Art offers many intangible benefits, and it can have implications for your overall wealth. Here’s how to balance passion and prudence.
When it comes to collecting art, conventional wisdom suggests that you can do it either for love or for money. Actually, you can do it for both. While an artwork can be a source of beauty, it is often also an asset and may be an important part of your overall wealth.
In fact, art and collectibles can easily represent a significant percentage of a wealthy collector’s personal balance sheet—and that share has the potential to grow, for a number of reasons. Record high valuations for traditional assets are providing the means and the motivation for more individuals to look at the art market, and that’s one of the factors driving art prices higher. At the same time, the art market is under the influence of one of the most significant wealth transfers in history.1 Consequently, more individuals who don’t fit the traditional mold of art collector are taking a new interest in art.
Think about how art fits into your bigger-picture goals, whether they’re financial, personal or both.
Whether you’re looking to refine an existing collection or starting with a blank canvas, here are some principles to help guide your decisions.
Artwork offers many intangible benefits, but collecting and owning it can have implications for your overall wealth and estate planning. To that end, it’s important to understand where art fits into the big picture. Successful investors understand the importance of making decisions in the context of an overall strategy—and this is arguably truer for art, which is less liquid and more idiosyncratic than most assets.
If you already have a significant collection, whether it’s one you inherited or amassed over the years, catalogue your artwork and understand the value of key pieces and your total collection. This information will prove essential for making informed decisions, including whether to maintain your collection, if and when to sell a work of art, and how to incorporate your art into estate planning.
If you’re just getting started, think about how art fits into your bigger-picture goals, whether they’re financial, personal or both. If you have a passion for collecting, be sure to consider what percent of your assets you should earmark for art—keeping in mind your liquidity needs, time horizon and additional costs related to storage, security and insurance. If you’re also interested in the potential benefits of art as an asset class, consider the role you hope it might play in your overall wealth.
Art is often treated as a single line on a balance sheet and talked about as a single market, but art is not a monolith. The art market is actually composed of many markets, with different genres, mediums and geographies behaving differently. Because tastes ebb, flow and evolve, different categories of art move in and out of favor, affecting prices.
Resist the urge to put the majority of your art budget in a single work or genre. In art, as in other asset classes, it makes sense to be diversified.
And while art markets tend to echo trends in the broader financial markets, the two do not move in lockstep. For example, when the global economy and markets tumble, the art market often won’t feel the effects for a year or two due to the characteristic illiquidity of art assets. The big auctions traditionally happen only twice a year, which can make it difficult to transact quickly, and few collectors want to take the risk of selling during turbulent periods if they can afford to hold onto their masterpieces until calm returns.
Bottom line: When making decisions about buying or selling art, consider how economic and financial-market conditions may affect prices and liquidity. Likewise, resist the urge to put the majority of your art budget in a single work or genre. In art, as in other asset classes, it makes sense to be diversified.
Savvy art collectors understand that the best acquisitions are those that can be held for decades, sometimes generations. Collecting art requires keeping an eye on the past and the future.
The past is important because the stories behind an artwork—its provenance—greatly impact its value, whether sentimental, historic, financial or all three. For this reason, art collectors should be diligent about learning and documenting the provenance of a piece. It isn’t uncommon, particularly with intergenerational transfers of art, for this critical information to be lost in translation.
Art collectors should also keep an eye on the future—how artwork fits into their estate plans.
At the same time, art collectors should also keep an eye on the future—how artwork fits into their estate plans. Many investors assume that the next generation will take care of it, or that it can easily be donated to a museum. However, the lack of a clear governance plan can present heirs with many unintended consequences, from tax implications and family disputes to forced sales in inopportune markets.
The economics of taste in art are as nuanced as the artworks themselves. With some understanding of what drives markets and a plan for how to manage and bequeath art, it’s possible to make sure that your collection is an asset—not a liability.
Morgan Stanley’s Art Resources Team can help you make informed decisions about your collection when it comes to governance, philanthropy, estate planning and more. Connect with your Morgan Stanley Financial Advisor or Private Wealth Advisor for more information about the team or for a copy of the report, "Art Is an Asset. Here's How to Make It Work for You."
- What percent of my assets should I earmark for art?
- How can I gain a better understanding of the value of my collection?
- How should I think about incorporating art in my estate plan?