Investing in art is a delicate matter that although it can bring personal and financial fulfillment, can come with some risks if you are not prepared. Before buying and selling fine art, it is best to be familiarized with these 7 risks to avoid or minimize exposure.
Talented art forgers can mimic even the most iconic artists and their works. To avoid this, the art market has applied measures such as catalogs raisonnés, perform stylistic and technical analyses by experts, and limited authentication to the artist themselves. Genuine art verification can be extremely difficult but it will give you peace of mind knowing that your investment is one hundred percent authentic.
2. Ownership Issues
Another risk to consider is entitlement risk. That is why transparent and secure ownership is vital to any market. Legal certainty is required to determine an artwork’s value and also to commercialize it. Defective entitlement may arrive from historical or contemporary robbery, illegal import or export, unauthorized sale, or even bankruptcy. The purchase of title insurance can mitigate these risks, transferring the title risk to the issuer.
Casualty risk remains a constant reminder of the real and tangible properties of art. It is crucial when assessing a collection’s value, to quantify the potential financial loss and its replacement cost. Insurance products and certified art storage warehouses are indispensable to protect investors against the risks associated with physical damage. This can minimize the cost of insurance policies.
4. Currency Exposure
Investor increasing global exposure makes currency risk a common concern. The quotation of the U.S. dollar will affect these portfolios. As a global hub for business, the art market attracts efficient local and international art buyers.
5. Subjectivity in Valuation
The subjective nature of art valuation is inherent and the realizable value of such artwork may vary over time. World-respected organizations devoted to the appraisal profession such as the Appraisers Association of America, have created strict organisms such as the Uniform Standard Of Professional Appraiser Practice to limit subjectivity. These third-party institutions and independent, ethical, appraisers dedicate their lives to provide an objective market valuation.
Art investment is often criticized for its lack of liquidity. Change in taste, the lack of transparent secondary market, and exclusive and often busy clientele are some of the facts to blame. Therefore, it may be challenging to find buyers for a particular work. Even if a work is sold it is unlikely to ensure the work was offered to the person who would’ve paid the highest price for the same. Let’s not forget though, that this is the same lack of liquidity that favorably works for these assets to preserve their value, provide timely negotiation opportunities, and reduce volatility.
7. Underregulated Market
The unregulated art market is seen as a significant risk for newcomers. Such unwritten rules are the cause of obstructions in the efficiency of the art marketplace. Nevertheless, the legal systems of several countries are moving towards a specialization in the art sector. Anti-money laundry, KYC protocols, and initiatives such as ARTAML are starting to be implemented by pioneers to the betterment of art transactions.
Taking these risks into consideration can give you a better understanding of the art market. Avoid falling into these risks by talking to a trustworthy art specialist before investing in an art collection or art piece.