As early as the invention of art, affluent individuals have been interested in amassing art collections. However, the perception of art as an investment asset is relatively recent. A recent report from Deloitte reveals that in 2022, the global value of art and collectibles held by ultra-high-net-worth individuals crossed $2 trillion. By 2026 this figure is projected to rise to over $2.8 trillion.
In any type of investment, profit is the ultimate focus. However, when it comes to art investment, the challenge often lies in strategizing how to purchase art in a way that guarantees maximum returns. Among wealth managers, whose main objective is to maximize client profits, integrating art and collectibles into client portfolios is common practice. 63% of them are already doing so and 89% of wealth managers in a Deloitte survey believe it should be an industry standard.
Danita Harris, the Managing Partner and Director of Philanthropy at GUICE Wealth Management, says, "An increasing number of high-net-worth individuals and family offices are considering art as a legitimate alternative investment class." She continues to explain that this trend is driven in part by the potential to use art investments for tax mitigation, creation of philanthropic capital, and as legacy assets. The fluctuating traditional financial markets are also leading to increased interest in unconventional investment sectors.
Despite the acknowledgement of the potential in art investment, wealth managers often fail to agree on the best approach to maximize value for their clients. They often find themselves pondering whether purchasing art at auctions or by private sales would lead to higher profits.
Both purchasing methods have their unique advantages and drawbacks, just like in any other investment area. Auction buying, for example, can be unpredictable in terms of prices. While auctions can sometimes be a tool for determining price levels and allow buyers to sense market demand, they can also cause price inflation by excessively promoting certain pieces.
Harris explains that although buying at auctions can provide access to popular pieces and potentially add value via market validation, there are risks involved. These include paying excessively due to competitive bidding and premium fees.
Private sales, on the other hand, provide the opportunity for better negotiation terms. However, this advantage only exists when the buyer has a deep understanding of the art market and connections to high profile dealer networks. A major criticism of private sales is that in the absence of bidding wars, it is hard for most buyers to know if they are paying a fair market price for the piece.
Profit potential in art investment depends on both the purchase and sale price. Therefore, the chosen sales process can greatly impact the price achieved at resale. Auctions, for instance, can potentially enhance resale values as they offer transparency through sales records and ownership histories. The downside of private sales is that they often lack visibility, leading to more cautious buyers and potentially lower prices.
Investors interested in diversifying their portfolios with art should approach it with both passion and strategy. One could start by familiarizing oneself with the art market, understanding major art trends, artist evolutions, and the contrasting dynamics between auctions and private sales.
Building ties with reputable galleries, advisors, or auction houses and ensuring thorough validation of an art piece’s origin, ownership history, and condition, can lead to value discovery. Investors must remember that patience is crucial. Art can offer significant long-term returns and exhibits low correlation with traditional markets. However, as it is an illiquid asset, a calm and patient approach to resale (be it through auction or private sale) is key.