10 Steps to Protect Your Wine Investment

10 Steps to Protect Your Wine Investment

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Wine-Searcher’s wine director David Allen MW shows how to avoid being ripped off when investing in fine wine.
Posted Friday, 14-Apr-2017
 A brief review of Wine-Searcher’s news pages yields numerous horror stories of wine drinkers and investors caught by frauds, scams and company collapses.

These articles are popular with readers. Assuming Wine-Searcher users aren’t all voyeurs reveling in the humiliation of others, it is probably fair to assume many of us fear we might encounter similar fates.

In some cases, losses are clearly due to fraudsters, in others it may be the result of poorly run companies believing they can trade their way out of failure – either way the customer loses. So here are a few simple suggestions to help the cautious avoid the major pitfalls encountered by wine investors and purchasers.

1. Don’t buy from cold-callers

It is easy to assume that the scammed are normally the elderly and vulnerable, taken advantage of by cold-callers, ruthlessly taking their life-savings and failing to supply fine wines they claimed to be selling them. Fraudster Harry Mosley recently pled guilty in a British court to duping 15 victims out of £436,792 ($548,000) in cash and wine between 2012 and 2014. Tragically, two of Mosley’s octogenarian victims died before he was brought to justice. Most of us think we would never be caught out ourselves, but victims are often reported to have found them very convincing. For many of us it might be worth having a brief discussion with elderly relatives to gently reminding them not to buy wines, shares, plots of land etc. from cold-calling salesmen. This might seem patronizing, but could be worthwhile if it helps prevent them becoming scam victims.

2. If a deal looks too good to be true – check it out

If prices offered seem unusually low, check those prices on Wine-Searcher. If they are out of line with the market ask why? Make sure the vendor physically has the stock, or find out how long delivery will take. Check claims made for the wines – using Wine-Searcher’s critic scores section or referring directly to critics’ websites can reveal exaggerated scores. Sometimes when scores have been revised downwards by critics;or scores and reviews claimed might relate to other vintages of the same wine.

In my own limited experience of receiving calls from wine investment companies trying to sell fine Bordeauxwines, a brief comparison of pricing on Wine-Searcher was sufficient to demonstrate the wines offered as a “good investment” were available elsewhere in the market much cheaper – making them unlikely to produce the returns claimed. These are simple checks and discrepancies detected can quickly identify merchants that should be avoided.

3. Buy from an established and trusted merchant

An en primeur purchase is essentially an unsecured loan to a merchant on the promise that they will supply the wine you have ordered, in two years or so. If you want to buy en primeur, you need to find a trustworthy merchant with a track record. Classic examples are the two historic, London-based, wine merchants Berry Brothers and Justerini & Brookes; in theory, merchants who have built their reputation over several centuries and hold royal warrants are likely to be financially solvent and will jealously guard their reputation. It is not a guarantee, however. Californian merchants Premier Cru traded for 35 years and were widely respected prior to their spectacular collapse with $70 million debts. Rather than restricting your purchases to a few ancient institutions, it is advisable to buy from members of organizations that adhere to voluntary codes of practice, for example The Bunch or the AWI.

4. Check out your merchant’s finances – do due diligence

Even if you trust a merchant, act exactly as you would if you were making a financial investment – check their company details and ask to see their accounts. If the accounts have holes in them, or if annual accounts have not be filed publicly, don’t give them your money. Additional checks should include consulting a number of specialist websites – Jim Budd’s Investdrinks.org website and blog have lists of companies he would not buy from, companies he would buy from and the addresses frequently used by fraudulent shell companies selling investments. Winefraud.com also lists recommended merchants (its emphasis is more on the authenticity of the stock offered by said merchants). Both these websites simply express the opinions of their creators, but both were created by acknowledged experts in countering wine fraud.

5. Ensure your merchant checks on their suppliers

If you purchase en primeur not only are you making an unsecured loan to a merchant but, similarly, merchants have the same arrangements with négociants, who have similar arrangements with the producers. The failure of a négociant could leave paid orders undelivered. The failure of a major négociant could precipitate the collapse of a merchant, if they had to go to the market and source large quantities of replacement stock after prices have risen post-release. Most merchants hedge against this by buying from multiple sources. They should check the financial probity of their suppliers before entering such arrangements in the same way that you should, and it is reasonable to ensure they have done so before giving them your money.

6. Ensure your money is ring-fenced

Normally négociants ask for en primeur payments from merchants in two or three instalments. Merchants, of course, charge their customers upfront for these purchases. Unscrupulous merchants have been known to use customer funds as working capital during the period before later payment instalments. If business is bad and capital is unavailable to pay later instalments, négociants are likely to cancel the order. A likely outcome is that the merchant could fail with your wine un-ordered. Always ensure your merchant keeps the balance of your payments in a separate account.

7. Ensure you have clear title to your stock

Wine is a physical asset and, unless you are part of an investment scheme, your investment is not protected by entities such as the US Securities and Exchange Commission or UK’s Financial Conduct Authority. To ensure optimum aging conditions and to delay the payment of taxes, many fine wine investors store their wines in professional storage facilities. If you do this, ensure you have records of the wines you own, such as invoices and warehouse landing records for external storage locations. Your records should show the unique rotation number under which each wine is stored – this is a unique number on a stock-tracking system against which a wine will be stored for the entire of its stay in a warehouse. The rotation number will be appended to your case or bottle and any movements the stock makes through the warehouse will be recorded against this number.

Most importantly, store your wines under your name. There have been numerous examples of once-reputable companies going bust and client reserves being seized by liquidators as company assets – because they could not be separated from the company’s trading stock. Ideally, wines should be in your own individual account. At the very least, check that your merchant has your stock clearly listed on their database in your own sub-account, and that that sub-account is replicated on the warehouse’s stock systems. Ensure any transfer of stock requires your authorization. In the infamous case of London’s Mayfair Cellars, the company’s finance director Dominic Smith sold more than $125.5m of client stock without their knowledge (or the knowledge of his fellow directors) between 2002 and 2006.

8. Physically inspect your stock

Good storage warehouses should be delighted to assist if you want to visit, see where your stock is held, and review how their systems work. While most of us might not spot sophisticated forgeries, discrepancies such as obviously photocopied labels would be apparent. Visiting enables you to check storage conditions are suitable in terms of temperature, humidity, vibration, light, invasive aromas and security.

An annual stocktake is advisable if you can. Check vintages are correct and that condition, quantities and case sizes agree. Genuine mistakes such as cases of six landed as cases of 12 are almost impossible to resolve 10 years after the event, but can be rectified if caught soon after purchase. Similarly mistakes such as mis-selling cases of Château Pichon Longueville Comtesse de Lalande as Château Pichon-Longueville Baron – or vice versa – are not uncommon. Indications that wines have been shipped from other markets should also be looked-out for. For example, a wine in the UK bearing an American importer’s slip labels would be devalued by the treatment it could have received (vibration and possible temperature fluctuations) while being shipped to the US and back.

9. Don’t pour good money after bad

It seems obvious, but several customers of infamous Berkeley wine merchant Premier Cru continued purchasing from them despite not receiving previous orders. Particularly with en primeur, orders delivery dates can be unpredictable, but a good merchant should not be reluctant to keep you up to date with the progress of your shipment. Repeated promises to supply allowed French firm 1855.com to dupe somewhere in the region of 11,000 customers out of more than $42m in the eight years between 2002 and 2010.

10. Leave cellar records

Many wine collectors are secretive about their wine collections, perhaps being reticent about spouses knowing exactly the value of their obsession. This approach is understandable but, as this is one of your assets, it is important that somebody – possibly your lawyer – knows where your wines are stored, the extent of your collection, account numbers and access passwords, should anything happen to you. Clearly this person needs to be completely trustworthy but, in the event of your wines remaining unclaimed, the storage warehouse could eventually claim and sell your prized bottles to offset unpaid storage debts – few would see this option to be preferable to their loved ones enjoying them.

We can’t guarantee that following the above guidelines makes it impossible to lose out while buying wine, but following them should enable you to ensure the risks you run principally involve the vagaries of fickle markets rather than unscrupulous traders and incompetent merchants.

All the above makes purchasing wines sound a fraught and risky business, when really it should be entirely pleasurable. In reality most merchants are decent, honest people trying to serve consumers’ interests. Operating in an unregulated market, where top wines can cost thousands of dollars a bottle, good merchants should always be happy to address all your concerns before taking your money – such an approach is in their own long-term interests. When buying, be cautious – use all the information available to you to keep an eye on your assets and that way you should be able to reap the benefits you deserve from your purchases.

UK Agora
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