Putting Coin Customers First Can Mean Long-Term Profitability
April 30, 2020
By Patrick A. Heller
In my experience as a coin dealer since 1981, putting customers first results in long-term customer patronage. Long-term customers are far more profitable over time than a larger number of one-shot patrons. As I have shared with the staff at the company where I work, “If you take care of your customers, your customers will take care of you.” This is probably great advice for every kind of business.
Coin dealers can make a profit by selling merchandise at a higher price than what it would cost to replace it. Collectors, above and beyond the enjoyment of being able to own fascinating and historic treasures, have a different time frame than dealers. Therefore, the collector can potentially make a profit in the longer term. This makes it possible, but does not guarantee, that both the dealer who sells it and the collector who buys an item could end up making a profit on the same piece.
Coin dealers, like all businesses, seek additional ways to sell more merchandise in order to increase their profitability. Last week, I was discussing with a long-term customer three sales tactics used by some coin dealers that are fully legal and, handled ethically, might also benefit the customer. Yet, I have seen multiple instances where these upselling strategies seemed to be used more for the dealer’s benefit than for the best interests of the customer.
All three of these following tactics enable a dealer to sell more merchandise to a customer than might otherwise occur.
The most common of these involves the push to use funds in their individual retirement accounts (IRA) to set up a precious metals IRA. This enables the customer to acquire some precious metals and some coins without having to dig into their everyday bank accounts. However, precious metals IRAs have several downsides, which I have discussed in previous columns.
Generally, it does not make sense to place tax-deferred assets into tax-deferred accounts. Instead, tax-deferred accounts are most suitable for assets that pay periodic taxable income such as interest and dividends in order to defer the applicable income taxes to the account’s owner. Precious metals IRAs are also costly to set up and maintain with the fees for a trustee and storage facility compared to having direct custody of the items. Third, the selection of items allowed in a precious metals IRA is limited, where a number of better options to own precious metals (such as for a lower cost per ounce) may not be acquired. Another concern is the additional government reporting and lack of privacy involved with a precious metals IRA versus making such purchases personally.
The second practice is leveraging. This involves paying out of pocket only part of the cost of an investment, then borrowing the rest to make it possible to make a larger purchase. Many investment funds leverage their holdings as it magnifies their profitability if the market moves as anticipated. The same applies for individuals where it is possible to gain greater profits for the amount of personal funds tied up. As an example, a purchaser may invest $10,000 and borrow $40,000 to make a $50,000 purchase. If the asset’s price rises 5 percent, a $10,000 investment would yield 5 percent, while a leveraged $50,000 purchase would yield a gain of 25 percent less the cost of the interest on the loan.
The problem arises if the price of leveraged assets is volatile. In the example above, a 5 percent price decline would result in a 5 percent loss on a $10,000 investment or 25 percent loss (plus the interest costs) on a leveraged $50,000 acquisition. Further, a 5 percent decline in value would almost certainly result in a margin call where the investor would have to immediately provide another $4,000 in funds (to reduce the loan balance to $36,000, 80 percent of current asset value) or risk having part of the leveraged investment liquidated at a loss. Over the years I have heard from many customers who were disappointed with their experience with leveraged purchases of precious metals. They did not fully understand the downside risks of using leverage.
The last tactic is for a dealer to offer to review a customer’s holdings to make suggestions for items to swap for other merchandise that may have better future appreciation prospects. This can be a valuable service, where a dealer may have a lot more market savvy and fresher information than the collector.
However, collectors need to keep in mind that if they do engage in a swap, the merchandise they receive will have a lower immediate liquidation value than the items they turned in. In order to work out from the customer’s perspective, the future performance of the items received will not only have to be higher than what was traded in, they it will have to be even higher to cover the effective buy/sell spread reflected in the swap.
Sometimes a swap can yield a better future return. But there are many items where a swap does not make economic sense. For instance, many pre-1934 U.S. gold coins are now selling at premiums far closer to their metal value than in the past 40 years. A swap of these items for bullion-priced gold coins and ingots are unlikely to result in better results than simply keeping the original items. However, in this scenario, some dealers may be tempted to recommend swaps of items that don’t really have an economic benefit for the customer.
I need to emphasize that all of these services could be valuable for customers in the appropriate circumstances and handled with the best interests of the collector as the standard. The company where I work handles occasional transactions of the first and third strategy discussed in this column (although alerting customers to potential pitfalls). We do not have arrangements to offer leveraged transactions.
From my 56 years as a collector and 39 years as a dealer, the “collector” in me would tend to patronize dealers who listen and help their customers achieve their goals rather than those who focus on promoting precious metals IRAs, leveraged transactions, or an initial evaluation of holdings for possible swap. Dealers who put the interests of their customers first will almost certainly enjoy better long-term profitability.