Raftery is a wealth advisor at Round Table Wealth Management, a multi-family office founded in 1999. She has over 20 years of experience in tax and estate planning, with a focus on issues that impact cross-border clients.

The views outlined below are the author's, but Family Wealth Report is grateful for the right to publish them and welcomes reader feedback.

News of record art sales and increasing valuations are regularly being reported in the media.  Due to the publicity, art is increasingly considered by wealthy families as an investment opportunity or as a way to create a family legacy.  Family office advisors need to understand the issues surrounding purchasing and collecting art and be able to see beyond the media hype.  Liz Klein, an art advisor at Reiss Klein Partners, stresses the need for education and due diligence.  

“Purchasing art is not merely a matter of subjective taste.  Of course a buyer should have a strong affinity for the work of art but with the growing art market, due diligence becomes increasingly important.  There are many pitfalls that can amount to costly mistakes.  There is a standard of taste, one backed by education, experience and expertise: connoisseurship in any endeavor worth doing is built over time.  A good work of art is one that contributes to the continuum of art history.  And, in the history of collectors, good advisors are priceless." 

With a greater understanding of the art world, family office advisors will be in a better position to help their clients navigate the unique issues and opportunities available in this asset class.

Art as an investment

As an investment, artwork appears to offer diversification and an opportunity for lucrative appreciation that may not be found elsewhere in financial markets.  However, thinking of art as a typical investment, such as a stock or mutual fund, can put investors in dangerous territory.  As with any investment, understanding the market as well as the risks involved is the best course of action.  The “art market” is really a series of different markets, and sub-markets.  A Warhol painted on silkscreen is very different from a Warhol drawing and two Warhol’s from different points in the artist’s career can have very different values. 

Even given the recent volatility in traditional financial markets, art remains much less predictable than other types of investments.  There is not the same level of transparency that we see in the financial markets.  There are many different pathways in which to buy and sell art, according to Anne Bruder of Worth Art Advisory. “In simple terms, artwork can be purchased on the primary market, in which the artwork comes directly from the artist’s studio and has not previously exchanged hands – it is the first sale; this scenario occurs through a gallery or dealer that represents a particular artist. Alternatively, one can acquire artwork on the secondary market, in which the artwork has already been sold at least once. A secondary market transaction can occur through an auction house, private dealer, or gallery.” 

The art market is largely unregulated which can lead to problems with authenticity, title and even money laundering. Finally, valuations are much more subjective than in other markets. What is popular at one point in time can quickly fall out of favor and decline sharply in value. Most art advisors agree that you have to love what you buy because there are no guarantees that it will maintain or increase its value.   

Creating a legacy

Investing in art can create a legacy that can be passed down within the family and enjoyed by future generations. Investing in art can also serve a family’s philanthropic goals. There are numerous families who collect with the intention to eventually donate their collection to a particular museum of their choosing. Some even acquire specific pieces of art with the promise to eventually gift it to a particular institution. Collections have also long been loaned to institutions for the public benefit. Having the family name associated with the collection, gives families a sense of responsibility and social purpose that can be maintained from one generation the next. When wealth and art endure, this sense of purpose can not only help solidify a family’s legacy but also serve as its mission, helping diffuse the potential for the art to be a divisive element within the family.

If creating a legacy is important, parents should begin teaching children early. Identifying each family member’s interest in art as early as possible can allow advisors to manage expectations and prevent problems down the road. Rebecca Lockwood of Sotheby’s often sees problems when artwork is passed to the next generation. “Because art is not easily divisible and cannot be monetized until sold, selling the collection is often the only way that families can move forward.” However, with proper planning and education, the benefits of maintaining a collection and creating a multi-generational legacy can be achieved.     

Conclusion

Individuals who wish to invest in art or use it to create a family legacy need to understand the unique features of this asset class. In addition to the considerations mentioned above, administrative issues such as costs of insurance, storage, valuation and record keeping must be considered. Given all of this, do your clients still want to invest in art? Klein advises her clients to “find a point of entry that makes sense to you” and to “buy fewer pieces, but buy the best you can afford.”  By gaining a better understanding of the art world, investors can not only make more informed decisions but also use art as a vehicle to diversify their investments and create a family legacy.