|The Fine Art of Risk Management|
The 2008 financial crisis provided a harsh reminder to many investors of the instability of the global financial markets and the risks associated with owning stocks and shares. High-net-worth individuals (HNWIs) appreciated, perhaps for the first time, the true value of owning valuable collectibles with no correlation to the financial markets.
Many families are just not used to keeping track of their tangible assets, leading to a high-net-worth blind spot.
The crisis encouraged a surge of interest in the acquisition and collection of fine art, classic cars, wine, furniture, jewellery, antiques, yachts, racehorses, sports memorabilia and other movable chattels. It is now recognised as prudent for such tangible assets to form part of an investment portfolio. Indeed, these assets are now being treated as belonging to a class of their own, joining the standard list of asset classes: equities, fixed income, cash and cash equivalents, real estate, commodities and derivatives.
The problem is that many families are just not used to keeping track of their tangible assets. This has resulted in what has been termed a ‘high-net-worth blind spot’. The whole area is sometimes quite simply overlooked.
Risk management is applied common sense. Fine-art enthusiasts have always looked after their collections very well, and much of what follows is simply a matter of applying those same tried and tested risk-management measures to the tangible-assets portfolio.
The first stage in the risk-management process is identification. Each item needs to be identified and catalogued, together with photographs, original valuations, proofs of provenance and as much historical evidence about the object as possible. Sophisticated software applications have been developed to help track such information.
Risk identification is best carried out by an expert risk engineer or a loss-prevention specialist who is familiar with inspecting and surveying tangible assets and how and where they are stored.
Risk measurement and assessment
The valuation of tangible assets is a specialist field and will involve expert appraisers. While the assets are being valued, the assessor should also ensure that the necessary paperwork showing proof of ownership and authenticity is in place. This is especially important for fine art, which may be hundreds of years old and have had many different owners from all over the world.
When the assets have been listed and valued, and the risks that each face have been identified by the loss-prevention expert, the expert should then recommend loss-control measures for each risk. For example, they might recommend that a Caravaggio is not displayed above an active fireplace, where the heat and soot will accelerate its deterioration and lessen its value. This simple advice could save millions of dollars.
Risk financing can be achieved by risk transfer or risk retention. Risk transfer can be arranged by contract or by insurance. An example of risk transfer by contract is lending the art collection to a museum, and transferring the risk of all losses to the museum as part of the lending agreement. An example of risk transfer by insurance is purchasing external insurance to protect the assets in transit to and while at the museum. In practice, a combination of both contract and insurance is used.
Risk retention includes the specialist area of captive insurance. A captive insurance company may be able to play a critical role in the risk financing of all of a client’s assets and liabilities, not just the tangible assets. A family office manager who has not yet considered captive insurance may be missing an opportunity to improve efficiencies, reduce costs and use the captive as a new profit centre.
Risk management of tangible assets is a growing area that involves the management and cooperation of people from various fields of expertise working together for the long-term protection of the investments.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Mar.26, 2015