In the past five to 10 years, there have been increased allocations to one of the most widely ingrained passion investments that move people in the literal and figurative way—the automobile.
A basic supply/demand imbalance has pushed up values of many collector cars, but most notably those that are the “best of the best.” This subset of collector cars may be characterized as having rarity, provenance, are in exemplary original or in some cases restored condition, and enjoyed desirability through time including when they were new. The substantial increases in value are a symptom of expanded participation across global and generational demographics, continued activity of hobbyists, collectors, investors and HNW/UHNW individuals. Whether the increase in asset allocations or exposure has come about passively or actively, for diversification needs, or as a lifestyle choice, the needle has certainly moved in terms of the impact on an individual’s or trust’s portfolio. This value shift suggests employing more rigor and applying greater expertise than has been traditionally undertaken by estate and trust, wealth, and family office advisors and those with fiduciary responsibilities. Simply housing these assets in a trust structure, for example, doesn’t focus on the critically important risks and opportunities that have developed. Asset and underlying market expertise needs to be added as a discipline in order to address financial dynamics and structure, logistical care and, in some cases, legacy planning.
While there isn’t uniformity across sovereign and even local jurisdictions in respect to advisory standards and treatment, estate and planning approaches and regulation, specific bespoke structures of ownership and use, tax, titling practice, insurance, etc., there is a commonality in the need to fully understand the underlying asset so as to efficiently achieve optimal and commercially compliant outcomes. Portfolio reductions, additions and rebalancing transactions increasingly occur in the global arena. Thus the marketability of the automobiles can be improved if certain baseline standards such as provenance and documentation are clear and understood. Principals, their trusted advisors and beneficiaries are best served by having complete transparency and understanding of the collections’ characteristics and factors that will impact value on an ongoing basis.
“Knowing what you have” is a critical first step. The nuances and differentiating characteristics and qualities of automobiles can be minute in nature but extreme in their impact on value. In many cases these nuances are not fully and clearly known or documented. There can be a sense of overvaluation as well as an under-appreciation of value. Advisors need to institute a comprehensive review and cataloging of the assets by expert and independent third parties to determine these factors, and to outline potential risks and rewards of the portfolio. Having an appraisal or an inspection is only part of the process. Collections are increasingly part of asset-backed lending programs as well. In addition to quantifying exposure more accurately, this enables the development of a plan for how to care and consider these assets or include them in more traditional allocation modeling. “Plan when you can, not when you have to.”
Great and rare cars are coveted and increasingly viewed as fine art. While the need for an advisor might have been discretionary when a collection was valued at $500,000, that collection could easily be worth many multiples of that today. Being inefficient or haphazard in the current environment may not be as palatable, especially when considering fiduciary responsibility. Thus, best practice dictates proactive and robust financial, legal and risk management oversight.
While we can empathize that the sight of a barn or collector garage filled with automobiles is likely more daunting to an advisor or trustee than a wall of paintings, that should highlight the need to address the circumstance with experts in the field. These collections may also require independent third-party risk/financial management oversight. If a reduction is required, as is often the case, the default approach all too often is “evaluate and liquidate.” One wouldn’t approach a room full of Picassos with a fire sale strategy. Doing that today with a great car collection is not an optimal solution.
While short- and long-term circumstances and objectives will vary, the legacy aspects of the collection could offer potential financial advantages and should not be dealt with as an afterthought.
M. Peter Neumann is a founding partner and CEO at Chrome Strategies Management LLC and president of MPN Advisory, a risk management consulting firm.