Are luxury assets an essential for the wealthy?
While some might question labeling high-end possessions as necessities, ultra-wealthy individuals increasingly view luxury assets as vital components of a well-rounded investment strategy.
However, investing in tangible luxury goods carries considerable risks that, if not carefully managed, can turn a prized possession into a financial drain or even a significant loss.
The Upsides
Luxury assets, such as fine art, exquisite jewelry, classic automobiles, and private aircraft, offer a range of advantages.
For instance, vintage car ownership provides opportunities to connect with fellow enthusiasts, enjoy the thrill of driving, and reap the rewards of meticulous upkeep. Moreover, the global market for classic cars is projected to expand by over US$10 billion in 2024, highlighting the enduring appeal of these opulent items. A notable example is the auction sale of a 1962 Ferrari 250 GTO for $70 million, making it one of the most expensive cars ever sold.
Beyond the enjoyment, status, and personal fulfillment they provide, luxury assets can also act as a safeguard against economic instability. As nations worldwide grapple with inflation, market fluctuations, and geopolitical uncertainties, the stability and long-term value of these assets make them an attractive investment option.
According to the Knight Frank Wealth Report 2024, 70% of UHNWIs increased their allocation to luxury investments in the past year. This trend likely reflects the recognition of the strong potential returns these assets can offer. Despite a general -1% dip in luxury investment values in 2023, five top-performing luxury asset categories maintained or increased their worth.
Unlike stocks and bonds, which are susceptible to market swings, tangible assets like art, diamonds, and high-end real estate often maintain or even appreciate in value during economic downturns. Since 2005, when the Fancy Color Research Foundation (FCRF) began tracking coloured diamonds, the value of pink diamonds has surged by 399%, and blue diamonds by 249%, indicating their growing desirability.
Luxury assets can diversify a portfolio in ways that traditional investments cannot. As the global wealth landscape evolves, the cultural and emotional significance of these assets is increasingly recognized. Collecting rare items, be it historic vehicles or artistic masterpieces, connects investors to a legacy and history that transcends mere financial gain. This emotional connection, combined with the financial security these assets can offer, explains why many affluent individuals now consider them essential elements of their wealth management strategies.
The Risks
No investment is without its vulnerabilities, from market crashes to unforeseen events. Luxury assets, however, face physical risks that intangible assets do not, including theft, loss, improper storage, fire, and accidents. A valuable item can lose its worth in an instant.
Reputational risks are also a significant concern for owners. Billionaire singer Taylor Swift faced considerable criticism after extensive private jet travel in 2023 resulted in an estimated 1,200 tonnes of carbon dioxide emissions, leading some to argue a disregard for environmental impact. While Ms. Swift later purchased carbon credits to offset her emissions, the reputational damage was evident.
With 10% of ultra-high-net-worth individuals aiming to reduce private jet travel, it's not surprising that new and pre-owned jet transactions are projected to continue declining. While positive for the environment, this trend may pose challenges for private jet owners.
Owning luxury assets can also expose individuals to personal safety and security risks. The public disclosure of Ms. Swift's travel details not only had financial, environmental, and reputational implications but also jeopardized her safety.
The Solution
The Taylor Swift situation highlights the critical need for careful management of both the practical and reputational risks associated with high-value luxury assets.
Appointing a trustee to hold ownership of luxury assets is a highly effective strategy for identifying and mitigating risk. A key benefit of using a trustee is their ability to implement robust risk management strategies. Professional, regulated trustees are skilled in protecting assets against physical threats. They can arrange for appropriate storage, insurance, and regular maintenance, reducing the potential for asset devaluation. Additionally, trustees often have access to advanced security measures and professional networks that enhance asset protection.
Beyond managing physical risks, trustees are also adept at addressing financial risks. With input from specialist advisors, trustees can provide guidance on the valuation and sale of luxury assets, ensuring transparent transactions that serve the beneficiaries' best interests. Furthermore, trustees can navigate the complexities of legal and regulatory requirements, helping to prevent disputes and ensure compliance with relevant laws.
By engaging a trustee, UHNWIs transfer legal ownership of their assets. This arrangement not only shields the assets from legal claims and potential personal liability but also helps safeguard their reputation and privacy.
The potential pitfall for luxury asset owners lies in selecting a trustee without a proven track record in protecting and managing their specific asset class. It is crucial for high-net-worth individuals to thoroughly assess a trustee’s experience with luxury assets to ensure they possess the necessary expertise to handle these high-value items effectively. Ensuring that a trustee is regulated in a leading jurisdiction with strong trust laws – such as the Cayman Islands, Channel Islands, or Switzerland – with a demonstrated history of successful asset management will provide peace of mind and help protect the value and integrity of the assets.
In Conclusion
Whether a luxury asset is deemed essential for a diverse portfolio is a personal decision for UHNWIs. While they present considerable risks, they also offer compelling advantages that extend beyond mere financial returns. By utilising the expertise of a trustee, UHNWIs can mitigate potential risks and ensure that these assets remain a strategic and rewarding element of their wealth journey.