BREAKTHROUGHS IN MANAGING TANGIBLE ASSETS: COMPLETING THE PICTURE OF WEALTH. by ACE Private Risk Services and Trōv - PDF

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BREAKTHROUGHS IN MANAGING TANGIBLE ASSETS: COMPLETING THE PICTURE OF WEALTH by ACE Private Risk Services and Trōv ACE Private Risk Services is the ACE Group s high net worth personal insurance business,

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BREAKTHROUGHS IN MANAGING TANGIBLE ASSETS: COMPLETING THE PICTURE OF WEALTH by ACE Private Risk Services and Trōv ACE Private Risk Services is the ACE Group s high net worth personal insurance business, which provides specialty coverage for homeowners, automobile, recreational marine, umbrella liability and valuable collections insurance for affluent individuals and families. Additional information can be found at: The ACE Group is a global leader in insurance and reinsurance serving a diverse group of clients. Headed by ACE Limited (NYSE: ACE), the ACE Group conducts its business on a worldwide basis with operating subsidiaries in more than 50 countries. Additional information can be found at: Media Contact: Carla Ferrara Wealth Advisor Contact: Annmarie Camp Trōv creates applications that help people collect and benefit from the information about every thing they own. The data is stored in a personal Trōv - a private online digital locker where their information is organized, valued, securely accessible, and selectively sharable. Members receive unique benefits from Trōv partners, including the world s leading insurers, wealth managers, luxury retailers, financial services, auction houses, appraisers, and more. Trōv is privately funded, and headquartered in the San Francisco Bay Area with offices throughout the U.S. For more information, visit trov.com or follow us on Media Contact: Jennifer Deitsch Wealth Advisor Contact: Mark Dowds Most successful families and individuals rely on a network of professional advisors to help them manage their financial assets, including strategies to transfer wealth to their heirs. Today, however, forward-thinking advisors, who include wealth managers, tax advisors, estate attorneys and insurers, say that too often high net worth families are not doing enough to manage and protect their tangible assets, beyond real estate. In recent years, tangible assets, such as fine art, wine, jewelry, antiques, sports memorabilia, classic cars and other valuables, have finally been recognized as an asset class in their own right. A comprehensive, full-circle view of any high net worth individual s wealth must include these tangible assets to complete the picture of total wealth management. This paper explores important issues surrounding the management of the tangible assets that reflect the passions, interests and legacies of the individuals and families privileged to own them. Wealthy families, with the guidance of their advisors, must overcome the blind spots that are placing their tangible assets, and the wealth they represent, at risk. The challenges inherent in managing tangible assets include: determining value and authenticity, keeping proper documentation, as well as loss prevention, insurance, and estate and tax planning. Additionally, we explore how new technology is making it increasingly easy to collect, secure, manage and protect these valuables, while allowing families to enjoy their tangible assets in ways never before possible. 4 THE GROWING IMPORTANCE OF TANGIBLE ASSETS In recent years, high net worth families have increasingly turned to tangible assets for more than their aesthetic values. A 2012 Barclays report found that high net worth individuals in the United States hold an average of 9 percent of their wealth in tangible assets. A 2011 ACE Private Risk Services study of high net worth households found that 74 percent of respondents, all with more than $5 million in investable assets, cited investment value as a reason to purchase rare art or wine, valuable jewelry, sports memorabilia or classic cars. Additionally, two-thirds said the potential for appreciation in value was important in their purchase decision. As values of many categories of tangible assets have escalated, these assets increasingly serve to diversify investment portfolios during periods of volatile market gyrations. In the ACE study, more than half of the respondents reported that the investment diversification value of their tangible assets has become more important to them since have all of their precious items insured against property loss with a valuables policy. Additionally, one in three reported that they were not updating the market value of these assets at least once every three years, and a full 15 percent of respondents had no formal documentation of their non-financial assets. It s amazing how often some advisors, especially those with sophisticated knowledge of financial markets, suddenly turn unsophisticated when it comes to nonfinancial assets, notably art, says Ronald Varney, owner and president of New York-based Ronald Varney Fine Art Advisors. It is essential to constantly monitor the changing information about your treasures so you can make better decisions. When you have complete information about your property and possessions, you re empowered to discover new ways that enhance the enjoyment of your possessions, for yourself and others. Investors are increasingly looking to hard assets, such as valuable art, antiques or fine watches and wine collections, because of the perceived ability of these assets to hold value during market fluctuations, says Tom Livergood, chief executive officer and founder of The Family Wealth Alliance, a Chicago-based family wealth research and consulting firm. Across the industry, we ve seen investors rush to safety and stay there. HIGH NET WORTH BLIND SPOT Even as tangible assets gain recognition as a new asset class, high net worth individuals rarely bring to their passions for art, wine or jewels the same rigor, skepticism and planning they have when making financial investments or business decisions. In ACE s 2011 study, despite the growing number of households reporting greater importance of tangible assets to their investment portfolios, nearly 40 percent of those surveyed did not To Evan Jehle, a New York-based principal at Rothstein Kass, a professional services firm with a significant family offices services practice, wealthy families typically pay far less attention to their personal property than to their business affairs. Our clients would never let something fall through the cracks in their professional lives, but many families have never thought of their tangible assets in this way before. Until now, wealth managers have managed their clients risk and made critical decisions about their estates by analyzing the status of their financial assets, mostly to the exclusion of their personal and real property, says Scott Walchek, Founder and CEO of Trōv, which provides innovative cloud-based tangible wealth management software that helps high net worth individuals know what they own, where it s located and what it s worth. That s not surprising since the traditional methods for managing and modeling wealth have focused primarily on financial assets. It is essential to constantly monitor the changing 5 information about your treasures so you can make better decisions. When you have complete information about your property and possessions, you re empowered to discover new ways that enhance the enjoyment of your possessions, for yourself and others. Thomas Handler, partner and chairman of the Family Office Practice Group at Handler Thayer, LLP, a Chicagobased law firm recognized as a leader in serving family offices, private businesses and high net worth individuals, says his office often advises clients who come to his firm without a business plan for their tangible assets. It is incredibly important for wealthy households to understand how to hold, report, title and insure their non-financial assets in estate planning. However, these calculations often become complicated and are rarely treated with the same discipline as traditional investment and business assets. Tangible assets are a dramatically underappreciated component of wealth planning. As one private banker observes, No one pays enough attention to tangible assets. Wealthy households simply don t understand the issues involved with properly protecting this asset class and often are unconcerned with their non-financial assets until it s too late. People don t know what they don t know. authenticity, documentation, estate and tax planning as well as insurance; additionally, owners of tangible assets should embrace the new technology tools that dramatically improve the management of tangible wealth. Value and Authenticity The market value of tangible assets can change, sometimes rapidly. In July 2013, a 1954 Mercedes-Benz sold for $30 million, the highest price ever paid for a car at an auction, shattering the previous record of $16.4 million set in Global sales of wine, diamonds and precious gems have also been increasing, often to record levels. In December 2012, Sotheby s recorded its highest one-day jewelry sales in the Americas, selling $64.8 million of high-carat diamonds and precious gems. The Live-ex Fine Wine 50 Index reached 106 in April 2013, up 5.3 percent in the first half of Over a 10-year period, prices for gold more than quadrupled, only to retreat more recently. CHALLENGES OF MANAGING TANGIBLE ASSETS Today s investors have the opportunity to reap significant benefits financially and aesthetically by investing in tangible assets, but these investments pose risks and challenges different from investment in traditional assets. Wealthy households and their advisors may cheer the rebounding market for art and other valuables, take comfort that they have diversified their investments and look forward to potential price appreciation in the future. However, those cheers could be premature if owners of non-financial assets fail to understand and properly address the critical issues facing these assets. Those issues include: value and The market for fine art is especially robust. In 2012, Christie s auction sales totaled more than $6 billion, a 10 percent increase from In May 2013, Christie s reported $640 million of sales in its Post War and Contemporary department in one week, setting a new auction record for any individual category. 6 Dramatic shifts in the market present challenges as well as opportunities for investors of tangible assets. Today s market is both global and complex, says Varney. Modern and Contemporary art have made all the headlines, for that is where the greatest demand is today; but by next year the market could be turned upside-down, as happened in the fall of 2008 amid the global financial crisis. Wealthy families should not be looking at their insurance policies as an expense, but as an investment. Alan Fausel, vice president and director of the Fine Art Department in the New York office of Bonhams, a Londonbased auction house, cites the rapidly changing market as a serious issue for investors. There is a huge risk and reward in today s market because so many investors are entering uncharted territory. Today s contemporary market has seen so much volatility and so much uncertainty with newly famous artists, that investors are especially challenged to understand the true value of the works they own. Protecting investments in art, jewelry, antiques or wine begins with an appraisal. Smart investors should perform their due diligence to select appraisers with specific expertise in the genre of their assets. An accurate appraisal is the foundation for every decision an investor will make regarding his or her tangible assets, says Anita Heriot, Philadelphiabased president of Pall Mall Advisors, a U.S. and U.K. art appraisal firm. Before donating, selling, insuring or placing valuable items in a succession plan, investors must know how much everything is worth. Wealthy individuals must understand that the values of their tangible assets have changed and these values will continue to change over time, says Heriot. Without understanding the value of their property, people cannot even begin to make correct decisions. SEVEN STEPS FOR MANAGING TANGIBLE ASSETS AS PART OF A COMPLETE WEALTH PROTECTION PLAN 1 Assemble the right team of experts To most effectively manage the risks involved with investing in tangible assets, families and their wealth advisors should select a qualified team of experts to assist with documenting, valuing, insuring and protecting their prized possessions. The team should include the following experts: Independent insurance agent or broker who specializes in serving HNW clients. To identify these agents, check to see that they have a well-defined process for assessing personal risks and have access to carriers such as ACE Private Risk Services that also specialize in serving HNW clients. Loss prevention specialist. HNW-market carriers like ACE often have risk consultants who can offer complimentary advice about minimizing the chance of loss, including recommendations for specialized security and safety vendors. Estate and tax planner, CPA and attorney. Family offices, collectors or wealthy donors each face a unique set of estate, accounting and tax planning needs. Research an estate planner or tax attorney who is best suited to meet these specific needs and provide specialized advice for different types of assets or changing circumstances. 2 Secure an accurate appraisal by a qualified appraiser and consider appraisals from several appraisers for especially valuable pieces. Appraisal industry associations, such as the American Society of Appraisers, Appraisers Association of America and International Society of Appraisers, provide guidance when it comes to selecting a qualified appraiser for your assets, for insurance purposes. The IRS provides and requires additional regulations and guidelines for appraisers and appraisal reports for income, gift and estate tax purposes. Consider two or three appraisals, by different appraisers at the same time, to guarantee your assets are valued accurately, as the appraisal is the foundation for almost every decision made with tangible assets. 3 Implement a tangible wealth management system to continuously track new transactions at the point-of-sale and monitor price changes that affect your property s value. Consider cloud-based software to help manage the records of your assets. These systems should store important details about each item along with its value, proof of authenticity and a schedule to update valuation. The most robust solutions will be able to accept information about transactions at the point of sale, eliminating the tedium of manually entering new items. They will also be able to automatically adjust valuations as related sales occur at retail and auction houses. 7 Heriot observes that wealthy individuals sometimes dramatically undervalue their tangible assets. She recalls one family that was tracking their assets based on appraisals from 1983, nearly 30 years between consultations. The collection was originally valued at about $2 million but after an updated appraisal, the fair market value was nearly $100 million. There were paintings of incredible value hanging on only one nail, including a Rothko with an insurance value of at least $70 million. Had this family known what their property was worth, they certainly would have taken better care of it. An appraisal from a qualified professional can also minimize other risks, as well as provide guidance regarding potential fakes and forgeries. In addition, an appraisal can identify other issues that could impact the value of the item or the right to ownership. These include the sale of items made from protected species, protected antiquities or stolen works. Documentation All too often, high net worth individuals and families find the process of documenting, tracking and managing the contents of their home, including fine furniture and other valuable items, to be an onerous task. Proper documentation of personal property typically involves photo or video records, storage of purchase receipts and, in the case of highly valuable items, expert appraisals, proofs of title and provenance, and records of any restoration work. Moreover, values need to be regularly updated, sometimes on both a depreciated value and replacement cost basis. Families rarely keep accurate records of their tangible assets because, quite frankly, it can be a lot of work, says Jarrett Bostwick, wealth transfer and estate planning specialist at Handler Thayer LLP, the Chicago law firm. If someone buys two pieces of art, a piece of jewelry, two watches and a diamond pendant for his wife, then they have to sit down and put a schedule together, contact the insurance company and have them come in and have High net worth homeowners can only sufficiently protect their wealth and understand the financial options available to them if they have access to a 360-view of all of their tangible assets. Financially successful families, and their wealth advisors, can take seven steps to manage the diverse, complex and evolving set of risks involved with this increasingly important asset class. 4 Work with the insurance agent to set proper limits of coverage for general contents and schedule valuable items on a valuables policy. Proper insurance coverage is a critical component of any wealth protection plan. For the best protection, families should insure their precious possessions with a valuables policy, which enables them to declare the value of each piece, or group of pieces, on the policy. This coverage is not restricted by specific coverage limits for certain items in homeowners policies, and it applies to a broad array of risks, including those excluded by homeowners policies, such as flood. No deductible applies. The best policies will guard against price fluctuations by providing coverage for the market value of an item just before the time of loss up to 50 percent more than the value listed on the policy. 5 Engage the services of a risk consultant to help prevent loss. Wealthy families often fail to work with a professional risk consultant, leaving themselves and their assets exposed to serious risks. Even if a property is adequately insured, virtually all owners would prefer to prevent loss in the first place over having to make a claim. A risk consultant can recommend and help owners implement key loss prevention strategies, including an updated inventory of property, evacuation planning, background screening of domestic staff and contractors, and backup power supplies for environmental controls and security systems. 6 Determine a lifetime strategy for your valuables, including a succession plan, at the outset. Too many families wait to develop a strategy for their valuables until it is too late to make a rational decision about a succession plan. It is never too early to begin planning. Discuss the various methods with your key advisors, such as lending pieces to museums for a period of time, which can enhance their value. If you re planning on leaving your assets in a will or trust, donating pieces to a museum or writing an estate planning letter, you will need professionals who have experience dealing with these assets and their unique tax and financial opportunities and consequences. Proper documentation enables proper planning and ensures that the proper tax basis is reflected, which can save family members thousands of dollars. 7 Regularly discuss your tangible assets with your circle of advisors. In every wealth planning consultation, devote sufficient time to discuss the quantity of tangible assets in your portfolio and the values for each item. Families may not consider themselves to be collectors, but anyone who owns jewelry, watches, memorabilia, antique furniture or other luxury items must ensure those valuable items are properly accounted for. Unless advisors are kept up to date about your tangible assets, they will be unable to help you minimize risk or capitalize on opportunities, such as being able to secure a loan on favorable terms by using the assets as collateral. 8 them ask you a whole bunch of questions, which is kind of a pain. Rarely do our clients par
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