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EXCLUSIVE GUEST COMMENT: Conflicts Of Interest In The Art Market: A Matter Of Timing And Professionalism

Richard Bagnall Smith, Luke Dugdale, Cadell + Co, 27 November 2015

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Art investment is now a familiar part of private client wealth management but how well do clients and advisors understand the potential conflicts of interest that can arise? This article examines the terrain.

A new generation of wealth has fuelled the number of buyers and sellers in the art market, not to mention the number of those wanting to match individuals from these two groups. Aside from fakes and forgeries, art trustees must therefore also be aware of potential conflicts of interest within this space. Cadell + Co launched earlier this year as the first independent FCA-regulated advisor for art held in trust. In this article, the firm's partner, client management and sales, Richard Bagnall Smith, and partner, wealth management, Luke Dugdale, give their views on how to avoid conflicts of interest when navigating the art world. The editors of this publication are delighted to share their insights and welcome readers to respond with their comments. The views of guest contributions are not necessarily shared by this publication.

Professionalism is the hallmark of our age, and nowhere more so than in the handling of assets held in trust.

In an increasingly litigious world, trustees need to be scrupulously professional in their work, especially when dealing with the rising proportion of art held in trust.
 
The reason is simple: when dealing with art-market institutions, trustees may unwittingly wander into a conflict of interest.

They do not mean to, and neither do the institutions themselves, many of which have long and illustrious histories.

Indeed, trustees would be well-advised to use the services of auction houses and dealers – but only when the time is right. More on that in a moment.
 
Conflicts may arise from the fact that the incentives for auctioneers and dealers are not always aligned with those of trustees. Quite properly, the art-market institutions are interested in the size of their own sales, and the associated revenue, and are not required to think of the trust’s long-term interests.
 
Unlike a new fund manager, who would “clear out” the lower performing equities or bonds, an auction house or dealer will pick the best pieces that will sell well, enhancing their auction sales versus those of their competitors.
 
With this in mind, those pieces that they choose to sell and thus which they would advise the trustee to sell, may not always be in the best interests of the trust. This is where a potential conflict may arise.
 
To take one example, the traditional furniture sector indices show a 40 per cent fall in value over the last ten years, while the Old Master picture sector has fallen 12 per cent during the last five years. Figures such as this have to play a part in trustees’ decisions as to which pieces to consider disposing of.
 
In addition, art-market institutions may well not be the best source of valuations. Auction houses will give long-term deals on cut-price valuations, but usually with the expectation of the work being consigned directly to them with minimal competition. And the commission will be a great deal more than the valuation costs.
 
If a trustee deals direct with an auction house, or has a long-term relationship, it is unlikely they will benefit from the types of discounts available on fees. In fact, for major pieces, not only can the consignment fee be waived, but a percentage of the buyer’s premium can also be given to the seller.
 
Given that the total fees an auction house will charge range between 22 per cent and 37 per cent, the seller can – by using independent, expert advice – end up with a considerably greater sum than expected.
 
Too often, however, the trustee has jumped to the end-game – the sale through Christie’s – without having a fully worked out strategy for which art to sell, which channel to use and what deal can be struck. Such a strategy ought to be devised in consultation with a fully independent art-market professional.
 
Once that strategy is in place, with decisions made as to what to sell and what not, then it will be time to go to the auction houses or dealers and let them do what they do so well, which is to get good prices for the art that they sell.

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