Harco van den Oever, of the firm Overstone Art Services, talks about the market in fine art and collectables and about how it should be viewed by the wealth management sector.

The art investment market is now big business and has broken out of its “niche” status to some extent. A recent report by Deloitte, for example, said the market is growing but participants must do more to sort out its funding structure if it is to grow further. So, against such a background, Harco van den Oever, of the firm Overstone Art Services, talks about the market. His firm provides art-backed lending and outsourced art services to the wealth management sector.  The editors of this news service are grateful for his insights but as always, don’t necessarily endorse all the views of a guest contributor and invite readers to respond.

A highly successful and well-attended art and finance conference, hosted by Deloitte in Luxembourg this September, shows that the wealth management industry is starting to notice the opportunities offered by the convergence of art and finance.

In their extensive report, Deloitte and ArtTactic rightly pointed to the fact that wealth creation drives art market growth due to an increasing number of ultra high net worth individuals buying and investing in art. In fact, it is estimated that there is $2 trillion-worth of art in private hands and that art and collectables represent 9 per cent of the net assets of wealthy individuals. Annual art trading is now at more than $66 billion.

In parallel to this, a major generational shift has taken place. The traditional post-war collector was happy to appreciate the art hanging on their walls simply for its beauty and emotional impact. Now however, the succeeding generations have tended to be substantially more financially savvy when it came to any asset class they own, including art.

This is supported by the Deloitte/ArtTactic report which mentions that 76 per cent of art collectors are buying art for collecting purposes, but with an investment view (up from 53 per cent in 2012) and that 62 per cent of them think that art and collectables should be integrated into the wealth management offering.

Experience has shown us that during our many interactions with art collectors and their family offices, the conversation quickly steers towards their personal financial requirements. Some private banks and wealth managers have been quick in identifying this opportunity and have developed the core skills required to address their collecting clients’ needs.

Others are finding the integration of an art advisory and financing capability challenging. Indeed, many relationship managers are uncomfortable having conversations about art. Without an interest in art, proper training and a clear understanding of the benefits of approaching art as an asset class, the decision to integrate art advisory into a wealth manager’s services will not translate in it being delivered by its client-facing staff.

In addition, hiring qualified staff to deliver art services is challenging as there are very few individuals in the market who have a combination of art market and financial services expertise.

Art-backed lending is another service some wealth managers find difficult to deliver despite being highly desirable for clients. From experience, we have found that the typical art-backed borrower is not an individual in a situation of distress. On the contrary, they are often a very active UHNW individual, who for lack of yield, do not keep liquidity on their bank accounts. This means that they often aim to leverage as much as possible the assets under their control.

Unfortunately, wealth managers without a properly developed art service find it difficult to evaluate the value of the collateral and the market’s various idiosyncrasies. Furthermore, in the wake of Basel 3 and more stringent capital adequacy ratios, the banking industry, if not reducing its overall loan exposure, has to perform an increasingly time-consuming due diligence process, often going against the time pressure felt by clients wanting to borrow in order to bridge short- to medium-term funding needs.

One proven solution is to jointly develop the art advisory services with a third party which has expertise in both the financial services industry as well as the art market and can offer advice on buying and selling art, insurance, transport, storage and restoration as well as art-backed lending.

In conclusion, it is increasingly evident that the integration of art and finance is becoming more commonplace and that wealth managers need to be able to respond to their clients’ needs or lose out on the opportunity to offer a truly client-centric value proposition as well as generate additional revenues.