Variously known as "treasure assets," "passion investments" and "emotional assets," high-end collectibles have been gaining in popularity with the global super-rich since the 2008 financial crisis. Recent surveys by Barclays and Capgemini confirm that, while the wealthy primarily buy for the psychological satisfaction of owning iconic pieces, they increasingly view their treasures as a store of value and a source of growth.

According to the 2012 Barclays report, Profit or Pleasure? Exploring the Motivations Behind Treasure Trends, high-net-worth individuals hold an average of 9.6% of their wealth in collectibles-and in some countries the number is as high as 18%. Barclays surveyed over 2,000 individuals worldwide with more than $1.5 million in investable assets to determine their motivations for seeking out and holding 10 different types of collectibles, including precious jewelry, pictures and paintings, sculptures, tapestry and rugs, antique furniture, wine, classic automobiles, stamps, coins and precious metals.

Recent reports of record auction prices have undoubtedly fueled interest in treasure assets, yet just 18% of the rich acquire collectibles solely for financial reasons, according to Barclays. In other words, the majority of wealthy individuals and family offices may be overlooking the investment potential. And a slow economy might just be the right time for advisors to suggest that certain clients enter the market or expand existing collections, since cash-strapped collectors are selling.

But how can advisors help clients distinguish a high-value collectible from a dust-magnet curio?
There really are no strict rules on what is or is not a true collectible. There are, however, some common criteria. An item should gain in value over time if it is desired by others, if it showcases fine craftsmanship and if it is authentic. It also helps if the item is rare or out of production.

Sweet Rewards
"The fine art market is enormous and probably the most highly sought after of all the categories listed in the Barclays report," says Michael Plummer, co-founder of New York-based Artvest Partners, which advises wealthy families and individuals on investing in fine art. "From an investment standpoint, fine art-contemporary, impressionist and modern art-is a deep market. It's globally traded and liquid."

Plummer, who once developed an art fund as the chief operating officer of Christie's Financial Services, says the 2008 financial crisis was a wakeup call that drove investors into tangible goods. "Wealthy collectors are not just looking for returns; they want to preserve wealth. For many of them, fine art is a good hedge and a store of value in uncertain economic times when confidence is diminishing in the financial markets."

He also says art investors appreciate the fact that their returns are generally not correlated to the stock and bond markets-a disconnect that was confirmed in the World Wealth Report 2012 by Capgemini. And while high-quality collectibles may fluctuate in value, they appear to be profitable investments over the long run. In a 2009 research paper, entitled Emotional Assets and Investment Behavior, three finance professors at Tilburg University in The Netherlands examined the investment performance of a number of collectibles-including art, wine, clocks and watches, stamps, atlases and books-that accounted for more than half of wealthy individuals' spending in the luxury collectibles sector.

Using a broad range of indices, they showed that from 1986 to 2006, all assets in the study provided positive annual returns. Art, wine and books were the best performers, returning 7.6%, 6.1% and 2.8%, respectively, compared with 5.9% for stocks and 2.7% for bonds.

When the stock market plummeted in 2008, prices dropped as much as 30% for some collectibles, as the market was flooded with sellers who were forced to part with their treasures to raise cash. Now prices have not only recovered, they're up considerably for many collectibles.  

Capgemini reports that pricey collectibles, including diamonds, gemstones, jewelry, stamps, watches, boats, jets and some luxury cars, appreciated significantly in 2011. But fine wine and sports memorabilia generally underperformed. Capgemini expects art and diamonds to be top performers in 2012.

Serious Risks
Notwithstanding the attractive long-term appreciation of many collectibles, there are considerable downsides to these investments. For starters, fashion is fickle.

"Parts of the antique furniture market are languishing because they've fallen out of favor," says Artvest's Plummer. He says collectors just aren't as interested in 18th and 19th century art and furniture as they were 15 years ago. "Today's collectors want to collect the art of their time and the designs of their time."

It's hard to predict what will be en vogue (read saleable) in the future. "Investors are looking at the contemporary art market to find the next big artist before everybody else does. That's where they're going to make the most money, but that's also the riskiest part of the market because it's akin to finding the next Google," he says.

Plummer says Artvest tries to give objective advice to its wealthy clients, so they're not just relying on what they see other investors buying, or on what galleries and auction houses are pushing. "The art market is quite complicated. Connoisseurship is something you can't pick up overnight. It's learned over time by looking at objects and training one's eye and learning about artists and the best periods of their work," he says.

Industry insiders agree that buying fine art and other high-end collectibles requires the advice of experts who thoroughly understand the type of collectible and can realistically value it. Clients should only buy collectibles at a premium to avoid missing a once-in-a-lifetime opportunity to obtain something they truly desire, not because they were charmed by the seller or the seller's agent.

It's also essential to invest in things that others will eventually want to buy. "One person's passion is another person's poison," says fourth-generation estate planning and trust attorney Matt Erskine, a principal in the Worcester, Mass.-based Erskine Company LLC, which helps clients acquire, manage and transfer ownership of unique family assets.

Erskine's clients collect everything from Revolutionary War-era sheet music to erotic netsuke (miniature sculptures created in 17th century Japan), which Erskine describes as the Internet porn of its day.

With high-net-worth clients buying all manner of unique items, from thoroughbred racehorses to classic cars, how can an advisor tell the difference between a rock-solid investment and an overpriced indulgence? Erskine offers this heuristic advice: "It's not an investment if you have to feed it or fix it," he says, quoting a pithy lesson he got from his 89-year-old father.

Erskine recommends Collectible Investments for the High Net Worth Investor by Stephen Satchell for details about which collectibles might make good investments. He also likes The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art by Don Thompson for its insight into the odd economics and psychology of the contemporary art world.

As if choosing the right collectibles weren't hard enough, there are plenty of other traps for the unwary. Some segments of the collectibles markets are notoriously illiquid, in part because one-of-a-kind pieces make it hard for experts, let alone buyers and sellers, to agree on their value. Other segments are subject to outright manipulation or fads that drive prices up, only so later they can rapidly collapse. Although it's possible to turn quick profits on collectibles, 10 years is a more realistic holding period for many items.

And collectibles typically provide no current income. What's worse, storage and other costs can consume cash.
When it's time to sell, transaction fees at auction houses can eat into profits. Auctions ensure a sale, but not necessarily the price the client wants or even the appraised value of the piece, if the reserve price is set at certain places. Erskine says it's essential to negotiate with auction houses, because they charge both buyer's and seller's commissions. A trend Erskine sees is that more clients are utilizing treaty sales, where the parties deal directly through a broker, to lower transaction costs.

Fraud is a major risk in this loosely regulated market, which is another good reason to hire experts to scrutinize items before purchase. There are abundant tales about fake Cartier watches, gold-covered tungsten bars and phony Château Lafite wine. Before buying, it's also a good idea to check stolen property databases, like the Art Loss Register, a worldwide catalogue of pilfered art, jewelry and other collectibles at www.artloss.com.
"Title insurance is also very important if you're investing," says Erskine. If there is any doubt about the title to a collectible, such as a lien, it could impede a future sale.

Perhaps the most surprising risk of investing in collectibles is the possibility that clients will be unable to part with their treasures when it's time to take profits. According to the Barclays study, most wealthy individuals and families buy and hold for emotional reasons-they are often reluctant to sell their prized possessions, even when the value rises significantly.

If advisors suspect that ardent attachments to physical objects might overwhelm their clients' reason, there are always dispassionate ways to invest, such as by buying Sotheby's and Collectors Universe stock. There are also funds that invest in just about everything from art to vintage automobiles, such as The Fine Art Fund and The Classic Car Fund.

Death And Taxes (Plus Insurance)
Clients usually are already collecting by the time they realize they need an inventory of their possessions, according to Erskine. They are also slow to become aware of the estate, tax and insurance ramifications of owning collectibles, which are important even if collectibles are a small fraction of their net worth.

"The first thing to recognize is that you cannot assume that your estate planning techniques will have the same results for artwork and other collectibles that these techniques will have for stocks, bonds, cash and more fungible investments," says Erskine. "You need to specifically ask your advisors, 'Will this technique work if I put my collection into my estate plan?'"

When collectibles are inherited, their value must be declared as part of the estate. If the value is not declared on the estate tax return, the heirs could have trouble selling the items later, as any reputable auction house will request documentation to prove the legal title is good, including the fact that there are not estate taxes due, before agreeing to sell the items.

Gains on the sale of collectibles are currently taxed at 28%. Erskine says it's possible to defer taxes on collectibles with Section 1031 like-kind exchanges.

In addition to succession and tax planning, clients need property insurance to guard against fire, theft and other losses. Almost 40% of wealthy collectors lack a valuables policy adequate to cover all of their collections, according to the 2011 ACE Private Risk Services Survey on Passionate Investing by Wealthy Households.

Homeowners' policies typically limit coverage for collectibles of significant value, so clients need to purchase supplemental coverage for these items. Because appraisals can often be too low for unique pieces, it might also be a good idea to select a carrier that will pay more than the insured amount for the items. The Chubb Group of Insurance Companies, for example, offers a 150% valuable-articles replacement clause for scheduled items in its policies, in case the policy holder is underinsured.

The Taste Of Others
Despite the time and effort advisors may spend educating clients about investing in collectibles and planning for their legacy, there's no guarantee that grandma's heirs will cherish her tchotchkes the way she did. In fact, the Barclays study indicates that inherited treasures are much more likely to be sold than those acquired by other means-a process the report euphemistically calls "decluttering."

Worse yet, family members could have absolutely no idea what they've inherited. Erskine notes that without guidance from trusted advisors, clueless heirs could mistake grandma's 10 carat yellow diamond broach for costume jewelry. As he says, "Just think if it was your family that put that in your estate yard sale."