Tapping experts is key when clients invest in art

Mar 4, 2012 @ 12:01 am

By Lavonne Kuykendall

Many financially savvy advisers know that when clients seek advice in buying or evaluating artwork, the advisers themselves will have to draw on a network of experts for guidance.

“You need to have a Rolodex on steroids,” said Peter J. May, a Philadelphia-based independent wealth manager who specializes in art investing for high-net-worth clients.

Financial advisers are in the best position to access experts who can help and collect the necessary knowledge, said Mr. May, who recommends that advisers “always ask another question to find out what makes [the client] tick and what you can do to help them.”

Investors who own fine art or other valuable collectibles can end up with a sizable portion of their net wealth hanging on their walls or stored in a vault, where many advisers never see it, let alone manage it, Mr. May said.

In some instances, advisers neglect to ask a client about their art collection, or they assume that the owner or an art dealer is managing the collection.

That misunderstanding can put an estate at risk if something goes wrong, according to industry experts.

DRAWING ON HIS ROLODEX

Mr. May said that he quizzes his clients to ascertain the type of help they need and vets experts who can assist in appraising and insuring the art collection.

For clients who want to buy or sell artwork, he begins by introducing them to a trusted auctioneer who has experience and contacts with other collectors.

“A good auctioneer may be able to recommend a broker, or they may know of somebody who is thinking about selling,” Mr. May said.

Additionally, specialist associations, such as the American Numismatic Association, for coin collectors, can be a source for approved appraisers and dealers.

Patrician Capital LLC, a multifamily office, manages art collections for its clients.

The average client at that firm has a net worth of $100 million, and many own extensive art collections, said Keith C. Austin III, a wealth management associate at the firm's West Palm Beach, Fla., office.

He and other professionals at the firm get involved with everything from recommending a potential acquisition to bidding on particular items at auction.

“When a client says they want art, we look at the overall portfolio,” Mr. Austin said.

Some clients have as much as 20% of their net worth tied up in art collections, particularly if they have been collecting for many years.

The wealth management advisory firm does its own due diligence on auction houses, and Mr. Austin said that he has developed strong relationships with a variety of top-name art experts.

But even careful vetting is no guarantee that an art sale or purchase will be trouble-free. That means advisers must do even more due diligence when working with clients who have a love of art investing.

To that point, charges of forgery drove one of the most prestigious art dealers in the country out of business late last year.

The firm, Knoedler & Co., is still embroiled in several lawsuits that allege that it sold some 20 forged paintings valued at about $37 million over the past dozen years or more.

UNREGULATED MARKET

Additionally, late last year, the Gagosian Gallery, the largest U.S. art dealer, paid $4.5 million to settle a lawsuit filed by a customer who alleged that the gallery sold him a $2.5 million painting without disclosing that the Metropolitan Museum of Art had a 31% ownership stake and had been promised the rest by the previous owner.

These problems come up in part because the art market is largely unregulated, said Judy Pearson, vice president of Aris Title Insurance Co., which offers title insurance on artwork for a fee that ranges from about 1% to 3% of the artwork's value.

“The art market has long recognized that there is no way to know for sure if there is a break in the chain of title,” she said.

Mr. May said that he recommends insuring the artwork, especially to high-profile clients who plan to donate a work to a museum or charity, where a scandal could embarrass them.

Advisers also must remind clients to update their appraisals and property insurance regularly, though few do, said Dorit Straus, vice president and fine arts manager for Chubb Personal Insurance, a unit of Chubb Corp.

Many advisers just don't realize that policies pay only their face value, she said.

“If you bought an Andy Warhol painting 50 years ago, you might have paid $300 for a work that is now worth $30 million,” said Ms. Straus, who stressed the need to update the appraisals.

When one of his clients says that he or she wants to collect art, adviser Grant Rawdin, chief executive of Wescott Financial Advisory Group LLC, sets a budget for acquisitions to keep things under control.

“Even for wealthier clients, there are liquidity considerations,” he said. “You can calculate what liquid assets they need available to maintain their lifestyles, then look at what they can take out of their portfolio and not miss.”

Mr. Rawdin asks auction house-based art advisers for their opinion on the market potential for the type of art the client wants to buy.

He said that he thinks of it as talking to a fund manager.

CUT-RATE CURATING

Once a collection begins to take shape, Mr. Rawdin recommends that clients have their art curated, which can be surprisingly inexpensive if they take advantage of art school programs that offer graduate students to do the work, he said.

Matthew F. Erskine, a partner at law firm Erskine & Erskine, recommends that art collectors' records include each work's location and provenance, including whether it was a commissioned work.

He also said that it is important to know if the person owns the copyright to the artwork and which works are on consignment.

“They put together a report which tells the story of the collection and puts it in context,” Mr. Rawdin said. “That is when it becomes a collection rather than an aggregation of art.”

lkuykendall@investmentnews.com

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