Alternative Investing Strategies: Fine Art Investments

By on September 7, 2018

Apart from your common investment vehicles – securities, mutual funds, bonds and real estate – alternative investments, such as funding start-ups, investing in the arts and microlending, can work in concert to bolster a diversified portfolio. The payoffs can be big or small, risky or manageable. But overall, they are something to consider when building a diversified portfolio.

Many high worth individuals will purchase fine art investments, such as paintings, drawings, prints and sculptures to grow their wealth and estate. Fine arts make great investments since the prices aren’t nearly as volatile and the risk of losing value is much lower than typical financial assets.

Just as with any investment, there is some research and essential knowledge you should have before running out to your nearest auction or gallery. So if you are looking to make an investment in some fine art pieces, here are few things to consider before building your personal collection and what to do once you’ve paid for your new asset.

Before Purchasing Fine Art Investments

Purchasing expensive art pieces is not your average impulse buy. So if you haven’t already, sit down with your trusted financial advisor to set some goals and guidelines for your fine art investment strategy.

Set your Investment Goals

First you will need to decide for what purpose do you want to buy art. Are you primarily interested in…

  • Displaying your art in the home as an investment in interior aesthetics
  • Building a collection based around certain artists, styles, genres and/or periods
  • Simply storing the art as an investment
  • Participating in an art fund instead of a private collection
  • etc..

Whatever your motivation for investing in fine art, you will want to know connect with a financial advisors or financial planners who have sufficient expertise or consultants with expert knowledge of fine art investments. And when necessary, seek out your own independent art consultant or appraiser to help you purchase pieces which are likely to increase in value.

Please note, however, that just as with stocks, even art experts cannot 100% predict future demands as tastes change over time and prices are influenced accordingly.

Get a Fair, Unbiased Appraisal of the Art’s Value

Generally investors do thorough evaluations to determine the potential value and return on an asset – investing in art is no different. You may need to determine the authenticity of certain artworks. And you will need to calculate the most accurate value of your collection. This value will be added to your portfolio and used for insurance purposes (see below).

Many parties involved in the sale of art have an incentive to inflate or underestimate the value of works to facilitate sales, commissions, etc.. To complicate matters further, there are numerous forgeries and copies out there. Protect your investment by doing your homework with expert advice and unbiased appraisals (several opinions may be necessary for peace of mind) before you buy.

Know Your Tax Liability

Individuals investing in high valued art must consider the tax implications in ownership. Consultant with a qualified tax advisor on whether or not owning the art outright, or through a separate entity such as a trust or a corporation will trigger a taxable event. And don’t forget about import/export duties and licenses for moving certain artwork across international borders.

If you artwork is meant to be stored, you may be able to cut your assess taxes by storing your art “tax free port” – a secured facility with climate controls in a designated country. Artworks held therein may be sold tax free. The largest free ports in the world, Geneva and Zurich, are estimated to house over $10 billion worth of paintings, sculptures, jewels, gold and other high-value articles. The concentration of high-value items in a “tax free port” may affect your insurance premiums, so weigh your financial burdens accordingly.

Protecting Your Fine Art Investments

If you have decided to make a significant financial investment in art, the first thing you will want to do after you buy your artwork is to insure your asset against damages, loss, theft and natural disasters.

There are numerous ways for insurance agents to protect your fine art investment. Policies may be stand-alone Art Insurance, supplemental to your Homeowner’s Insurance, or tied to the owning business or trust.

Purchasing Art Insurance

By general definition, art insurance can cover such things as:

  • Paintings and drawings
  • Prints and posters
  • Photographs
  • Sculptures
  • Fine jewelry
  • Antiques – weapons, furniture, decorative objects, books or rugs
  • Vintage or Collectible Automobiles
  • Rare wines
  • Coins and stamp Collections
  • Other miscellaneous collectibles

Review the Coverage Terms of Your Art Insurance
Your average homeowners’ and business owners’ policy may not be strong enough to cover a valuable art collection. Read the insurance policy terms in detail, understand what is covered and what is not, and review the valuation method used by your insurer to settle a claim. Run of the mill coverage may vastly undervalue art or cover only enough to buy a reproduction.

As you shop for insurance, consider of every sort of loss or damage scenario that may occur. With some policies, fire and water damage are covered, but perhaps not if the result of an earthquake or a civil disturbance. And many require the policyholder to take certain precautionary measures to protect their fine art investments. Perhaps theft is covered, but perhaps only if certain types of locks and security systems are activated. The possibilities for disclaimers are endless, so do your homework before accepting a policy.

A trustworthy insurance broker can offer advice on how to display and store a collection, to preserve it from physical deterioration and protect it from damage or theft. They also will offer guidance on photographing and documenting your assets with appropriate paperwork. These extra services can be highly worthwhile.

Consider Art Title Insurance

Art title insurance is a specialized category of art insurance that protects buyers in cases where the seller does not have rights to the work being insured. In a market where forgeries and theft is common, this protection will come in handy – particularly with your high-value and famous works of art.

Revisiting the Appraiser for Insurance

When insuring your art investment, many (large) insurers can help find an appraiser to accurately assign a value to your policy. This appraiser should be qualified by a professional association and independent. If your insurance company requires their own appraiser, consider hiring an independent appraiser for a second opinion. If the collection is valuable enough, the second opinion will offer added peace of mind.

Fine Art Investment is One Way to Diversify Your Portfolio

Art is a long-term investment, and most people who buy fine art pieces don’t end up selling them later on. There are no guarantees of profitability, but with a little work and financial planning you can fill your home with beautiful works of art that may prove worthy investments down the line.

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