Advising Your Clients on Their Automobile Collections

ChromStrategies

In the past five to ten years there have been increased allocations to one of the most widely ingrained passion investments moving people in more ways than one, the automobile. A basic supply and demand imbalance has pushed up the value 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 condition and enjoyed beyond their new time.

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 have come about passively (simply due to rising values), actively (for diversification needs), or as a lifestyle choice, the needle has certainly moved in terms of the impact on an individual 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, family office advisors and those with fiduciary responsibilities. Simply housing these assets in a trust structure does not focus on the critically important risks and opportunities that have developed. Asset and underlying market expertise need to be added as a discipline in order to address financial dynamics and structure, logistical care and in some cases legacy planning.

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 today’s environment may not be as palatable especially when considering fiduciary responsibility. Thus, best practice dictate proactive and robust financial, tax, legal and risk management oversight.

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 known or documented. There can be a perception 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 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 an asset backed lending program as well. In addition to quantifying exposure more accurately, this enables the development of a plan as to how to care and consider these assets or include them in more traditional allocation modeling. “Plan when you can, not when you have to.”

Separately, while there is no uniformity across sovereign and 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 results.

Portfolio reductions, additions, and rebalancing transactions increasingly occur in the global arena. Thus, the marketability of the automobile can be improved if certain base line 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. In an event where a hands on approach is called for by an outside advisor or lender 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 who have the execution experience to address this dynamic.

These collections may also require independent third party risk and financial management oversight for varying periods of time. If a reduction is required, as is most commonly the case, the default approach all too often is “evaluate and liquidate”. One wouldn’t approach a room full of Picasso’s 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

Advising Your Clients on Their Automobile Collections