Art as An Asset

Sarah D. McDaniel, CFA®, Managing Director, Head of Ultra High Net Worth Planning Specialists

Eliana Greenberg, Associate, Ultra High Net Worth Planning Specialists

Art may play a significant role in the context of a collector’s overall wealth. Generally, a collector may segment wealth between financial assets, including stocks, bonds and real estate, from other possessions, such as art.

This separation is sometimes the result of thinking of art as an interest, rather than as an asset. Additionally, the historical opacity and inaccessibility of the art market may also be contributing factors. However, these factors have and are being alleviated. It is because of this increased transparency that a collector should carefully consider the role of art on a balance sheet in addition to the salient implications of owning art.

Of the $63.7 billion in 2017 global art market sales, 52.9% or $33.7 billion was through dealers, 44.7% or $28.5 billion was through public auctions, 2.4% or $1.5 billion was online. Additionally, of the $63.7 billion in 2017 global art market sales, $26.8 billion or 42% were in the USA, $13.4 billion or 21% were in the UK and $12.7 billion or 20% were in China leaving the other 17% or $10.8 billion of sales in other regions.1

Increasingly, more information about the art market has been published. For example, Dr. Clare McAndrew continues to publish “The Art Market,” in which there is vast amounts of information about the size and structure of the art market based on public and private sales. This publication is in addition to other previously published noteworthy reports: “The European Fine Art Foundation Art Market Report” from Dr. Rachel A.J. Pownall and “The Art and Finance Report” by Deloitte. The generation of these and other art market reports is evidence of heightened curiosity and demand for art market information. Specifically, the value of global art market sales in 2017 was $63.7 billion, in 2016 was $56.6 billion, in 2015 it was $63.6 billion and in 2014 it was $68.2 billion.

As the art market evolves, so too do the methods of gaining art exposure. To date, the predominant means of accessing art is from direct purchases. However, there are increasingly new ways of indirectly gaining exposure to the value of art via other types of transactions. Direct purchases of art may be accomplished through the previously described auction houses, dealers, art fairs and online purveyors. Indirect methods of accessing art may be accomplished via art securities, financing and funds.

There were approximately 310,685 businesses operating in the global art, antiques and collectibles market in 2017, comprising 296,540 in the gallery sector and 14,145 auction houses. The art market directly employed an estimated 3 million people in 2017, stable from 2016, and it is calculated that the global art trade spent $19.6 billion on a range of external support services directly linked to their businesses, supporting a further 363,655 jobs.1

While collectors’ rationales for collecting art may differ, the significance of art on a collector’s balance sheet is increasing. As an example, Larry Fink, the chairman and CEO of BlackRock, said, “Two greatest stores of wealth internationally today include contemporary art, and I don’t mean that as a joke, I mean that as a serious asset class, and the other store of wealth today is apartments in Manhattan, Vancouver and London.”2 Interestingly, the evolution of real estate as a definable and measurable asset provides a precedent for art in that real estate and art present similar challenges, including the following:

·         Each asset is unique

·         Valuations can be challenging given that few if any direct comparables exist

·         There are a myriad of indexes with diverse underlying calculations and results

·         Both are highly illiquid

·         Buying, holding and selling costs are considerable

·         Buying and selling are infrequent

The ultimate challenge facing a collector may be what to do with the collection after the collector’s death. Does the collector intend to keep any, a portion or all of the collection together, and who will oversee the art? It is prudent to

create a strategy so as to not put undue financial or emotional pressure on the surviving family. With a succession

plan, the collector may establish legal structures to own and retain the art, appoint art specialists to advise on the

art should other family members not have the requisite knowledge, alleviate the emotional association with the art

given the collector’s death, and mitigate the financial burden of imminent or future taxes. The collector may establish a structure that owns the art and affords the collector the flexibility to draft and customize the governing documents to memorialize the collector’s intention for the art as well as address the needs of the family and the collection. Specifically, the specialists necessary to advise the family with regard to the art can be identified, appointed and instructed according to the specifications of the collector. This way, financial considerations with regard to maintaining the collection may be addressed, and the emotional consequences of being uncertain about decisions concerning the art are mitigated.

Art oftentimes plays a significant role in the context of a collector’s overall wealth. Generally, a collector may segment wealth between financial assets and other possessions such as art; however, art has become increasingly

more accepted as an asset, given “art transactions have recently accounted for over $60 billion annually,”3 art prices have increased 50 to 100 percent over the past 50 years so art originally purchased to decorate a home may now be extremely valuable, and it is estimated that over $3 trillion worth of art is held in private hands.4 It is important for a collector to understand that the size of the art market has increased and the structure of the art market has evolved, thus bringing with it more opportunity, information and responsibility. Therefore, it is prudent for a collector to recognize art on a balance sheet and plan accordingly.

1 Dr. Clare McAndrew, “The Art Market  2018,” Art Basel and UBS.

2 Bloomberg News, “NY Apartments, Art Top Gold as Store of Wealth, BlackRock Chief Says,” 21 April 2015,

http://www.etfa-mag.com/news/n-y--apartments--art-top-gold-as stores-of-wealth-blackrock-chief-says-21449.html?section=.

3 Anna Louie Sussman, “Is Art an Object of Passion or an Asset Like Any Other?”

fittps://www.artsy.net/article/artsy-editorial-artobject-passion-asset-other.

4 Jianping Mel and Michael Moses “Wealth Management for Collectors,” journal of Investment Consulting Vol. 77, No., 72 October 2010 (50-59).

Disclosures:

This material, including all charts and graphs, has been prepared for informational purposes only. It does not provide investment advice or any advice regarding the purchase and/or sale of any investment. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. It is not a recommendation to purchase or sell artwork nor is it to be used to value any artwork.

 Investors must independently evaluate particular artwork, artwork investments and strategies, and should seek the advice of an appropriate third-party advisor for assistance in that regard as Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide advice on artwork. Investing in commodities entails significant risks. These are speculative investments and, as such, their value can be subject to declining market conditions. The value of commodities markets may fluctuate widely based on a variety of factors, including, but not limited to, price volatility and lack of liquidity. Investing in physical commodities, such as art, exposes the investor to other risk considerations such as potentially severe price fluctuations over short periods of time; storage and insurance costs that exceed the custodial and/or brokerage costs associated with the investor’s other portfolio holdings; lack of a fundamental pricing model for art; absence of an income stream compared to other investments; challenges to authenticity and ownership; and lack of regulation.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning, and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters.

Morgan Stanley Smith Barney LLC is not implying an affiliation with, or sponsorship or endorsement with, or the third parties named within this presentation.

Past performance is no guarantee of future results.

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