We can all acknowledge that what makes a piece of art beautiful comes down to subjective taste, but what isn’t subjective is successful investing. As it turns out, the two can actually go hand in hand, as collecting art is proving to be one of the most fulfilling ways to grow your wealth.
Getting creative with your investments
Much like walking into the Musée d'Orsay, the idea of integrating art into an investment portfolio might seem intimidating — especially if you don’t already have a passion for it. So, it’s helpful to first consider how you can benefit from integrating art into your portfolio. Once you understand this, it’s likely you’ll find yourself developing a passion for it, too.
Within the last few decades, the idea that art is more than just decoration for your home has become more prevalent. This is partly due to the evolution of art’s definition, as well as a greater understanding of its potential in its various forms. The market has expanded beyond the confines of what we now define as classic art — like paintings, sculptures, and antiques — to also include fashion items, physical objects like high-end furniture, leisure goods, and perhaps most significantly in recent times, digital art.
Since 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 5000 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 these examples show, the world of digital art is experiencing immense growth, and it’s incredibly lucrative to artists and intermediaries (galleries and auctions).
With so much innovation surrounding both the creation and distribution of art, there are more opportunities than ever to invest in it — and these opportunities are also more accessible. However, it’s important to be mindful of the fact that art can be consumed and experienced without being limited to physical possession. That’s because 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 category, 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 a vibrant discourse over how to value digital art, which can significantly increase or decrease in value on a daily basis. Even though the democratization of digital art collecting and investing has been made possible through the blockchain-based technology, there are intrinsic and external risks that must be considered and weighed.
Growing wealth using your tastes
Before you invest in art, you need to have a goal in mind. Personal taste, style, and intentions are all important factors when creating an art collection. From a tactical perspective, many new collectors start off by selecting works by emerging or lesser-known artists, which usually attract a lower ticket price. When using this strategy, the hope is 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.
Similarly to how you might consult with a financial advisor, financial planner, accountant, or even a lawyer before making a big investment, it’s best to venture into the world of art investment with professional guidance. With art in particular, partnering with a trusted art advisor, gallerist, art dealer, and art lawyer can be essential in helping to 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 towards price transparency has emerged during the pandemic — along with an increase in digital platforms that facilitate remote dealmaking and lower barriers to entry — there are still significant issues regarding provenance, authenticity, condition reports, insurance, IP rights assignments, 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, from BMO’s High Net Worth Wealth Planning team. “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); and what IP transfers, delivery, and insurance clauses to add in the contract, storage facilities, sales taxes, and more.”
Art, estate planning, and the “Four Ks”
Any estate plan for an art collection should consider the experience the executor has in dealing with art. Often, a knowledgeable agent is engaged to be part of the Will and testament process in order to assist with representation and management of the art. This will help to ensure the assets are handled in such a way that their value is maintained for beneficiaries.
It’s important for the Will and testament to clearly state whether the art is to be treated as a capital investment item or a personal effect so as not to confuse the executor, who may treat your art as a personal item, like furniture or jewelry, and distribute it among loved ones in unequal and emotion-driven ways. You can avoid family squabbles and the risk of 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:
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Know what you own: Perform a complete disclosure, inventory, and identification with a clear and reasonable valuation of the assets of art owned. This should include an up-to-date condition report that considers the history of any damages or restorations made to the work. When it comes to NFTs, you should source information of the computer platform holding them, and ensure that they are sufficiently secured from hackers and viruses. For pieces that have been loaned or leased to galleries, a well-kept list that includes very clear instructions should be maintained to avoid issues later on.
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Know how you own it: Depending on whether the 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, clients may have already decided who the beneficiaries are, whereas if it’s in a holding company, then they don’t only have to plan for the art itself, but also for the company’s shares transfer.
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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. So, determine if you can or should leave it as a collection, divide the art works among family members, sell to third parties, or donate to nonprofits like museums.
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Know who you should leave in charge: Knowing who should execute the transfer is especially useful 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 constellation of different forces. Impulse buying or being attracted to the prestige of having one’s name on a golden card underneath a painting in a museum are all part of the inherent emotionality behind it. Johnson has “experienced all the possible rainbow colours of the good, bad, and ugly,” which she describes as “selling for financial distress at a great loss, selling out of boredom, selling to ride the popularity contest wave, donating at death to create tax relief to the estate, and departure for divorce.”
For each event, a valuation and tax consequence (capital gains or tax credit or deductions) was realized. Having the good fortune of creating a divestment plan and cultivating an art lover’s and expert’s network is always a winning strategy — even when the sale is during distressing circumstances.
Mutual funds and pools, or fractional ownership companies have also been 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. The 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 investment’s ‘passions exuberance’ in temperate check,” Johnson reminds. “The art devotees among us 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.’”
Banking on the museum
The characteristics most commonly 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, BMO Art Collection. “Artworks are placed in the working spaces of the bank for the enjoyment of our employees 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, and as we manage and refine the collection, pieces are loaned, donated to charities and institutional collections, or sold to fund new purchases.”
Knowing what to look for
When you’re ready to purchase art as an investment, you should 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.
Seek advice
If you’re ready to invest in art, it’s likely that you already have some knowledge of the arts and are exploring your possibilities. Your next step should be to determine an investment focus and the extent of your financial commitment. This involves considering which artists, eras, and media interest you. Once you’ve done this, it’s best to consult with a financial professional who specializes in art. They can develop a strategy and plan that works for you so that you can successfully invest.
For more information, please speak with your BMO financial professional.
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