Protecting the Family Jewels

Some clients have a fondness for tech stocks. Others like real estate. Still others prefer to devote a considerable portion of their net worth to more personal investments: fine art, classic cars, rare vintages or jewelry. Diamond firm DeBeers reported that sales were up 26% last year—despite the fact that the company raised prices 29% in 2011.

Escalating, if sometimes volatile, prices for gold, platinum and precious stones have resulted in many collections being underinsured—or perhaps not insured at all—and you, as an advisor, need to be wary on behalf of your clients.

Even if clients haven’t padded their portfolios with precious metals or investment-grade stones—the latter of which is something Janece White, vice president of Chubb Personal Insurance, says they “must be very wary of” and “willing to sit on for the long term”—heirloom pieces, or even jewelry they bought before the run-up in precious metals, could make up a significant portion of their net worth.

Making sure that such significant assets are adequately protected is more of a challenge than it used to be, as pieces that were formerly uninsured because of relatively low value may have seen substantial increases in replacement costs. With the price of gold outpacing the price of platinum, advisors should consider discussing with clients whether they have both up-to-date appraisals and adequate coverage in place.

Precious metals are not the only factor that should concern you. The prices for investment-grade stones have seen steady increases over the past several years as well. For example, a three-carat flawless diamond of D color selling in 2006 for $42,000 per carat would now fetch $99,800 per carat—an increase of 135% in six years. Says White, “One-carat diamonds are up 19%; two carats are up 15%; three are up 18% and five carats—it’s a seller’s market.”

Even if your client isn’t systematically investing in jewelry, she may be sitting on a large and underprotected cache of wealth. White points out that advisors who neglect to protect such hoards could be leaving themselves open to E&O claims in case of loss—or at least the loss of the client to a more attentive advisor. “Depending on the client,” says White, “there could be a considerable amount of their net worth tied into these collections.” She adds that while advisors always worry about conventional assets such as a client’s home and car, they may overlook collections, which—particularly if they happen to sparkle—can turn out to be worth more than a client’s home.