October 12, 2012updated 09 May 2016 11:24am

Managing Family Art Wealth Demands New Standards and Techniques

Many wealthy families are art lovers, own collections or actively buy and sell in the art market. As younger generations assume leadership, new financial approaches to the family art collection are being demanded to more effectively respond to shifts in the art market landscape according to a new report released by Fine Art Wealth Management Ltd.

According to the Report, the rise of art collecting and investing by 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 family offices offer, and indeed are ill-equipped to provide. “Successfully managing the interests of ultra-high-net-worth families with exceptional art wealth requires long term financial planning for the art assets,” said Randall Willette, Founder and Managing Director of Fine Art Wealth Management.

Read Fine Art Wealth Management’s new report on manangin family art wealth

Traditionally a small number of private banks have offered clients interested in art a limited number of art services. However few wealth managers have approached art as an asset class requiring its own unique set of financial solutions including: art financing, succession planning, structured art investment, and philanthropy incorporating all of these onto one platform.

The report discusses how families with exceptional art wealth are also moving toward an increased focus on using their collections and their wealth to realise what they define as a richer life and to achieve a greater sense of fulfilment for themselves and their community. Since 2005 Fine Art Wealth Management has supported collecting families and their close advisors by operating at the forefront of innovation and “best practices” in art wealth management and investment.

Report Highlights

Integrating art wealth management into the Family Office platform

An art collection requires the same strategic planning as other financial investments and will the help of skilled advice can become an effective working asset. Once a collection has passed a certain threshold, a wide range of financial planning considerations can come into play including succession planning, art financing, structured art investment and philanthropy.

The importance of art governance and due diligence for private collections

Since most family collections are unique and irreplaceable, proper documentation is crucial and can decide whether a painting has higher or lower value. Putting in place sound art governance and undertaking comprehensive art due- diligence can also help prevent or diminish family disputes. If the assets are not appraised and documentation reviewed for proper title, authentication, condition, and provenance distribution of individual items can result in a highly inequitable allocation at time of distribution.

Dealing professionally with art requires time and extensive knowledge. In most cases an expert is compelled to examine the historical material and form his own opinion. The contradictions which arise in this context may have less to do with the subject of art history as they have to do with the expert himself. Family offices would be wise to seek advice from independent professionals who have no vested interest in the art and draw on expertise from both the academic and commercial art worlds.

The need for long term financial planning for art assets

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 managing art wealth. One key to making sure a family collection doesn’t damage family harmony is to work toward open communication and look for creative ways to include family members in the decision-making process. Family offices need to consider art as part of the overall financial and estate planning process for wealthy families especially in relation to other assets such as property, stocks, and bonds.

Art philanthropy and wealth giving to art institutions

Today the private collections of ultra-high net worth families can rival those of major art institutions and by joining forces an extended family unit can make significant impact on the global art market. Private museums and foundations are being created at an astounding rate and for many collecting families art giving has become synonymous with art investing. Wealthy families are moving toward an increased focus on using their collections and their wealth to realise what they define as a richer life and to achieve a greater sense of fulfilment for themselves and for their community.

Art as an alternative asset class

Many of the gains realized 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, as investors shift their concern from weathering the financial crisis to anticipating the inflationary effects of rising government spending and debt. However, this must be balanced with other client-specific requirements such as liquidity needs and time horizon. Family offices should be aware that a high degree of risk is involved and there can be no guarantee that one’s investment objectives will be achieved.

Art investment funds

As interest in art as an alternative asset class has grown in recent years so has the emergence of art investment funds. These funds seek to capitalize on the inherent inefficiencies of the art market and provide the potential to identify, create and execute transactions in works of art at highly attractive terms. Of course such benefits are only achievable if the fund is well managed and the decisions to buy and sell are made by experienced independent and objective advisors.

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Some art fund advisors engage in a broad spectrum of activities in the art market. As such, there may arise instances where the interests of the advisor conflict with the interest of the investor and a well- structured art fund should protect investors from such risks. It is worth noting that prevailing UK financial services regulation requires that potential investors in art funds are required to nominate a Financial Service Authority (FSA) regulated investment adviser to participate on the investor’s behalf in the evaluation and selection process.

The rise of managed art accounts

As art fund managers wrestle with ways to attract new capital infusion, one increasingly popular solution is to offer private single owner accounts particularly for family offices with larger pools of capital and a long term investment horizon. Successful art fund managers are seeing a marked increase in activity from family offices in some cases representing as much as 40% of their activity. The minimum investment for a managed art account ranges between $2 and $3 million with a 3 to 5 year investment horizon.

Private art investment clubs

The desire to establish a private art investment club has grown particularly among ultra-high net worth friends and family wishing to co-invest in a particular sector of the art market. However, it may also be a family office or other small group of investors who wish to pool their capital and engage a professional third party art investment manager to invest and manage the portfolio for them. This type of arrangement is sometimes self-managed and no third party investment manager is engaged. Given their limited size (there are normally no more than 10-15 investors), these boutique investment vehicles require much lighter regulation and reporting and as such are less costly to set up and administer.

Read Fine Art Wealth Management’s new report on manangin family art wealth