Towards new asset classes
Increasing competition in the private banking sector forces the industry to develop new fields of business. Along with the demand of high net worth individuals (HNWIs) for a more balanced portfolio, there has been recent growth in the global art market. In one year, the global art investment fund market has grown from 760 million USD in 2010 to 960 million USD in 2011. For wealth managers and private banks, this offers new opportunities.
According to a new report published by Deloitte Luxembourg and ArtTactic, 83% of polled private banks in Luxembourg feel that there are strong arguments for including art and collectibles in traditional wealth management. In times of an uncertain economic environment, art is still a solid asset class and is seen as a store of value with the added benefit that its value can be protected and increased.
However, the majority of private banks already offer art services to their clients, be it private views or sponsoring exhibitions and art fairs. When it comes to art consulting, private banks still face a challenges due to the complexity and lack of transparency of the market.
Only 11% of the polled private banks offer art or collectible investment funds to their clients at the moment. Recognising the signs of the times, 39% of the private banks are looking to provide such an investment products to their clients in the next two to three years.
Unlike other asset classes, emotional and aesthetic factors are the main drivers in art investment. In spite of these non-financial arguments, potential investment returns can still be considered stable in times of crises. In order to diversify their portfolio and hedge against inflation, clients are beginning to explore more unusual asset classes.
Since 83% of the polled private banks tend to outsource their art-related services to art advisors, collaboration between the industry and the market is growing. There is still, however, a gap to overcome: while art advisors mainly advice individuals on the buying and selling of art pieces, private banks are interested in the financial aspects of art and its impact on the client portfolio.
Only 22.5% of the collectors are interested in advice on art investment funds. Other services like art valuation, appraisals and educational services are in demand, since it is precisely the emotional aspect of art that can lead to thoughtless purchases.
The resistance of half of the polled banks to include art as a part of their portfolio platform is significant, as there are challenges to be faced. This tenor results from the lack of awareness on the part of private banks as to whether their clients are looking for these kinds of funds or not. The study shows that presently only 11% of private banks offer advice on art investment. The main hurdles are the unregulated nature of the art market, due diligence and a lack of liquidity.
Nevertheless, these challenges do not keep collectors away from demanding collectible assets. If anything, the lack of liquidity discourages investors from choosing these asset classes. The survey shows one thing in particular: the art market is booming, especially in China. Online art fairs, auctions and the development of indices are bringing art closer to people.
This also means that more and more capital is moving to the art market and the need for financial services is increasing. Early developments have run alongside the wealth management sector. This is exactly its weak point, the difficulty of combining the art market and the financial industry. Luxembourg private banks are ready to take up the challenge. EK