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NOVEMBER 02, 2021

Successfully investing in art to grow your wealth

When appreciating art, beauty is in the eye of the beholder, as our artistic preferences rely upon our own subjective taste. In contrast, successfully investing in art is not at all subjective because the practice comes with a specific set of proven principles. And these days, collecting art is proving to be one of the most fulfilling ways to grow your wealth.

Getting started

Much like walking into the famed Musée d'Orsay in Paris, the idea of integrating art into your investment portfolio may seem intimidating at first, especially if you are new or somewhat indifferent to the world of collecting art. In this case, it is helpful to understand how you benefit from integrating art into your portfolio. Once you have a grasp on this, you may find yourself developing a passion for both the world of art itself, as well as for investing in art to grow your portfolio.

Understanding new forms of art

In the last few decades, how we define art has evolved beyond what we may think of as “classic art,” which includes paintings, sculptures, and antiques. Now, we also look to fashion items, physical objects like high-end furniture, or leisure goods. Recently, digital art has greatly increased in popularity and value.

With the advent of internet-based art in the early 1990s, we’ve seen the ascent of digitally based art assets, such as websites, non-fungible tokens (“NFTs”), augmented reality art, and even biotech art as demonstrated with Eduardo Kac’s fluorescent transgenic rabbit sculpture. In 2021, Beeple’s Everydays: the First 5,000 Days, a collage of 5,000 digital images, sold for $69 million, becoming the most expensive NFT and one of the most expensive works ever sold by a living artist. As the realm of digital art experiences immense growth, both artists and intermediaries (galleries and auction houses) find this medium to be incredibly lucrative.

With so much innovation and accessibility surrounding both the creation and distribution of art, there are now more opportunities than ever to invest in it. That said, investors must be mindful of the fact that art can now be consumed and experienced without the limitation of physical possession. In other words, art can be bought and sold through online or blockchain platforms, which represent a new kind of digital capital in themselves.

NFTs and digital art specifically fall into this newer purchasing option, as transactions are executed using digital currencies, which can be extremely volatile. Because of the unique risks and characteristics that come with cryptocurrencies, there is vibrant discourse over how to value digital art, as this can shift on a daily basis. Even though the democratization of digital art collecting and investing has been made possible through the blockchain-based tech, both intrinsic and external risks must be considered.

Invest in art you enjoy with professional guidance

Personal taste, style, and intentions are all important factors when building your art collection. “The first rule is to figure out your budget. The second rule is to buy what you love,” advises Rosanne Peel, director of capital advisory at BMO Family Office. From a tactical perspective, many new collectors start by selecting works from emerging or lesser-known artists which usually sell at a lower price with the hope that one day the artist will become famous, and their work will appreciate in value. This approach is much like investing in a start-up. Sometimes it works out, and sometimes it doesn’t. “Artists and styles may go in and out of vogue, so you should choose each piece with the goal of providing pleasure for your own eyes,” Peel explains.

Similar to how you might consult with your financial advisor before making a big investment, it’s best to venture into the world of art investment with professional guidance. When it comes to art, partnering with a trusted art advisor, gallerist, art dealer, and art lawyer can increase the likelihood of a successful investment. After all, the art market is still relatively obscure, and it can be difficult to navigate if you’re unfamiliar with it.

Though a greater push toward price transparency has emerged during the pandemic, along with digital platforms that facilitate remote deal making and lower barriers to entry, there are still significant issues regarding provenance, authenticity, conditions reports, insurance, IP rights, and licensing.

“The increased accessibility of art consumption has made this market even more risky if approached without proper guidance and a well-thought-out art collection plan. Strategically, there are many decisions that must be planned before execution,” says Sara Johnson, director of wealth planning at BMO Wealth Management, Canada. “Each and every step of the art investing process is critical to making a happy art collector and setting them up for success by minimizing complications for future resales and/or succession. An art buyer needs to carefully weigh the details of the transaction, such as: who should be buying (the individual collector, their trust, or family foundation), where and when to make the purchase (at an art fair, an auction, or on a blockchain marketplace), as well as which IP transfers, delivery, and insurance clauses must be added into the contract, storage facilities, sales taxes, and more.”

Art, estate planning, and the “Four Ks”

An estate plan that includes art should consider the executor’s experience in dealing with art. Often, a knowledgeable agent is engaged to be part of the will and testament process to assist with representation and management. This helps ensure the assets are properly handled so their value can be maintained for beneficiaries.

As well, the will and testament should clearly state whether the art is to be treated as a capital investment item or as a personal effect. This designation clarifies the details for the executor, who may elect to treat your art as a personal item (i.e. furniture or jewelry), and mistakenly distribute it among loved ones in unequal and emotion-driven ways. You can avoid family squabbles and potentially diminishing the art’s value by leaving specific guidance for your executor.

Johnson refers to the “Four Ks” when addressing art in an estate plan:

  1. Know what you own: Perform a complete inventory, identification, and disclosure, with a clear and reasonable valuation of the art assets. This should include an up-to-date condition report that clearly illustrates the history of any damages or restorations made to the work. When it comes to NFTs, cite information regarding the computer platform holding them, and ensure they are sufficiently secured from hackers and viruses. For pieces that have been loaned or leased to galleries, an accurate list including very clear instructions should be maintained.
  2. Know how you own it: Depending on whether your art is in a single person’s name or owned jointly in a trust, company, or a foundation may determine how and to whom it will be transferred. For example, if it’s in a trust, who the beneficiaries are may have already been decided upon, whereas if the art is in a holding company, you need a plan for the art itself and also for the company’s shares transfer.
  3. Know what you want: Knowing what you want to happen to your art, including whom you’d like to leave it to after your passing, is critical. Determine if you can or should leave your art as a collection, divide the art works among family members, sell to third parties, or donate to nonprofits like museums.
  4. Know who you should leave in charge: Knowing who should execute the transfer of art assets is especially important for a truly customized estate plan. If a thoughtful approach is taken with the right team of specialists, very positive results can be gained. They should be specialists that understand the story of the collection, the goals of the collectors, and what needs to be put into place to safekeep, administer, and transfer the art. Sometimes, a collection may require some post-mortem upkeep and cash flow planning as well, especially if the art is in a foundation or has been gifted to museums.

Risk management

The market of buying and selling art is a combination of different forces. Impulse buying or attraction to an artist’s prestige are parts of the inherent emotionality behind it. Johnson has “experienced the good, bad, and ugly” of art transactions, which she describes as “selling for financial distress at a great loss, selling out of boredom, selling based on popularity, donating at death to create a tax relief to the estate, and departure for divorce.”

For each event, a valuation and tax consequence (capital gains or tax credit) is realized. Creating a divestment plan and cultivating an art lover’s and expert’s network is always a winning strategy even if the sale occurs during distressing circumstances.

Mutual funds and pools or fractional ownership companies are also quite popular. These are longer-term investments that allow relatively small cash investments to be put into the portfolio of a ready-made art collection. Such pools are quite illiquid and sometimes come with pre-established maturity dates with intensive and, at times, costly due diligence reporting for valuations but they do exist and cover a desirable niche for overall wealth diversification.

“The key is to keep the art investors' passion and exuberance in temperate check,” Johnson reminds. “Art devotees still believe in the truth of Annie Leibovitz’s statement: ‘I've always cared more about taking pictures than about the art market. I hope people will buy what they love, [and then] care for and enjoy it while keeping an eye on its afterlife.’”

BMO’s art gallery

The characteristics typically associated with investment art are museum-worthy original works (often paintings or drawings) by established artists with a known body of work that have shown an increasingly high market value in auction sales over time.

“With BMO’s Art Collection, investing in original art is part of a larger commitment to supporting artistic creativity in the communities we serve,” notes Dawn Cain, curator of the BMO Art Collection. “Artworks are placed in the working spaces of the bank for the enjoyment of our staff and clients. When we acquire art, we look for innovative works that prompt discussion and reflect the varied ideas, media, and stories of today’s artists at every stage of their career. Some works may increase in market value over the long term. As we manage and refine the collection, pieces are loaned, donated to charities and institutional collections, or sold to fund new purchases.”

Making selections and seeking advice

If you’re ready to invest in art, look for original works with a known provenance or collection history that are certified by an accredited conservator as being in excellent, good, or stable condition. If you’re investing in works on paper, ensure that they are signed, limited-edition, and numbered prints.

You may already know about art and are exploring your options. Your next step should be to determine an investment focus and the extent of your financial commitment. This involves considering which artists, eras, and mediums interest you. Once you’ve sorted this out, it’s best to consult with a financial professional who specializes in art. They can help you develop a strategy and plan that works for you.

For more information, speak with your BMO financial professional.

 

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