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.