Editor’s note: The following article is by Randall Willette, founder and managing director of Fine Art Wealth Management. As always, we are grateful for his insights and welcome any reader responses.

The world's premier international art show for Modern and Contemporary works opens this week in Basel, Switzerland and will feature nearly 300 leading galleries from around the world with more than 2,500 artists ranging from the great masters of modern art to the latest rising stars. Renowned for its high-quality exhibitions, Art Basel will be attended not only by the global art world including art collectors, art dealers, artists and curators but a new generation of wealth for which art is increasingly becoming an important component of their alternative investment strategy.

The growth of art investing by high net worth individuals is creating a more complex set of financial and non-financial needs which go beyond the traditional range of services family offices offer, and indeed are ill-equipped to provide through their existing business models. 

Today’s global art community is evolving into a complex and intricate web of international art market experts, art investment funds, specialist law firms, and trust and estate practitioners. Successfully managing the art interests of ultra high net worth families must involve sound art governance and long-term financial planning for art assets. 

Holistic approach to art wealth

Traditionally, a small number of family offices have offered clients interested in art a limited number of services including assistance with purchase and sale as well as collection management. However, the majority have not approached art as an asset class requiring its own set of unique financial solutions.

Today, the private collections of UHNW families can rival those of major art institutions and by joining forces an extended family unit can make a significant impact on the global art market. Private museums and foundations are being created at an astounding rate and for many collecting families art giving has become synonymous with art investing. Wealthy collectors are moving toward an increased focus on using their collections and their wealth to realize what they define as a richer life and to achieve a greater sense of fulfillment for themselves and for their community. 

While there are no set rules on what art wealth management services a family office should offer, there are common needs among families with exceptional art wealth. Not every family office will wish to provide every category of art service, but many offices are handpicking a selection of these, including art financing, art succession planning, structured art investment, and art philanthropy, that allows them to function as holistic overseers of a family’s art wealth. 

Art due-diligence

Dealing professionally with art requires time and extensive knowledge. Obtaining recognition as an art expert generally requires intense study, whether theoretical, academic or practical. Information relating to origin, which is often several hundred years old, does not always prove as reliable as one would wish. Since the artist who created the work of art is no longer available, the expert must make an assessment as to the extent to which he believes the piece of work can be attributed to one or other artist on the basis of years of study and experience. 

Over the past few years, provenance, or the history of ownership for a particular work, has become increasingly important. Provenance can help determine the authenticity of a work, establish the work’s historical importance, and trace the work’s legitimacy. Undertaking comprehensive art due-diligence can also help prevent or diminish family disputes. If the assets are not appraised and reviewed for proper title and provenance, distribution of individual items can result in a highly inequitable allocation at time of distribution.

Family offices would be wise to seek advice from independent professionals who have no vested interest in the art and can draw on expertise from both the academic and commercial art worlds. There are a variety of experts within the art market, from art historians and dealers to valuers and restorers. Credentials should include membership of officially approved associations and/or vetting committees for major international art fairs. Experts should be recognized leaders in their field and/or consultants to major museums and collectors.

Art governance

Unlike the financial markets, the art market lacks professional regulation and there are not industry-wide standards of best practice in art governance. Since most family collections are unique and irreplaceable, proper documentation is crucial to protect from theft, damage or other loss, and sound art governance should focus on three key areas including insurance, appraisals and provenance. Most importantly, proper documentation can also decide whether a painting has a lower or higher investment value. 

It takes a tremendous commitment to actively manage an art collection, which is why partnership with an established provider can be an appealing and viable alternative for a family office. At the same time, there are inexperienced art investors who allow themselves to be advised without being capable of assessing whether the experts are providing a good or bad service.  

10 tips for sound art governance:

1. Understand the real value of your family collection and consider it as part of your overall financial and estate planning;

2. Realize that your collection is an investment and drive performance through active management;

3. Preserve and protect the value of your art assets by establishing strict rules for art governance and following "best practice" in art due-diligence;

4. Make certain the collection is well-documented and have it valued every three to five years;

5. Whatever sector you collect, learn about its history, availability, market trends and prices supported by quantitative, qualitative and behavioral research;

6. Build strong relationships with a team of qualified commercial art experts, academics, conservators, insurance advisers, and art valuers;

7. Choose an art holding structure which suits the family's overall financial needs in terms of succession, asset protection, tax planning and flexibility;

8. Plan for the future by discussing with family members early on their level of interest in the collection and what kind of legacy you want to strive for;

9. Should you decide to gift the collection, bring in an art succession planner that can help you work through the range of emotional and practical issues involved;

10. Be aware that the art market is becoming more litigious and retain the services of an experienced art law specialist who can assist with legal due-diligence and dispute resolution.

Financial planning for art assets

Having created or inherited a collection, many families will wish to ensure it is preserved both during their lifetime and for future generations – either for their family or for art lovers more generally. Planning how to transfer a family collection to the next generation can be one of the most critical aspects of building and maintaining a successful collection.

Deciding where the collection may reside after it passes from a family’s control, be it with an institution such as a museum, a family member or another collector, also is a key consideration. And, in the light of potential tax and other financial liabilities, deciding on the best strategy early on can be critical in valuing and transferring a family collection.

Often, the family’s overall financial needs may help to determine the specific vehicle chosen to transfer all or part of a collection from one generation to another. Questions concerning whether children will have the organizational and financial resources to care for a collection and whether there will be sufficient wealth to bequeath an inheritance outside of the collection itself may have to be worked out. Regardless of whether the children have an interest in a family collection, decisions about its disposal can be quite emotional. One key to making sure a collection doesn’t damage family harmony is to work toward open communication and look for creative ways to include family members in the decision-making process.  

Art philanthropy and wealth giving  

It is a fine gesture for families with exceptional art wealth to share their wealth by enriching a museum’s collection with works of art, or to give them on loan to an exhibition in order to share their enjoyment with others. But donating your collection to a museum may involve more than one thinks. Making a donation – particularly when it comes to larger collections or rare or more expensive pieces – can take considerable forethought and planning. Done properly, however, donating art to a museum can benefit not only the institution, but also a family’s financial status and future generations of art lovers or museum patrons. In most cases, partnering with a museum early on is crucial. 

In recent years a growing number of wealthy collectors are choosing to build their own museums rather than donate works to existing institutions. While there are a number of factors driving the growth of private museums globally, a lack of public exhibition space has played a major part. For many collecting families, they simply want their art works to be seen. Though still relatively rare, private museums opened by wealthy collectors are increasing in both number and size globally.

Conclusion

By their very nature, family offices are customized vehicles that are built around the explicit needs of a family and all its members. Many UHNW families are art lovers, own collections or actively buy and sell in the art market. They require someone who shares their passion for art and understands and appreciates the significance and pleasure in investing in art of high value.

Most importantly, they require a holistic approach to art management tailor-made to their private collection. It takes a tremendous infrastructure and commitment to offer a comprehensive art management service, so a partnership with another or an established provider can be an appealing and viable alternative. As a growing number of art investors choose to work with family offices for a more holistic approach to managing their art wealth, it will become more critical for the service offering to evolve in ways that can better meet the needs of collecting families.