Should you invest in Art?

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Investing in art. With record sums achieved auction, how does fine art compare to more traditional asset classes? There’s been a fee shakeup at Fidelity. Active funds will have performance related fees in the future. But is this good news for investors? And why you shouldn’t bank on BoMaD– that’s the Bank of Mum and Dad– who may not have the cash reserves you expect them too.

Welcome to the money show, the FT’s weekly podcast about personal finance and investing. I’m Claer Barrett, FT money editor, bringing you this week’s money news.

The Frieze art fair has come to London this week, and with it, art collectors. Most of the works touted by gallery owners will have rather hefty price tags, which has prompted the FT’s James Pickford to ask, can we really regard art as an alternative investment class? He joins me now to discuss. Welcome James.

Hello.

So, great piece, but does it make sense to treat art as an investment?

Well, you certainly can. But you will require nerves of steel, and it’s not something to be recommended for sort of amateur speculators, I should say. There is a high volatility in works of art in terms of the values they carry. The fees you’re going to pay are far higher than other asset classes. And of course, you just never know whether the artist whose work you’ve bought is going to drop out of fashion tomorrow, or in five years time.

So, you know, thousands of artists with work you can buy. You can just decide to sell their work, but you may not even find a buyer for some of these things because they’ve been forgotten.

Experts say you’ll be pretty lucky to even break even on their own on art. And if you do it very well, if you’d put a little work in, you might an annual return of 10% or something. And obviously, it’s a lot easier to go to the stock market for returns in those sorts of–

Although you can’t pin a share certificate on your wall and gaze at it in wonder every day. But let’s go back to the costs and fees. We’re going to come onto that in our next item too about buying active funds. But if you’re buying an artwork, what kind of cost and fees are typically involved?

It’s the real killer when you’re looking at returns from art. Because let’s say you’re buying at auction. You will typically pay 25% to 30% in the form of a buyer’s commission. So you can imagine, if you were buying a passive fund, and then you could expect as little as 0.2% when you buy that. You can imagine, an auctioneer turns around and says, actually, I’d like a quarter more on top of that, please.

And then, if you decide to sell this work later on– your tastes change or your circumstances change– you go back to the auction house, you’ll pay a seller’s fee of 5% to 10%. So between times, the thing has to go up by 30% to 40% in value just for you to break even. And that is not taking into account some of the ongoing costs you might expect to pay if you’ve got a particularly valuable work of art– insurance, transport, storage, valuation costs.

So the other thing I haven’t mentioned is, you could obviously buy it at a gallery. Then, you don’t quite know what markup the gallery owner is charging on the art. And that would simply be– they usually take 50% and the artist takes 50%, but you’re never quite sure whether you’re getting good value there.

Yes, and we haven’t even gone into the issue of provenance, which is debated every week on one of my favourite programmes Fake or Fortune? I just love that, when people buy something, and they get it out of a skiff and find out it’s an old master. But sadly it doesn’t happen very often. But for people who are buying at auction or from galleries, what kind of length of time will they need to hold onto an artwork in order for its value to typically rise?

It very much depends what it is. But because, obviously, they’re vastly different according to whether it’s an old master– i.e. a painting which has been painted before 1820– or a contemporary work by a living artist, where values can fluctuate wildly. And it depends– even with a big name, a Picasso or whatever, it tends to be of the right thing to command the highest prices.

But experts talk about at least 10 years for fine art. And the market particularly doesn’t like it if you tend to buy and sell something over a very short period. And that’s particularly for the work of living artists. It takes a very dim view of flipping.

And and you will find that, if you buy a contemporary work from a gallerist, they may well decide not to sell you anything else, any of the good stuff, if you do go ahead and flip the work because it’s sort of–

It’s just not done, darling.

It’s not done because it risks fixing a low price, low benchmark public price for their artist, who they’re trying to look after and treat as someone who wants to be a long term investment.

While you’ve been researching this piece, any big no-nos that you’ve come across? Things that you really shouldn’t buy because they won’t sell later on?

I think you will find that– I mean, the market finds that contemporary art are where the biggest rises have been seen, as opposed to old masters, which– before the 1980s, all of the record auction prices were held by old masters but– I don’t know if you remember, you’re probably too young to remember, but 1987, Van Gogh’s Sunflowers sold for around 24 million pounds. And that was the first time that a modern– if you like [INAUDIBLE] modern– but a modern work of art–

I do remember that, actually.–

Had the auction record. And ever since then, auction records have been broken by modern artists and contemporary artists. So people say, you’ll make more money in contemporary art, but of course, it’s more volatile. So you could see old masters as a sort of safe, plodding investment that has been doing, over recent years, exactly what it’s done for previous decades, which is gradually rise in price– but very gradually.

Good, well thanks very much there, Sir James Pickford, deputy money editor– you can read FT Money’s lead feature, all about the risks of investing in art, in the FT FT Money section of the newspaper, or online from Friday at ft.com/money. Still to come, why you shouldn’t bank on BoMaD.

The active versus passive debate took a new twist this week after Fidelity, the global asset manager, announced a major rethink to the fees it charges on its active funds. For next year, it’s going to phase in new fulcrum fees– a confusing sounding name, but one that says will align investment performance with the management fees ordinary investors, like you and me, are charged. Merryn Somerset Webb has written all about the news this week in her column for FT Money, and joins me now on the line. Welcome, Merryn.

Hi Claer.

So you want to welcome this move, but, like many journalists, you’ve been frustrated by the lack of detail in Fidelity’s big announcement this week.

Yeah, absolutely. I mean, I really, really want to welcome it. You know, one of the things that they said when they announced it was that cost is the big thing that the industry can’t duck anymore. It’s got to confront it. And so this, when they first started talking yesterday– you and I were both on the press call– when they first started talking, it sounded like we were going to hear something really good. We’re going to cut the base fee me on our funds to an absolute minimum, and then we’re going to charge you– what they call a fulcrum fee, but I think we’ll call a performance fee because it is related to performance fee– charge a performance fee on top of that.

And then, if the fund underperforms its index, you get some money back. If it doesn’t underperform, you don’t. So the take that the fund management house gets is really related to whether it outperforms or not. Now, that’s good. That’s a good idea. That’s exactly what we want to see. We want to see the retail investor only being charged for outperformance when it actually sees outperformance.

The problem, as ever, is that the devil is in the details. When Fidelity announced this, they didn’t tell us what the quantum of the base fee was going to be. They didn’t tell us of the quantum of what they call the fulcrum fee– and we call the performance fee– was going to be.

So we ended up absolutely none the wiser. We ended up knowing that they had an idea that lots of people have had before, but we don’t know anything more about how it will be executed, except for a vague suggestion that, if the funds actually do regularly outperform, investors might end up paying even more than they do at the moment. So nice idea, interesting idea, not a new idea, but still an interesting one. But we still can’t tell whether it represents genuine progress for the retail investor or not.

No, and they’ve said that the earliest that they can start introducing this new share class on existing funds would be January 2018, which doesn’t give you all that long to–

I mean, it was slightly bizarre to announce the change without giving us any detail. So it definitely doesn’t pass what you might call the clarity test, which is very frustrating. And of course, this means that they will introduce a new class of funds. So this new charging system won’t apply on current funds because, as Fidelity said, and I found this rather bizarre, their big clients aren’t interested in sudden change.

So they don’t like sudden change– even if it benefits them, apparently. Which leads you to think that maybe it won’t benefit them. So the old fund won’t get the new charging system. There will have to be new funds. So there will have to be a process where people might migrate from old funds to new funds, et cetera. So it’s not going to be quick. It’s not going to be straightforward. And it may well turn out to be incredibly complicated, and complication, as you know, is the enemy of the retail investor.

Indeed. We’ll keep following this story for updates. But in the meantime, you’ve described this as the active funds industry fighting back against the passive revolution. So what are the main criticisms of actively managed funds? One, they are often not reactive.

Two, whether they’re properly active or not, they tend to be extremely expensive, and three that they don’t usually outperform their indices. So the vast majority of actively run funds underperform the index anyway, therefore you’re paying an awful lot to get absolutely nothing back. And my own criticism of them, which goes beyond money, is that they tend to be very bad, as a whole, of performing the social function that shareholder capital requires from them, i.e. that they keep an eye on corporate leadership, that they stop them behaving in a socially irresponsible way, an environmentally irresponsible way– an illegal way, stop them running any [INAUDIBLE] risk, et cetera.

So the fund management industry is supposed to be sort of capitalism’s policeman, effectively. And it’s a job that it does very badly.

And although we don’t have the details of exactly what Fidelity’s going to do, should we at least be encouraged that they, and other active fund managers, are finally recognising that something’s got to give on fees.

Absolutely, I mean, that’s what I was trying to say in the column– I don’t want to write this off. It represents progress because it represents this conversation about how we can find the correct balance between fund managers making profits– which, of course, they must– and result investor being treated fairly.

This is a balance that has been wrong for many decades, now. It’s been skewed horribly in favour of the fund management houses. Any movement in the conversation about how we can redress that balance is really important. So while I’m not yet– and I don’t think anybody is– prepared to come out and say, well, Fidelity has done something that we will massively approve of here, the very fact that it has, as one of the largest fund management companies in the world, and one of the few private ones, that it is now moving the conversation forward has to be considered progress of sorts.

Well, thanks very much there to Merryn Somerset Webb. You can read her column, “Active Fund Managers Start to Fight Back Now” on our web site at ft.com/money, or in Saturday’s FT Money section in the weekend FT. FT money is hosting an ask me anything event on the evening of Wednesday, October the 25th with all US investment columnist Ken Fisher, Fisher investments.

Want to come? Go to ft.com/kenfisherevent to book tickets, which cost 35 pounds, including a glass of wine or two, if you’re quick, and view full terms and conditions.

Are you relying on a future bail out from the bank of mum and dad? Or perhaps you’re a parent preparing to bestow a generous withdrawal on one of your adult children? In either the scenario, Jason Butler, FT Money’s wealth Man columnist, thinks you should think very carefully. And he joins me now in the studio to discuss. Welcome, Jason.

Hello Claer.

So let’s start with BoMaD, the Bank of Mum and Dad, or wealthy parents who feel they should probably help out their children with, say, a housing deposit or other gifts. What should they be wary of?

Well, there are a myriad of issues that they need to think of. But the single biggest one is that their own needs need to come first because we’re all living a lot longer– but not just living a lot longer. We’re going to be younger for a lot longer. And that has implications for the cost of our lifestyle being more than we think, perhaps, you know, than the old traditional thing of you retire, you have a few years of active retirement, and then you fade into the distance, and then eventually die on time. And then your next generation receives the assets.

So we’ve got an issue there of an increasing expectation of a lifestyle, which is going to have cost implications. But then we’ve also got other issues. We’ve got marriage breakdowns. If you give your children money, and then the ex-husband or wife of your daughter or son takes half of it in a divorce settlement, that’s sort of very painful situation.

And we’ve also got people having a lot different approaches to life, people starting businesses, people living abroad, so there’s a lot more complication about the lifestyles of the people receiving the money. So I’m a big fan of people thinking about lending the next generation money, and that has some benefits in the sense that you’re not giving up the right to the money. So if there was a divorce the next generation down, or a bankruptcy, your money’s not hopefully going to disappear down a black hole.

But equally, it means you can put off the decision about actually gifting the money and writing it off to the stage when, perhaps, you’ve got more clarity about what your own needs are. And the beauty of that, of course, is that the generation below that’s borrowing the money will still pay a fair level of interest, but less than they would pay, say, mortgage companies, or credit card companies, or loan providers, and they would pay it back so that the person– the parent of the relative lending the money is getting some return and is, in a way, sort of helping the younger generation whilst also protecting their own situation. So lending money to generations is a good idea, but not in isolation.

OK, so for generations who’ve got baby boomer parents, the expectation that a large inheritance could solve their financial problems in the future sounds pretty foolish. This would be a completely new way of re-thinking that relationship.

Well, it’s one aspect. But the issue for young people is that they got to start thinking they’re going to get an inheritance bailout, whether it’s a loan, a gift, or just money that’s left in the pot. They’ve got to start thinking in the sense that they’re going to probably have two or three careers, that they’re going to have to reinvent themselves several times, that they can and must, in fact, work for longer.

In fact, it’s been proven that work is actually one of the single biggest determinants to mental and physical good health and longevity in general– and life fulfilment. So it’s not a bad thing that you’re going to have to work for longer. But when you’re thinking about your overall financial plan, it means that you’ve got to think much more holistically about a much longer time horizon for both living, but also the fact that you’re going to have to save more. And therefore, the decisions that you have on a daily basis have to be taken in the context of how they reflect to your future self. So in other words, living a life of Riley now has a price to pay when year later on in later life, particularly if you don’t get that inheritance bailout because mum and dad have been skiing, spending the kids’ inheritance.

Yes, I love that term. And the SKIN club, I’ve also heard of– Spending the Kids Inheritance Now.

But one story we’ve covered in Money this year is that the number of wills being disputed in the courts, for example, are on the rise, which is never a good situation for anyone. So how can families talk about money and inheritance while everyone is still alive?

Well, this gets to the nub of my article, and which obviously is a thorny issues, as I say, that talking about money in families is actually harder than talking about sex and relationships. People just find it difficult, awkward, and taboo. And there are lots of reasons for that because money is such an emotive, and it’s a very abstract thing for many people, and they’ve all got their own different perspectives.

The older generation sometimes thinks that, if they have some control over the next generation to treat them nicely, that they do that by perhaps controlling the purse strings. Equally, the younger generations might find it a bit difficult to sort of upset mum and dad, or auntie or uncle, and talk about money and their own issues because it might show that they’ve perhaps not been as successful, or as good with money as they should be.

So the big issue that family should do is, first and foremost, get this out in the open. They need to sort of show some sunlight on the family’s finances. And I talk about the issue of having a family meeting, a family mission statement– actually getting your cards on the table, who’s got what, where, and when, and what people’s issues are. Because you can actually find out that someone’s need over here could be met by someone who has need over here.

So if someone’s got loads of cash not earning a great return, perhaps that could be uncle or auntie lending that to their nephew or niece– but on sensible terms with a charge on the property, a proper commercial arrangement. But equally, it may be that just different members of the family have a different way of focusing on money– and if someone’s got, I think it was called– dyscalculia, that’s it, yeah, sorry, thank you– but if they’ve got a real number phobia, it may be affecting their ability to make smart decisions, not because they’re spendthrift but because they find it difficult to understand.

So I think the issue for families is to actually talk about money, and everyone’s needs, and everyone’s expectations, and everyone’s relationship with it in a structured way. And this is where the most progressive accredited or chartered financial planning firms come in. It’s not about selling you investments or managing your money for a percentage. It’s about paying someone a fee to help coordinate and be the catalyst for this, and help start that conversation, and document what people are saying and thinking in a more formal way– and believe it or not, the more communication you have, and the more understanding you have in a family in a formal setting– perhaps facilitators would say by a professional– means that you’re more likely to develop trust and understanding between the generations, and there’s more likelihood to be better, more comprehensive, more congruent decisions made about the family’s money and the use of it.

Very, very interesting. Well, thanks very much there, Sir Jason Butler, you can read his column now, “Why You Shouldn’t Bank on BoMaD” on ft.com/money, and in this weekend’s FT weekend newspaper. Do you get in touch with us and tell us what you and your family think, whether you’d be happier to talk about money or sex. Maybe we’ll do sex on the podcast next week Jason.

Absolutely.

What do you say?

Definitely.

That’s it for the FT Money show this week. To get in touch with our team of financial experts, email money@ft.com, at the tweet us @ftmoney, or comment on our articles online at ft.com/money. We’ll be back next week at the usual time. Goodbye.