Passion Investing, The Smart Way

Classic cars are becoming more important to collectors.

Classic cars are becoming more important to collectors.

Investing in art and collectibles is both deeply personal and generational. That’s why the hot collecting categories shift by decades, according to experts who spoke at a Private Asset Management Magazine panel held at the Lambs Club in New York City in May.

Advice for collectors: start by getting the planning right, said Chris Schumacher, director and client relationship manager at Geller & Company, a wealth advisory firm based in New York City. Talk to estate attorneys, and decide what insurance is needed for assets. Plan out cash needs for the next year, two years, and five years, to avoid being forced to sell off assets for liquidity. For art, think about which museums might wish to acquire or be the recipient of your artworks.

It might be worth looking at hiring a family CFO, or an outsourced service such as Geller provides, to manage the household’s human resources as well as your collections, Schumacher said.

Acquiring art takes considerable due diligence, especially to avoid fraud, said Ronni Davidowitz, head of New York’s trusts and estates practice at the law firm Katten, Muchin, Rosenman LLP. She recommends independent appraisals of all artwork.

Keeping track of your art and other collections is key if you want your heirs to understand what they are inheriting. They’ll have to pay taxes 9 months after your death, making it important to plan for those payments in advance. On an ongoing basis, they will also need to pay for the collection’s upkeep and insurance, which requires them to have the same level of passion for the art that you have, Davidowitz said. She suggests thinking carefully about how to divide your collections among your children and heirs, to minimize a “legacy of disharmony.”

Where some investors run into difficulty is in lending their collections to museums and galleries to increase its provenance. The works’ value likely will rise after a show at a major institution, but transporting artwork carries risk, as does storing or repairing it, said Diane Giles, Northeast business development executive at insurer Marsh Private Client Services. The biggest losses to art collections are not theft or fire — both of which represent 13% of losses — but rather damage due to transit, at 53%. Improper installation — hanging a valuable work over a smoky fireplace, failing to bolt an outdoor sculpture to the ground — is also a major cause of loss, she said. Giles recommends using reputable fine-art shipping companies to move art, and making sure to store art correctly: away from flood zones, in temperature-controlled settings.

The new generation of collectors, Giles says, are moving away from Old Master paintings, brown-wood furniture, and silver, and into vintage 60’s muscle cars, watches, and wine — especially in China, where wine has become a major asset class. The highest-flying sectors of collectibles have outperformed the S&P 500 over the last five years, she says, driven higher by a limited supply as collectors gravitate toward flashy items.

Because of the booming market for art of all kinds — today there are 268 art fairs around the world, compared to 69 several years ago, said Michelle Impey, assistant vice president and fine art director at ACE Private Risk Services — it’s possible to acquire a focused, well-thought-out collection in nearly anything. But be sure you know what it’s worth, she cautioned: one out of four investors with $5 million or more of investable assets has never updated the insured value of their collections.

That’s a problem when assets appreciate rapidly. Fancy colored diamonds, for instance, rose 155% in value between 2006 and 2014, compared to 62% for white diamonds.

Heirs don’t always know what they are inheriting, and they may not realize how valuable it is. Impey noted the example of a Calder necklace bought by chance at a flea market for $15 that was later sold at auction for $260,000.

They also may not know how to take care of the collections they now own. Installation hardware has a lifespan, and copper wire can become brittle and break, causing framed works to fall right off the wall.

And wherever the work is hung, Impey said, make sure to know who has access to the collection. About half of art thefts are in private residences — and the FBI says 80% of those are inside jobs, Impey said.