To the untrained eye, an antique character doll sold at a Sep. 24 art auction curated by London-based private auction house Bonhams auction is perhaps no more than a charming relic from a bygone era.
But, to the participants of the event, the rare character doll, produced within the two decades after the turn of the 20th century by the German manufacturer Kammer & Reinhardt, was enough to draw a £242,500 ($395,750) bid – the highest ever paid for a doll in the world to-date.
The figure, donning a delicate white dress, a boater hat wrapped in a blue ribbon and a contently pensive expression, was the design of 20th German sculpture Arthur Lewin-Funcke and reportedly modeled after the artist’s own daughter. It and several other dolls manufactured by Kammer & Reinhardt around the same time also attracted bid prices double and even triple original estimates.
Fine Art: A Multi-Billion Dollar Market
Headlines declaring the high returns made by art dealers are not few and far in between. A rare still life portrait created by French Impressionist painter Vincent Van Gogh is expected to reap an impressive $50 million for publicly-traded, London-based auction house Sotheby’s at a planned auction. Indeed, the roughly $66 billion global fine art market has proven time and again to be lucrative industry for some, and the financial world is increasingly taking notice.
Around 76% of art collectors take an investment view when making a fine art purchase according to a 2014 art and finance report published by accounting firm Deloitte Luxembourg — up from 53 percent in 2012. Meanwhile, the average wealthy individual in the U.S. holds 9 percent of their wealth in treasure assets like fine art and jewelry, though wealth managers expect that percentage to rise. Already, wealthy art investors to China’s flourishing art market hold as much of 17% of their wealth in treasure assets.
The Benefits of Investing In Art
Deloitte recently announced the launch of a new U.S. Art and Finance Group, and it should come as no shock that private banks and wealth managers are following suite and growing their art investment businesses. The art market made reaped 47.4 billion euros ($65.9 billion) from global sales in 2013 according to Deloitte’s report– just short of a pre-recession record of 48 billion euros gained in 2007.
Evidently, savvy art investors have done well for themselves over the past decade when compared to investors in more traditional asset classes like stocks or bonds. During this period, fine art as an investment asset class has outperformed most traditional investments vehicles with the exception of U.S. stocks, while those holding either post-war and contemporary or Chinese art has outperformed all traditional asset classes by at least three percentage points.
As evidenced above, fine art has the potential to reap significant monetary returns for investors, and even potentially act as a diversification buffer since, unlike traditional investments assets, its performance isn’t linked to the stock market. But, as Deloitte’s report suggests, many art connoisseurs don’t make purchases based on their expected returns.
Art, by and large, is a purchase made for its intangible aesthetic qualities, and rightfully so. If handled carefully, its holder can enjoy art for decades and even centuries while it continues to accrue value. Translation: you can leave that framed Jeff Koons sketch on your wall for your viewing pleasure knowing very well that it will still continue to appreciate in value. With, unlike traditional investment assets, you aren’t subjected to mandatory early withdraw fees for enjoying your art today.
The Fine Art Market Is Highly Manipulated
If think you’re ready to take the big leap into art investing, be advised that are some lesser attractive realities involved in the process. Valuation is perhaps one of the biggest obstacles to successful and fair investment in fine art. The industry’s heavy reliance on the traditional gallery-focused model still poses some risk to novice and even more veteran investors.
In this model, a handful of Western collectors, art galleries and museums dominate the fine art market in a game that would perhaps be considered blatently illegal in most other markets. Transactions are conducted in secret, and high-profile, “taste-making” collectors that can significantly boost the value of a work are given priority on often steeply-discounted purchases.
In comparison, prices for traditional investments can easily found on exchanges such as the NASDAQ, and price manipulation – while possible – can be more easily uncovered and challenged.
While the proliferation of art price databases and indices like Artnet’s C50 index, has helped combat issues of transparency, many only reflect the performance of “blue-chip” artists, like Picasso or Post-War and Contemporary artists and not the entire fine art market at large. And, with fine art auction prices having as much as doubled between 2009 and 2013 – faster than the rate of most professional salaries since the 2008 financial crisis – it is questionable whether entering the high-earning fine art market is reasonably affordable for the average investor.
Fees and Taxes: Fine Art Investment’s Hidden Costs
Transaction, maintenance, and collection management—in addition to taxes–costs of investing in art also pose a legitimate barrier to entering the market. A buyer’s premium paid at auction can cost a collector 15% to 25% of the hammer price, while sales taxes on the premium in the U.S. tack on an additional 8.375% to the sale price, according to the Wall Street Journal. Account for insurance, travel costs, and maintenance, collection management and appraisal fees, and art investors can expect to add 1% to 5% of the value of the work annually.
If you decide to sell your art work, expect to hand Uncle Sam roughly 28% in capital gains taxes according to Forbes, whereas sales on stocks, bonds, and real estate stand at 15% in comparison. And, if you’re lucky enough to inherit highly valued art work from a deceased relative, estate taxes can also set you back substantially.
Art Funds: Fine Art Investment Without All The Costs
For those interested in art investment but not keen on paying the steep fees and costs associated with doing so, an art investment fund like London-based The Fine Art Fund Group may be a bit more your style. Investors to the group’s funds, which include both Chinese and Middle East fine art funds, have the option of borrowing works of art for their personal use.
The Fine Art Fund Group and similar companies can also assist clients with minimizing or even eliminating transaction costs at the point of sale. Still, making an investment into an art fund isn’t cheap – The Fine Art group requires a minimum investment of between $500,000 and $1 million, making Personal Capital’s $100,000 minimum investment in order to become a client look like a bargain.
Ultimately, fine art – or, art created exclusively for aesthetic engagement – is just that for many art buyers, and matters of monetary value pale in comparison to the intellectual and even spiritual value gained by adding a new painting, sculpture, or character doll one’s art vault. Always buy art because you truly enjoy it. Do otherwise and, in a down market, you may end up an unsellable eyesore on your hands.
Related: Is Wine A Good Investment?
Latest posts by Financial Samurai (see all)
- Should I Buy A Vacation Property? - March 24, 2015
- Real Estate: It’s Almost Always Better To Build Than To Buy - February 20, 2015
- When To Kick Your Kids Out Of The House: A Practical Guide - February 4, 2015