Published November 29, 2012
Art Has Cachet -- and Risk
Art can be a tempting investment, with its creative mystique and potential for soaring values. Attending glittering events such as the annual Art Basel Miami Beach, a four-day, celebrity-studded event representing more than 2,000 contemporary artists, makes it that much harder to resist.
Whether your tastes are classic or avant-garde, art is a tangible commodity and, as with any commodity, many investors view it as a hedge against stock market volatility. But before you drop a bundle at a gallery or raise your bidding paddle at auction, understand that art comes with its own risks and expenses.
Aside from the added costs associated with maintaining art, there are the fickle tastes of buyers. "Art follows fashions and trends," says Dorit Straus, worldwide fine art manager at Chubb Group of Insurance Companies. The popularity of various artists and periods fluctuate, so one year's must-have Andy Warhol is another year's Monet.
Having said that, Straus says art investing can be lucrative."If you take a long view of art, many investors have reaped the benefits, but you have to buy right and know what you're buying."
Read on for seven special considerations when investing in art.
Investing in Art is the Like Investing in Gold
Adding art to your portfolio could reap financial benefits in the long term, but you need to understand how it fits in with your other investments.
Investors shouldn't think of art as just another commodity, like gold, for instance. "It's much more nuanced than that," says Jeff Rabin, co-founder and principal of Artvest Partners LLC, an advisory firm for art investors. "I tell clients it's the most opaque, illiquid and unregulated asset."
Given those limitations, Rabin counsels investors to take care of their liquid asset needs before buying art and to build a cash cushion for market downturns. In 2008 and 2009, collectors were selling what Rabin calls "phenomenal works of art" on the cheap in order to raise cash. That may be good for buyers, but it will put a major dent in your long-term portfolio if you're the seller.
Because art comes with so many investment risks, most likely you'll need specific advice from an expert. "Investing in art is much more complicated than people realize," Rabin says. "Just because you're talented in other areas of investing doesn't mean you'll excel in art."
Is that a Manet or a Monet?
Buying any collectible with a long and varied history is not easy. One artist may have several different periods, some more valuable than others.
Purchasing art as an investment requires a somewhat contrarian viewpoint. "If a work of art is considered 'hot,' it's going to be fully priced," says Rabin. "I would caution investors to look beyond what everyone else is chasing."
The art world is also fraught with fraud, making due diligence a priority. The provenance, or origin, of a work of art is essential. But sometimes if a deal looks too neat and clean, especially if it's an old master, it could be a scam. "The more paperwork and data someone is providing, the more suspicious you should be," Rabin says. "And anytime anyone pulls out a Rembrandt or a Raphael, you should run."
Artvest also developed an educational nonprofit website, ArtInvestmentCouncil.com, covering all aspects of art investment, which can be a helpful tool for beginning investors.
How easy is it for an art-lover to walk into a gallery and buy a piece of art? "I wouldn't liken it to any other industry," says Rabin. There are a lot of variables to buying art. Whether or not you can negotiate prices, for instance, depends on the gallery, the popularity of the artist, the condition of the work and many other factors.
An art adviser can help navigate the purchase, but you need to do some research there, too, Rabin says, by making sure the adviser is one you can trust, with pricing that is transparent. Make sure he or she is only paid by you and not receiving fees from a gallery.
Before you stroll into a gallery or art fair, take the time to educate yourself. Rabin recommends reading art publications, visiting galleries and attending events such as Art Basel. "Get familiar with different periods and genres, talk to artists, visit galleries," he says. "Don't buy anything until you've researched the artist."
Even if you aren't able to afford what the top dealers are offering, at least know what they are showing, says Straus. That will give you an idea of what's selling. "The key is to talk to everyone," she adds.
The Cost of Owning Beauty
There are several costs associated with owning art that you won't have with other investments, says Straus. They include regular appraisals, storage, insurance, maintenance, and auction or gallery fees.
Art is subject to all sorts of risks that affect its physical condition and if you want it to maintain its value, it has to stay pristine. And that involves costs. "Art is not like stocks and bonds that you can put in a bank safe," says Straus.
Taxes are another consideration because they could be higher than they would be on a portfolio of stocks or bonds. Art is considered a collectible, and generally will be taxed at the higher capital gains rate of 28%, versus the current 15% for most equities held long term. The rate could be even higher if you sell the art within a year because gains will be taxed as ordinary income.
Investing, Without Owning, Art
If you want to include art in your portfolio purely for investment purposes, without the challenges of owning a physical collection, consider an art fund. In such a fund, investors get much more diversification than they could from amassing a physical collection, according to Rabin, but they don't need to have all the expertise, or worry about storage, restoration, transportation, security and insurance issues.
There are different types of funds with diverse investing strategies. Some are opportunistic, with managers looking across the art world for any good investments. Others are more specific, specializing in certain periods, regions or artists. So, shop around for the one that is appropriate for your portfolio.
Be aware that art funds usually have no liquidity and long holding periods -- eight years is typical, says Rabin. In order for funds to gain returns from investments, the managers need the time to invest the assets and the choice to liquidate them over time. "In that respect they should be thought of more like a private equity fund than a mutual fund," he says.
Protect Your Investment
Insurance for works of art is surprisingly inexpensive, relative to jewelry or other collectibles, says Straus, but it's one of the best investments a collector can make. A regular homeowners insurance policy will not be sufficient and serious investors should find a company that specializes in the specific type of art they collect.
Most fine art policies don't have deductibles, but look for a scheduled, all-risk policy with very few exclusions that will reflect the current value of the artwork, Straus says.
But a good insurance company can do more than provide a policy. Representatives will come to your home and review where your paintings are installed -- for instance, over a working fireplace is a no-no because of the possibility of soot -- how they are hung and stored, and the general environment. In Florida, humidity is a problem, especially for works of art hung outside, Straus says. Some works of art are susceptible to sunlight, but special glass coverings can help protect them. The company can also make suggestions about how to frame art and maintain it.
The company should also be able to help provide a raft of resources to maintain and protect your collection. Chubb developed its Masterpiece Protection Network of packers, movers, storage facilities, appraisers and "everything to do with art," which is continually updated and provided to clients, says Straus.
The Art of Estate Planning
Bequeathing an intact collection to heirs can leave them with a huge tax bill and a difficult asset to manage and sell. Advance estate planning is essential because the potential for appreciation could quickly put an owner over the federal estate tax limits.
Even if you think you can avoid taxes by leaving the collection to a museum upon your death, you should make sure the deal is inked well in advance. "Often a museum is not looking for an entire collection, or there may be works or artists that are not desirable to a museum's collection," says Rabin.
One of the best ways to avoid estate taxes upon your death is to put the art inside certain trusts. An attorney can help you decide which works best for saving taxes and preserving a collection and its appreciation for a charity or family.