YOUR PRACTICE-When your client wants to get rich from a Warhol
July 14, 2012
Reuters - 08/15/12
By Jennifer Cummings
A decade ago, the questions Annelien Bruins got from clients who wanted help building art collections were about how to find pieces they'd love.
Bruins, an art consultant and chief operating officer of Sarasota, Florida-based Tang Investments LLC, said buying art then was a "passion purchase." Nowadays, it's become more about love and money.
As investors grow frustrated with tepid returns of traditional asset classes, art has become an alluring option, and demand is outstripping supply in the high end of the market.
U.S. billionaire Leon Black, for example, paid an eye-popping $120 million for Edvard Munch's masterpiece "The Scream" in May, according to the Wall Street Journal.
Those headlines may tempt novices to test the art market. And this is where many investors can get into trouble.
Financial advisers can help their clients explore art collecting, but they also have to provide a reality check, making them aware of the illiquidity and the lack of transparency in the specialized art market. There are also high transaction and insurance costs, and the risk of getting stuck with a fake.
"If you want to talk about a buyer beware market, this is it," said Suzanne Gyorgy, head of art advisory and finance for Citi Private Bank, which advises ultra-high-net-worth families on their art investments.
As a general rule, investors should keep their art allocation to less than 10 percent of their overall net worth, art consultants said. This means art investing for pure investment purposes is best suited for the super wealthy, who have enough of an investment to offset the high fees and costs that come with collecting.
Average investors can still invest in art as long as there's more to it than hopes for a financial gain.
"If you buy it because you love the work, you can buy anything because you'll have it on your wall for 30 years," Bruins said.
As art investing grows in popularity, there are more resources for art investors, including a new set of indices from the art data and analytics company artnet, which helps financial professionals track returns for individual artists and sectors. For instance, you can track artnet's modern art index, which is up 93 percent since July 2009.
That said, this isn't a do-it-yourself market like day trading. Inside knowledge is essential in the art world to getting a good deal and avoiding a scam.
Unless you're a financial adviser who happens to have an advanced degree in art history, connect your clients to outside help, like an art adviser, who guides people through the building, valuing and securing of a collection.
Try finding an expert through the Association of Professional Art Advisors, which requires its 120 members to operate transparently with clients.
Clients can expect to pay their adviser roughly $150 to $350 an hour, said Wendy Cromwell, the association's vice president. Alternatively, advisers can work on commission - generally 20 percent for sales under $25,000 and about 6 percent for sales over $1 million. Investors can also get an adviser on retainer, which can cost at least $10,000 a month, Cromwell said.
Financial advisers should make sure their clients are getting their collections appraised often - typically once a year for pieces that make a large part of the investor's overall net worth and for contemporary pieces, which can fluctuate in value frequently. Everything else should get appraised roughly every five years or less, Bruins said.
If you think your client's net worth is weighted too heavily to art, talk to them about using their collection as collateral for a loan. That money can be reinvested in stocks or other assets. Traditional lenders, like Citi Private Bank, offer these kind of loans, as do auction houses such as Sotheby's .
And check your client's insurance protection.
If they are simply relying on their homeowner's policy, read it carefully to see what's covered. In some cases you can spend extra so that each piece of art is covered separately, said Irvin Schorsch, president of Pennsylvania Capital Management, a wealth adviser and long-time antiques collector.
For more valuable collections, the client can invest in policies designed specifically for art. For instance, Privilege Underwriters Reciprocal Exchange, a White Plains, New York-based insurer to the wealthy, has policies that not only cover the cost to repair a damaged piece, but also the change in market value the damage may have caused.
If nothing else, financial advisers should make it standard practice to ask clients if they own valuable art, jewelry, wine or other collectibles, said Martin Hartley, chief underwriting officer for Privilege.
A lot of people don't even think of these items as part of their net worth, and therefore don't have them properly protected, Hartley said.