Wealthy individuals hold an average of 9.6 per cent of their total net worth in “treasure assets”, according to a new report. Given the volume of assets at stake, that is a significant amount of wealth held in treasure worldwide.

Ignoring passion investments means ignoring something “inherently important to your clients,” says Dr Greg Davies, head of behavioral finance at the wealth and investment management division of Barclays, which has just released a report called Profits or Pleasure? Exploring the Motivations Behind Treasure Trends.

Wealthy individuals hold an average of 9.6 per cent of their total net worth in “treasure assets”, with shares reaching as high as 18 per cent in some countries, according to the report. Given the volume of assets at stake, that is a significant amount of wealth held in treasure worldwide.

What Dr Davies, as a behavioral finance expert, finds most fascinating is why it’s held in that form. Is it for investment purposes or passion? The data was “pretty unequivocal on that,” he says, and it “is not for financial efficiency reasons…These are things people often find they have an affinity for.”

The most important motivations were the enjoyment owners got out of their treasure – they were “buying a stream of enjoyment” – social motivations, such as sharing the object, or owning things that reflect status, and heritage considerations, preserving the object and passing it on to subsequent generations. In fact, only 11 per cent of these assets in the UK were held for financial reasons. The proportion is under 10 per cent for the US and Switzerland.

“We really have to recognize there are other objectives being met here,” says Dr Davies.

Acknowledging the non-financial

What does all this mean for wealth managers? Firstly, explains Dr Davies, they need to “acknowledge there is a role” for passion investments. “Classical finance assumes away a lot of what is important.”

Secondly, they need to see if they can “formally carve out a place for it in the portfolio.” This means acknowledging the client’s full wealth and “adjusting the financial advice in full recognition” of it. Barclays’ process divides assets into “investment holdings” and “personal holdings.” A key point is making sure the client understands the distinction as well. 

The volume of treasure assets then has implications elsewhere in the portfolio: it will affect how much risk and liquidity is needed, as well as cash-flow modeling for upkeep costs such as storage.

“Many of these assets, in fact most, are extremely illiquid,” says Dr Davies.

Then there are the tax implications, which can be very complex and need to be addressed by an expert.

Another important point is to make sure clients make these investments on good advice. If individuals are trying to make a financial gain, the process needs even more scrutiny.

The stories about art being a great investment, which can catch on in the press, can be “very salient; very vivid,” says Dr Davies. “In reality most [passion] assets have high costs along the way, with no real underlying index in them – so you need experts just to get a valuation.”

“The notion that art can be a good investment is very close to the human psyche,” says Dr Davies.

And if investors are going after financial gain alone they may be disappointed on two fronts, cautions Dr Davies. Not only may the asset underperform, but the Barclays report found that owners derived less enjoyment from passion assets when they had been purchased with a financial motive.

“Extreme deviations from rational behavior”

The idea that investors don’t act rationally, and tend to be driven by emotions, is widely accepted. This is heightened when it comes to passion investing.

“All the experts [on the report panel] agreed…the art market is very driven by behavioral biases” and exhibits “extreme deviations from ‘rational behavior’.” In an auction house, explains Dr Davies, the whole environment is geared towards creating excitement and tension. Although, he adds, he would be “the last person to say” other markets weren’t affected by this, “but it’s that much more prevalent” with passion investments.

Other behavioral nuances emerged from the report, such as the fact people demonstrated an urge “to de-clutter”, even as they added to their collections. “The reality is that few go through with these intentions,” the report says.

It is a fascinating contradiction. Dr Davies says that the “wild” financial markets of the past five years could have added to it, as people accrued more tangible treasure holdings and plan to sell them as markets calm down. But there’s more to it.

There is also an “endowment effect” at work, the report finds. This is where ownership itself increases the value of an asset to its owner. The end result is that the price they would sell it at is far higher than the price they would buy the same asset for. For example, Dr Davies explains, while people would likely consider taking profit on a purely financial investment if its value rose 10-15 per cent in a year, in many cases they wouldn’t sell a treasure asset unless its value had shot up around 60-70 per cent. Others say: “I would never consider selling at any price.”

This also means that when someone inherits treasure, they may not initially like it and therefore express a wish to de-clutter and sell. But if they don’t sell quickly, the endowment effect can kick in and the treasure grows on them, explains Dr Davies.

Dr Davies says his “suspicion” is that, if the survey were to be repeated in five years or so, it would find the same thing: that people were adding to their collections, not decreasing them.

Another “interesting nugget” that came out of the report is that cars and fine art sculptures are the last to go when people do de-clutter. “These are the ones people want to keep,” says Dr Davies, and they are also the assets that the report found are most closely linked to social motivations – sharing objects and displays of wealth, for instance. And that point alone demonstrates that passion investments need to be considered in a much broader context than the financial.