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WEALTH MANAGEMENT - And to My Dog, $12 Million

As art takes up an increasingly large portion of wealthy investors' balance sheets, private banks race to provide sophisticated advisory services.

LEONA HELMSLEY WAS PRETTY particular when it came to certain parts of her will. Over a dozen single-spaced pages, New York’s famed Queen of Mean stipulated in great detail her last wishes: to disinherit two of her four grandchildren, to be sure that her mausoleum was acid-washed or steam-cleaned at least once a year and to be sure to fund the $12 million trust she left for her dog, a Maltese named Trouble. But when it came to her artwork and jewelry, the real estate tycoon, who died in August, left scant instructions to her executor: Sell them and add the funds to her trusts.

With the market for art reaching record highs, rich people ought to treat their art at least as well as their pets. Too often, say experts, they get caught up in sentiment and fail to consider art and other such valuables as real economic assets and key parts of smartly managed portfolios. That’s a serious mistake, since the world’s wealthiest have some $37 trillion in their personal fortunes, according to a recent Capgemini/Merrill Lynch world wealth report. Valuations are notoriously hard to pin down, but art might account for 2 percent or so of that total — or something approaching $1 trillion. Still, appraisals, appropriate asset allocations and estate planning often go unaddressed by many wealthy investors.
Private banks and other wealth managers are scurrying to change that, advising the wealthy on everything from how to bequeath collections to heirs or museums to managing art holdings as part of a diversified balance sheet. Some are forging partnerships with outside experts on art collecting and valuation.

“Art can be a problem asset. It can be illiquid, valuation can be subjective, and it’s not easily divisible when passed on to heirs. But there is growing interest in art, and just about every one of our clients will have a collectible on the balance sheet,” says Janine Racanelli, head of JPMorgan Private Bank’s Advice Lab, which focuses on taxation, capital markets, ownership structures, executive compensation, insurance and other advice for the wealthy.

Art poses particular problems for estate planning, says Phyllis Silverman, vice president and trust product specialist at PNC Wealth Management in Pittsburgh. Changing valuations mean that clients need accurate and regular appraisals to ensure that heirs have enough money to pay taxes and still keep a collection. Notes Racanelli: “If a client wants to bequeath a vast collection to four children and the art is a substantial portion of the client’s balance sheet, there may need to be a separate source of liquidity to pay taxes,” such as an insurance policy paid into a trust to cover tax bills.
Estate planning, as Racanelli observes, can be complicated by the often emotional process of dividing a collection among several children, especially given the sentimental value of artworks. She helps families develop relationships with established museums and advises wealthy investors on building private museums.

PNC recommends that art not exceed 10 to 15 percent of a portfolio to protect against market swings. Periodic valuations aside, art is illiquid, and selling multiple pieces by  an artist at once may drive prices down. “Yes, stock prices may go down, but you can see the market quotations and sell quickly,” Racanelli says. Thus, applying portfolio theory to art only goes so far. “The reason that art is purchased is personal and emotional and doesn’t fit handily with the approach to acquiring other investments.”

HSBC Private Bank has its own art advisory service, but it has also formed partnerships with art specialists to offer advice to clients through third parties. Its latest is with 1858 Limited, a London-based art and design adviser. “This is an important differentiator for a private bank,” says Viola Raikhel, director of international art advisory at 1858. The partnership gives clients an adviser to help with establishing collections, buying and selling at auction, valuations for insurance and other market analysis. Mary Duke, HSBC head of wealth advisory services for the Americas, says the bank tries to encourage a broad view of client portfolios, to include art and family businesses, for example, to get a better handle on risk, asset allocation and performance. But, she adds, “It’s complicated. Often the focus is rightly on the liquid portfolio, the financial assets, because you don’t need a curator to maintain that.”