Newcomers continue to stream into the burgeoning art market, and many of them are first-time buyers who, frankly, don’t know much about art.

And that, experts say, is something that should get the attention of wealth advisors.

“Those who haven’t had the background investing in that type of asset are at a huge disadvantage,” says Scott Hodes, a senior counsel at law firm Bryan Cave in Chicago.

Hodes is himself an art collector—he was lucky enough to have been tutored on the subject by his longtime client, environmental artist Christo, and his wife, artist Jeanne-Claude, who died in 2009. He also served as the attorney for the Expo Chicago art fair, which this year attacted some 40,000 visitors. 

“That’s a lot of people walking through the doors, many of whom don’t know a whole lot about collecting art,” Hodes says. 

The rub is that even if people are buying purely for the joy of owning fine art, studies indicate that there is usually an element of investing involved in collecting. That means people need to be careful, he says.

“The threshold question is, why are they buying?” says Hodes. “Are they buying because they like the image, or because they’re going to turn around and sell it and hopefully make a profit, or a combination of both?”

Jim Minich, a managing director with CTC | myCFO’s Capital Advisory Services, says many of his firm’s entrepreneurial and middle-market business owner clients are paying five and six figures for works of art “more for passion and because they want to have the nicer things.” They are generally not looking to art to diversify their portfolios. 

A 2014 survey by Deloitte, a consultancy, found that emotional value was a key motivator for art collectors, but that the exclusive social network and status associated with buying art was increasingly drawing buyers to the art market.

At the same time, the survey showed that 76% of those buying art were doing so as collectors, but with an investment view, up from 53% in 2012. Only 3% had a pure investment view, and just 21% did so for pure passion, without an investment view. 

Whatever their motivation, many newcomers to art investing and their financial advisors don’t know what they don’t know when it comes to buying art and, equally important, the many things involved once they’re ready to write a check. This opens a new path for wealth managers to enhance their service offerings.

The Art Of Collecting

“People who collect art because it’s an allocable asset today in their portfolio have to understand what they’re buying and understand the art market,” says Hodes. “The art market can be very manipulated.”

Many collectors have not done their homework, thinking they can get instant gratification by going to a dealer or art fair, he says. But the art market is the second-largest unregulated market in the world (after drugs), says Hodes. Money-laundering opportunities abound, especially with works of art bought in Asia and shipped to the U.S., where they are sold at auction or through a dealer. “In an unregulated, booming market where all kinds of financial games are being played, the innocent buyer probably is being taken advantage of.” 

One option for new buyers is to hire an expert to help build a collection, says Hodes. The New York Times reported in August that the art advisor sector is swelling. Advisors usually are paid on retainer, or a rate of $150 to $300 an hour. Increasingly, they’re working on commission, typically taking 5% to 10% of the purchase price on transactions where they act as consultant.

The article said many advisors are highly knowledgeable and well connected, but cautioned that some newcomers don’t understand all the basics of the profession, such as the need to have a collector as a client. Moreover, some advisors demand two fees when they help arrange a sale: one from their client and another from the gallery selling the work, the Association of Professional Art Advisors told the newspaper.

Hodes recommends that buyers hire advisors through a written contract that sets out the terms of representation. “It ought to specify the hourly charge and, if a work is bought, what their commission is going to be or how [the advisor] is going to be compensated,” he says.

Buyers can also fall prey to frauds and forgeries. Hodes says many artists, if asked, will authenticate their work, especially if it is going to auction, to ensure what goes on the block is their work. 

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