In celebration of Luxembourg’s newly opened free port (see “Le Freeport” Opens in Luxembourg“), consulting giant Deloitte released its third Art and Finance Report on Wednesday. The report (which can be downloaded in full here) offers a wealth of new data and insight into the ever-growing art investment sector, as well as some of the motivations of key stakeholders in the fields of art and finance. All told, 261 private banks, family offices, art collectors, and art professionals contributed to this latest study.

Deloitte Luxembourg and ArtTactic, which conducted the research for the report between April and June 2014, found that the average wealthy individual currently allocates approximately 9 percent of his or her portfolio to art and collectibles. However, particularly in the United States, the firm says, wealth managers are forecasting increased portfolio allocations to art as an investable asset class. They say such an increase will provide “fertile ground for Art & Finance-related services aimed at protecting, leveraging, and enhancing” wealth allocated to the sector.

“Why are you/your clients buying art?”
Source: Deloitte Luxembourg & ArtTactic Art and Finance Report 2014 (p. 56)

The vast majority of art buyers may still not look at their purchases as purely investment-motivated. In fact, only 3 percent of collectors surveyed this year said they took an investment view only when purchasing works. But, the number of respondents tuned in to the potential future performance of the works they collect has risen dramatically.

In 2012, 53 percent of collectors took an investment view, to some extent, on their purchases. Just two years later, in the 2014 survey, that cohort has risen to 76 percent of overall respondents. An even greater 81 percent of arts professionals surveyed in 2014 suggested that their clients claim to take the possibility of a future return on investment into consideration when buying art.

“Do you think that art and collectibles should be part of a wealth management offering?”
Source: Deloitte Luxembourg & ArtTactic Art and Finance Report 2014 (p. 56)

The financial community has been relatively slow to accept art into the fold as a truly viable alternative asset class. Reasons abound. Among them: high transaction costs, little regulation and transparency by which to determine a palatable risk profile, and relatively low liquidity potential.

The percentage of wealth managers who recommend that art take a place in their clients’ portfolios have dropped from an all-time high of 82 percent in 2011 to 63 percent in 2012 and a lower-still 55 percent in 2014. It’s a key indicator that, should the art market want to continue its growth, increased transparency needs to be at the top of its key stakeholders’ agendas. Increased leveraging of market data services such as artnet Analytics, will assist in creating a more open and informed investor base for artworks and is a key means through which greater transparency has and will continue to be brought to the market.

Simultaneously, however, collector interest is driving smaller private banks and family offices to change their tune. Interest in art as an asset class has jumped 9 percent over the past two years, from 53 to 62 percent. Private banks and family offices have responded accordingly, with 53 percent of the former and 57 percent of the latter stating in the 2014 study that they believe art should play a role in their clients’ portfolios. According to the report, family offices in particular have taken the view that art is a key asset class useful for diversifying families’ holdings and weathering market volatility.

“What do you consider the strongest arguments for including art and collectibles in traditional wealth management/private banking?”
Source: Deloitte Luxembourg & ArtTactic Art and Finance Report 2014 (p. 62)

Beyond the diversification argument, rationales for recommending investments in art include responding to increasing client interest in art-related issues and keeping a competitive hand in the game in order to attract client business.

Should the art market continue to grow—with current compound returns on upper-echelon contemporary art ranging from 10.5–14.9 percent in some cases, according to the report—there will continue to be a knock-on effect of art growing in client’s portfolios relative to other asset classes. Thus, even if those clients haven’t actively expanded their art buying, in certain cases, there will be an increasing need to treat those assets more seriously because they will account for a greater percentage of client wealth.

But, the above chart has a potentially more interesting implication with a more macro outlook to the art market’s future. According to Deloitte’s research, client demand related to the general macro-economic status quo has dropped nearly 20 percent in the last two years, from 53 percent to 34 percent. Other assets are performing well. And thus investors aren’t necessarily as concerned with alternative assets, especially assets as practically complex as art, as they might have been in the heart of the recession. Yet, client demand continues to rise, suggesting a tipping point having been reached in the overall view on art’s role in any individual distribution of wealth across various assets.

“Which of the following ‘art and wealth management services’ do you feel would be most relevant to your clients and/or the institution you represent?”
Source: Deloitte Luxembourg & ArtTactic Art and Finance Report 2014 (p. 58)

So, where is there room for disruption and growth in the art and finance sector? As previously suggested, efforts at creating greater market transparency take the cake. Across the collectors, wealth managers, and art professionals Deloitte surveyed, better art valuation services was the number one request, on average. Requests for improved access to art market research and information followed shortly thereafter, with particularly strong interest from art collectors and industry professionals.

Wealth managers appear to be most interested in art’s potential tax benefits for their clients, expressing the most interest in art philanthropy and estate planning services. That is an area which can, at times, benefit from the art market’s opacity. So, it will be interesting to watch where wealth managers’ interest shifts in the coming years as the structures that bolster that opacity continue to be broken down by innovation.