Art is now firmly established as an asset class, albeit a non-traditional one. High-net- worth (HNW) collectors buy art and collectibles (antiques, jewelry, classic cars) for enjoyment but with a strong secondary motive: They hope that their collection will prove to be a store of value and ideally even appreciate over time. Additionally, collectors increasingly use their art as a financial tool, for example as collateral for a loan. As a result, most private banks now offer art loans, either in-house or through third party boutique lenders.
According to Deloitte’s Art & Finance Report (2016), only 10 percent of wealth managers interviewed believe that the art investment industry will expand in the next couple of years. This makes sense. Art has been recognized as a financial asset; a potential inflation hedge due to its relatively low correlation to the financial markets. That said, it isn’t necessarily a great investment asset. Works of art are highly illiquid and traded in an opaque, unregulated market. They don’t generate an income but they do generate high transaction and ownership costs. Lastly, artworks are a risky investment from a title and authenticity perspective.
The New Collector
Today’s art collectors are savvy. They use art indices and quality research to understand not just the overall art market but also the performance of individual artists. Collectors increasingly ask their wealth managers to include their art assets into financial reporting to get a better picture of their overall wealth. Lastly, collectors understand, better than ever, the importance of independent advice in art transactions so that they don’t lose money as a result of undisclosed commissions.
According to Deloitte’s report, 78 percent of wealth managers interviewed feel that art and collectibles should be a part of their service offering. To my mind, there’s certainly a role for wealth management firms and private banks. That role is: (1) acting on behalf of their client in transactions as a neutral fiduciary, and (2) providing collection management, wealth reporting and estate planning services. As of yet, however, the opacity and unregulated nature of the art market have been obstacles to successfully incorporating passion assets into traditional wealth management models.
While private banks and wealth managers are investigating how to offer art-related services to their collector clients, auction houses Sotheby’s and Christie’s have recognized the changing demands of their own client base. In the last couple of years, both houses have made a move towards diversifying their services by purchasing several art support companies.
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In 2016, for example, Sotheby’s bought the Mei Moses indices (a database of repeat auction sales) and Orion Analytical, a high-tech scientific research firm that investigates forgeries. In the same year, Sotheby’s also acquired Art Agency Partners, the art advisory firm set up by Amy Cappellazzo. Christie’s purchased Collectrium, the online collection management tool founded by Boris Pevzner, in 2015.
What’s Art Asset Management
Like other financial assets, art collections should be monitored and managed pro-actively, particularly when a collection has significant value. There are many components to a successful art management strategy. For example, due diligence before acquisitions reduces the risk of overpaying or buying problem works (title, authenticity, condition).
Regular appraisals allow the collector to understand the make-up of his collection and monitor his exposure to the various segments of the art market he’s invested in, each with their own risk profile and market cycle. Regular appraisals also allow for sufficient insurance coverage in the case of loss or damage. Lastly, a well-protected, diligently documented art collection enables the collector’s financial advisors to create a better wealth management strategy and estate plan to protect the collector’s wealth during his lifetime and to pass on his legacy after his death.
Whereas art and wealth management professionals acknowledge the benefits of a pro-active collection management strategy, the execution of such a strategy is invariably more complex. In contrast to other financial assets, artworks don’t just lose money as a result of market fluctuations. Physical deterioration and a lack of documentation are real risks to a collector’s investment but, unfortunately, they’re also very common.
A damaged painting has the potential to lose a large percentage of its market value. A sculpture without provenance documentation, such as a sales invoice or certificate of authenticity from the artist, may be impossible to use as collateral for a loan, let alone sell successfully. Therefore, in addition to pro-actively monitoring the financial value of the collection, it’s paramount to protect the artworks themselves and to safeguard the archives related to the collection. This isn’t always an easy task.
Unique challenges come up in the management of a wealthy family’s art collection. Historically, most privately owned art collections weren’t managed at all because: (1) art values weren’t yet sky-high, (2) collectors didn’t view their art as financial assets, and (3) there was a need for discretion to protect the privacy and safety of wealthy families. The third reason is still the case today, with good reason. As a result, a lack of information sharing among those working for the family in different capacities may make it difficult to obtain a complete overview of the family’s art collection.
At the moment, no recognized methodology exists for managing the financial, physical and data components of an art collection in a cohesive fashion. That said, in response to the changing demands of HNW collectors, and aided by rapid technological advances and increasingly innovative art support business models, such a methodology will no doubt be developed within the next couple of years, particularly if driven by private banks and wealth managers.
Until such time, collectors and their financial advisors do have options. When a collector has an extensive and valuable art portfolio, it’s a good idea to invest in a collection management system. I’ve worked with custom-made and off-the-shelf databases for years. Although the benefit of custom-made databases is that they’re tailored exactly to the collector’s requirements, they’re also expensive to build and maintain.
Off-the-shelf databases have improved tremendously over the past five years. They’re generally easy to use, have extensive reporting capabilities and aren’t costly. As of yet, there’s no system available that facilitates the incorporation of art and collectibles into wealth reporting. That said, most collection management systems allow data to be exported into Excel, which can be added manually to financial reports.
Before choosing a system, it’s good practice for a collector and his advisors to determine their most important pain points in terms of data capture and reporting. Is the main goal of acquiring the database to keep track of the actual artworks? To report to the insurance company on a regular basis? Schedule conservation treatments? Monitor maintenance costs? Determining these factors in advance ensures that a collector buys the system most suitable for his requirements.
Lastly, the key decision that needs to be made before buying a system is whether a collector will hire a collection manager to maintain the database or allocate this responsibility to an existing member of staff. This is of paramount importance. A database is only as good as the information it’s being fed. In other words, if the database is not kept up to date at all times, the collector and his advisors will rapidly lose confidence in the system, effectively rendering it useless.
Working with HNW Families
Most wealthy families have multiple homes around the globe. Often, therefore, the care for the art collection is fragmented: divided between local domestic staff who care for the objects and the (family) office staff who pay the bills and keep the insurance schedules up to date.
As mentioned before, many families have collected art for decades before the need for an up to date inventory came up. As a result, there’s simply no complete overview of what artworks they own, what the objects are worth and where they’re located. At the same time, incomplete archives inevitably result in missing artworks (for example, a painting that was sold or gifted years ago but is still incorrectly listed on the insurance schedule). Unfortunately, the more time passes, the more difficult it will be to retrieve such information.
Individuals working for wealthy families know from experience that managing the family’s art collection isn’t necessarily straightforward. Requirements to protect the art must be balanced with the lifestyle needs of the family. For example, the ideal environmental conditions (temperature and humidity) for an Old Master may not be comfortable for a dining room where the family spends a lot of time and so compromises have to be made.
Additionally, the way in which the art collection is managed is very much dependent on the family members themselves, who may be involved in the art collection or have different priorities. Both scenarios come with their own challenges.
Whereas domestic employees are experts at running large and complex households, caring for art is a highly specialized skill set. It’s worth hiring a collection manager or curator, particularly for large and valuable collections. An individual trained in the issues that come up with the ownership of art will be able to oversee the physical protection of the artworks, maintain the archives to a high standard and consistently feed data into the collection management system. This individual will be able to cost-effectively manage the collection and will have the knowledge to hire the right conservators, shippers and insurance brokers.
Most importantly perhaps, the collection manager can act as the information hub for all stakeholders tangentially involved in the art collection; liaising on all art-related matters with the insurance broker, domestic and office staff, the family’s wealth manager and the family themselves so that no valuable information gets lost.
Maintaining the Archives
The most efficient way to maintain collection archives is to store them in one physical location (for example, the family office or the office of the estate manager) and to allocate responsibility for their safekeeping to the collection manager. What should be kept in the archives?
First, any paperwork related to the provenance, value and condition of the artworks, such as sales invoices, certificates of authenticity, appraisal documents and condition reports. It’s worth digitizing the paperwork that is, scanning to a computer, to reduce the chances of losing valuable documentation that can be the difference between being able to sell or not sell a painting 20 years from now.
Second, as ownership costs for art are high, it’s helpful to have an overview of the annual maintenance costs of the collection. Archiving invoices for conservation treatments, appraisals, transports and insurance premiums, among others, will allow the collection manager to collate this information on an annual basis, set next year’s budget and reduce maintenance costs where possible.
There’s another benefit to understanding the maintenance costs related to a collection or a particular work of art. Knowing the value of his artworks in relation to the costs associated with maintaining them allows a collector to make smart cost-benefit decisions.
For example, it’s generally accepted knowledge that lending an artwork to a museum exhibition enhances the work’s resume and as a result, hopefully, increases its value. It’s hard to guarantee such an increase, let alone put an exact dollar amount on it. Therefore, if the cost of lending a work is prohibitive (collectors usually pay for transport and insurance) and the museum exhibition isn’t of the caliber that would likely add value to the artwork, the collector may decide to decline the offer.
Protecting the Physical Artworks
To better protect the physical artworks, it’s worth creating a collection management manual. This document should contain, among others, checklists for domestic staff to use in case of emergencies or last-minute requests from the family. It should contain a list of pre-approved transport companies, both local and international, and instructions on how to condition-check and photograph an artwork before it’s handed to a transport company or conservator.
Maintenance guidelines for different categories of art (painting, sculpture, silverware, antique furniture) are helpful to have. Yearly inventory and condition checks by the collection manager will ensure that damages or deterioration in condition can be dealt with immediately.
Where to Start?
To successfully execute an art management strategy, a collector needs to know what he owns, what it’s worth and where it’s located. Cataloguing an existing art collection and reconciling the artworks with the archives - complete or not - is a huge undertaking. It can take months or years to accomplish, particularly if the collection has been amassed over the course of decades. The only way to approach this successfully is to be highly systematic.
Three sources of information about an art collection exist: (1) the actual physical objects found in the residences and offices of the family (sometimes in storage facilities); (2) the paperwork related to the collection (sales invoices, condition reports), and (3) (old) inventory lists, insurance schedules and appraisal documents. Often, before a collection manager is hired, there have been several attempts to inventory the collection, which are more often than not abandoned as it’s so easy to lose track half-way through a cataloging project. Nevertheless, these inventory lists can form helpful snapshots of the whereabouts of particular artworks at a certain point in time.
Cataloguing the collection (describing, condition checking and photographing each object) will result in a Master inventory list (either on paper or digital) that can be cross-checked against the paperwork in the archives and the (old) inventory lists, appraisal documents and insurance schedules. It’s good practice to allocate a unique inventory number to every object found (collection management systems generate these numbers automatically when a new entry is made) so that paperwork and photographs can be easily tied to the object they belong to. High quality photographs are an essential tool to recognize objects that have previously been catalogued incorrectly and to record damages and condition issues.
Collectors often combine such a cataloguing exercise with the purchase of a collection management system. This step is smart as it allows data to be entered as and when the cataloging process takes place. The resulting inventory list with images can be used as the basis for an updated appraisal of the collection further down the line. Needless to say, new collectors would benefit from staying on top of their collection and archives from the get go, particularly if they intend to use their art assets to diversify their financial portfolio or use them as collateral for loans.
This article was written by our CEO Annelien Bruins. Read the article in Trust & Estate Magazine's Art, Auction & Antique section by clicking here.