Share

In 2018, a version of intrepid artist Banksy's Girl with Balloon was sold by Sotheby's in London for £1,042,000 (US$1.3 million). As soon as the auctioneer's gavel fell, the painting slipped through a hidden paper shredder built into the frame, destroying half the image. The half-shredded, newly dubbed Love Is in the Bin (2018) then sold in the same London salesroom for £18.5 million (US$25.3 million) in 2021.

“Ordinarily, you'd say, 'That's a ruined piece of artwork,' when, in fact, the artwork has now been sold for significantly more than it was purchased for," says Alan Binnington, director of the trust specialist team at RBC Wealth Management in Jersey. “It's just so different from anything that's ever happened before, that people become excited and are prepared to pay for it."

The purchase of Love Is in the Bin (2018) is the epitome of art as an asset class, a spontaneous burst in value that represents both the volatility and allure of collecting art as a form of diversifying wealth. The nine-way bidding war for Banksy's Love Is in the Bin (2018) lasted 10 minutes, according to a report from Artsy .

The appetite for art as an asset class has risen among high-net-worth individuals (HNWIs) in recent years, partially as a response to the instability in the financial markets, says Binnington. “When the markets are volatile, people tend to favor investments that they can see and touch, like gold, classic cars and art." According to a report  by the Chartered Alternative Investment Analyst Association (known as CAIA), the contemporary art market appreciated by 15.1 percent in 2020, even as auctions were put on hold or moved into online forums.

However, interest in art as an asset class by HNWIs isn't necessarily about market instability; there's a wider generational trend unfolding.

A new class of interest

High-net-worth Millennials have emerged as key investors in the art market. Their spending patterns, motivations and challenges differ from those of traditional art buyers. Deloitte and ArtTactic's Art and Finance Report 2021  found that the majority (86 percent) of younger collectors (i.e., those under 35 years) rank social impact, emotional value and purpose-led investment in art as their highest motivation, versus 32 percent of older collectors. The survey also found they place a stronger emphasis on the financial aspect of art ownership.

This is reflected in 2021 figures from Christie's , which found that 35 percent of the buyers at auctions were new – a third of whom were Millennials. Buoyed by demand from next-gen wealth, 255-year-old Christie's was the first major auction house to sell a purely digital NFT (non-fungible token) artwork – a form of unique digital asset stored on a blockchain. The piece, Everydays, by Beeple, sold for US$69 million.

Julie Kleis, trust specialist team director at RBC Wealth Management in Jersey, says she's handled a number of works in trusts, but NFTs are an entirely new phenomenon. “I personally don't perceive it as art," she says. But she also says it could very well become more common and accepted. “People have different interpretations about what art is."

The fluidity of art's definition doesn't apply to the complexities of art as an alternative investment. Collecting art carries a unique set of challenges to consider.

Art for more than art's sake

As interest in art as an asset class has risen, trustees have broadened their skillset for supporting their clients, says Binnington. “Now they tend to understand more of the pitfalls and risks."

As an unregulated market, Binnington says, it's important to have independent experts to guide the purchase, and to pay attention as values rise and fall and artists move in and out of fashion. “The old masters have been around for a long time. Therefore, their prices don't fluctuate that much. As you come toward more modern art, prices tend to fluctuate simply because they haven't been around that long," he says. “Then you go to the extreme with NFTs, where it's hard to know if they'll be a multiple of their value or merely a fraction next year."

Of course, investing in a work of art is just the beginning. The next step is where the trustees really come into play, says Kleis. “We also have to consider the tax position – where is the art? Who's enjoying the art? For example some of our clients have a piece of art that we own within our trust structures, but they have it in their homes, so, in effect, they're borrowing it from us."

I had a client who had a violin that had to be kept at a certain temperature and humidity level, but he wanted to play it at a particular concert and the only way he could get it there was to take it on the plane," says Kleis. “So sometimes the risks aren't so easy to manage."

Kleis says there are also scenarios in which a work of art that's meaningful to a family ends up at the centre of a dispute over which members of the next generation will receive it. Placing the art in trust at an early stage can take some of the heat out of a dispute, given that the trustees will be the owners and so they can help navigate these situations says Kleis. “The trustees are well-placed to decide on the appropriate course of action, balancing the wishes of the beneficiaries with the protection of the trust assets."

An (en)viable alternative

According to CAIA, the art market has an estimated global value of US$1.7 trillion, with around US$60 billion in annual transaction volume. But there's something special about art that supersedes financial value. Unlike a structured product or security within a portfolio, art tends to elicit emotional attachment. It makes people feel good.

“Art is a very attractive area for some people," says Binnington. “It's always going to be a much higher risk area … but even if that value falls, you will always be able to display it in your home and admire it.

Find out more about investing in art.


This publication has been issued by Royal Bank of Canada on behalf of certain RBC® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.

The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.

This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither Royal Bank of Canada nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Royal Bank of Canada.

Clients of United Kingdom companies may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. The Channel Island subsidiaries are not covered by the UK Financial Services Compensation Scheme; the offices of Royal Bank of Canada (Channel Islands) Limited in Guernsey and Jersey are covered by the respective compensation schemes in these jurisdictions for deposit taking business only.