As inflation increases, some advisors see a silver lining in art as an alternative investment that is unaffected by the financial markets. As with many alternative investments, there are private equity funds that are developing in the art market, such as Masterworks. Others are picking potential winners in the new NFT art market. Still others, who have art, whether they are collectors, investors or artists, are enjoying the significantly above market returns that artwork is generating. The result is that art is being bought by people across the wealth spectrum, from the ultra-high net worth collectors, to the millennial looking to invest a few thousand dollars. Regardless of their level of wealth, art collectors who buy art directly are highly fee-conscious individuals.
More often than not, once they acquire art, their approach is a “do-it-yourself (DIY)” for managing the art. The problem is that the scope of management always broadens, so much so that using DIY management creates a number of problems, including:
1. You cannot insure making optimal decisions because of the difficulty seeing (or remembering) the big picture: the family/market/cultural environment that the collection exists within, as well as the social, economic and regulatory environment around you.
2. Your schedule becomes burdened by matters that can be handled better and more efficiently through delegation.
3. You put time and energy into making important decisions only to have the ball dropped on executing the critical administrative details because, ultimately, your DIY approach makes you responsible for chasing all the details; and, details will fall through the cracks.
4. You take action only when a situation has developed or opportunities have been missed, because you are reluctant to “start the clock” on hourly billing or other fees.
5. If, and when, something happens to you, as the one responsible for the management for the art, there is no clear succession on who has access to information nor is there time for successors to fully understand the situation.
Traditionally, the alternatives proposed to the DIY Artist or Collector for management of their collection too often is either to sell the collection or transfer ownership and control of artwork to a non-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 fiduciaries.
Planning promotes consistent decision-making and minimizes missed opportunity problems. Administration resolves the issue of poor execution; while, leadership provides the continuity of ownership and minimizes risks on an outsource basis. More significantly, planning for the artist, collector or family office, prevents them from being forced to give up ownership of the collection in order to preserve it.
Management of artwork and other collectibles can be simplified by aggregating assets based on the role that the owner plays for income tax purposes and the owner’s goals in life and at death. Further, to manage collections effectively, you need access to perceptive market analysis with the ability to sort significant trends from fads; expertise with income and estate taxes peculiar to tangible assets; and, last but not least, you need to be sensitive to the feelings and emotions that are unique to the collector and heirs.
All this makes for a tall order. Seeking specialized expertise in advance is probably the only way for the typical collector or artist to maximize the value of his or her collection.