Destiny Family Office specializes in helping high-net-worth collectors understand, account for, and protect the financial might of their collections, both for themselves and their families. Here, we discuss the many challenges that heirs of high-net-worth collectors may face upon inheriting a collection. 

If you have a valuable collection you’d like to include in your financial, tax and estate planning in an effort to prevent those challenges, contact our Destiny Family Office team today. And don’t forget to self-assess your planning to date by completing our Collectibles Scorecard.

Collections of art or memorabilia bring their owners great joy, but their ability to deliver significant capital appreciation is becoming hard to ignore. As in traditional investments, not every asset is a winner, but certain pieces have demonstrated an ability to multiply in value over the years. Whether your collection is strictly a passion pursuit or you collect with an eye toward financial gain, as your collection grows to represent a more substantial portion of your net worth, you can ill afford to ignore the associated risks.

Returns may be tantalizing in many cases, punching on par with equities while offering owners a utility – joy and admiration – that stocks rarely can. However, collectible assets are different from equities or other traditional financial instruments in far more ways than they are alike. Often, it’s those differences that introduce significant risk.

When evaluating collections as an investment with the capacity for alluring gain or destructive loss, collectors should be aware of the following risk factors to avoid unwelcome surprises.  

Sensitivity to Tastes

Unlike with equities or bonds, where valuation is typically based on some underlying fundamental analysis that evaluates the financial standing of a company or credit, valuation in the world of collectibles and memorabilia gravitates closer to the art side of the art-versus-science spectrum. Collectors can rely on previously recorded, comparable sales prices for the same or similar items to inform their understanding of valuation. But as the familiar refrain of the financial world goes: past performance does not guarantee future results.

Instead, to develop an investment thesis for a collectible, a collector must have confidence that demand will increase relative to supply in the future, pushing the value higher. While the erosion of supply can be supportive of prices in some assets (for example, vintage baseball cards deteriorating in condition or being accidentally thrown away), it is more often the case that the level of demand will be most responsible for driving value. For collectors who hope to see their assets increase in value or at least retain it, they must be wary of their ability to predict future trends in taste. 

Future generations may not hold the same reverence for an artist or a piece of cultural memorabilia as their predecessors. This is especially relevant as a generational shift in wealth is set to unfold over the coming decades. Younger collectors may prioritize different categories, leaving demand sparse for assets in vogue with their parents. Without underlying fundamentals to fall back on, the unpredictable nature of collector tastes poses material risk to values.

Cash Flows (or lack thereof)

Similarly, most collectible assets boast no underlying cash flows and offer no dividends or interest payments to their owners. This shortcoming makes valuation challenging, but it also leaves owners reliant solely on capital appreciation to realize returns, with no dampening of volatility offered by returns from income. In a higher-rate environment, collectible assets will face increased competition for capital from interest-generating fixed-income assets. 

In the rate-hiking cycle of the last few years, we saw many collectible categories recede in valuation as sentiment worsened and treasuries offered an attractive place to park dormant capital. 

Liquidity

The most liquid stocks in the market might have a bid-ask spread amounting to mere basis points. The price realized for a collectible asset at auction could vary by tens or even hundreds of thousands of dollars based on the day. For example, in February 2024, a sealed box of 1979 O-Pee-Chee Hockey cards (the set famous for Wayne Gretzky’s rookie card) sold for $3.72 million. However, the winning bidder ultimately backed out of the purchase. On the second attempt at a sale in December 2024, the case sold for just $2.52 million.

While collectible markets have become more liquid and efficient, liquidity still pales in comparison to most traditional financial assets. 

Selling a collectible asset for cash – and realizing full value for it – is not an instantaneous pursuit. Best results for high-end assets are typically achieved through weeks or months of marketing before the asset ultimately crosses the auction block. Even then, outcomes are dependent on the presence of multiple motivated bidders. 

In times of distress, liquidity may be even harder to come by. In softer moments for the art market, for example, the pool of willing bidders is generally smaller than in more prosperous times, and an artwork may sell for far less than it would have months prior, or it may fail to sell at all if there is a reserve price in place. Unlike with stocks, realizing full price when selling an asset is highly dependent on the venue and timing of the sale. 

Some collectors may pursue greater liquidity by borrowing against their collections, but this can be costly in a higher-rate environment, and it also introduces or amplifies risk. In particular, volatility becomes a vastly more ominous threat as the possibility of a margin call looms.

Volatility

Certain long-tenured assets like the works of Claude Monet have a demonstrated track record of relatively consistent and stable returns. Fluctuations in value are not seismic, but in collectible assets, that’s likely more exception than the rule. The recent whipsaw motion of many collectible markets during and after the pandemic provides further evidence that even the most coveted assets can multiply in value and halve in mere months.

In June 2021, a Tom Brady rookie card sold at the height of the sports card boom for $3.1 million. Two years later, in November 2023, the same card sold for $855,000, a 78% loss without netting out any auction fees or costs. While an extreme example, shifts in sentiment can lead to dramatic shifts in value in an illiquid market lacking the underlying financial fundamentals that anchor prices. 

Collectors must be careful to avoid becoming forced sellers in a falling market. Those who have borrowed against collections will fear margin calls as the value of that collection tumbles and further collateral – or the sale of assets – is required. Collectors should also be mindful of the size of their collections as a percentage of their net worth and whether or not they could stomach a freefall in the collection’s value.

Theft

Much to Hans Gruber’s chagrin, financial instruments are not often considered at risk of physical theft in the modern economy. While cybersecurity and phishing risks remain pertinent, market participants are far more worried about the valuation of their equities and bonds than their actual location and vulnerability. Contrast that with collectible assets, where theft still regularly graces the headlines.

The uncomfortable reality is that tangible assets of recognizably high value can invite criminal attention. Collectors can mitigate those threats using proper security protocols, storage, and insurance, but they require mitigation nonetheless. Failure to reckon with the possibility of theft – even if it seems slim – yields significant vulnerability. 

Damage

An individual receiving news of an approaching hurricane rarely worries about the location of their Apple and Tesla shares. However, the threat of physical damage should loom large in the minds of collectors. Though restoration services for artwork or memorabilia may have improved in sophistication, damage to an asset still has the potential to erode value. To ensure their treasured items’ physical safety, collectors should store them in a manner that minimizes risk from fire, weather, theft, and other threats. However, sometimes disaster conquers even the strongest precautionary measures, necessitating proper insurance coverage.

Collectibles offer their owners a tremendous combination of joy and appreciation potential. With those benefits, though, come various risks unique to the asset class. Even if a collector assembled a collection purely from passion, with no designs on financial gain, they should carefully consider these risks to avoid an unintended and perilous financial outcome. An understanding of the inherent risks and even modest efforts to mitigate them can yield superior outcomes and avoid worst-case scenarios. After all, our collections should offer a source of pride and inspiration rather than unexpected stress and consternation. 

If you have a valuable collection you’d like to include in your financial, tax and estate planning, contact our Destiny Family Office team today. And don’t forget to self-assess your planning to date by completing our Collectibles Scorecard.