Benjamin Franklin, one of America's first self-made men of wealth, once noted, "If passion drives you, let reason hold the reins." That's good advice, though Ben would probably admit it's easier given than taken. Accomplished people often build fortunes on passion and maintain them with reason. The most financially secure among them have learned how to bridle financial risk. Reining in their personal passion for collecting life's finer things--from fine art to jewelry and antique cars--can be a different matter, however.
Wealth managers may not view it as part of their responsibilities, but to the extent any personal collection represents a sizable percentage of a client's overall net worth, they have an integral role to play. By helping clients understand the risks of collecting and helping them to obtain the proper advice, wealth managers are protecting not only passions, but also a growing share of that wealth.
"Despite rising costs and financial market turmoil, high-net-worth individuals and ultra-high-net-worth individuals last year spent considerable amounts of their wealth on investments of passion," according to the 12th annual "World Wealth Report" issued in late June by Merrill Lynch and Capgemini.
When talking to clients, it's worth remembering that collections rarely take shape overnight. Instead, a few wine bottles gradually multiply into a fully stocked cellar. Or an interest in Impressionism begins with the purchase of one painting and slowly morphs into an entire art collection. Unfortunately, while risks change and grow as collections expand, the collector's consideration of risk doesn't always grow in kind. That's particularly true of affluent collectors, who, with so many business concerns crowding their minds, often view collecting as a pleasant diversion.
At the same time, risk can vary greatly depending on the collector. A moderately practiced enthusiast, or the seasoned amateur, may be overly confident in his or her knowledge. The accomplished acquirer may have trouble keeping track of everything.
With the fledgling collector, not knowing where to turn for help is often a problem. When floodwaters soak a centuries-old manuscript, immediate access to an expert who can recommend freezer storage to halt destructive enzyme reactions is invaluable.
So, too, is access to loss-prevention experts who can reduce the potential for damage. When it's time to install a basement wine cellar or to convert a barn into a hermetically sealed garage, you want the best climate-control specialist available. And when you have to quickly transport and securely store a multimillion-dollar art collection far from the path of a hurricane or wildfire, you need a referral to a company you know can be trusted without hesitation.
As a collector graduates to seasoned amateur status, a different set of risks emerge. Authentication--proof positive that a collectible is what it's purported to be--tops every list. Despite even the best intentions of dealers and auctioneers, the title of older artworks is prone to challenge.
Authenticity is also a major issue for the growing collector car market, where fleet values can range between $500,000 and $50 million. Make, model and year preferences are largely driven by personal tastes, but "exclusivity" is the buyer's predominating motivator. Fraud is rarely even a passing thought. The collector is more likely to fret that if he doesn't act now, he'll never see the vehicle again--or worse, if he does see it, a rival collector will be behind the wheel.
Admittedly, this you-snooze-you-lose pressure is common to other collectibles. The frightening difference here is that it doesn't take much for an unscrupulous auto dealer to pass off a not-so-special classic Camaro as a best-in-class 1968 z28. In fact, it's as easy as prying off a serial number plate from a totaled "real deal" that had been valued at $150,000 and affixing it to a near perfect body-double worth $25,000.
A professional authenticator can spot small discrepancies in vehicle specs and condition. Working exclusively with dealers and auctioneers who have a reputation for verifying authenticity and title before bidding or buying is another smart move--one that applies to artwork as well as it does to automobiles.
For the highly accomplished acquirer, finding experts to help with authentication and risk management is easier. But stewards of essentially "finished" collections tend to be less active in monitoring current market value of long-held items in their sprawling inventory. This laissez-faire oversight increases the likelihood that a collector will undervalue some items, and in turn, fail to increase the amount of insurance needed to cover replacement value in the event of loss. And a perfect storm of current events has only deepened this exposure.
Rapidly rising commodities prices, retiring Boomers looking to further diversify asset allocations with a sturdy "store of value" that outpaces inflation, and an emerging market of foreign collectors in India and China have all combined to spur collectible values--and the risk of being underinsured--upward. In this environment, rare cars can jump in value from $80,000 to $250,000 in five years' time. This is why auto collectors should have their vehicles reappraised every three years and see that the insured value of each one is increased accordingly. Likewise, a car purchased at the peak of its popularity should be insured for an "agreed value" in line with that high-watermark price. Then, if stolen or totaled, the owner won't be out the difference between the current value and the much higher purchase price.
Arguably, however, the item most at risk for being too infrequently appraised--and thus, underinsured--is jewelry. Over the past three years, the per-ounce prices of gold and platinum jumped from $400 to $950 and $800 to $2,000 respectively, while diamond prices have seen four increases in the first four months of 2008 alone. Unlike other collectibles, many jewelry collections are heavily comprised of gifts received from loved ones. As such, the items' "perceived" value is sentimental, first and foremost. Determining specific dollar value is too often an afterthought.
From an underinsured risk standpoint, this is an enormous mistake. Because it is frequently worn, jewelry "travels" more than most collectibles--making it extraordinarily vulnerable to damage and theft. Today's bullish precious metal and stone markets have turned a $1 million ring into a $2 million ring in a year's time. As a rule, any jewelry item last valued at seven-plus figures should be reappraised yearly. Other jewelry and collectibles should be reappraised at least every three years.
As a further hedge against losses in today's climate of soaring year-to-year values, collectors should consider coverage that insures up to 150 percent of the last appraised market value. For collections that have grown dizzyingly expansive in scope, owners can take advantage of software that manages cataloguing, documents appraisal histories, and schedules reappraisals. Posting catalogue data to digitally encrypted online platforms allows for common access and more vigilant collective oversight by insurance agents, curators, estate attorneys and, yes--even wealth managers.
Owners of renowned private collections face additional risks when lending to museums. These loans help burnish the reputation of a collection, which is a plus if you plan eventually to sell or donate it. But before sending that Rickenbacker to Detroit or the Monet to Manhattan, owners should not assume the borrowing entity will completely cover their risk exposure. Ultimately, lenders have an obligation to fully understand and take control of managing third-party risks.
The lender needs to assert his right to a say in how loaned items are transported and situated. He should stipulate that a qualified risk manager conduct pre- and post-installation site inspections. Most important, he must give his insurer ample forewarning of his lending plans. The optimal time for notification is as soon as the deal is done in principle and well before signing any loan agreement.
Wherever a client is in his maturation as a collector, the primary role of trusted advisors remains the same. Your goal is to transfer worry away from the client to the appropriate experts, including high-end independent insurance agents, brokers and insurers with collections risk management expertise and appropriate insurance products. Achieving this end does more than protect the collector's passion. It safeguards a growing part of wealth today, as well as the peace of mind the client richly deserves. And as the founder of one of America's first insurance companies, Ben Franklin would surely agree.
Andrew McElwee is executive vice president of Chubb & Son and chief operating officer of Chubb Personal Insurance. He can be reached at amcelwee@chubb.com.
