Private clients appear to be more interested in passion assets than wealth managers. Are advisers missing a trick?
It must be six or seven years since we began to notice a really distinct trend: several significant new asset classes becoming the subject of investment from funds and ultra-high net worth (UHNW) individuals. Moreover, these assets were also being used as part of interesting and imaginative security on borrowings.
By way of example, we acted on the financing of a rapper’s back catalogue, the purchase and finance of various sports clubs (both in the UK and globally), funding the building of a super car and a super yacht, art funds, wine collections, and the list could go on.
While each of these assets had its own distinctive characteristics, together they were linked by the interest and genuine enthusiasm of the investors in a form which is rarely observed in more traditional investments. There is something deeply personal about these investments, which are not mere whims. They are frequently real, alternative stores of value.
We wanted to understand better the common qualities of the investments, the expectations and motivations of the investors, as well as how wealth managers, financial and investment specialists and other advisers viewed the sector.
We therefore launched a research campaign, surveying more than 300 sophisticated investors and 170 advisers, including 75 wealth managers, to identify attitudes towards investing in and leveraging passion assets and ultimately to enable us to advise our clients and network more effectively. Some of the findings supported what we felt we already knew, while others took us by surprise.
Diversifying portfolios
It was the divergence of views between investors and wealth managers which really grabbed our attention. Understandably, the vast majority of wealth managers interviewed (93 per cent) said portfolio diversification was an important aspect of their service to investors. However, when it came to passion assets, only 65 per cent said they would consider using the asset class for diversification purposes in the current economic climate, compared to 90 per cent of UHNW investors, who believe diversifying a portfolio with passion assets is a good hedge for the future.
Although the attractive attributes of passion assets are clearly understood by four in five wealth managers (81 per cent), only two in five (40 per cent) are likely to increase their allocation to passion assets in this economic climate.
It seems that having a portfolio which includes passion assets is something that investors value more than some of their advisers. Despite 69 per cent of wealth managers reporting an increase in demand to invest in passion assets from their client base, only one in five (21 per cent) of portfolios currently have an allocation in passion assets.
Although the attractive attributes of passion assets are clearly understood by four in five wealth managers (81 per cent), only two in five (40 per cent) are likely to increase their allocation to passion assets in this economic climate
Wealth managers are also less likely to be interested in, or understand fully, the opportunities for leveraging a passion assets portfolio than their clients. Only two in five wealth managers (41 per cent) highlighted the ability to borrow against passion assets as a key driver for investing in these assets. This is dwarfed by the 67 per cent of those UHNW individuals interviewed, who have already leveraged their assets in this way.
Indeed, more than a third (34 per cent) of HNW and UHNW investors surveyed indicated they would have leveraged their assets if they had been aware of the option. This is another opportunity for advisers to add real value.
Reluctant advisers
Perhaps there is some reluctance within the advisory community to recommend passion assets to their clients because in the past it has been difficult to obtain useful and accurate data and valuations.
Only last month we saw both the sale by Sotheby’s in London of a bottle of The Macallan Adami 1926 Scotch whisky for £2.2m ($2.8m) and the FT reporting that another recent sale of fine and rare single malts at auction saw a decline in value of around 7 per cent. But even here, whiskies with an interesting back-story continue to hold their value and more.
Conversations with private clients, including family offices, in the last six months have shown some interesting emerging trends. These include a real uptick in interest in various forms of investment – both collective and individual – in classic and other collectible cars, as well as art and watches.
Lenders, particularly in the private bank arena, are more willing to lend around these assets than might be expected, provided they can get comfortable with the security position. Although there are quite frequently contradictions in the positions of the borrower and lender, it is usually possible to get to a satisfactory agreement in a sensible timeframe.
We believe advisers may be missing a trick. This seems like a real area for them to add value, knowing that they lead with their heads, while investors sometimes lead with their hearts and are happy to do so when it comes to this type of asset.
In the legal world, the first step in preparing to advise on passion assets is awareness of the types of investment available and, naturally enough, what clients hold already.
When it comes to overseeing such assets for clients, wealth managers are currently all pushing at an open door, through which lies the opportunity to enjoy clients’ infectious enthusiasm.
Ella Leonard is partner and head of the funds, finance and regulatory department at Fladgate LLP
