Harriet Davies
Editor - Family Wealth Report
11 June 2012
Feature
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.
