Phil Whittaker of Sotheby's Institute of Art discusses and analyses the various ways that people can buy art for investment purposes, and explains the fees involved.

Date: Apr 2012

Tags: Art, Asset allocation, Alternatives, Fees, Education

• For HNW individuals who want to learn more about investing in art, the successful ones shop around to find galleries they are interested in and art which they actually like
• Reliable ways of buying art with less danger of getting ripped off include going to a reputable gallery, or buying through an auction
• Buying and selling art incurs high transactions costs
• While art funds exist, most of them either don’t get off the ground initially, or investors lose money through the fund

For HNW individuals who want to learn more about investing in art, Phil Whittaker said in an interview that the worst thing they can do is buy art to try to make money – unless they have at least US$20 million to invest, and at which point that should employ an adviser to do it for them.

For individuals looking to invest on a smaller scale, the successful ones shop around to find galleries they are interested in and art which they actually like. After buying a couple of inexpensive pieces and talking to the people in the galleries, the client will start to be able to trust them, and vice versa.

At that point, the galleries will start selling clients the better-quality items, said Whittaker, because the role of the gallery is to promote artists over the long term, not just sell art to make a quick profit.

Such a relationship takes time to develop, he added, but investors need to keep in mind that collecting art should be a joy, not approached like any other investment.

The process of buying art

According to Whittaker, one of the most reliable ways of buying art with less danger of getting ripped off includes going to a reputable gallery and buying the work of reputable artists.

Investors should expect a typical gallery, depending on the fame of the artist, to probably make a 100% mark-up on the items they sell, and split the profit with the artist, he explained. As the artist’s reputation improves, their share increases.

The other main way of buying art is through an auction. Typically, Whittaker said it is a stepped commission system, so if an individual buys at auction, for example US$100,000, they need to pay 25% commission as a premium. This might fall to 20%, and then again to 12%, above certain thresholds.

For sellers, if they put a piece of art up for sale, and it sells for US$100,000, typically they will get US$90,000, creating a spread for the auction house.

As a result, said Whittaker, it is easy to see how buying and selling art incurs high transactions costs.

Other ways to invest in art

While art funds exist, Whittaker said he wouldn’t advise individuals to invest this way. Most art funds, he explained, either don’t get off the ground initially, or investors lose money through the fund.

Art funds will typically offer 20% returns over five years, yet most art funds don’t perform as well as that, he said.

For example, an art fund of US$200 million, which Whittaker said is mid-sized, would typically charge up to 20% fees, due to the storage, handling and insurance required.

The fund then only has US$160 million remaining to spend on art, and considering the large transaction costs in buying and selling, the fund needs – in order to provide its promised 20% returns – to sell the art at some point for over US$266 million in the space of two to five years.

Unless there is an art bubble, or the fund is particularly lucky to pick the right pieces, Whittaker said this won’t happen.

Further, the art world is quite small, he added, so if people are buying art for fund, then generally market players know about it, so put the price up to try to keep supply stable. Equally, requirements to liquidate the art within five years requires fund managers to offload it, resulting in them increasing supply into a stable market, so prices will fall.