October 11, 2011

Managing the Risks of ‘Passionate’ Investing

Due to heightened market volatility in traditional investment vehicles since 2008, many high-net-worth families are turning their collections of fine art, jewelry, wine and other precious items into more than a passion.  They’re using them as part of their investment strategy. While many have succeeded with this approach, these ‘passionate investors’ and their wealth advisors should understand all the risks involved.  These include not just market risk but also risks of damage, theft and improper title. 

If anything, these risks are growing, because the collections are growing. Among households with $5 million or more in investable assets, 55% plan to increase spending on collections over the next 12 months, according to a new study we commissioned.  One in five plan to increase spending a great deal.  And their collections are already worth a lot. Nearly 70% report having collections worth $500,000 or more; 21% say $5 million or more. The research also confirms that their spending plans spring partly from greater interest in the investment value of collections. About half of respondents report that the investment diversification value of their collections became somewhat or much more important after the 2008-2009 economic crisis. Only 5% say the investment value became somewhat or much less important.

As collections play a greater role in the asset base and investment strategy of wealthy families, understanding the risks becomes critical. Yet many remain unprepared. According to ACE’s research, common mistakes include: 

  • Nearly 40% of collectors do not insure all of their collections with a valuables policy.  Often known as scheduling, a valuables policy supplements the often overlooked terms in homeowners policies that limit coverage for jewelry, wine, stamp and coin collections, and other fragile or precious items.
  • Thirty-four percent protect both their homes and collections with insurance policies from mass-
market carriers, which often do not allow for some fluctuation in the value of precious items.
  • About one in three do not update the value of their collections at least once every three years.  Among those who insure with mass-market carriers, the number jumps to 50%. This behavior can pose a significant risk.  For instance, we know of one extensive jewelry collection that nearly doubled in value over six years. If the insurance coverage had not been adjusted, the uninsured portion could have amounted to well over $100,000.
  • About half (45%) have not used a risk consultant to make sure their collections are displayed, stored or shipped in a way to minimize the potential for damage or theft. The number jumps to 73% for those who use mass market carriers. 
  • How can wealth advisors play a critical role in helping their clients avoid these mistakes?  

    First, ask about their collections. Chances are they will have at least a few items of significant value. Fully 94% of the households in ACE’s survey do, and 57% consider themselves serious collectors. 

    Next, refer clients to an independent insurance agent or broker who works with carriers that specialize in serving families with emerging and established wealth. (See our previous AdvisorOne article about finding one.) The agent and carrier can then present a range of risk management options involving both insurance coverage and safety measures to prevent damage, deterioration, or theft—many of which are outlined in our white paper on passionate investing. Depending on the type of collection, the insurance advisor and carrier may recommend expert services to ensure proper title, documentation, tracking, display, storage, restoration, and shipping. 

    With the right team and risk management plan in place, families with substantial assets can more fully enjoy the collections they love, as well as better protect their wealth. 

    Gary Raphael, Senior Vice President, Risk Consulting, for ACE Private Risk Services, has 23 years of personal lines insurance experience, with a special focus on property valuation, loss prevention, and claims management for affluent and high net worth clients.

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