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Investing in Art Could Leave Your Clients Hanging

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People love to watch Antiques Roadshow on TV. Everyday folks haul in a painting in a battered frame. “How did you acquire this?” the expert asks. “I bought it for $35 at a yard sale five years ago,” the owner replies.

The painting looks awful and you think, “They saw you coming!” Then the expert explains the painting is worth $25,000. Your client comes in the next day, cool to your portfolio suggestions. He says, “I’m thinking of investing in art. What do you think?”

The Case for Saying Yes to Art
Various indexes make the case for art as an alternative investment class. One index reports that art has enjoyed a 10 percent annual appreciation over several decades. The art market was great between 2002 and 2007 with annual returns estimated at 11.6 percent.

There’s always the chance of a big score. In 2013, the auction house Christie’s sold the painting Three Studies of Lucien Freud by the Irish-born painter Francis Bacon for $142 million. Painted in 1969, it set a record for contemporary art.

Fine art can be beautiful. You can hang it on the wall and admire it daily. Stocks and bonds are electronic entries on a computer screen. Where’s the romance in that?
Because fine art is in short supply, the works of famous artists are extensively cataloged and tracked. When you own fine art, you own a rare treasure. Fine art is a status symbol among hedge fund managers and oligarchs. Nothing says, “I’ve arrived,” like owning something that others cannot.

Because fine art is so expensive, many museums cannot afford to own it outright. When they stage shows, they often borrow works from prominent collectors. You might lend your painting to museum after museum. This brings you into the inner circle of other collectors and museum patrons, the mega-wealthy.

Art investment funds exist, though not in the mainstream. In April 2014, CNN reported “Wealthy Investors Flock to Fine Art Funds.” These funds are targeted primarily at ultra-high-net-worth investors and institutions that consider art an alternative asset class.

The Case for Saying No to Art
At this point, your client has stars in their eyes. They see themselves as Pierce Brosnan, the sophisticated art collector in the movie The Thomas Crown Affair.

What else do they need to know?

Only the best art will do. Only a limited number of artists have created works that are considered to be collectable. Those works usually have auction price histories serving as a guide to their popularity. Your client will want to own an original work by the artist. Signed prints don’t count. The mega-collector is seeking to acquire French Impressionist paintings by certain artists you would likely recognize as household names.

Even great artists have bad days. Artists who paint for a living often produce lots of canvases. They might paint daily. Sometimes they wake up grumpy, have an argument with someone or just don’t put their heart into their work. Those paintings still bear their signature but are considerably less valuable because they aren’t examples of their finest work.

Dead artists have an advantage over living ones from the collector’s point of view. Dead artists aren’t creating new works. The supply of their work is limited. Living artists increase the available supply each time they have a show. New art is sometimes referred to as “wet art.”

Like hemlines and fashion, artists can gain in popularity or fall out of favor. The artist whose works your client collects must have staying power. Otherwise, like investing in the stock market, some sectors can cycle out of favor and remain on the sidelines until they regain popularity. This can take years.

The work must be in pristine condition. If it has rips or tears that have been patched at a later time, the painting has been restored and loses value. A dejected guest on Antiques Roadshow often is scolded for having refinished a piece of furniture when leaving it in its original condition would have bumped up the value considerably. The same is true of art.

Beware of forgeries. Anything worth owning has likely been faked. The mystery writer Jonathan Gash, known for the Lovejoy novels, offers the following formula:

» The Impressionists collectively produced 1,000 paintings;

» 2,000 of which are considered authentic;

» 3,000 of which are in the United States.

Your client wonders, “How can this happen?” A painting might come with a story of a shady past; the buyer can own the painting, but it never can be displayed publicly. It’s easy to sell a fake to an unwitting buyer if the work never will be exposed to professional scrutiny.

“Provenance” is the art world’s term for “chain of previous ownership.” Under ideal circumstances, there’s an unbroken series of transactions from the original artist to the current owner. More likely, it will be proof of ownership via their previous purchase transaction from a reputable gallery or auction house, which they in turn would likely have records of provenance. Plenty of stolen works of art are still unaccounted for. During World War II, the Nazis appropriated privately owned art on a grand scale. The Lost Museum; The Nazi Conspiracy to Steal the World’s Greatest Works of Art, by Hector Feliciano, makes the point the Nazis kept remarkably accurate records of what was appropriated and the names of the previous owners. The descendants of the previous owners have a legitimate claim to the artwork today.

Art that’s worth owning is worth stealing. In The Thomas Crown Affair, Pierce Brosnan’s character was an art thief in addition to being a wealthy collector. Countless movies have romanticized art heists. Your client’s Old Master will need to be insured, and their insurance company will likely require a state-of-the-art security system. The insurance company might even require that the art be kept in a vault.

Next to consider is transaction costs. Whereas stocks can have relatively small spreads between bid and offer, along with posted costs to buy and sell, fine art often changes hands through auction houses. The buyer might be paying a 15-20 percent purchase commission plus sales tax. When it’s time to sell, there’s a selling commission too.

If this contributed to a fair and open transparent market, your client might be agreeable to paying higher fees as a cost of doing business. Not all sales are public, especially when the buyer or seller prefers anonymity. Mega-collectors in a financial bind might prefer a quiet, private sale at a lower price instead of a public auction that draws attention to their financial difficulties.

Investors like liquidity. “If I need to sell, how soon can I get money?” they ask. Stocks and bonds settle in three business days. Selling art is more complicated, especially if the work is best sold through a specialized sale months from now. Stocks have bids and offers visible throughout the day. The value of art is often defined by how much someone else is willing to pay at that moment.

Finally, many stocks pay dividends. Bonds pay interest. Paintings deliver neither. Your client gets the pleasure of enjoying the artwork, but forgoes reaping any financial rewards until the art is sold.

Your client now has a more balanced picture of the pleasures and pitfalls of owning art as an investment. It’s obvious that in both securities and art, they need a knowledgeable advisor. For investing and insurance, that’s you.

 

is president of Perceptive Business Solutions in New Hope, PA. His book "Captivating the Wealthy Investor" is available on Amazon.com. He can be reached at [email protected].


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