One of the privileges of working in the private client sector is the opportunity to get involved in dealing with real assets and to gain a deep interest and knowledge in what is often a fascinating area. Art is one such asset, with high net worth individuals (HNWIs) increasingly interested in acquiring art and collectibles both for profit and for social and cultural reasons.
Global art market sales were estimated at $45 billion for 2016 and, while it is difficult to put a value on the total value of art held by private individuals, estimates of $3 trillion have been quoted.
The trend towards art investment could be a reaction to increased austerity and the shifting moral position over assumed 'hidden wealth' of those involved at the top end of the market. In other words holding art is more visible and, arguably, less likely to invite criticism.
Investment in art can be purely used as a hedge against inflation and fluctuations in currency; it can add to the potential benefits of diversification, with art as part of a wider portfolio of assets.
There has also been a return to investing in 'real assets' after the financial crisis; art is seen as tangible and more easily understood than some of the more complex pre-crisis schemes and products of which investors may now be more wary.
Furthermore, an art collection can be used to generate income if it is of sufficient size or cultural interest and exhibitions and loans of the pieces can be arranged with museums on commercial terms.
Art can be used by specialist lenders to provide security for financing in the same way charges and mortgages can be given over other assets.
For those not wishing to invest directly in tangible assets, or not seeking to build up an art collection, exposure to the art market can still be achieved via art funds and structured products.
However, an interest in art is not necessarily related just to profit. In many cases there can be cultural and emotional motivations for individuals looking to acquire art.
An individual may wish to acquire items from their heritage, particularly with the globalisation of culture, and to share this on a wider scale through museum exhibitions rather than pieces being housed in private galleries in their homes.
Some individuals might be keen to invest in emerging artists to support their development and fund further works and with less of an eye on wealth preservation and growth.
Investment in art can be a real passion so trustees seeking to work with clients with these types of assets need to be able to understand and relate to that enthusiasm; they would be wise to keep themselves informed of the latest trends and activities in the art market as well as developing a knowledge of any niche area in which the client has an interest.
A structure may be used for asset protection; for example for clients looking to ring-fence their assets against political instability or for estate planning purposes to preserve an art collection for the enjoyment of future generations of the family.
Housing the pieces within a trust or foundation structure can provide an ease of administration with the structure taking on the responsibility for, for example, exhibition agreements with museums and galleries or entering into financing arrangements – relieving the ultimate beneficial owner of these activities. The structure can also then appoint any required third parties, such as curators or specialist advisors, and make arrangements in regard to shipping, storage and insurance.
However there are certain risks associated with art, collectibles and antiquities of which trustees and directors should be conscious when dealing with these assets.
A qualified specialist should make a thorough assessment and research and confirm who was responsible for creating a particular work – known as attribution. Issues can arise where phrases such as 'in the school of' or 'after' are used as it may seem as though a piece has been created by a certain artist. There is certainly ambiguity of the language used in the art market of which trustees need to be mindful.
Authentication should also be taken into account to confirm that the piece is not a fake or forgery – or indeed has been lost or stolen. This includes an expert undertaking a stylistic assessment as well as a technical review of the materials and physical characteristics of the work.
A review of the provenance and previous ownership also links with ensuring authenticity; art can change hands numerous times and it is often not until an artwork appears for public sale that questions on ownership arise.
In conclusion, art is as likely to be a passion as a straightforward investment for the wealthy individual. The trustee administering the asset will become highly knowledgeable in undertaking the checks and balances required to carry out their duties, in particular authenticating the provenance of the works.
An original version of this article was first published in the Guernsey Press' Q3 Business Review, September 2017