Manage your art as an alternative investment – Forbes | Candle Made Easy

With inflation rising, some advisers see art as a silver lining as an alternative investment unaffected by financial markets. As with many alternative investments, private equity funds such as Masterworks are also developing in the art market. Others select potential winners in the new NFT art market. Still others who own art, whether they are collectors, investors or artists, enjoy the well above market returns that works of art generate. The result is that art is bought by people across the wealth spectrum, from collectors with very high net worth to millennials looking to invest a few thousand dollars. Regardless of their wealth, art collectors who buy art direct are very fee conscious.

Most often, once they have acquired art, their approach is a do-it-yourself (DIY) approach to managing the art. The problem is that the scope of management is always expanding, so using DIY management brings a number of problems, including:

  • You cannot be sure to make optimal decisions as it is difficult to see (or remember) the big picture: the family/market/cultural environment in which the collection exists, as well as the social, economic and regulatory environment around you.
  • Your busy schedule is burdened with matters that can be handled better and more efficiently through delegation.
  • You invest time and energy in important decisions only to drop the ball on executing the critical administrative details, because ultimately your do-it-yourself approach makes you responsible for tracking all the details; and details will fall through the cracks.
  • You only act when a situation has developed or opportunities have been missed because you are reluctant to “start the clock” with hourly billing or other fees.

If, not when, something happens to you as the person responsible for managing the arts, there is no clear succession as to who has access to information, nor do successors have time to fully understand the situation.

Traditionally, the alternative that has all too often been suggested to the do-it-yourself artist or collector is either to sell their collection or to transfer ownership and control of artworks to a non-profit organization – either a public charity or an operating private foundation. Without understanding the bigger picture, these alternatives may not be the best option for the artist, collector, their heirs, or trustees.

Planning promotes consistent decision-making and minimizes problems caused by missed opportunities. Management solves the problem of poor execution; While leadership ensures continuity of ownership and minimizes risks on an outsourcing basis. More importantly, planning for the artist, collector, or family office avoids being forced to relinquish ownership of the collection in order to preserve it.

The management of works of art and other collectibles can be simplified by grouping assets based on the role the owner plays for income tax purposes and the owner’s goals in life and death. To manage collections effectively, you also need access to astute market analysis with the ability to separate significant trends from fads. Expertise with income and inheritance taxes specific to tangible assets; and last but not least, you must be sensitive to the feelings and emotions unique to the collector and heirs.

All this makes a great task. Finding specialized expertise beforehand is probably the only way for the typical collector or artist to maximize the value of their collection.

Inventory your collection

Most collectors do not have a current inventory of their assets; or if the inventory is present, it is missing important information or is in an extremely cryptic format. Inventories in the estate are often designed to minimize the estate tax value of the estate and are seldom complete or detailed enough. Inventories can sometimes be confusing as artists often work in many different mediums and collect artworks, making it difficult to determine who created which artworks in the collection. Therefore, you need expert assistance to describe assets for inventory. The inventory should contain at least the following:

  • List of works created by an artist and owned by you;
  • Authors (including co-authors and collaborations and contact information);
  • creation and acquisition date;
  • Contracts related to work, such as licenses, commissions, etc.;
  • where the items are located;
  • galleries or dealer names along with their contact information; and any documentation relating to the artwork such as catalogues, sales contracts and so on.

Whether you’re using a spreadsheet, a software program, or even an old-fashioned card catalog system, beginning an inventory is critical.

Include in the inventory all references to any existing contractual relationships, including supply agreements, copyright, distribution and reproduction rights. Remember that ownership of artwork does not transfer copyright in that artwork. In some countries, artists retain certain rights to transfer and display artworks even after the sale.

Aggregate your collection

Even with all significant works of art properly inventoried, researched, labeled, and stored, you will most likely be presented with a large number of items, not only easily identifiable valuable art, but also coins, gems, jewelry, furniture, or other collectibles. Each collection of items is associated with masses of documents, catalogues, notes, letters, sales contracts and paperwork. While it doesn’t seem like much, a single piece of paperwork can be crucial in determining an item’s provenance (and therefore value). To support your new collections of items, each with many different tax, provenance, and rating issues, you need to simplify.

A crucial first step towards simplification is the aggregation of articles and the associated paperwork. Items with similar characteristics are grouped together and these groups are given specific rules or guidelines based on trends in the art market, the tax implications of buying or selling and most importantly your preferences.

Manage your collection

Usually only the collector plays an active role in buying and selling art and other collectibles. Advisors and professionals need to help you manage your collections. As part of this management, they need help finding the professionals with the right expertise and experience to manage the collection. Outside expertise must work within the collector’s financial and legal affairs to coordinate property management with investment management of the family fortune – in both routine and emergency situations – without the high price of bringing these specialized services in-house. These professionals provide the collector with the “rolling chassis” for inventory, aggregation, appraisal, storage and management of the collection.

The remarkable “stickiness” of individual collectible ownership encourages long-term understanding and education about how the collectible fits into the larger collection. The financial gain from the immediate sale of a collection can far exceed the comparable gain from an alternative investment. The emotional, personal, and social “returns” to actually owning the collectible often trump the financial rewards; and the wish of both the collector and his heirs is that the collection should not be sold. Indeed, far from having to be wary of “passive” art investors, collectors often become too personally active and emotionally involved in the objects’ ownership. Collectors have more expertise and knowledge of their areas of interest than most professional consultants available to ‘manage’ the collection. The result is that professionals providing curatorial, scholarly, and organizational services are not directly rewarded for their management expertise and access to collectors’ markets.

It’s this stickiness that ultimately causes most of the problems when managing an art collection like an alternative investment. Investors are less likely to have a personal or emotional attachment to their limited partnership interest in a hedge fund and more to a collector than to an art object. To counteract this, you must commit to the discipline of inventory, aggregation, and management.

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