Hedge funds and family offices regularly adorn their hallways with fine art. But they have more than an affinity for, and the funds to afford, paintings by Monet and Miro. They understand art’s financial utility in a way that some wealth managers have still failed to grasp.
Financial advisors who refuse to acknowledge fine art as an asset class are ignoring two distinct opportunities, according to the 2019 Deloitte Art and Finance Report.
As an asset class, art has performed exceedingly well over the last two decades. Between 2000 and 2018, artnet’s Index of the top 100 artists had an 8% compound annual growth rate, compared to the S&P 500’s 3% over the same period. Including dividends, the S&P 500 returned 4.8%.
In 2018, art was a top performing asset, returning 10.6% while the S&P 500 declined 5.1%.
That comparison can be criticized. Fine art and the S&P 500 are on opposite ends of the liquidity spectrum. But most private wealth advisors (55%) don’t allocate any client money to alternative investments and those who do might not be allocating enough. A compelling case can be made for art as an investment.
In addition to diversifying portfolios, art can serve another purpose for wealth managers.
The wealth management industry is grappling with how to connect with and serve younger generations who will inherit the money and assets of their existing clientele. Art can be a sensible way to bridge them, according to Deloitte.
“In parallel, we have also monitored how the wealth management sector is increasingly responding to the competitive pressures in its own industry, and the role art and collectible wealth are playing in the transition to a more holistic wealth management model,” the summary of the report explains.
Clients want deeper personal or emotional connections with their investments and art is a terrific asset class in that regard. In 2019, most art buyers (65%) said they make purchases as collectors and investors. Only 2% said they bought art purely as an investment, according to Deloitte.
Private banks and family offices appear to see the opportunity and continue to ramp up art-related services. Last year, 72% said they offered art-related services, up from 64% in 2017.
Advising clients about art extends well beyond number-crunching to determine if they can afford a piece of art. Once a client buys art, many conversations stem from the purchase. They need to address whether insurance is required to protect it, the role art plays in risk management, and how it will be transferred to another generation.
A common practice by hedge funds, art can also be borrowed against if an owner needs cash. All of this can help make the client-advisor relationship stickier.
Until relatively recently, the aforementioned was limited to the wealthiest clients. But new ideas and models between the art and finance industries are increasingly opening doors to smaller wealth managers and less-affluent investors.
A lack of transparency and readily available information is the top reason wealth managers don’t offer art-related services or products. Measuring the benefits art in a portfolio is also a concern for advisors, although improving reporting tools could help this in the coming years, according to Deloitte.
“We are seeing a shift towards a more financially motivated art ownership model. This could have a significant impact on the development of the wealth management industry over the next few years.”