Manage your art as an alternative investment

As inflation rises, some advisers see a silver lining in art as an alternative investment that is unaffected by financial markets. As with many alternative investments, there are Private Equity funds that are developing in the art market, such as masterpieces. Others choose potential winners in the new NFT Art Market. Still others who have art, whether collectors, investors or artists, enjoy the significantly above-market returns that works of art generate. The result is that art is bought by people from all walks of life, from very wealthy collectors to millennials looking to invest a few thousand dollars. Regardless of their level of wealth, art collectors who buy art directly are very cost-conscious individuals.

More often than not, once they acquire art, their approach is a “do-it-yourself” approach to managing the art. The problem is that the scope of management is always expanding, so much so that using DIY management creates a number of problems, including:

  • You cannot ensure that you are making optimal decisions because of the difficulty in seeing (or remembering) the big picture: the family/market/cultural environment in which the collection exists, as well as the social, economic and regulatory that surrounds you.
  • Your schedule is weighed down with issues that can be managed better and more efficiently through delegation.
  • You spend time and energy making important decisions only for the ball to fall in the execution of critical administrative details because ultimately your do-it-yourself approach makes you accountable for chasing all the details; and, details will slip through the cracks.
  • You only act when a situation has developed or opportunities have been missed because you are reluctant to “start the clock” on hourly billing or other charges.

If, not when, something happens to you, as the head of art management, there is no clear succession on who has access to the information and there is no time for that the successors fully understand the situation.

Traditionally, the alternatives offered to do-it-yourselfers or collectors for the management of their collection are too often either to sell the collection or to transfer ownership and control of the artwork to a not-for-profit entity – either a public charity or an operating private foundation. Without understanding the bigger picture, these alternatives may not be the best option for the artist, collector, their heirs or trustees.

Planning promotes consistent decision-making and minimizes issues of missed opportunities. The administration solves the problem of poor execution; while leadership ensures continuity of ownership and minimizes risk on an outsourcing basis. More importantly, planning for the Artist, Collector or Family Office avoids having to relinquish ownership of the collection in order to preserve it.

Managing art and other collectibles can be simplified by grouping assets according to the owner’s role for income tax purposes and the owner’s goals in life and death. Additionally, to effectively manage collections, you must have access to insightful market analysis with the ability to sort out important fashion trends; expertise in income and inheritance taxes specific to tangible assets; and, last but not least, you must be sensitive to the feelings and emotions of the Collector and his heirs.

All of this is a sizeable order. Seeking specialist expertise ahead of time is probably the only way for the typical collector or artist to maximize the value of their collection.

Inventory your collection

Most collectors do not have an up-to-date inventory of their assets; or if the inventory exists, it is missing critical information or is in an extremely cryptic format. Estate inventories are often intended to minimize the land value of assets and are rarely complete or sufficiently detailed. Inventories can sometimes be confusing, as artists often work and collect artwork in many different media, making it difficult to determine who created which artwork in the collection. Therefore, you will need the help of an expert to describe assets for inventory. At a minimum, inventories should include:

  • List of works created by an artist and in your possession;
  • Authors (including co-authors and collaborations and contact details);
  • Dates of creation and acquisition;
  • Contracts associated with works, such as licenses, assignments, etc. ;
  • Where are the items;
  • The names of the galleries or resellers, as well as their contact details; and, all documents referring to the work of art, such as catalogs, sales invoices, etc.

Whether you use a spreadsheet, software, or even an old-fashioned card catalog system, starting an inventory is essential.

Include in the inventory any reference to contractual relationships that may exist, including consignment agreements, copyrights, distributions and reproduction rights. Remember that ownership of a work of art does not convey copyright in that work. In some countries, artists retain certain rights to the transfer and display of artwork even after sale.

Aggregate your collection

Even when all significant works of art are clearly inventoried, researched, labeled and stored, you will most likely be faced with a large number of objects, not only easily recognizable valuable works of art, but also coins. , gems, jewelry, furniture or other collectibles. Each collection of items is associated with masses of documents, catalogs, notes, letters, bills of sale and paperwork. Although that may not seem like a lot, a single document can be critical in determining the provenance (and therefore the value) of an item. In order to support your new item collections, each with many different tax, provenance, and valuation issues, you need to simplify.

An essential first step in simplification is to group the elements and their associated documents. Items with similar characteristics are grouped together and these groups are given certain rules or guidelines based on art market trends, the tax implications of buying or selling, and most importantly, your desires.

Manage your collection

Usually only the collector takes an active role in buying and selling art and other collectibles. Advisors and professionals must accompany you in the management of your collections. As part of this management, they will need help in finding professionals with the appropriate expertise and experience to manage the collection. Outside expertise should work within collectors’ financial and legal affairs to coordinate the management of tangible assets with the management of family wealth investments – in both routine and crisis situations – without the high price of insourcing these services specialized. These professionals provide the collector with the “rolling frame” for inventorying, aggregating, valuing, storing and managing the collection.

The remarkable “grip” of individual ownership of collectibles encourages a long-term understanding and education of how the collectible fits into the overall collection. The financial benefit of the immediate sale of a collection can far exceed the comparable benefit of an alternative investment. The emotional, personal, and social “return” on actual ownership of the collectible often outweighs the financial rewards; and, the desire of the collector and his heirs is that the collection not be sold. Indeed, far from having to be wary of “passive” investors in art, collectors often become too personally active and emotionally involved in the ownership of objects. Collectors have more expertise and knowledge in their areas of interest than most professional advisers available to ‘manage’ the collection. The result is that, rather than having professionals paid directly for their management expertise and access to collecting markets, they are paid for curatorial, research and organizational services.

It is this stickiness that ultimately causes the most problems when managing an art collection as an alternative investment. Investors are less likely to have a personal or emotional connection to their limited partnership interests in a hedge fund as much as a collector than to an art object. To counter this, you must commit to the discipline of inventory, aggregation, and management.

About Oscar L. Smith

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