Why Treasures of the Heart Are Not Always Treasures of the Portfolio

When it comes to collectibles, sentimental value can get in the way of sound investment decisions

Despite recent market volatility, most high-net-worth individuals own special collectible assets—such as jewelry, art, precious metals and cars—for emotional reasons rather than for purely financial purposes. This situation has prompted some experts to suggest that advisors should treat such personal treasures as part of an individual’s total wealth, and not necessarily as a portfolio holding.

Overall, 82% of high-net-worth U.S. investors hold collectible assets, partly for enjoyment; 76% for their heritage value; 59% for social motivations; 28% for their rarity and 7% for monopolization motivations, according to Barclays’ latest Wealth Insight report.

Only about one-fifth (21%) of wealthy investors, for instance, hold these assets as security or protection against the risk of problems with their conventional investments, according to a Barclays report released Monday. while just 23% do so for strictly financial reasons.

“The collectibles market has seen a surge in activity — most recently demonstrated by the record sale price of Edvard Munch’s ‘The Scream’ in May,” said Daniel Egan, behavioral finance specialist in the Americas for the Wealth and Investment Management division of Barclays, in a press release. “However, while treasure has grown in popularity, it hasn’t necessarily translated into strong financial returns for investors and strong caution should be exercised in viewing it as an alternative to traditional asset classes.”

Precious metals are largely held for financial reasons (60%), though it is the only “treasure asset class” more likely to be held for financial than emotional reasons. Meanwhile, wine (93%) and classic automobiles (91%) are held overwhelmingly for emotional reasons.

Seventy-one percent of all respondents, including those who do not own treasure assets, report that emotions influence their overall financial decision making, Barclays Wealth explains in the report “Profit or Pleasure? Exploring the Motivations Behind Treasure Trends.” This percentage is even higher for those that do own such assets, with 98% of those surveyed agreeing that they hold these objects in part for emotional motivations. The study reveals that the emotional motivations for holding treasure assets are complex and interconnected, with respondents reporting multiple reasons for owning their treasure assets.

Precious jewelry, fine art pictures and antique furniture are the most popular collectible investment types in the U.S., the Barlcays report says.

“Taking into account the layers of emotional motivations that factor into holding treasure assets, these collectibles should be regarded as part of a wealthy individual’s personal holdings rather than as a separate asset class in their investment portfolio,” Egan said. “Critically, the personal value individuals attach to these assets means that purchase and sale decisions are even more susceptible to emotional biases than usual.”

The study also found that 32% of respondents will reduce the number of types of treasure they hold over the next five years for reasons including a desire to liquidate assets, realize returns or carry out estate planning, and many will not follow through on their intentions to “declutter.”

In addition, emotional attachment appears to influence the sale of treasure assets, with U.S. investors requiring an average price increase of 62% in the first year of owning an asset to trigger a sale. The exception is those who inherit collectibles, who say they are much more likely than those who acquired such items through other means to say that they have sold them or plan to do so in the future. Sixty-two percent of inheritors have already sold their stamp collection, the asset class most frequently subject to decluttering, compared with 36% of non-inheritors.

“There are multiple behavioral factors at play throughout the life cycle of an investor’s ownership of treasure assets,” stressed Egan. “Many are initially drawn to buy these collectibles for emotional reasons and then hold onto them because their emotional attachment grows, leading them to assign a higher value to an item than they would have paid to purchase it.”

Regional Differences

The Barclays research found differences in collectible trends and motivation by region, including:

  • High-net-worth U.S. investors in the West hold 9.7% of their total wealth in treasure, the highest concentration across regions;
  • Investors in the South prefer precious jewelry, fine art and antique furniture and only hold 7.9% of their total wealth in treasure, the lowest concentration across regions;
  • Heirloom importance and cultural motivations are less important in the West; only 29% of these investors’ treasure is held to protect and pass on to their children and grandchildren, and only 28% is held for cultural or family reasons;
  • In contrast, 39% of Northeast investors’ treasure is held for heirloom reasons and 38% for cultural motivation;
  • Just 20% of Southern investors’ treasure is held for sharing with friends, indicating that they are fairly private with their treasure and do not feel a strong social motivation; and
  • Southern investors are also more likely to report financial motivation compared with other regions; 11.4% of their treasure is held for pure investments or as financial security if conventional investments fail.

“The ‘stickiness’ of these assets underscores the necessity of viewing collectibles holistically within the context of an individual’s total wealth, as they can have a profound impact on their optimal wealth management strategy even if they were not purchased with finances in mind,” said Christopher Johnson, director and wealth advisor in the Wealth and Investment Management division of Barclays, in a statement.

“As the estate and capital gains tax landscape in the U.S. is set to shift at the end of 2012,” he said, “these financial implications are increasingly top of mind for wealth managers and their clients.”

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