The Rise of Art as an Asset Class
The rise of art as an asset class for a new generation of wealth is creating a more complex set of financial and non-financial needs which go beyond the traditional range of services wealth managers offer, and indeed are ill-equipped to provide through their existing business models.
An art collection requires the same strategic planning as other financial investments and with the help of skilled advice can become an effective working asset. There are a number of important trends emerging around art as an asset class and new fee earning opportunities for wealth management professionals to take notice of.
Once a private art collection has passed a certain threshold, a wide range of financial planning considerations can come into play. These include:
1. Establishing a family governance system for the collection.
2. Unlocking equity in selected high value works of art.
3. Active management and investment.
4. Art succession planning and philanthropy.
1. Establishing a family governance system for the collection
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By GlobalDataWith the exception of a small minority of major collectors, most families either never address governance when it comes to their art assets or wait until they are in the midst of a family crisis before they finally get serious about creating and implementing an art governance plan.
One key to making sure a collection doesn’t damage family harmony is to work toward open communication and help collectors look for creative ways to include family members in the decision making process including three essential functions:
-Agreeing shared values for the collection.
-Determining what kind of legacy the family should strive for.
-Creating a framework for decision-making.
A governance system is often used to manage other family assets however rarely do you see it applied to the family’s private art collection.
2. Unlocking equity in selected high value works of art
As HNWI’s are allocating an increasingly larger portion of their wealth in artworks, art financing is becoming an effective way of enabling collectors to access the equity value in their collection without selling their art.
While private banks have been slow to offer this service to their high net worth clients, new specialist lenders are entering this lucrative market to tap the increasing demand.
Some of the key reasons sophisticated collectors are borrowing against their art include the following:
-Generate liquidity and manage short term cash needs.
-Free up equity to redeploy capital into other investments.
-Provide orderly liquidation to achieve long term estate planning goals.
-Manage tax and capital gains.
Remarkably, the niche for collateralised art lending has barely changed in 25 years however; a new generation of collector is driving the demand for financial innovation.
3. Active management and investment
Many of the gains realised by sophisticated investors in recent years have been a result of strategic diversification of their holdings by moving into a broad range of asset classes.
Most recently, this trend has extended to investing in art. Additionally, we are seeing the emergence of art funds and single owner managed art accounts for ultra-high net worth families looking to put a portion of their wealth into selected sectors of the art market.
While many investment professionals agree that real assets like art provide diversification benefits due to the low correlation, there has been surprisingly little research into the appropriate allocation in an investment portfolio.
4. Succession planning and philanthropy
Having created or inherited a collection, many families will wish to ensure it is preserved both during their lifetime and for future generations.
Planning how to transfer a family collection to the next generation can be one of the most critical aspects of wealth planning for a family collection. Often, the family’s overall financial needs may help to determine the specific vehicle chosen to transfer all or part of a collection from one generation to another.
Ownership through a trust structure can offer significant advantages over direct ownership, in terms of preservation of wealth generally and in particular in relation to art collections.
A new generation of wealth is emerging for which art is increasingly becoming an important component of their overall wealth management strategy to put under the care of wealth management professionals and can benefit from their core competencies in wealth planning.
Randall Willette is founder and managing director of Fine Art Wealth Management Ltd., a specialist wealth management consultancy.
