The recent release of the annual UBS Global Art Market Report outlined some important trends in the global art market, particularly from a private wealth perspective. These trends are important for trustees to consider and be aware of given the popularity of art as a trust asset for many wealthy beneficiaries.
The report noted the following five key trends in the art market:
- The US retained its position as market leader;
- Millennials emerged as active market participants;
- The online market witnessed continued growth;
- Auction figures rose 3% year-on-year;
- Art Fairs continued to shape the global market.
We consider that trustees should be aware of two of these trends in particular when either holding, or purchasing, art as a trust asset.
Millennials emerged as active market participants
The report suggests that, particularly in the Asian market, there has been a growth of high net worth millennials purchasing art. In Singapore, 46% of collectors surveyed were millennials, 39% in Hong Kong whilst collectively millennials accounted for just under half (45%) of high-end spenders.
Trustees play an important role in succession planning with the next generation of beneficial classes often looking to take an active role in the administration of a trust fund. Trustees must comply with their fiduciary duties and therefore they often need to achieve a difficult balance between seeking the views of beneficiaries as regards the purchase and/or sale of art whilst also managing the expectations of beneficiaries in this regard.
It is very possible that one beneficiary will want the trustee to invest in a piece of art but another will have the opposite view. Whatever decisions are taken, the trustees must be comfortable they have done all they can to comply with their duties to avoid any claims being made against them.
It is also important that trustees take independent advice. A beneficiary's desire to purchase a piece of art does not mean that the purchase of that art is a prudent investment for the trust fund. Art is often described as a 'trophy asset' or 'passion purchase' and so it is important that appropriate independent advice is sort as regards to value and collectability.
The online market witnessed continued growth
According to the Report, the online market now presents 9% of global sales and was worth $6bn in 2018. However, it should be noted that just 4% of high-net-worth collectors surveyed had spent $1 million or more on a work of art online which does denote a degree of caution when purchasing high value items online. This caution should be mirrored by trustees when considering whether to buy art online.
Conducting a purchase or sale online inherently has more risk than conducting a purchase or sale in person and it is vital that trustees conduct proper due diligence prior to concluding any transaction to ensure that the Seller does in fact own the artwork in question, that they are obtaining an unencumbered title and that the artwork is of the provenance and value that they believe it to be.
In particular, a prudent trustee should take steps to:
- Make enquiries of the seller as to the history of the artwork in question;
- Request sight of previous purchase and sale paperwork;
- Request physical inspection of the work rather than relying on photographic evidence online;
- Consider instructing an independent expert to verify the provenance, authenticity and value of the artwork;
- Negotiate contractual warranties within any contract of sale to address the risk that the art is not sold with good title; and
- Obtain insurance to provide protection in the event that the trustees face a claim from a third party to ownership of the art.
A high profile claim which has recently been issued in the English High Court provides a timely reminder to trustees of the importance of undertaking thorough due diligence. In this case, Gary Klesch, an Anglo-American entrepreneur and investor, bought the two works of art from Richard Green Fine Painting. He paid €3 million for one piece and €2 million for the second. After purchasing the artworks, Klesch discovered that the piece he bought for €2 million had been sold for $882,500 at Sotheby’s New York in June 2017 and the piece he purchased for €3 million was sold in November 2017 for €1.45 million. Klesch argued that Richard Green Fine Paintings did not provide him with this information and had he known it, he would not have paid the prices he did. It will be of interest to see how this claim develops but the key point is that had proper due diligence been undertaken (which one would expect given the high value of the pieces of art) such information would have been easily revealed and the entire issue would have been avoided.