Advice around collecting and investing in art has developed as an important offering for some wealth managers, and this article explores how this has happened and what the future may hold.

Annelien Bruins, chief executive of US-based Tang Art Advisory, argues that art ought to be an important part of the wealth management offering. As this publication has shown in some recent interviews (see here for an example), the art market has developed, drawing in figures from the worlds of investment banking and specialist finance. While it might still appear to be a niche – although one capable of producing big-dollar sales numbers – the sort of advice around art is one of those “value-adds” wealth managers at certain levels like to pride themselves on. 

The editors of this news service are pleased to share these views with readers and invite readers to respond. This news service is a forum for debate and discussion, so please make use of it and email the editor at tom.burroughes@wealthbriefing.com

Twenty years ago wealth management was really more about investment management. A talented stock picker could create wealth for his clients by choosing a winning combination of stocks, bonds or other assets, beating the benchmarks in the process. These days few active managers are able to outperform low-cost exchange traded funds and index funds and, as a result, are having a hard time justifying their fees.

At the same time the financial lives of high net worth individuals and families have become increasingly complex, particularly those with homes and business interests in multiple tax jurisdictions. 

As a result, wealth managers and private banks have had to rethink their value proposition. Over the last decade or so, the paradigm in the industry has shifted from accumulating wealth to optimizing and protecting wealth in a more holistic manner. A proven expertise, for example, in international tax and estate planning or multi-generational wealth advisory goes a long way to set a wealth management firm, private bank or family office apart from its competitors.

That said, tax and estate planning aren’t the most exciting of topics to discuss at a cocktail party when prospecting for new clients. Passion assets like art, cars and wine have proven to be more effective icebreakers.

Art: From business development tool to profit center
Participating in the art world is a successful business development tool for the wealth management industry. Some 64 per cent of wealth managers surveyed by Deloitte for its annual Art & Finance Report (2017) said that they actively provide art-related services to their clients, including client entertainment and hospitality. 

Aligning one’s firm with art-related events such as art fairs builds brand awareness and at the same time allows for opportunities to cement relationships with COIs and prospective and existing clients. Some private banks take it one step further. Their art collections, expertly managed by full-time curatorial staff, are used as a sophisticated backdrop for client appreciation lunches and dinners.

Over the last ten years or so it has become clear that there is an opportunity for wealth managers and private banks to use art not just to attract art-collecting clients but to keep them by integrating art-related services (art advisory, appraisals, collection management, art investment, art lending and estate planning) in their wealth management offering. 

Results from Deloitte’s annual surveys confirm this paradigm shift, commensurate with the rethinking of value propositions in the industry. In 2011, 83 per cent of wealth managers surveyed felt that art should be included in their service offering because of client demand and increased competition. Instead, in 2017, 83 per cent felt that art should be included so that a holistic approach to wealth management could be offered to clients.

Growth of art finance
In the early years of this millennium, with art values booming and financial markets increasingly turbulent, the concept of art investment had gained popularity. Investors were looking for hard assets that would shield them from market volatility and inflation. The first generation of art funds emerged.

Artworks and collectibles were promoted as an attractive portfolio diversifier. Access to auction data and the subsequent development of art indices created the illusion of complete transparency, even though the data available provides only part of the picture. Investing in art is risky for investors unless they have a thorough understanding of the idiosyncrasies of both the asset and the market. Additionally, the problem with art investment is that unlike real estate, owning an artwork does not generate an income: value gains on a painting are speculative in nature.

Most collectors still buy art primarily for enjoyment rather than pure investment, even though a secondary financial motif often exists (i.e. there is an expectation that the art they buy will appreciate in value over time). Therefore, instead of offering a client the opportunity to invest in art when they already have a collection, there is a another way to put their art assets to work. Auction house Sotheby’s has been doing it for three decades: providing bridging loans to dealers and collectors who need liquidity until their art sells at auction. 

Art financing, more so than pure art investment, has become a sophisticated tool for portfolio diversification and estate planning purposes. Many private banks allow their clients to borrow against their art collection, provided that the collateral meets certain criteria. The numbers seem to support this: wealth managers surveyed say that 58 per cent of art lending is done in-house whereas only 11 per cent of wealth managers handle art investment funds in-house (Deloitte, 2017). 

Allowing clients to borrow against their art collections provides the client with liquidity that they can use to invest in other, more high-yielding assets. In succession planning an art loan can help to pay for estate taxes instead of having to sell the art collection.

What about art advisory?
Many wealth managers provide some kind of art-related service, either in-house or outsourced. Certain services fit better with their core capabilities than others. A painting is a hard asset, in the same way that real estate is. Aside from investment and liquidity considerations, hard assets need to be maintained to avoid losing value due to condition issues. They also need to be regularly appraised and adequately insured in case of damage or loss. Additionally, owning high-value art has the potential to generate significant tax consequences. 

As such, art finance, inheritance planning, philanthropy and collection management are more aligned with a wealth manager’s capabilities than art appraisals or art advisory (buying and selling art), which require a deep knowledge of specific sectors of the art market (i.e. contemporary or Impressionist). Some 83 per cent of wealth advisors surveyed by Deloitte (2017) stated that in the future they would outsource art-related services. One reason for outsourcing art-related services is that finding talent who can straddle the divide between art and finance is a challenge. 

However, the lack of transparency and regulation in the art market were the biggest obstacles to incorporating art in their wealth management offering, according to 75 per cent and 65 per cent of wealth managers surveyed, particularly in light of the increased scrutiny of the financial sector. The unregulated nature of the art market is one of the reasons why banks usually will only allow existing clients with other assets already under management (stocks, bonds, etc) to borrow against their art collection: they have already been vetted.

However, it seems like the art industry is moving towards a more regulated future. On April 19th of this year, the European Parliament adopted the fifth Anti-Money-Laundering directive. Aimed at reducing money laundering, it requires art businesses to verify clients’ identities for transactions with a value over €10,000 ($11,713) and to report any suspicious activities. There is talk about lawmakers in the US following suit. Hopefully these developments will aid wealth managers in their efforts to further incorporate art-related services in their overall offering.

Art: A worthwhile investment for the future?

Art as a component of wealth management is here to stay. The areas of expertise that wealth managers will probably handle in-house are directly related to their core capabilities: estate planning and art finance, including art loans. It seems more likely that art advisory and appraisals expertise will be bought in, due to the deep level of art expertise required in these areas.

Being able to offer an appropriate mix of art-related services, both in-house and outsourced, will allow wealth managers and banks to not just distinguish themselves from the competition but more importantly, provide their clients with a better, holistic approach to managing their wealth.

Sources

Artnet (Brian Boucher), See What Experts Have to Say About Sotheby’s Ac-quisition of the Mei Moses Art Indices, October 29, 2016
Artnet (Eileen Kinsella), US Art Dealers May Soon Be Subject to Government Financial Regulation, May 2, 2018
Artsy (Editorial), The Pros and Cons of Borrowing Against Your Art Collec-tion, July 4, 2017
Bloomberg (James Tarmy): Is stock market volatility good for the art market?, April 26, 2018
Deloitte Art & Finance Report (2017)
Deloitte Art & Finance Report (2011)
Deloitte 10 Disruptive trends in wealth management (2015)
Forbes (Benjamin Wolff): The financial services business is now the humanities business, May 6, 2018
The Art Newspaper (Anna Brady), European Union tightens anti-money-laundering rules in the art market, April 30, 2018

DISCLAIMER: 

THIS ARTICLE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX OR INVESTMENT ADVICE. THIS ARTICLE SHOULD NOT BE TAKEN AS ADVICE FOR OR AGAINST BUYING ART WHETHER FOR ENJOYMENT OR FOR INVESTMENT PURPOSES; WHETHER THROUGH AN ART FUND OR DIRECTLY. 

THE AUTHOR DOES NOT GUARANTEE THE ACCURACY OF THE INFORMATION PROVIDED IN THIS ARTICLE AS SHE MAY RELY ON THIRD PARTIES NOT UNDER HER DIRECT CONTROL. THE AUTHOR DOES NOT ACCEPT ANY LIABILITY FOR THE USE OF THE CONTENT OF THIS ARTICLE OUTSIDE OF THE SCOPE STATED IN THIS DISCLAIMER. THE OPINIONS EXPRESSED IN THIS ARTICLE ARE NOT NECESSARILY THOSE OF TANG ART ADVISORY.