Fiducia Partners Insights - Is Investing In Art A Good Or Terrible Idea?

Is Investing In Art A Good Or Terrible Idea?

January 17th, 2019 Posted by Family Wealth, Investment 0 thoughts on “Is Investing In Art A Good Or Terrible Idea?”

Art and visiting exhibitions is one of my greatest enjoyments and so this week I decided to write about the fine art investment market. Often referred to as a passion investment, investing in fine art generally has more to do with the joy of owning a particular piece than it does about financial gain. Owning a rare or well-known piece evokes feelings of prestige and status, an attractive lure for many of the world’s wealthiest people.

Investing in art is particularly popular right now, helped by high profile sales like 2017’s auction of Leonardo da Vinci’s Salvator Mundi at Christie’s. The painting sold for $450.3 million, setting a new record for the most expensive painting ever sold and creating an astounding profit for the seller who bought it for $127.5 million in 2013.

However most art investors will tell you that despite the potential for return, you should only buy a piece of art if you love it. Unless you’re buying the most rare and coveted pieces like Salvator Mundi (and even some dispute that painting’s authenticity) you really cannot know if the value will go up or down so buying it because you love it is important.  

As with any investment, there are some big risks to investing in fine art so it is not a decision to take lightly. In many ways, the risks are bigger than that of investments in stocks or bonds which can easily be liquidated unlike art where owners often have to wait a long time before the right buyer comes along. The value of a piece of art is also highly subjective and because of the secrecy in the market it can be hard to determine what similar pieces or other works by the same artist are valued at or were last sold at. If buying (and selling) fine art using a specialist auction house this also means adding huge fees to the price with commission commonly in the region of 20%-50%. Once bought there are other costs to consider such as insurance premiums and storage costs. For example a very valuable painting should be kept in a temperature and humidity controlled strong room to ensure its future value.

Also, as many will know, one of the biggest risks in the art market is that of fraud or forgery. Both are common and the onus is on the buyer to check a piece’s authenticity, provenance and legal ownership meaning due diligence is crucial. Even when an investor or organisation has the best resources at their disposal to steer them away from fraudulent and forged pieces it can still happen. Last year for example the Metropolitan Museum of Art had to give up two pieces within a month of purchase after it was found that one, a vase, was looted by tomb raiders in Italy in the 1970s and the other, a bull’s head, was stolen from a warehouse in Lebanon during the civil war in the 1980s. 

Minimising Risk

To minimise the risks of investing in fine art, the first thing to do when considering a piece is to find out all the information you can about its condition, its provenance, its history, any ongoing maintenance costs, if there are any restrictions and if it is still within copyright etc.

You also need to check on the reputation of the seller and if they have any protections in place for buyers. You want to avoid anything that could jepodise the purchase or cause you to lose your investment. For example if the seller is insolvent at the time you purchase the piece, the seller’s creditors might be able to seize the piece, even after it has been paid for.

In order to determine provenance there are a lot of details to collect and the seller should normally provide records such as a certificate of authenticity, any export licences and documents like wills and estate inventories. International databases of lost and stolen art should also be checked. Note that the art market is a largely unregulated industry and there is no central record of art sales and ownership, which can make it hard to find out about a piece’s history (and easy for fraudsters).

This lack of regulation may seem alien to many investors where in the financial market, heavy regulation makes it illegal to trade on nonpublic information and publicly traded companies must disclose relevant information to investors at the same time to avoid some gaining an advantage. However in the art market insider information is traded all the time, making it hard for a newcomer to join in without seeking advice from established insiders. Far from being an illegal activity, using insider information is a staple of the art market and is a key reason why some make a success of it and others don’t. An example would be if an art dealer has prior knowledge that a major museum plans to show a lesser-known artist they could use that information to sell some pieces to a prospective collector.

If you’re considering delving into the world of fine art investments please do get in touch with me as I have many trusted contacts in the art world and would be delighted to provide an introduction. 

As always, I am very grateful when people who like my articles click on the thumbs up icon above or leave a comment.

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