Advisor Max Briggs loves art. A planner with FLC Capital Advisors in Palm Desert, Calif., Briggs serves as a board member for the Palm Springs Art Museum. There, he rubs some highly celebrated art-loving elbows, including some of the institution's honorary trustees, like singer Barry Manilow and actor Kirk Douglas.
But even Briggs - whose firm manages $160 million in assets - says his sophisticated clients generally treat their paintings and sculptures "as something they are enjoying, not something they are monetizing in their lifetime."
As is the case with many advisors, Briggs counsels caution when clients start talking about "investing" in art. He compares the art buying to the purchase of a home: He wouldn't presume to tell clients exactly what or where to buy, but when they do purchase expensive art or property, "We have to look at it from a comprehensive financial planning point of view," Briggs explains.
It's no wonder there's a flurry of attention around the art market now, as prices bust through dizzying highs and media coverage of the frenzy becomes ever more widespread. In November, British painter Francis Bacon's three studies of Lucian Freud netted a whopping $142.4 million - the steepest figure ever for a painting at public auction, and almost $60 million higher than auction house Christie's had estimated the painting would get.
It comes as no surprise, then, that financial planners are hearing frequent inquiries from clients about making financial bets on paintings, prints and sculpture. Despite the intoxicatingly high valuations, however, most financial planners know their clients should carefully look before they leap.
"I am cognizant of art as an asset class and aware of its long-term cycles. I know over time there is a market for acquiring and disposing of it," says Win Smathers of Shorebridge Wealth Management in Pittsburgh. But Smathers, whose firm manages $300 million in assets - including those of art market agents - also says the sum total of his art knowledge is "just enough to be truly dangerous."
Even financial planners with more expertise in the art market than Smathers agree that tricky valuation and tax questions arise in the corners where art and wealth preservation meet. Any forays into those arenas should be regarded as a serious undertaking, they say.
Advisors with art world experience have developed lengthy to-do lists for clients who own (or intend to own) valuable paintings or sculptures. Yet before planners wade into the nitty-gritty with clients who want to start buying masterpieces, they first stress that art world neophytes should rarely make purchases of paintings as part of their investment portfolio - because the market simply remains too unpredictable.
Indeed, when Briggs' clients get serious about collecting for investments purposes, he steers them to someone more knowledgeable, like First Foundation Advisors in Irvine, Calif. (Not coincidentally, Briggs sits on the board of First Foundation Advisors' parent bank.)
Rick Keller, a CFP and chairman of First Foundation Advisors, leads a team of four planners who, all interested in art, have successfully marketed themselves as well-versed in art collectors' concerns.
"We set up a group in our company that advises clients," says Keller, whose firm manages $2.5 billion in assets. We don't tell them they have to have 10% of their assets in art or anything like that. But if they want to buy, we tell them here are some characteristics we'd like to see and help them make wise choices."
It helps Keller that the bank affiliated with his advisory firm, an institution of which he is chairman, lends money for the purchase of art works. Although Citibank also offers such loans for ultrahigh-net-worth clients - as well as the services of planners well informed about the art market - few other big banks lend for art purchases, specifically because of the trickiness of the market.
Most of his clients, Keller says, "have no intention of selling their art." But regardless of their plans for the work, his first concern when they buy is that "they don't get taken."
For his own walls, he once overpaid significantly for a work that was misrepresented, even though he had purchased from high-end dealers. Be warned, he says: Counterfeits can turn up anywhere, from art fairs to auctions, no matter how tony the setting. "If it's truly a valuable work, then it's truly worth copying," Keller says.
Although he urges clients to avoid speculating - "You definitely want to buy because you like it and want it, not because you expect to make a lot money" - he also tries to halt them from making a purely emotional purchase.
Yet with art values fluctuating so quickly and dramatically, even more prudent buyers may find it hard to get a handle on current fair prices. Keller says he recommends that clients who want to buy art find a trusted art agent and even explore other ways to evaluate the value of works they are considering.
The good news is that, in recent years, transparency has flooded the once secretive and hard-to-track art market. Nowadays, planners and their clients have plenty of ways to get a sense of art market prices. The growing number of fairs where investment-grade art is sold creates opportunities for financial planners and their clients to window-shop and compare price tags in a somewhat relaxed setting.
As an easier and travel-free option, consider the online data banks that store sales records for publicly auctioned art. Sites like Artnet and Beautiful Asset Advisors, which charge basic annual subscription rates of about $300 a year, "give you an initial sense of the price points," says Katharine Markley, lead market and strategy analyst at Artnet, one pioneer for online art-prices data.
Markley says many financial planners have signed up as Artnet subscribers, particularly since the 2008 downturn in stocks: "We've been working quite closely with that community."
Beautiful Asset Advisors, co-founded by retired New York University Stern School of Business professor Michael Moses, also offers more sophisticated tools for financial planners and their art-buying clients. It even allows buyers to calculate inflation adjustments on historical prices and then compare them with today's.
For advisors looking to offer more specialized help to clients, Moses also sells - at a price tag closer to $30,000 - software that helps rebalance a client's overall portfolio to account for the risks posed by any added art assets.
Although they track public art auctions historically and worldwide, both Moses and Markley know what's missing from their online databases are complete records of private art sales, the ones typically done with dealers. Those may represent half of the estimated $50 billion art market, they say.
For financial planners of art buyers trying to help their clients evaluate their possible next purchases and only relying upon those online databases, the omitted numbers create a gaping and dangerous hole in their knowledge about the value of many works.
Keller encourages clients buying art to supplement online information with help from a trusted, veteran appraiser. In many cities, he says, local museums can provide referrals.
After clients first purchase a work, Keller says he often recommends an appraisal both for estate-tax analysis purposes and for insuring the work. The appraisal will need to be revisited; when used for tax purposes, it should not be more than a few years old.
Typically, clients who buy investment-value works of art place the property in a trust, which helps beneficiaries avoid issues in probate court and shields ownership of the valuable asset from public eyes.
MONETIZING THE COLLECTION
Selling art raises another set of questions - specifically, how to prepare for the steep tax rate on any gains made. Since art qualifies as a collectible, as do antiques, gems, stamps, coins and precious metals, Uncle Sam wants 28% of the gains.
As an alternative to selling, San Diego planner Ronald Friedman suggests another way of getting value out of the art without having to take it off their walls. A financial planner at Friedman Brannen who is a CFP and CPA - his practice is largely based on flat hourly fees, not assets under management - Friedman currently serves as board member of the San Diego Museum of Photographic Arts. He sometimes tells his clients to consider giving the art's "remainder interest" to a charity of their choice. For tax purposes, this allows his clients to claim a charitable deduction on their taxes, but keep the painting hanging at home for an established time period. In order to qualify for the deduction, the clients must irrevocably designate the remainder of the artwork to one or more charitable beneficiaries.
To use this technique, Friedman says, a good appraisal is pivotal. If the value exceeds $500,000, the appraisal needs to be attached to the tax return. "You have to have someone who has experience in doing evaluations," he says. During an audit, the IRS could ask for the specific work of art's sales track record and then compare that against the valuations.
Careful appraisals might also be in order "if you are considering making gifts of artworks to family members," Friedman says. He says he helps clients look for appraisers who have "good track record of defending their evaluations before the IRS." A simple search of online databases "won't fly" in an audit, he adds.
Few of First Foundation's clients actually sell their art investments. Indeed, so many want their families to hold on to the works after their deaths that Keller says one of his main priorities is helping clients ensure the next generation inherits without difficulties and avoids squabbles.
"It may be that all the children love the Andy Warhol," for instance, but do not share such deep attachments to other works, he says. That creates a potential problem.
Keller helps his clients develop estate plans that identify and schedule calendar years of art ownership for their heirs. "Whatever the parents want to do with their art may be articulated in the estate planning documents," he says. Even at the end of a client's life, art remains fundamentally distinct from other investment assets and needs to be treated differently.
Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.
- Pitfalls of Investing in Art & Collectibles
- 7 Smart Strategies for Impact Investing
- Data Mining: Finding the Perfect Client
Register or login for access to this item and much more
All On Wall Street content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access