputable wine merchants that have a history of delivering the goods.

Wine futures are orders for wine that is still sitting in the barrel, which means there will be a lag of at least 18 months between payment and delivery to the buyer.

It pays to shop around for the best price, but beware of merchants and traders offering significantly discounted deals.

It’s the usual caveat emptor, says Clew: “Generally speaking if the price looks too good to be true, it probably is.”

Two, buy by the case. It’s best to order case quantities and take delivery in the original wooden case. Individual bottles can sell at up to a 30% discount versus bottles in their original case.

Three, diversify. Collectors hoping to profit on their wines should consider buying futures from a range of the top chateaus.

It’s a sound strategy, but an expensive one: Clew estimates that a futures purchase of one case from each of the top 15 Bordeaux chateaus would cost about $100,000.

Four, avoid the futures-flipping mentality. It’s tempting to hope for fast profits with wine futures, but buyers who want to flip wine like shares in a hot IPO face several obstacles.

Trading wine is expensive for individual collectors — auction houses typically charge 20% fees to sell a collector’s wine. There are also costs to store the wine properly and insure it after delivery.

That means a futures buyer should plan on holding the wine for at least five years in most instances, Clew points out.

Given the growing demand for collectible wines, it’s likely that the overall price trend will be higher. Still, managed properly, wine futures can be a great way to acquire top wines for personal consumption or enjoyment, says Clew.

“The benefit of buying a future is that you’re locking up quantities now, and usually at a price that is the best price that you’ll be able to get that wine for [over] the life of the wine,” he explained in an interview.

“For most of the wines that we’re talking about, most of these Bordeaux wines, the price will go up in the aftermarket,” Clew shared.

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