An occasional commentator for this publication on the intersection of wealth management and fine art is Randall Willette, founder and managing director of Fine Art Wealth Management. In this article, Randall considers the family dimension to managing art collections – a multi-sided issue, to be sure. The editors of this news service are pleased to share these insights from an expert; but do not necessarily endorse all contributors’ views and invite responses. Email tom.burroughes@wealthbriefing.com

Managing a portfolio of high value works of art is similar to managing a family business. It’s a fascinating and complex mixture of advantages and disadvantages, costs and benefits, strengths and weaknesses. Family-owned art collections have many things going for them, they can plan long term and have a strong culture as long as family members are committed. But they can also carry a daunting set of disadvantages as they can be rigid, inward looking and unresponsive to change and sometimes swamped by emotional issues.

This white paper is intended for the steward of a family with significant art holdings. If that is you, then whether the collection survives your grandchildren has less to do with having the best curatorial team and more to do with your family's personal involvement and their overarching life values and attitudes. Though seemingly obvious, this is a point worth emphasizing. Too often families depart from the core practices and fundamental life outlook that their forbearers relied on to build the collection in the first place. This paper advises families how to avoid this outcome in a number of ways:

1. Illustrates that passive collecting is not enough alone to sustain and secure a legacy for the family art.

2. Assesses why it pays to be a creator of value when it comes to art and outlines the skills and mind-sets necessary to create future generations of value creators.

3. Identifies that driving performance through active management not only captures value, but also brings business savvy to the family's ethos and collection management style.

Value creation: Key to long-term sustainability for a family collection

Every family collection requires a “founder” who takes the initiative and risk to expand, upgrade, and grow the family's art holdings. Your willingness to assume this role through the strategic purchase, ongoing curatorial management and sale of works of art will determine your ability to directly create value and drive performance through active management. 

The approach to managing a family collection should not be a static one, rather the founder should pursue multiple strategies designed to produce out-performance. Similar to a private equity manager, the steward of the family art should seek not only to engage in the right transaction at the right time and at the right price, but also to enhance the value of each individual artwork that he or she manages.

This can be done through a variety of curatorial and marketing activities practised by successful collectors and dealers. One such strategy is to enhance the physical condition of the family's art assets. Conservation, restoration and cleaning and even re-framing can add significantly to the attractiveness and sale ability. In addition, an individual work can be enhanced through strategic promotion and exhibition while inclusion in an important show at a respected institution can add significant value. Supporting scholarly research and increasing awareness surrounding a body of work are two other effective ways to add value to the family's art holdings. Finally, a curatorial approach and the acquisition of multiple works into a cohesive collection may result in significantly higher prices than the amount each work might command individually.

Since the age of antiquity individuals of wealth have acquired, traded, and competed over objects of beauty and inspiration. What is new is the preponderance of data that serves to provide art investors with an understanding of the risk/return potential inherent in this alternative asset class. The historical performance that emerges from analysis of this data can be highly attractive for the steward of a family collection.

Cultivating future generations of "founders"

While it is easy to fault later generations for failing to look after the family art, the inflection point in the rise and fall of a family collection typically occurs when the founding generation are faced with what to do with the collection when they are no longer able to maintain it.

Some founders decide to either transition the collection into museums, continuing to play a key role in their development, or donate them so that they can enjoy them displayed at other institutions. For a great family collection selling is likely a last resort as it would mean dismantling a lifetime of work. However, even if the decision is not made until their death, most families care deeply for their collections and are interested in ensuring they have a sound future.

Cultivating future generations of "founders" requires developing and executing a succession plan and a genuine commitment by heirs. Family leaders must take concrete actions to cultivate the needed capabilities within the family. Specifically, they should create space for future leaders to develop the ability to thrive in the unstructured and ambiguous environment that typically defines the art market.

For families with fiduciary structures such as art foundations or trusts, future heirs should serve on their committees or boards as a training ground which will help them to learn and practise the skills they will need.  And to the extent that future generations demonstrate a passion for art, identifying and cultivating this passion is another means by which families can perpetuate a culture of ownership necessary for value creation across generations. This ethos, above all else, is the fundamental value that family stewardship rests upon.

Family collections that succeed are those that have struck the right balance between the needs of the collection and those of the family. They usually have a family ‘strategic plan’ to help guide their efforts towards shared objectives and goals, as well as formal family meetings and a formal constitution or set of rules. Just as with running a successful family company, family-owned art collections must find a solution to one central, overriding family issue – they must formulate and adopt policies that strike an appropriate balance between the best interests of the collection on the one hand, and the well-being of the family on the other.

Three Steps to survival of the family collection

Despite many well publicised success stories, it’s a sobering fact that very few established family collections survive through to the second generation. So much depends on the ability of family members to communicate their worries and aspirations with each other, and on their ability to work together to develop a cohesive approach. Three key conclusions are that:

1. Family members can significantly improve the collection's chances of survival by drawing up a family strategic plan that establishes clear ground rules governing the family’s relationship with the collection and defining the responsibilities of family members.

2. Establishing a family art council provides an organised forum for family communication; policy making; strategic planning and conflict resolution.

3. The family’s strategic plan should be drafted and set out in a written constitution that records the family's vision, its agreed values, and its policies in relation to the collection.

Questions concerning whether heirs will have the organisational and financial capacity to look after the collection will also have to be worked out. For those who get it right, the reward goes far beyond transferring knowledge, raising confidence levels, and creating peace of mind. Concerted effort and effective preparation can help ensure the collection will last for future generations.

The role of a facilitator

Family members often think they are communicating in a full and frank manner. On many occasions they are not. Successful communication can be greatly improved by asking an impartial person from outside the family to act as a facilitator. Ideally, this should be a professional consultant with broadly based art world expertise and financial experience, who is skilled in managing group dynamics and in helping family owned businesses. He or she can assist with setting the agenda, moderating or facilitating family meetings, and ensuring an atmosphere in which everyone feels free to express their concerns.  

The facilitator is not there to solve the family’s problems – indeed, it should not be assumed that he or she knows all the answers. The role of an impartial facilitator is to help the family to discuss the issues surrounding the collection in an informed and logical way, to guide family members as they seek out a consensus, and to help them draw together their decisions and set policies that can be codified in a written collection management document.

Conclusion

Just like a family business, every family collection needs management both for itself and in order to share it with the outside world. While the primary value in a family art collection continues to reside in the response it evokes in those that experience it - emotional, personal and impossible to quantify - it is also true that it can be valued in explicit financial terms that can be assessed and managed. As such, when the steward of a family collection uses his or her keen and practiced eye to evaluate works of high intrinsic value through the lens of financial risk and return, they ensure that works targeted for investment by the family will be highly valued and stand the test of time.