A recently released Art & Finance report, published by Deloitte Luxembourg in conjunction with ArtTactic, found that 76% of art collectors said that they consider estate planning the most relevant wealth management service (up from 69% in 2017). Sixty-five percent of collectors also said that art philanthropy would be a relevant service in the context of incorporating art philanthropy into an estate-planning strategy. The report also notes that mounting pressure to ensure transparency in the art industry and the change in regulations are possible drivers of the increase in demand for estate-planning services. The question is, are wealth managers, family offices and estate planners recognizing this demand?
Keeping Up With Demand
Wealth managers seem to be somewhat well aware of the demand, with 88% saying that they offer estate planning services in-house (up from 77% in 2017) and 65% saying they intend to increase their involvement in estate planning over the next 12 months. Seventy-four percent also said they offered in-house art philanthropy services. This increase in focus on estate planning by wealth managers seems to be paying off, as 67% of wealth managers answered that their clients’ estate plans sufficiently address their art collection (only 38% said as much is true in 2017). Of course, as any estate planner will tell you, 67% isn’t an ideal number, but it’s certainly a major improvement. This also means that opportunity remains for estate planners to provide services to this particular group of clients.
It turns out offering estate planning services in-house isn’t only for the benefit of the clients. Gauthier Vincent, lead wealth management consulting partner at Deloitte in Stamford, Conn., explains that there’s an advantage for the private banks and wealth managers as well. “Everything that allows the private bank to gather more information about a client creates a more intimate, sticky relationship. To advise on estate planning, one has to ask questions about family dynamics. Very personal stuff,” says Vincent.
Family offices don’t appear to be as well-equipped to help clients plan for their art collections. Only 53% of those surveyed responded that clients maintain an inventory of their collection that, at a minimum, identifies each piece, its present location and its approximate value so that the estate could be administered without the collector’s input. What’s worse, that number has actually gone down— in 2017, 61% of clients had such an inventory in place. Twelve percent of family offices also said that they haven’t even discussed the topic!
The numbers were even worse for private banks. More than one-third said they have yet to even discuss art-related wealth with their clients. Some of the reasons for that, according to Micaela Saviano, senior manager and leader of the Art & Finance group at Deloitte Tax LLP in Chicago, is “Art doesn’t produce a regular income stream, its value can be subjective and it is less liquid. Additionally, it is a passion asset; although collectors know they should make plans for their collection, sometimes it is challenging to do so for personal reasons.” Vincent adds that “The art market requires very specialized knowledge—and it’s not a very liquid market, with uncertainty around the value of underlying art. So, it’s not easy to include art value in an underwriting assessment, for instance. Banks must be comfortable with this type of collateral.”
Despite these challenges, art collections are often significant means of wealth for certain clients. It’s therefore still important that wealth managers have an accurate inventory of it, which includes an up-to-date valuation (if, for example, a client decided he wants to sell the collection). Currently, 86% of wealth managers say they rely on a third party for valuation services. As client demand for valuation services continues to rise, wealth managers may eventually benefit from providing such services in house.
Some other challenges with planning for art collections is that “many private banks just don’t have enough volume to justify this in-house expertise,” says Vincent. The aforementioned emotional connection to a collection can also be an obstacle, according to Saviano.
Furthermore, the same reasons driving the demand for art-related estate-planning services are also cited by wealth managers as major roadblocks to incorporating art and collectibles into their services. Lack of internal expertise and the unregulated nature of the market also play a factor. According to Deloitte UK experts, “a lack of transparency with regard to beneficial ownership, together with art’s transportability, high value, and inconsistent and seemingly arbitrary pricing mechanisms, may have led authorities to conclude that art is, or has the potential to be, used as an asset to evade taxes and launder money.” This conclusion is obviously a serious issue for wealth managers and estate planners. New tighter anti-money laundering regulations recently handed down in various jurisdictions may be able to help weed out these unscrupulous collectors and report them to authorities, as they create reporting obligations for art professionals and others with knowledge of any suspicious activity or transaction reports, in addition to certain other mechanisms.