As an asset class, gold just isn’t what it used to be. For millennia, well-to-do individuals have relied on bullion as an instrument for storing wealth. The practice made great financial sense—if a political or economic crisis reared, the bars of gold could be sold off to weather the storms or held onto for tomorrow’s greener pastures.
Gold is still the most precious of precious metals, but as an asset class it has slowly made room for two other emergent asset classes—fine art and exclusive residences in the world’s greatest (and economically safest) cities. As Laurence Fink, chairman of the world’s biggest asset management firm, BlackRock Inc., stated at a Credit Suisse Megatrends conference in April, the “two greatest stores of wealth internationally” are “contemporary art” and expensive “apartments” and homes in New York, London and Vancouver, Canada. With apologies to Croesus, gold has slipped to third place.
There is financial risk in this slippage, however. Unlike gold as an asset class, homes and art can be damaged or destroyed by fire, terrorist acts and Mother Nature at her worst. Most bullion today trades as ETF-backed gold—not gold bars stored in a fortress bank. Investors basically own gold like shares of stock, without actual physical ownership. Thus, the owners can rest assured that the only risk to this asset class is the price of gold, which, alas, has plummeted in the past three years.
This is not the case with the top two asset classes, a point of interest that I discussed recently with Paul Funk, executive managing director at the New York-based national insurance brokerage Crystal & Company. Paul’s high-net-wealth clients are plowing money into both fine homes and fine art at a fast clip, as well as in related asset classes like vintage automobiles and rare jewelry.
Such holdings aren’t a new passion for his clients, who simply like to own beautiful things. What is new is the skyrocketing value of these assets in relation to inferior insurance protection. He provided the example of a client who owns several fine cars, including a rare Mercedes Gull Wing, vintage Jaguars and more than a couple Ferraris.
“We started our relationship with this client about a year ago,” Paul said. “We appraised the value of the cars and then compared this to the insurance limits. The fleet was insured just a few years back in the $4.5 million range. The problem was that they were now worth twice that amount and the insurance was inadequate.”
Were the cars to be destroyed by fire or flooding, the owner would confront the stark possibility that he was as much as 100% underinsured. Sure, this possibility is remote, but Paul noted other problems buried within the prior insurance policy, including no provision to replace vintage parts with parts of like quality, reducing the overall value of the vehicles in the aftermath of an accident—obviously not the most prudent investment management strategy.
Home, Sweet Asset
Owning a home is the American dream for all of us, one of the best investments we can make in our futures. For high-net-wealth individuals and families, owning a truly spectacular residence in cities where real estate values are ascending is that and more—a relatively assured means of protecting their wealth.
In London’s posh Chelsea neighborhood, for instance, many multi-million dollar homes are owned by Russian, Iranian and Chinese billionaires, who frequently leave the residences unoccupied. In such cases, a house is not a home; its purpose is not for socializing or sleeping. Such residences are the equivalent of gold bullion in a bank vault, purchased by the owners as a way to store wealth outside the home country.
The same phenomenon is in play in New York, Paris, Vancouver, Los Angeles, San Francisco and other cities with a track record of strong real estate prices. Of course, most affluent people buy multiple residences with the full intent of living in all of them. But as they purchase homes in different geographic regions to spread the market risk, they may inadvertently increase the insured risk.
As Paul points out, many families are global and their insurance is not coordinated on a global basis, and they may be purchasing policies from local insurers that provide inferior coverage. Instead, high-net-worth individuals and families should seek to work with a broker that can create a seamless global insurance program utilizing locally licensed insurers that provide coverages similar to their U.S. policies.
These broad-based policies are needed because many high-end homes and apartments have interiors that are irreplaceable. For example, these residences often include rare woods, tile, light fixtures, stained glass and other expensive items and materials. “If the global insurance program does not provide full reimbursement for the costs of replacing these items in the event of damage or a total loss, the value of the home as an asset class will deteriorate,” he explained.
Sheetrock and drywall, in other words, is no replacement for plaster-and-lathe or expensive paneling. Other insurance loopholes involve damage to a home caused by an adjacent apartment. Say an upstairs neighbor’s steam radiator malfunctions or a pipe in a kitchen sink bursts. The water builds up and leaks into the condominium below while the owners are away on vacation, causing extreme damage to the walls and rare wood trim and moldings.
“The upstairs neighbor’s policy will only respond if it can be proven that their negligence caused the problem,” Paul said. Without recourse to adequate insurance coverage of your own to absorb the costs, the value of the home as an asset class suffers once again.
The solution is obvious—have someone like Paul with extensive experience in working with global and high-net-worth families ensure the coverage is up to date, comprehensive and broad. “Insuring expensive homes and rare automobiles is complicated and better left to insurance brokers and insurers that appreciate the nuances,” he said.
A Team Effort
He makes an excellent point. Today’s high-net-worth family is often a complex “family enterprise” owning multiple businesses, homes, fine art and other assets at a time when society is increasingly litigious. While it is routine for these individuals to regularly reach out to their stockbrokers and financial advisors regarding their investments, many fail to include insurance brokers and agents in these deliberations and determinations.
“We have found it common for wealthy people to be focused more on tangible investments and trust and estate tax issues, and not so much on intangible things like insurance,” Paul said. “Most of my clients now have us as part of their advisory teams. I wish I could say all of them did.”
With fine art and pricey homes now the go-to asset classes for many wealthy individuals, this practice not only is irresponsible; it’s financially risky.