The wealthy have regained much of their net worth since the 2008 global financial crisis, but they have not fully regained their confidence. As a result, an increasing number are using their passions for fine art, fine wine and other collectibles to diversify their investment portfolios.
Wealth managers, however, often fail to recognize the broad range of risks that need to be addressed when dealing with collectibles as investments. This ranges from ensuring authenticity and title to limiting the potential for theft, loss and damage from an array of hazards.
Managing these risks requires a sophisticated understanding of these assets' values and their potential loss exposures. It requires expertise in both loss mitigation and prevention, and key relationships with organizations that specialize in preserving the value of collections. By partnering with an experienced insurance consultant, wealth managers can broaden their client relationships in an area that is often a significant portion of a family's wealth-and very close to their hearts.
Passionate Investing
After taking a beating during the recent recession, prices for fine art and related collections like antiques and fine wine now seem to be on the upswing. Records were set in 2010, when Pablo Picasso's "Nude Green Leaves and Bust" sold for $106 million-$26 million more than was expected-and Albert Giacometti's life-size bronze sculpture "Walking Man 1" fetched $104 million. The Liv-ex Fine Wine 100 Index recovered throughout 2009 and rose 40% in 2010, surpassing its previous market peak. Even more prosaic art forms, such as comic books, are reaching record values. The 1938 Action Comic No. 1, which featured the debut of Superman, sold for a record $1.5 million in 2010.
An emerging class of millionaires from emerging markets in Asia, Eastern Europe and South America are contributing to the increased valuations. Chinese millionaires spent $830 million on fine art in 2009, according to Newsweek.
What cannot be measured, and what is unique about collections as investments, is the aesthetic value they provide to their owners. The term "passionate investing" has become part of the lexicon to describe the emotional attachment people have for their collections.
Heather Becker, CEO at The Chicago Conservation Center, an art restoration firm, is familiar with the passion affluent people have for their fine art collections. "The pain they go through when their most precious items have been damaged is profound," Becker says. "They may be worried about the financial aspects, but more often the greatest concern is the personal history, cultural and aesthetic loss.
"Art owners take their role as the caretaker of these precious objects very seriously," she says. "That responsibility can be very stressful, so making sure they have the proper support and experts around them is an important part of the long-term care of such works of art."
Casino developer Stephen A. Wynn would likely agree with Becker's assessment. While hosting a party in 2006, he accidentally put his elbow through Picasso's La Reve, a painting he had just sold for $139 million. The painting was restored, but the sale was canceled after its value plummeted by a reported $40 million.
Broken Pieces, Broken Hearts
Wynn is far from alone in experiencing the financial and emotional losses resulting from a damaged collectible. Losses in recent years include an antique 1909 German Steiff teddy bear, on loan to a children's museum in England, that was torn to pieces by a guard dog. The toy was valued at $75,000. At the Milwaukee Art Museum, a fundraising event dubbed "Martini-Fest" resulted in drunken attendees damaging two bronze sculptures.
"We have assisted owners with paintings that were accidentally scratched or punctured by guests getting too close as they walked by," Becker says.
Poor-hanging hardware, harsh natural light, acidic framing materials and uncontrolled humidity are also culprits in many cases of damaged art and collectibles, she adds.
"We often see paintings hanging above a fireplace, without the owner realizing the effects this can have on the piece," Becker says. "We have seen collectibles and fine works on paper negatively affected by water and mold because they are hung in a bathroom."
Shipping collectibles puts them most at risk. Bottles of wine, paintings and fragile glassworks suffer damage because they are incorrectly crated, or the vehicles lacked proper temperature and humidity controls. Security inspections at airports have become a serious concern. The U.S. Transportation Security Administration implemented new rules in the aftermath of 9/11 that allow security personnel to open all packaged goods. A crate containing a valuable painting or sculpture may be cracked open or reassembled without the same care that professional art shippers employ, resulting in damaged or even lost items.
Is It Real?
Theft is another serious risk facing the owners of art and other collectibles. The FBI and Interpol estimate that art theft and smuggling result in annual global losses of between $4 billion and $6 billion. In May 2010, five paintings by Picasso, Henri Matisse, Fernand Leger and Alfredo Modigliani were stolen from the Museum of Modern Art in Paris. Their combined value was estimated at between $126 million and $635 million.
Interestingly, the FBI notes that most of the stolen art in its database was taken from homes. This may be because smaller items are easier to steal than the larger pieces one might find in museums and galleries.
Owners of large collections frequently loan valuable works to museums, which can help increase the item's market appeal and value. But this practice also makes thieves aware of the collection's owner, increasing the possibility of theft when the works return to the owner's home.
Forged and stolen art works are also a form of theft. Film director Steven Spielberg, for instance, purchased a Norman Rockwell painting, Russian Schoolroom, in 2007 that his staff later found on a list of stolen art.
Ten Steps
Myriad and complex risks confront the owners of valuable collections. Here are the steps that wealth managers can discuss with their high-net-worth clients to help them keep their valuable collections safe:
1. Assemble a team of experts.
The team should include an independent insurance agent or broker, an insurance company specializing in serving affluent clients, appraisers, and art conservation and loss prevention specialists.
2. Establish a system for tracking and valuing the collection.
For large collections, consider purchasing collection management software. It should allow the user to detail the name of the object, its size, current condition, date of purchase, the period of the piece and its appraisal record. Store the records in a safe location, such as a bank safe deposit box or in a secure database.
3. Protect the collection from theft.
Consider an investment in both perimeter and external security systems. The goal is to catch thieves at the property edge-before they try to enter the residence. Surveillance systems inhibit thieves, as do guard dogs and human guards. Register all collections with applicable registries that keep the information confidential, so as not to alert thieves about their ownership.
4. Protect the collection from fire and smoke.
Ensure that all homes have fire and smoke detection systems installed. If the home has a water sprinkler system, make sure art is protected from the water spray, or consider a waterless fire protection system.
5. Guard against damage from water, sunlight and other hazards.
Locating valuable paintings, antiques, tapestries and other collection pieces under bathrooms, laundry rooms or other rooms exposes them to the risk of damage from a plumbing leak.
Avoid locating items near windows or install windows that reduce ultraviolet penetration.
Works of art should be hung out of the reach of children, pets and any possible flooding. Never display art above a fireplace, unless the fixture is never used. Use museum-quality hanging hardware and professional framers.
Do not store collections in the attic or basement, where heat and humidity levels can reach extremes.
Consider purchasing a racking system. Make sure it is stabilized and above the floor, and that the storage site is temperature and humidity controlled. Alternatively, consider using a company that specializes in the storage of collectibles.
6. Store fine wine in a wine cellar.
Bottles should be placed on their sides to keep the cork wet and reduce the risk of oxygen entering the bottle. Temperature should be maintained at between 55 to 60 degrees Fahrenheit. Fluctuations in temperature can speed the aging process. If the temperature is maintained with a heating and cooling system, make sure the system has a back-up power supply.
Keep wine away from a constant light source, which may give off heat and damage the wine.
Choose wine racks that are made of unfinished wood and not certain kinds of woods like cedar, which can impart an odor that affects quality.
Ensure that wine racks can withstand natural disasters like an earthquake or hurricane, if the region is prone to such risks.
7. Use professional art shippers.
Hire only reputable companies that specialize in transporting valuable works. Trucks or vans should be temperature and humidity controlled, and fitted with systems that reduce the risk of damage from shocks, vibrations and sudden stops. Specialized crating and packing materials are another necessity.
When shipping by air, consider using professional art shippers who are certified to inspect and officially seal art during the packaging process. This reduces the risk that airport security inspectors will open and potentially damage your art shipment.
8. Make sure museums have adequate safety measures and insurance.
When loaning items to a museum, ask where the collection will be displayed. The precautions outlined in steps No. 4 and No. 5 should be followed by the museum.
Have an insurance agent review the museum's insurance policy to make sure the collection will have adequate coverage.
9. Develop an evacuation plan.
List and prioritize items to be evacuated in case of hurricane, wildfire or other natural disaster. Determine emergency packing and transportation methods.
Set clear timeframes for when the collection should be abandoned.
Apprise local fire companies of where art, antiques and other collections are stored in the home, and how best to extinguish a fire without damaging these works.
10. Maintain proper insurance.
Choose an insurance company that caters specifically to the needs of high-net-worth clients.
Ask how coverage handles temporary fluctuations in the replacement cost of valuable articles. The best policies will pay market value up to 50% higher than the scheduled amount of coverage in case of loss.
Annually review the inventory of valuable collections, adjusting coverage levels as needed.
Make sure items acquired during the year are added to the insurance policy. The best insurance companies automatically provide coverage for newly acquired items, but they all require notice within a certain period of time, usually 30 to 90 days depending on the item.
Gary Raphael is senior vice president of risk consulting for ACE Private Risk Services.