This article is in response to Mr. Koehler’s articles in the December and January issues of this publication entitled “Appraising jewelry my way”.
Valuation & Appraisal science for personal property, including gems and jewelry, is now in its 4th decade of long-standing, but continually developing Core Valuation Principles, and applied Ethics, Terminology, Procedures, Methodology and Reporting for professional providers of valuations and value related appraisal services, i.e. authentication, identification, grading, etc.
In other words, the wild west of doing it “my way” has long ago been replaced by over 3 decades of peer reviewed and courtroom tried professional codes of conduct and standards of practice. Over the past 20 plus years, many in the gems and jewelry business stopped offering appraisals once becoming aware of the pitfalls they and their clients were exposed to when performing without the benefit of professional valuation and appraisal education.
Not withstanding that reality, the arrival of professionalism still needs to get out to many practitioners. Ignorance will be no excuse if you find yourself in court due to having placed your client or a reasonably foreseeable third party within the ambit of financial harm, especially now that professional valuation and appraisal education is so readily available, accessible and affordable. Twenty years ago this past October, AiSociety founder and president, Mr. Elly Rosen wrote a 14-page article for JCK Magazine’s Management Study Center entitled, “Why You Need Appraisal Education: Profits vs. Pitfalls in Professional Appraising™”. This is a great read and can be found at www.aisociety.com/aicertify/read-profits-vs-pitfalls/.
Contrary to long-standing misconceptions still prevalent in our trade, gemology is NOTa qualification of “Valuation”.Gemology and Valuation are two totally separate disciplines. Gemology entails identification, authentication and grading. Appraisement services often involve or include gemological services, but the Valuation component of an “Appraisal” is based on well established principles, and applied terminology, procedures, methodology, report writing and yes, ethics.
Lest you think that one can become proficient in the Valuation discipline in a 10 or 15 hour weekend program, you should know that the AISociety’s “AiSV” AiCore Fundamentals Program alone totals 120 classroom hours of instruction, discussion and testing. A subsequent 130 classroom hours then follows for the “AiSCV-AVS Advanced Valuation Specialist” diploma title program, followed by the “AiSCV-GJ Gems & Jewelry” specialty diploma title program to finish up the AiS-G&J Triple-Crown certification.
The AiCode of Ethical Conduct & AiStandards of Practice™ is based on the 14 AiCore Ethical Principals™ which can be seen at: www.aisociety.com/aisociety/aicode-aistandards/. Please note #s 6 & 7: “Objectivity & Impartiality” and “Disclosing Conflict of Interest”. What do these mean? They mean that the appraiser must be impartial, not performing in a manner designed to “help” themselves down the road; usually, not even acting as an “advocate” for the primary client. The report must be able to be relied on by all within it’s purview who are not expressly excluded by proper reporting language. Any, I repeat ANY, conflict of interest, present or future, must be disclosed in the report for the benefit of third parties. Jewelers MUST learn to put on a different hat when appraising.
So what is the principal role of the appraiser? The overarching role is that of an unbiased information provider. It is the client that decides on scope of work agreements in consultation with the appraiser during the all important initial client interview. It is up to the appraiser to lay out options that would serve the needs of the client. The more narrow the scope of work, the more limiting and contingent conditions need to be discussed, agreed upon and then disclosed as may be relevant to those reasonably expected to rely on the report. During the client interview the appraiser needs to determine the Intended & Assigned Use of the appraisal, which in turn will drive the scope of work for a defined market. An appraisal that does NOT state an intended use and/or defined market can easily be misused by the original client or third parties. Courts have consistently said that third parties can rely on reports unless those third parties have been effectively fenced out in those reports.
OLD WAYS DIE HARD. The vast majority of practitioners providing valuations and value related appraisal services for gems and jewelry are still locked into often misguided and erroneous reliance on a pure or hybrid, formulaic cost approach instead of the market data approach (MDA). We don’t see much of this in other personal property valuation disciplines. Residential Contents appraisers don’t add up the cost of materials and labor to appraise an oak dining room set. Art appraisers don’t calculate the cost of materials and labor for stone statuary. Of course they do take into account the quality of artistic expression and relevant provenance attached to the maker/artist. In short, they take into account the important valuation principle of “Value-in-Place”. So why do so many jewelry appraisers insist on adding up the cost of component parts plus labor and then applying some arbitrary markup to arrive at a calculated retail “value”?
The formulaic cost approach, usually irrelevant to actual market activity for finished goods, disregards Value-in-Place, and thus completely falls apart for mass produced items and higher end items to say nothing of items with value-adding provenance and period pieces. It should be obvious that the result of such ill-advised methodology is skewed far off actual market value.
The uninitiated often continue with this approach for never having studied and learned professional Valuation principles. Instead, they follow gemology based “appraising” which traditionally teaches formulaic reliance on the sum of the parts, plus ___ (whatever). Courts have repeatedly said that the MDA (if done correctly) will prevail over the cost approach for appreciable personal property valuation, i.e., that the presumption of correctness will side with the MDA. It is the reasonable approach for triers of fact who understand that the Market Data Approach is based on knowledge of actual market activity, i.e. often in the form of researched comparables. What is a legitimate comparable? Items that have similar elements. They certainly don’t need to be identical items.
“Price” versus “Value”. “Price”, usually a fact in the market place, can be an asking or actual selling price from one seller or from a series of sellers. “Value” is an opinion based on knowledge of accomplished facts - prices - within a defined market. The mode of ten transactions, for instance, may or may not represent the most common selling price in a market. A “methodology” of grabbing at a price from a single source is deeply flawed and will not usually withstand critical valuation scrutiny.
Appraising for insurance coverage is just one of an unlimited number of intended uses. Other intended uses include: estate tax, marriage dissolution, charitable donations, casualty loss, collateral, distribution, inventory audit, damage reports, appraisal review, retrospective and prospective. Some of these might involve reporting on multiple markets. For all reporting one needs to understand the proper usage and definitions of Market Value, Fair Market Value, Fair Value and Replacement Cost.
So you say, “all of my appraisals have been accepted so far, what is the problem?” We live in a more litigious society than ever before. Trial consultants trained in valuation are being hired at an increasing pace. There are numerous accounts these days of jewelers being sued for issuing appraisals that end up hurting a client or third party financially. Have you ever thought about how you would go about defending your appraisal reports, aka your work product? Some practitioners might think that as long as their descriptions are accurate, any value conclusions are just our opinions and therefore no other defense is necessary. If so, they need to think again. They’re trying to navigate a minefield with a blindfold on. Pitfalls abound. Just a few examples: under or over valuing for a plethora of intended uses; non-disclosures in numerous areas; biased point of sale appraisals; lack of proper use and definitions of markets; wrong markets; no justifiable market at all; no “basis” for value conclusions; formulaic cost approach with arbitrary markups; canned computer programs; liability to third parties; improper methodology; and crossing the line of advocacy.
Part of Valuation education is becoming familiar with the federal rules of evidence under the Daubert Standard, or state rules of evidence under Daubert or Frye, depending on which state or jurisdiction.
Where are you in your understanding of professional valuation and appraisal practice? Take a 16-question quiz to check your appraisal acumen here: www.aisociety.com/aicertify/gems-and-jewelry/profits-v-pitfalls-aiwebinar-quiz/. When you register for the session, you can use the complimentary code we set up for you: jewelrynews. That will zero out the $18 fee for the AiWebinar on the answers to the “Profits v Pitfalls” Quiz.
In the next issue we’ll look at some of the ins and outs of: insurance appraisals; point of sale appraisals plaguing so many jewelers; an alternative to point of sale appraisals; some court cases with valuable lessons taught; and intro to usually very lucrative advanced and regulated assignments for the professional client community.
Elly Rosen, AiS founder and president, is a pioneer in the field of personal property appraising. His professional profile can be found at www.linkedin.com/in/ellyrosen.
The AiSociety (www.aisociety.com), with a global valuation standard has alumni and enrolled AiCandidate members in 7 countries, on 4 continents, and growing. AIS offers advanced live, online, audio-video Valuation courses utilizing the latest Internet technologies, ranging from a 10-hour AiIntroductory module to the 120-hour AiCore, 50-hour Gems and Jewelry Specialty and 80-hour Advanced Valuation Specialist diploma program’s 3 courses: AiS-Law™ Advanced & Regulated Assignments; AiS-Tax™ Revenue Valuation & Appraising; AiS-Trial Expert Witness, Consultant & Document Reviewer; all 250 hours leading to the AiS-G&J Triple Crown Certification.