08 March 2018
Yesterday saw the release of Knight Frank’s 2018 Wealth Report, which confirmed editor Andrew Shirley’s previous prediction that art would “comfortably overtake wine as the best-performing asset class” of the year. Indeed, after lagging behind other luxury asset classes for quite some time, in 2017 the average value of art sold at auction rose by 21%, kicking fine wine off the top spot. Earlier this year a report from New World Wealth also revealed art collecting as the top hobby for multi-millionaires in 2017, while Randall Willette of Fine Art Wealth Management has asserted that in 2018 “the surge globally in the number of wealthy entrepreneurs will be accompanied by a sharp increase in art investment.”
With over 25 years in the fiduciary services industry, First Names Group’s Alasdair McLaren has significant experience working with wealthy families and individuals who own highly valuable collections of art. In light of the recent commentary, we’ve quizzed Alasdair on the popularity of fine art and the practicalities of art collecting.
New World Wealth’s 2018 Global Wealth Migration Review ranks art collecting as the top hobby for multi-millionaires. Does this ring true to you?
Art certainly features within many of our clients’ asset holding structures. However, in my experience, wealthy individuals who own art do so for a variety of reasons. It may be as a status symbol, or perhaps they just need suitable wall furnishings to decorate a newly acquired stately home. Equally, art assets may come as part of a property purchase. We also have clients who’ve inherited one or more pieces of art that they don’t necessarily have any emotional attachment to, which they may choose to keep for investment purpose or, because it is perceived as a family ‘heritage asset’, or they may simply sell to realise a return.
The clients who are, in my opinion, true ‘hobbyists’ are those with a real passion for art – and usually for a specific genre, for example contemporary art or Dutch Old Masters. They may own hundreds of millions of dollars’ worth of art and have a structure set up purely to hold their collection. Unlike other types of art collector, they are spurred primarily by their passion, with one eye on investment potential. So, while fine art is clearly on the rise as an asset class, I believe art collecting is a genuine hobby for a relatively small percentage of art-owning multi-millionaires.
Will the worldwide increase in the number of wealthy entrepreneurs be accompanied by a surge in art investment?
I reckon so. As shown by Knight Frank’s index, the asset class has been performing very well, and people who have created new wealth tend to look to luxuries such as fine art to reflect status and demonstrate cultural sophistication. It’s similar to the increasing Chinese demand for fine wine. Wine and art are both seen as trophy assets.
Is there a typical profile of an art-owning client?
This is a tough one to answer. My clients who are serious art collectors tend to be older, but that’s probably because they have been collecting art for many years and have reached the stage where they are working with us on estate and succession planning.
We’re also seeing younger art enthusiasts emerge as family interest is passed on to the next generation. They grew up with art, they understand art and art markets, and see the value in it. Sometimes a son or daughter who has no interest in the family business will instead be brought into the family wealth by being given full or partial responsibility for the family’s art collection.
What are some of the practicalities of art collecting?
Number one: due diligence. Checking the provenance of an artwork before it is acquired is vital to ensure the collector is getting what they’re paying for and that value is upheld going forward. This should be done by an independent art consultant, ideally one with specialist knowledge of the artist/genre in question.
Once a piece has been purchased, planning may be required around tax issues. Where is the piece going to sit? Will it be held directly or through a holding vehicle such as a trust, foundation or company? Will it need to move cross-border? It’s important the collector seeks expert tax advice to plan accordingly.
As with any high-value asset, monitoring is a must. Detailed records, regular stock takes and periodic valuations are all of the utmost importance. They will most likely be required for insurance purposes too. Indeed, insurance is a big matter and art has particular needs. For example, dim lighting and humidity control monitors will help protect the art from damage. And, given the portability of art, security is also crucial.
When it comes to liquidating the asset, there is an art to selling art! Again it comes back to monitoring performance; beyond finding the right buyer, the key is identifying the right time to sell. For instance, if a Modigliani recently sold for a record price and you have two Modiglianis, then it may be time to sell.
Why hold art through a trust or company?
Beyond tax efficiencies, structuring an art collection offers significant benefits in terms of asset protection and succession planning. The collection effectively becomes ‘ring-fenced’, from individuals and from other assets. When the time comes to pass it on to the next generation, this can be achieved cleanly and evenly through allocation of shares in the company holding the art – rather than, say, trying to divide up ten paintings between three children.
If you won the lottery, would you collect art?
Yes – and given my heritage I’d have a particular interest in Scottish art.
Are there any art exhibitions you’ve seen recently you’d recommend?
The Charles I exhibition currently on at the Royal Academy in London is probably the most interesting I’ve seen in a long time. It’s the first time his full collection has been collated in one place since his death in 1649.
Which masterpiece would you own?
Actually, I already own it! It’s a picture my kids drew for me on my Christmas card a few years ago. I love it and it means a lot to me – and that, to me, encapsulates the whole point of art.
This article has been issued by First Names Management Limited on behalf of certain companies that form part of the First Names Group. The article has been prepared for general circulation to clients and intermediaries, and does not have regard to the particular circumstances or needs of any specific person who may read it. Nothing in this article constitutes legal, accounting, tax or investment advice.
The information contained in this article has been compiled by First Names Management Limited and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of publication, and are provided in good faith but without legal responsibility.
