‘Free Ports’ for Storing Clients’ Valuables: The Pros and Cons

Last year, Beijing announced the creation of an 83,000-square-foot free port near that city's planned new airport. The free port is predicated on encouraging Chinese art collectors to store their valuables in Beijing, the Jing Daily newspaper reported. Other free ports dot the world, but there are none in New York City, arguably the world fine art capital.

While airports and seaports are logical places to locate a free port (otherwise it might be difficult to argue the transitory nature of the goods for tax-exempt purposes) these factors also add undue risk. Collectors and their financial advisors should be concerned about the numerous airplanes flying low over these warehouses and the close proximity of large bodies of water. They can be sure that their insurers are taking these factors into consideration.

Theft, on the other hand, is rarely a concern, as most free ports are highly secure. At a free port in Changi, Singapore, for instance, high concrete walls surround the warehouse, which is patrolled 24/7 by armed guards. Using state-of-the-art technology, stringent background checks are conducted on all personnel as they enter or exit the building, and both motion sensors and video cameras are strung throughout the premises.

Although security may not be an issue, collectors should consider the potential impact of a catastrophe at a free port, or any art warehouse, where they are storing tens of millions of dollars' worth of valuables. One direct hit from a major storm and all their efforts to amass a rare and unique collection could be lost. Just as a well-balanced stock portfolio emphasizes a diversity of investments, a large collection of valuables should be stored in different warehouses, emphasizing geographic diversity and, therefore, reduced exposure.

Another thing that makes insurers question how much risk they're taking on is that free port managers tend to be tight-lipped about the kinds of goods contained in these warehouses, which is understandable given their clientele's demand for privacy.

Because of the heightened exposure, Conte estimates that the premiums to store goods at a free port can be two to three times other storage rates, "if coverage at a specific desired location can be obtained" at all.

"Insurance capacity is the big issue here," Conte added. "Financial advisors need to exercise caution about insurance protection, including the coverage limits, terms and conditions, before simply storing their clients' valuables in a free port. Don't assume the insurance is high caliber just because that would be the expectation."

Knowing in advance what insurance covers and what it doesn't cover is as important as which company you buy the insurance from. Just because it's call a free port doesn't mean it's a great value.