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Are Your Clients' Assets and Collectibles Properly Documented?

by Katharine Richardson

Executive Summary
  • Financial planners can help ensure clients have proper levels of property and casualty coverage by encouraging clients to create an asset inventory.
  • Inventories are particularly important for high net worth clients, who may have extensive collections and multiple properties.
  • The process of helping a client produce an inventory, discussing the contents and their intended purpose, and organizing coverage and a plan for those assets can strengthen the advisor's relationship with the client.
  • Inventories provide planners with a clear picture of a client's total assets, beyond financial holdings.
  • This paper discusses reasons to prepare an asset inventory, guidelines for proper documentation, guidelines for compiling and storing an asset inventory, and common errors made in documentation.

The Insurance Information Institute reports that nearly two-thirds (64 percent) of all homes in America are underinsured by an average of 27 percent. Homeowners' underestimating the value of their total personal property is one of the primary causes of underinsurance. The value of collectibles, art, antiques, jewelry, china, glassware, and heirlooms can appreciate over time, sometimes significantly. Often homeowners are not aware of current values or even the total size of their collections. For affluent clients, who may have extensive art collections and multiple residences, proper coverage becomes an even greater issue.

To ensure adequate levels of coverage, the Insurance Information Institute and the Chartered Property and Casualty Underwriters Society recommend that policy holders create detailed inventories of valuables. In the event of a loss, an asset inventory is invaluable. Proper documentation speeds the claims process and results in better outcomes for the insured. Financial planners have a fiduciary responsibility to protect their clients from risk, and helping clients create a proper inventory of their valuables is an excellent beginning to the risk analysis process.

When advisors suggest to clients that they need to create an inventory, clients are often overwhelmed with the task and don't know where to start. Planners can assist their clients by providing guidelines and direction on how to create a catalog, what information needs to be included, and how it should be stored. This paper presents an overview on these subjects for planners to share with their clients. It also provides advice on how to motivate clients to prepare an inventory, suggests errors to avoid in documentation, and discusses how documentation aids in recoveries. Guiding a client through the inventory creation process is a valuable exercise that financial planners should consider completing with every client.

Why Prepare an Inventory?

Suggesting that a client create an inventory is an excellent starting point for new client relationships. The inventory not only helps the client, but also helps the planner gain a full view of the client's asset portfolio. David Goldberg, CFP®, principal of Nashville, Tennessee-based David Goldberg and Associates, says, "Inventories are essential. When working with a new client, we always start with an inventory of what they have, when and where they got it, why they own it, and what it is earmarked for." For existing clients who don't have an asset inventory, suggesting they create one can be an excellent task to add to a scheduled portfolio review.

Goldberg explains that financial planners have a legal responsibility to be an advocate for their clients' interests, to get to know their clients, and to advocate solutions designed for a client's unique situation. Reviewing a client's inventory helps Goldberg understand the client's current needs and to plan for their future. To create an appropriate management strategy for a client, a planner should completely understand the client's portfolio and the intended use of the assets it contains.

Convincing a client about the importance of sharing their full list of assets can be a challenge for planners. Goldberg explains that people often operate under the myth that keeping their eggs in many different baskets will protect their interests, when in fact it is often the opposite. By keeping information scattered, clients can run into problems because they can't remember what they have, where they have it, banks change, insurance companies change, safe deposit boxes change, or objects are lost or misplaced. Goldberg encourages clients to consolidate ownership and share their complete asset list with their financial planner, so everything can be clearly identified, inventoried, and reviewed on a regular basis. He adds, "You can't ever eliminate surprises, but you can reduce the effects of them."

Motivating Clients

There are many reasons why a family should prepare an inventory. Proper documentation of assets minimizes risk, which can lead to lower insurance premiums. If a claim has to be made, an inventory speeds the claims process and helps guarantee a fair settlement. If items are stolen, documentation can aid law enforcement in recovery and provide proof of ownership. Documentation also helps preserve family history and ensure that items are successfully passed to future generations. Financial planners can provide this list of benefits to clients to inspire them to begin the process.

For a fine-art collector, an inventory can help reduce premium costs. Claire Marmion, central zone director of Art Collection Management at the AIG Private Client Group, explains that the insurance rates for specified fine art are generally lower than the rates for personal property and general contents. "If you document your pieces, work out how much insurance you need for general contents, and separate out what can be a considerable sum in fine art—several million—then you are going to benefit from a much more competitive rate," says Marmion. "You'll also get broader coverage when pieces are specified. Why would you want to insure your Andy Warhols in the same category of your insurance policy as your lawn mower or your fireplace irons?" A specific fine arts policy often will provide more complete coverage at a lower rate than will a general contents rider.

Sometimes motivating a client to begin the inventory process can be the challenge. John Russell, Jr., principal of Brentwood, Tennessee-based Corporate Financial Advisors, says that when he is trying to get his clients to create an inventory, he recounts an episode of Antiques Roadshow in which a woman discovers that a table she bought at a yard sale for $125.00 is actually worth $250,000. Russell reminds his clients that they never want to be that person who didn't know what their table was worth. The story is a perfect example of what a lack of documentation can cost someone.

Russell, whose father was Johnny Russell, Grand Ole Opry member and Nashville Songwriters Hall of Fame inductee, relates his own personal stories to his clients. "My father was in the entertainment business, as are some of my clients; they often have a great deal of memorabilia, keepsakes, original lyrics, master recordings, and so forth," Russell says. "If you aren't aware of their importance, they can easily be discarded. The original lyrics to one of my father's songs, 'Act Naturally'—which was recorded by Bucks Owens as well as the Beatles—have never been found. There is obviously a significant monetary value attached to these lyrics, but for me there is a greater personal and emotional value."

Russell suggests reminding clients of the sentimental and historical value of items that may be lost forever without documentation. "Oftentimes family members, parents, grandparents, aunts, and uncles have bought objects that the next generation knows little or nothing about. Clients aren't aware of its history, its importance to the family, or its monetary value," he says. As family members age, there can be issues with loss of memory and dementia. If a family takes the time to record a detailed inventory, the loss of a piece of history can be prevented. An inventory can aid in specific bequests of such objects.

Financial planners can further prompt their clients to prepare an asset inventory by pointing out the estate planning considerations. Goldberg explains that if a client has a significant collection of, say, art, jewelry, or cars that they want to pass down to a loved one, that collection needs to be cataloged and have a value assigned to it for estate tax purposes. He has seen many people forced to sell inherited heirlooms for which the estate taxes were not planned. If an investment advisor knows about these assets through an inventory, then steps can be taken to make sure the recipients are able to keep the items through trusts or financial arrangements. If the advisor doesn't know about the items, it can be disastrous.

Marmion stresses to her clients that it is much better to proactively create a proper inventory then to try to pull together the bits and pieces after a tragedy has occurred. Leonard Aronson, Accredited Senior Appraiser of the American Society of Appraisers and owner of Aronson Fine Art, agrees: "When there are losses of one kind or another—theft, damage or whatever it may be—going through recovery without a full, up-to-date inventory can be very painful. Even with an insurance company that is geared toward fine-art loss, that wants to help, the company needs to have detailed information to process a claim."

What to Include in an Inventory

Claire Marmion provides these guidelines for inventory documentation:

1. A detailed list of all the pieces using the Object ID™ standard (see sidebar), which includes complete descriptions and measurements
2. Very good photographs—detailed images—digital format is best
3. Documentation of purchase, invoices, an appraisal, scanned documents that pertain to the value of the pieces, and where the pieces were purchased
4. Condition report—especially important for art being loaned or transported

Storing an Asset Inventory

All six of the professionals interviewed for this story recommend maintaining inventories in an electronic format, which provides for easy updating, duplication, and storage. Homeowners can print multiple copies or save copies to compact discs for distribution. Electronic files can be stored in multiple locations and can save a tremendous amount of space when dealing with large collections. The more advanced curatorial software packages offer tracking and sorting capabilities needed by serious collectors, galleries, and museums. Aronson notes that having an appraisal stored electronically will save a collector money when seeking a re-evaluation or update of the appraisal.

There are several software products available that make the inventory process quite easy, including

Each product is geared toward a different market, so it is important that financial planners recommend software that matches their clients' needs. The average homeowner doesn't need the same features as an avid collector with hundreds of pieces in their collection.

Homeowners should provide copies of their asset inventory to their financial advisor, insurance agent(s), attorney, CPA, or family members. The Insurance Information Institute recommends that homeowners keep their inventory documentation in a safe place, away from the house, such as in a safe deposit box. The Institute also suggests printing out inventory reports to give to an insurance broker when opening a policy to ensure proper coverage.

Updating Inventory Documentation

A financial planner should encourage their clients to keep inventories up-to-date at all times, but reviewing and updating every six months is a practical goal. John Russell notes, "I recommend that my clients update their records at least once a year or whenever a significant asset is purchased." David Goldberg adds, "We do an extensive inventory process in the beginning with our clients, and then every six months we review any changes that are material to their financial and family picture."

For serious collectors, Aronson suggests a range of three to ten years between full reappraisals of items, depending on the volatility of valuation of the items in the collections and the needs of the collector. But he cautions that if the location or condition of an object changes, the documentation should be updated immediately.

Documentation Errors

The biggest error made in asset-inventory documentation of is the lack of it. Russell explains, "The primary mistakes made are not documenting at all, not keeping the documentation in a safe place, and not putting it in a format that is easily understood and accessible for yourself or others who may be affected."

Carol Hagen, CEO of software producer Visnulimited, adds, "We all pay for insurance to guard against an unexpected disaster. Unfortunately, we often fail to recognize that insurance is a two-way street, an equitable partnership based on the quality of records that you keep. Your records reflect the level of return you can hope for on your insurance investment."

Julian Radcliffe, chairman of the Art Loss Register, an international organization that has aided collectors and museums with the recovery of over 3,000 stolen items worth over $100 billion says, "The number of victims who have reasonable photographs or descriptions is improving, but still there are many, perhaps 30 percent, who cannot log their loss because the image or description is inadequate. Sometimes owners fail to take measurements or photograph the defects, damage, or details that are essential to matching items such as furniture or sculptures, cast from the same mold, which are not unique without such marks."

Marmion says she sees clients make three types of errors. First, not specifying their works of art on an insurance policy or specifying them at the wrong value, so they are not really benefiting from the widest coverage. Second, rather than individually listing each piece, which can be laborious, clients insure their items on a blanket basis. If the client keeps pace with market trends, a blanket policy can work, but if the client doesn't, they may find their coverage isn't sufficient to replace the piece. The third error she sees is clients who don't track item locations, so objects get lost.

How Can Documentation Assist in Recovery?

The Council for the Prevention of Art Theft reports that documentation is crucial to the protection of art and antiques because law enforcement can rarely recover artifacts that have not been adequately photographed and described. The police have many objects in custody that have been recovered but cannot be returned to their rightful owners because there is no documentation available to identify the victims or prove ownership.

If a client does suffer a theft, and they have adequate documentation, a financial planner can connect the client with the Art Loss Register. As the central checkpoint for the police, the art trade, and insurers, the ALR undertakes over 200,000 searches a year. The Art Loss Register also circulates details of stolen objects to dealers and acts as a liaison with Interpol and other international law enforcement agencies. Currently the ALR has 150,000 stolen items listed in its database, with about 10,000 added each year. Says Julian Radcliffe: "Although this is probably a large proportion of the higher-value items [stolen], particularly those that are insured, there are thousands of items every year that should be logged with us. But they aren't—either the insurer forgets to do so, or victims do not know of us," adds Radcliffe.

Documentation and Claims

In the case of a natural disaster where a client suffers a catastrophic loss, with up-to-date documentation of their assets on record with their planner or insurance agent, the claims process will run much more smoothly than if documentation isn't current.

Says John Russell: "You find the greatest value in documenting when there has been a loss or death. Having all of this in an electronic format can mean the difference of thousands, hundreds of thousands, or even millions of dollars to the person who has suffered the loss or family members who have lost a loved one."

In addition to speeding up the claims process in a total loss, documentation is often invaluable in claims relating to partial loss. Being able to provide evidence of an object's condition before an incident such as a fire or flood will help guarantee adequate compensation and aid in restoration.

"The business we're in is to reduce the cost of risk, protect the condition of these pieces, and enhance the client's enjoyment of them for 20 to 30 years," says Claire Marmion. "I can't stress enough how important documentation is in facilitating that process."

Conclusion

Leonard Aronson sums up the discussion: "The acquisition and codifying of knowledge is extremely important. Bringing a client's information into a central digital inventory not only gives financial planners information that can help them make the best recommendations for their client—it also enables client and planner to discover what is accurate and what assets the client really does have."

By encouraging clients to provide an inventory of their assets and reviewing the contents, financial planners can gain valuable information to help them design management strategies, minimize the client's risk, and maximize the use and enjoyment of clients' assets.

Katharine Richardson is a writer and a consultant on marketing, public relations, and Internet usability design who lives in Nashville, Tennessee.

Sidebar 

The Object ID™ Standard

To help define a standard of proper documentation, the insurance, law enforcement, museum, auction, and appraisal industries collaborated on the development of the Object ID™ standard for the description of cultural objects. The FBI, Interpol, and Scotland Yard all support Object ID. The standard is maintained and updated by the Council for the Prevention of Art Theft (CoPAT). CoPAT publishes an easy-to-use documentation guideline called the Object ID Check List. Web site: www.object-id.com; phone: +44.1747.841540 (United Kingdom).

Sidebar 2 

Web Sites for Further Research