Art collectors mainly purchase fine works of art for their beauty, but what many people don’t realize is that they are also acquiring a financial asset. Although it may not be considered an investment in the usual sense, an art collection can play an important role in pursuing wealth planning and philanthropic goals, while also diversifying asset mix. More high net worth investors are seeking tangible assets, and investing in art is becoming a major trend.
It is important to remember that the art market is unregulated. Therefore, it is critical for buyers and sellers to be cautious. Art experts can help art investors navigate the risks and rewards of their investments. These specialists who understand the art marketplace provide the care and management that the asset requires in order to help an investor make informed decisions to fit into their overall wealth management strategy.
Furthermore, credit specialists are able to review and develop an art borrowing strategy for clients. Determining the quantifiable worth, credit specialists can offer opportunities to borrow against the value of art and then reinvest the loan in a way that allows clients to pursue other financial objectives. This is an effective way to make cash available from an otherwise illiquid asset.
The added liquidity could be used to finance business objectives. Of course, an investor’s overall financial portfolio is taken under consideration when assessing their suitability for a loan. Once they are approved, the holdings will remain in the client’s possession, so they may continue to enjoy the beauty of their art while simultaneously generating cash to pursue other financial opportunities.
Today, investing in art covers many genres besides old, rare masterpieces. As the art marketplace — worth an estimated $55 billion in 2012 — rises from a recent recessionary dip, an interest in 20th century artists has escalated. For example, a 1964 Roy Lichtenstein painting called Sleeping Girl recently sold for a record $44.9 million. Furthermore, an emergence of new moneyed collectors from Brazil, Russia, India and China, in addition to buyers from Silicon Valley and Wall Street, have driven market prices upward.
Despite the market being on the rise, there are still risks associated with buying art. As noted above, the art marketplace remains unregulated. Prices will fluctuate according to an artist’s evolving reputation, quality of work, as well as supply and demand aspects around a particular work.
As a result, there are no guarantees that a piece of art will gain in value.
The art market is also unique in that personal tastes will be an important driver in setting prices. Unlike stocks and bonds, which can be sold quickly, art may take time to sell as the work needs to be marketed. The sale will involve a number of steps from displaying the work, having potential buyers view the piece, verifying authenticity, and researching the demands and tastes for the artist and the work in setting a sales price.
When purchasing art, a buyer should first and foremost buy what they like. Because art has economic value, the collector should be aware of the financial aspects surrounding selling, gifting, donating and so forth.
For instance, as the tax law currently stands, art sales are not afforded capital gains treatment. Instead they are taxed at a flat 28 percent rate, almost double the rate on other kinds of investment assets.
No matter when the collector chooses to sell, the collection is part of the taxable estate and will be subject to federal and state taxes as circumstances dictate.
Fortunately, there are many credit specialists around the country, including in Hartford, who concentrate on helping clients understand the wealth planning options available to them and the implications art has on their overall planning strategy.
These options include gifting to family members, donating the art to a charitable institution, or perhaps creating a permanent museum. Investing in art can be extremely rewarding, but it is also risky. Experts in the art industry as well as client wealth advisors are important in assisting investors when it comes to their art investments.
Jim Fanelli is U.S. Trust’s managing director and market director of sales. Christopher Borowiec is U.S. Trust’s managing director and private client advisor. They are located in West Hartford.
