If the artist is no longer living, the situation is more complicated. Authentication boards exist in some cities, which have experts in certain deceased artists, but a lot of them will not authenticate, fearing they could be held liable if the piece turns out to be a fake, according to Hodes. In New York, proposed legislation would give immunity from litigation to authenticators in certain situations, he says.
For those who buy art at auction, Hodes has a cardinal rule: “I would advise any buyer to read carefully the rules of auction and determine exactly what prechecks have been made by the auction house.” The big houses will probably offer protection if the work turns out not to be good, he says, but smaller local auction houses across the U.S. are not staffed to do the work the major ones do. “So in their rules of auction, they will put in that the buyer buys ‘as is, where is.’”
In other words, the buyer can’t invoke buyer’s remorse if, for example, the work turns out not to be authentic or was stolen. In the U.S., one cannot make title to a stolen work of art.
Devil In The Details
First-time art buyers are often stunned by the details they must attend to when considering a fine art purchase, says Kimeral Anthony, an account executive at ABD Insurance & Financial Services.
Anthony advises her clients, “Look before you leap. Before you even think about finalizing a wire transfer, check with your insurance advisor to make certain either your current insurer will actually extend terms and provide coverage in transit [of the art purchase] or that your advisor can help guide you to an insurer who will.”
Art buyers may find that middle-market insurers, such as State Farm, Allstate and Farmers, will not insure something worth $5 million. For that, the buyer needs a high-end carrier—Chubb, AIG, Ace or PURE. “But the caveat is that just because you’re with a high-net-worth insurer, it doesn’t mean they will extend coverage on what you’re buying,” says Anthony.
They very well may not or may do so only if the client already has fine arts coverage for a significant amount with the carrier. “Give yourself plenty of lead time before finalizing your purchase, a minimum of 60 days, and depending on the significance of the art and the value, that time period could be extended to six months or a year,” she says.
Besides insurance, buying a work of art involves several other “moving parts” that people never think about, according to Anthony. Take logistics. A valuable piece can’t simply be shipped to its final destination—or be packed by the buyer and put into the backseat of a car. A team of experienced fine art handlers will have to measure the piece to determine whether it requires custom-made, museum-quality crating. The people who are packaging and transporting the art must be professionally trained to do so.
And during this entire process, security must be on site, paid for by the buyer. “Essentially, no one is alone with this piece,” says Anthony. Security has to accompany the artwork in transit to its final destination, perhaps the buyer’s home, and measures to safeguard the piece must be in place there to make the insurance company comfortable with the risk.
In addition, personnel must be available for the installation, a process in itself. First, the piece has to just sit in its new environment, probably for 48 hours, to become acclimatized to the temperature in its new environment. Then, the team comes back and completes the installation.
“Sometimes clients try to cut corners,” says Anthony. “They’re not acclimated to what they’re getting into because they’ve never done it before so it sounds foreign to them.”
Wealth Management Services
In the Deloitte survey, 62% of collectors said they would like their wealth managers to include art and collectibles in their service offerings. The industry is getting the message. Eighty-eight percent of family offices and 64% of private banks surveyed said estate planning around art and collectibles was a strategic focus in the coming year.
Hodes says art financing has become a big game for some major banks in their trusts and estates divisions, though they don’t know the ins and outs of making loans on art. “Banks have loaned against art in New York for many years, but now they realize that art is an allocable asset, and when they’re dealing with art, they have to do so differently from other assets,” he says.
According to Minich, CTC | myCFO’s parent, the Bank of Montreal, is building a presence in the art financing space. As a commercial lender, he says, it is never looking to the art as its primary source of repayment. The bank has to get comfortable with art as the collateral piece, but it doesn’t expect to have to seize the art. “You’re making a loan to a rich person with multiple repayment sources to buy a piece of art; you’re not making an art loan,” he says.
Lending institutions find it critical to understand the volatility in the pricing in the market. “With Picassos, there’s a limit to how far it could fall,” says Minich. “You could feel comfortable if you had a collection of those as your collateral; you could offer a good advance rate.”