#3: Art as an investment: integrating art into Wealth Management Strategies
Collecting art was once about the pursuit of beauty. Owning an impressive collection was – and remains – a status symbol, a sign of taste and wealth. Today, however, collecting is becoming increasingly linked to economics.
While people still of course buy art for its aesthetic qualities, collectors are concerned about art’s potential financial return. High-net-worth-individuals (HNWIs) are incorporating art into their broader wealth management, borrowing against it, and exploring how it can contribute to diversified portfolios while considering how collecting affects aspects like tax and estate planning.
What’s more, a younger cohort of collectors is demanding more transparency, information, and accessibility from the art market so they can make more informed decisions about investing in art. New financial tools are being developed to make art more liquid to help this new generation see returns on its collecting.
Blue-chip works by big names like Francis Bacon, Pablo Picasso, and Jean-Michel Basquiat have historically registered long-term, steady appreciation. In fact, in many cases, such artworks have even outperformed traditional asset classes. The Artprice Global index shows that art prices climbed by around 9% each year between 2000 and 2021 and generated bigger returns than equities at certain points. Art’s ability to stand up to periods of economic downturn continues to attract investors looking for alternatives to traditional assets.
Despite this, the art market is not protected from volatility. While the stock market has a continuous stream of transactions and liquidity, art investments are distinctly illiquid. Private sales (often not made public) and auctions are unpredictable and oscillate depending on market trends, artists’ reputations, how frivolous buyers are feeling on the day, and of course, broader economic factors. Take the 2008 financial crisis, for example; the value of art declined sharply but it bounced back faster than many other markets. Art can be a relatively risky investment, and it requires knowledge, careful planning, and a long-term view to be successful. This is where players like art advisors come in – their expertise, contacts, and market knowledge can be the difference between investing in a dud and the next big thing.
“There is no regulatory body for Art Advisors like there are for other financial services, therefore it can be difficult to know who to instruct to work with you. My belief is that any Art Advisor should have the client’s best interests at heart and act in a similar way to a lawyer, protecting their client in what is often seen as an opaque industry.”
The value of an art advisor
The art market knowledge, art history expertise, and contacts of a respected art advisor can give HNWIs collectors the edge when navigating auctions and private sales, and when advising on which artists will generate the best return. They will do the leg work and scour art fairs, auctions, artists’ studios, galleries, and their network based on each client’s preferences. An art advisor is only as good as their contact book. They will also help clients negotiate a final price and to manage logistics like shipping and framing. Choosing the right advisor involves assessing their qualifications, reputation, specialisation, and whether they fit your personal or corporate needs. They typically charge 5% to 20% commission.
To gain some insights on the topic, we spoke with Julia Bell, Principal Partner at Parapluie and among Spear’s Top Recommended Art Advisors for 2024. She emphasised the increasing complexities, particularly regarding the role of art advisors.
This underscores the importance of choosing an advisor whose practices are transparent, including commission structures and affiliations. Yet, there’s more to consider. "Make sure you know where your Art Advisor’s knowledge lies. If you are interested in a particular area, say Old Masters or Postwar and Contemporary, make sure you select an Advisor who knows the area well."
Using art as collateral
More collectors are borrowing money from banks and speciality lenders against their artworks. As recent auction results have shown, it’s not a good time to sell – so instead of parting with an artwork for a knockdown price, it often makes more sense to borrow against it. Banks will generally look at a UHNWI’s balance sheet before lending money against art for a recourse loan, while specialty lenders tend to deal with collectors who have illiquid assets and have money tied up in art or property. They offer nonrecourse loans.
Julia Bell was also able to offer some insights on this growing market. She explained, "The borrowing rate on the loan can be much higher if it is only secured on the artwork. Most lenders require the artwork to be removed and stored for the duration of the loan, although some US-based lenders may offer the opportunity to retain the work." This highlights the careful considerations collectors must weigh when borrowing against their art, especially concerning the accessibility of their collection.
Over the years, the UK Government has introduced several tax-saving and deferral schemes for art and cultural property collectors. These programs allow the public to access cultural treasures that might otherwise remain private or be sold abroad, in exchange for providing tax benefits or deferral opportunities to the collectors or their estates. This is worth bearing in mind.
However, the tax-saving and deferral schemes in the UK are "predominantly for artworks of national significance that require public access." Bell said. She elaborates, "Artworks need to be assigned as such, and to gain tax benefits, collectors need to either donate or give the public access to the artwork."
She points out the difference between the UK and the US systems, where collectors in the US can donate artwork to an institution and claim tax relief, provided they have an independent appraisal within 60 days of the donation. "We don’t have that incentive in the UK," Bell adds, suggesting that such incentives could potentially stimulate more interest in the market.
Estate planning
Art presents unique challenges in estate planning. A good financial advisor can help craft a detailed estate plan that encompasses art assets. Key considerations should include tax implications, the distribution of art among heirs, and the possible creation of a family foundation. Advisors can help navigate the complexities of estate planning to ensure your art collection is transitioned smoothly according to your wishes and financial legacy.
Art provides numerous intangible benefits, but its impact on your overall wealth and estate planning should not be overlooked. Understanding how art fits into your broader financial strategy is crucial. Savvy investors recognize the importance of making decisions within the framework of a comprehensive strategy, and this is especially relevant for art, which is more illiquid and unique compared to other assets. Astute art collectors know that the most valuable acquisitions are often those that can be cherished for decades, or even generations. Successful art collecting involves balancing an appreciation for historical significance with a vision for future value.
