Don’t worry. That headline doesn’t imply registered investment advisors need to take a painting class or an art history course. However, those advisors that service a large amount of high-net-worth clients, particularly those in the “ultra” category, ought to consider the advantages of becoming more knowledgeable about the investment implications of art.
Art as an investable asset class is alluring on multiple fronts. For starters, it’s clearly an alternative asset, meaning it can act as a credible portfolio diversifier. Second, it’s value, while subject to pullbacks here and there, is “stickier” than stocks and bonds.
“Unlike stocks or other investments, art does not tend to go up and down in value based on market fluctuations,” according to Artelier. “This was especially true during the 2020 pandemic where other markets fluctuated significantly while the art market remained stable. The changes were not felt because the value of investment grade art is independent of most external events and so has a tendency to steadily increase as the years go by.”
Not to mention, art is a revered investment by the rich and famous. The famous part doesn’t matter, but the rich part does.
How Advisors Can Help Art Investing Clients
Again, advisors don’t need to be art critics or experts, but if they have clients that are investing in this asset class, they should prepare those clients for estate planning and tax implications (if they’re looking to sell). This is true of both clients with small, but valuable collections and those with larger collections of moderate to high value.
“If you already have a significant collection, whether it’s one you inherited or amassed over the years, catalogue your artwork and understand the value of key pieces and your total collection,” according to Morgan Stanley. “This information will prove essential for making informed decisions, including whether to maintain your collection, if and when to sell a work of art, and how to incorporate your art into estate planning.”
Another area where advisors can add value, regardless of art knowledge, is with clients that tell them they are new to art collecting/investing and those that are currently just “dabbling” in it. In simple terms, these clients need to know what they’re getting into from a returns perspective.
“For example, when the global economy and markets tumble, the art market often won’t feel the effects for a year or two due to the characteristic illiquidity of art assets,” adds Morgan Stanley. “The big auctions traditionally happen only twice a year, which can make it difficult to transact quickly, and few collectors want to take the risk of selling during turbulent periods if they can afford to hold onto their masterpieces until calm returns.”
Succession Matters
And no, that’s not a reference to the hit TV show. As noted above, estate planning is essential for any client and that’s amplified with clients that have valuable art collections and multiple heirs. After all, it’s possible the two children may not be art aficionados and simply want to monetize the collection bequeathed to them.
“Many investors assume that the next generation will take care of it, or that it can easily be donated to a museum. However, the lack of a clear governance plan can present heirs with many unintended consequences, from tax implications and family disputes to forced sales in inopportune markets, “ concludes Morgan Stanley.
Bottom line: Art-enthused clients need to have plans in places and advisors can check that box for them.
Related: Social Security Still Prime Real Estate for Advisors