The Challenges Of Art Wealth Management

 Image Courtesy venu magazine

Image Courtesy venu magazine

Art vs Stocks - how do they stack up?

Is art really a good investment option when compared to stocks and bonds? Maybe. For certain sophisticated investors. In certain circumstances. Investing in a painting or sculpture is certainly not the be-all and end-all that many art fund managers claimed it to be in the earlier years of this millennium. Not surprisingly, many of those funds are no longer around today.

That’s not to say that a knowledgeable collector can’t do well in the art market. Art does have advantages when compared to other financial assets. For a savvy collector, for example, the asymmetry of information in the art market may actually work to their advantage. Quality art tends to hold its value which makes it, in principle, a good inflation hedge. And of course, unless you store it in a vault in Geneva’s free port, a painting has the benefit of looking good above your sofa, as opposed to a stock certificate.

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But when viewed from an investment angle, art also has disadvantages that are often brushed over in the rush to sell a painting or to push an art finance product. For example, art is highly illiquid, which means that an investor may not be able to sell at the right time of the market cycle in order to cash in on his investment. Art has exorbitant transaction and ownership costs. And lastly, the valuation of art is complex and comprises a large subjective component, commonly referred to as the ‘passion premium’.

Do wealthy collectors buy art for pure investment purposes?

In my experience, the answer is more nuanced than that. Most collectors like yourself still buy art primarily because they love it. They connect with an artwork on an emotional or intellectual level, or they simply want to decorate their home with a statement piece, in the same way that they would enjoy owning an antique car. That said, these days investment is certainly a strong secondary motive for collectors. They simply want to buy smart (which means at the right time and at the right price) with the hope that their acquisition will increase in value over time - preferably while enjoying the art in their home.

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Changes in the art market: art as a financial tool

What helps is that collecting art is easier for collectors today that it was a generation ago. International art fairs and online buy and sell platforms make art more accessible and easier to sell. The market is more transparent. Auction data is available to the general public, providing a collector with access to roughly 50% of price data (transactions through dealers and galleries, as opposed to art sold at auction, are not recorded). This data is usually not enough to trade confidently on their own but certainly helpful in negotiations with insiders.

Additionally, the increased transparency of the art market has allowed the art finance sector to grow significantly. Provided the art collection meets certain criteria, many private banks and specialty lenders allow their clients to use art as a financial tool: as collateral for bridge or longer term loans, for example. In certain circumstances, 1031 exchanges (a real estate mechanism to defer capital gains tax) may be suitable for art collectors.

The challenge for wealth managers and private bankers

Whether art was bought for pure investment, out of passion or a combination of both is perhaps not even that relevant for our purposes. Simply by virtue of having been purchased, the art collection of many collectors is now a part of their overall portfolio which could also include stocks, a private business or an investment property.

Even though art may not be an ideal investment asset, it certainly is a financial asset. Buying, owning and selling art, for example, all have the potential to generate tax consequences for a collector. Increasingly therefore, collectors are asking their wealth managers and private bankers for impartial advice on transactions, art asset management (which includes the administration of the collection and archives), appraisals and estate planning services.

Art is a complex asset which requires not just financial expertise but also a deep understanding of the idiosyncrasies of any given artwork and of the supply-driven art market itself. A painting, for example, does not have an intrinsic value nor does it generate an income, as opposed to stocks or bonds. The drivers of value in art are largely aesthetic, cultural and art-historical. Art values are also subject to fashion, speculation and the aforementioned ‘passion premium’.

According to Deloitte’s Art & Finance report (2016), 78% of wealth managers interviewed for the report said that they believe art and collectibles should be included as part of a wealth management offering. However, the reality is that most wealth advisory firms and private banks don’t have the in-house expertise to advise their clients on art.

What art expertise is required and how to find the right professional?

For estate planning purposes, a T&E attorney with experience in handling art is indispensable for a collector. So is the right appraiser, with expertise in the area of the market that the collector is invested in. Conservators are invaluable to collectors in order to help them protect their art collection. Lastly, if a collector wants to acquire or sell a piece, his wealth manager needs to refer out to a reputable art advisory firm.

The art market is not only opaque and fragmented. Professions nor transactions are regulated which means that determining which firm or expert is best suited to assist their clients is a major challenge for wealth managers and private bankers. It’s not always clear, for example, how art advisors and private dealers are remunerated, and whether an appraiser has a conflict of interest in appraising a collector’s artwork (for example because they’d like to have the piece on consignment further down the road).

Therefore, it benefits a wealth manager to understand the basic tenets of the art market. By being informed about the issues that come up with the ownership of art, he is better able to ask the right questions on his clients’ behalf, successfully vet art service providers and refer out to the most suitable art expert for any given situation.

Art Wealth Management: the new online program by Tang Art Advisory and One Art Nation

In addition to educating art collectors and art advisors, One Art Nation and Tang Art Advisory have teamed up again - this time to educate wealth managers and private bankers.

The course will cover the idiosyncrasies of the art market (supply-driven, unregulated, opaque) and how it compares to the financial markets. We’ll discuss the pro’s and cons of art investment when compared to other asset classes. For example, what are the risks associated with buying and selling art? How likely is it that an artwork is a forgery? How to minimize transaction costs to avoid eroding an investor’s rate of return? How do taxes affect a collector’s investment?

We will discuss concepts such as behavioral finance and investor confidence and how they affect collectors in the art market. We will also discuss drivers of value and price data. For example, auction data and the price indices that can be computed from them, are making certain categories of the art market more efficient. But how should a wealth manager read those numbers and how helpful are they to their collector clients? Other topics include estate planning, philanthropy and managing an art portfolio for growth.