10th Deloitte Art & Finance Conference Report

Milan, November 2017

Published in Art & Museum Magazine

Introduction

The magnificent Palazzo Mezzanotte, Italy's stock exchange, was the home of this November's 10th Deloitte Art & Finance Conference in Milan. Why would 414 of the world's top financiers and art experts converge from their seemingly disparate worlds to debate the future of art wealth management services and its interaction with the commercial art market and cultural sector?

Quite simply to better advise their clients by learning first-hand about new strategies, initiatives and to portend the future. Not least of these speculations was the search for that holy grail - the quest for the algorithms and mechanisms which seamlessly track performance, evaluate and value works of art. Given the unique characteristics of every single piece of art, turning it into a commodity with indices sufficiently robust to comfort the world's top wealth managers seems a tough call. Nevertheless, it was a challenge that was fully relished by both delegates and panellists, the sheer number attending being testament to the crucial nature of this topic.

Co-organised by the Deloitte offices in Luxembourg and Italy with support from the Borsa Italiana, this year's conference was opened by Adriano Picinati di Torcello, pioneer of global art and finance at Deloitte. Its focus was Family and Corporate Collections Managing Private Art Collections & Corporate Collections of Family Businesses.

Key themes this year included the regulatory environment, the evolving role of the wealth manager and the art advisor, the future impact of technology to support better methodologies for valuations and transactions.

An opening address from Barbara Tagliaferri, Deloitte's Art & Finance Co-ordinator in Italy, discussed the undeniable influence of Italy's cultural heritage on its economy, the origins of which date back to Classical Antiquity and the Renaissance. Whilst Italian heritage is widely recognised, Italy today is way down the pecking order of commercial art market territories, all of which underwent a marked dip in 2016.

Across the world the art market generally recovered in 2017. As Tagliaferri explained, financial institutions are not always prepared for managing clients’ art portfolios as they grow. Expertise in alternative assets such as works of art can help a company to reinforce its brand and strengthen relations with government, universities, clients and other stakeholders. Ms. Tagliaferri described how Deloitte has done just that by bringing together art and finance and advancing the preservation of public and private spaces through the Deloitte Foundation.

Private spaces are important; 3% of global wealth is in family offices and these art collections reflect the intrinsic characteristics of the principals. It is surprising then, that such lovingly acquired treasures are often an intangible aspect of a family's wealth. A panel devoted to the role of the wealth manager in supporting family offices in maintaining and building value was well received.

Speaking on behalf of the Italian Family Office Association, Patrizia Misciattelli proposed that through art, it is possible for the family to form a bridge between generations. She argued that it is more than money and power; it is about values and passion. Art & collectibles have a special role, according to Misciatelli, who draws on a career in banking. She realises that as well as protecting wealth and managing risk, the art advisor should guide the family in leveraging art to enhance its reputation and educate future generations. She lamented that second and third generations too often seek fast performance and focus their minds on venture capital without reflecting on the true value of the portfolio.

Understandably, some will prefer to sell either all or part of a collection where it does not suit their own taste. Melanie Damani of Edmond De Rothchild bank suggested that one should consider an individual’s preferences and not force the taste of the older generation on the younger. The second generation should be free to explore new fields and new areas of collecting. Thus, we witness the evolution of the family story. What was deemed crucial is to teach sound values, genuine curiosity (not easy) and to provide offspring with an eye for new art forms. As always, good Family Office governance is vital to facilitate a successful transfer. 

So how should investments in collectibles be best managed? Panellist and Legal Counsel Alessia Zorloni suggested that preservation of value is the main driver for collectors and for this to happen families must invest in ongoing research, good advice and sustained support of the artists they collect and patronise.

The primary vehicle to maintain wealth will often be to set up a foundation to create an identity for the family.  Collectors need experts who can offer specialist advice on aspects such as the most appropriate legal structure, but also on art related matters such as how to handle a long-term loan to an institution and to educate them as to how the impact on society will be assessed. For this, one needs a deep understanding of their goals and passions as a collector; do they for instance want a dialogue with an artist? To what extent is collecting a psychoanalytical journey? Do they realise that the collection will represent an evolving portrait of the family?

Indeed, just as each family will have its idiosyncrasies, so can each country. Domenico Filipponi, Head of Art Advisory at Italian bank Unicredit suggested that Italians differ to other nations. They become passionate as they work over a number of years to build up a portfolio and this can speed the collecting process. For Filipponi, the process should be about both love of a piece as well as the investment potential. Education was a continuing thread throughout the conference; when Unicredit started to provide art services, this was first on the agenda. 

According to Dave Wolf, director of life insurance provider, Clarity Life, to assist clients you need to educate them on more than just the art. The tax implications of a family which typically has members all over the world are not just those of passing ownership of art on to the next generation, but that of moving pieces across frontiers, something that cannot merely be achieved with a structure. This can happen for many reasons, especially where children migrate and wish to have something transferred to their own country.

One of the most insightful moments of the conference came from Massimo Penco, a lawyer and collector, who made the critical observation that without culture you have no market, no value and no price. Culture is the cornerstone to wealth in fine art and without passion, there is no investment. 

So, today’s wealth managers now have a road map in front of them illustrating some of the pitfalls. One of the biggest issues today was subsequently illustrated in the second panel of the conference exploring Trust, Transparency and globalisation in the Art Market. The first topic was regulation. According to Deloitte’s latest Art & Finance report, 77% of art professionals are in favour of self-regulation. The expert panel concurred. Using cultural heritage Codes of Ethics and industry association membership guidelines and enforcement of those guidelines is preferable to government regulation which is unlikely to accommodate the peculiarities of the art market.

Some countries have lobbied government to relax draconian laws. In Italy for example, there has been a four-year process, approved on August 2nd by the Italian parliament to liberalise age old controls on the circulation of cultural goods. Anything below €13,500 is not subject to control, nor is anything younger than 70 years. Equally India has abolished VAT between states helping free movement of goods, while Germany has imposed recent laws where none previously existed.

Unfortunately, despite harmonisation attempts within the EU, all member countries can continue to enforce their own rules and, worse still, these can be open to misinterpretation in enforcement. Some Italian export offices are not picking up on new legislation and continue to demand licenses!

Self-regulation needs to be credible. Trust in the art market is damaged by conflict of interest. This occurs where dealers self-authenticate artworks, auctioneers vet their own works or engage in practices such as chandelier bidding.  Self-regulation only works if you set the right parameters and enforce them - a point made by Anastasia Tennant, Policy Advisor at the Arts Council which controls and assists international trade in cultural property.

Another obstacle is art crime. Shockingly for Family Offices and others, it is generally accepted that the majority of crimes are perpetrated by insiders. Indeed, a figure from ex FBI agent Laura Patten, now advisor at Deloitte, suggested this was as high as 87%. One investigation showed that 80% of frauds included non-disclosure agreements (NDAs) so confidentiality contracts are not a deterrent. Patten applauded initiatives like Smart Water and lauded the Carabinieri’s stolen objects database as the best in Europe.

Proof of authenticity is now paramount in the wake of recent news items and the role of investigative journalism is important in bringing fraud to light. Journalist Maria Adelaide Marchesoni reminded the audience that apart from public sales in auctions a large part of the market is completely dark and registers of objects which could assist will not be popular for reasons of privacy.

Katya Hills of the Art Loss Register raised the question as to how well-versed art collectors are in conducting due diligence and precisely what role intermediaries and advisors can play in supporting them. This question is raised regularly at art business conferences all over the world. Due diligence initiatives exist in the ADDG and RAM in the UK and Switzerland respectively. The role of Compliance Directors in Wealth Management firms needs to evolve so they can establish a recognised standard of effective due diligence.

Given how popular contemporary art collections remain, getting the buying side right is a must. Insurance giant AXA ART undertook an academic study which seeks to understand how contemporary art is evaluated, what tools are used and the purchase criteria. 

AXA ART Survey 2017 Evaluating Contemporary Art

Explaining how online data supports the process, Professor H Dieter Dahlhoff of Kassel University stated that the research findings corroborated what everyone in the art market inherently knows – collecting is about so much more than buyers and sellers. The criteria are presented as a Venn diagram of Price: Market Value, Quality: Aesthetic Value and Reputational: Brand Value. Effectively the report recognises that it is nigh on impossible to make investment decisions based on indices, algorithms or any form of data interrogation alone. Value is not about price. Artist prominence, emotional bond and reputation cannot be overestimated. 57% of survey respondents cited quality as the most important factor, following their own experience and instinct to determine what good quality is. Purchases in contemporary art are ‘shrouded in secrecy’ and are the eccentric journey of the investor/collector. Nevertheless, all and sundry seek the ultimate quality evaluation tool in the hope of justifying an investment which for one piece alone can be more than a London property. Too few respondents however actually use purchasing tools available to them and most cited the internet as their main source of information.

5th Art & Finance report, Key Findings

The highlight of the conference was a presentation from Adriano Picinati di Torcello and Anders Peterson of art market analysis firm Art Tactic. These two have worked tirelessly to research and publish a 272-page report - the definitive body of knowledge on art and finance.

This year’s report is built on survey results encompassing around 350 survey respondents, including 69 private banks, 27 family offices, 155 art professionals and 107 art collectors. Moreover, 42 experts representing different aspects of the art or finance worlds have shared their insights through articles and interviews. The result is a comprehensive report which illustrates the trends and developments in the art and finance industry and the global art market in general. 

Key findings from this are summarised as follows:

Valuations: now becoming offered as standard alongside art-related services. Private banks are focusing on advisory services and commissioning valuations. Finding the right expertise is a challenge. Art collections management systems and wealth reporting systems are converging to support estate planning and to monitor value and condition.

Philanthropy: in art-related areas is growing. This area could grow to offer better undertakings with more lateral thinking about the opportunities.

Investment tools: price databases, forecasting data, market performance indices, innovations such as blockchain and tagging technology, due diligence and reporting tools, risk management tools with an emphasis on data analytics. Much exists, more is deemed necessary and energy will be focused on increasing accuracy and pulling in subjective along with objective information. AI may also have a role to play here and specifically:

ArtTech: start-ups abound, some will succeed, and others will fail as online continues to develop. Blockchain (Maecenas exhibited at the conference) is hailed as the ultimate in efficient and credible transacting in years to come.

 Art-Secured Lending:  a key development is that credit loss provisions are moving from loss incurred to a loss expected model. This will of course impact the way that financial advisors model risk management for secured lending. New ways of keeping art in situ with the collector in Europe are emerging and will support business growth.

Transparency:  almost 75% of both the art and wealth management markets believe that more transparency, regulation and assistance in the due diligence process will be necessary to enable an efficient and profitable growth in the future, and this with self-regulation at its heart. A very high percentage is concerned with forgery in the wake of scandals hitting the press. Due diligence companies and processes will play a significant role in building trust and confidence in the market.

Education:  information and knowledge sharing must improve both for those in the industry and the collectors/investors they serve.

Conclusion: 

Quite simply, as the very rich compound their wealth, their appetite for luxury investments is growing at a similar rate. The number of UHNWs is predicted to increase by 43% in the next ten years and escalating prices and higher stakes in the art industry has forced financiers to get to grips with the market. Wealth managers are now embarking on the next step, to offer holistic management for their clients rather than advising on individual investments. There is a marked shift from the view of fine art as the outsider alternative asset to be replaced by the need to stay on top of the game across all alternative assets and to integrate fine art collectibles into standard strategy and reporting.

With current focus still very much on contemporary art and the market picking up after a dull 2016, the US is bullish, the EU market is primed to increase and the Middle Eastern, Chinese contemporary and the auctions markets are growing or recovering.

In his conclusion of the conference, Adriano cited Deloitte’s perception of the ecosystem which is the convergence of finance, culture & business.

For the conference it has been a long 10-year journey from uncertain origins in Luxembourg. Today, the conference goes from strength to strength with the report, now in its 5th year representing the nexus of information for what is now a 24-country strong initiative throughout Deloitte.

Pandora Mather-Lees

London, November 2017