FAMILY OFFICE INSIGHTS

Family office connections: art, wine and collectibles

We are joined by Mary Klein, Jamie Ritchie and Ron Varney to discuss the art, wine and spirits, and collectibles spaces and how family offices view these industries. The discussion includes the effect of COVID-19 on these markets and lessons learned from previous downturns, how family offices can start and support a collection, risk management considerations and engaging next-gen in collections.


Audio transcription

Edward: Welcome to Family Office Connections. I'm Edward Marshall, managing director at Boston Private. Today our program focuses on the art, wine and spirits, and collectible spaces and how family offices are looking at these industries. I'm joined by three accomplished professionals who specialize in this world from a variety of angles and will provide their unique perspectives of working with and for family offices in the art, wine, and collectible arenas. Today we'll discuss several areas including the effect of COVID-19 on individual markets in this space, lessons learned from previous downturns, how to start a collection, how family offices can support collections and potential pitfalls that they should be considering, risk management around collections, valuation, and then next-gen in terms of using collections as a way to engage there. So, let's get started with some brief introductions. First, I'm joined by Ron Varney, founder and principal of Ronald Varney Fine Art Advisors. Ron, give us a quick snapshot of your background.

Ron: Thank you, Ed. Actually, I started in the art market back in 1989 at Sotheby's and I worked in the Trusts and Estates Department for a number of years. And then eventually I started my own firm in 2012, headquartered in New York, essentially representing family offices, private clients throughout the United States and in Europe on a host of art-related issues. A lot of these have to do with buying and selling art, valuing art, authenticating art, and so forth.

Edward: Thanks, Ron. My next guest is Jamie Ritchie, worldwide head of Sotheby's Wine. Jamie, give us a quick overview of your experience.

Jamie: I joined Sotheby's in 1990, 30 years ago, having just celebrated my 30th anniversary on Friday. I'm English-based or born, but I've lived in New York for the last 25 years. I run a global wine and spirit business, which involves auctions in London, New York, and Hong Kong. And we have a retail business in New York and Hong Kong as well, and then expanding into storage. And I oversee the retail and the auction storage business in the entire wine operations.

Edward: Thanks, Jamie. The third panelist today is Mary Klein, an advisor on art for family offices and COO of a global law firm. Mary, give us some insight into your professional background.

Mary: Yeah. Thanks, Ed. I currently serve, as you mentioned, as chief operations financial officer for a multi-stakeholder global law firm. I held senior partnership leadership roles in transactions and governance at Ernst & Young and realigned the operations for a multi-billion dollar single-family office. I represent Carnegie Hall as an advisory director and have been doing that for over nine years. And I serve as a member of the investment advisory committee for The Art Students League of New York.

Edward: Thanks, Mary. All right, let's get underway with our questions. Ron, given that a lot of museums, auctions, and festivals have been canceled or moved to some sort of a virtual setting because of our response to the pandemic, how have you seen this affect the art and collectibles space?

Ron: Well, I think it's certainly shaken confidence in a lot of people. You know, with the entire art market basically paused for the past three-plus months, it's created a lot of doubt about how to sell things, how to get things valued. Just the practical issues of, let's say, managing a collection, all of those have been called into question. So, I think people have had to rethink how they approach the art market with museums closed, the auction houses slowly coming back to life, and the art fairs all but canceled. So, I think that we're kind of reinventing the art market as we used to know it. We're in a phase now where I think that everything is being looked at with a fresh eye. And increasingly, we'll probably get into this as we go along, but I think technology will play a huge role in how this market is redefined. And Jamie can probably talk a little bit about recent sales at Sotheby's that have been virtual with people bidding from salerooms all over the world. This is kind of the new way in which the art market is gonna go forward. But I think technology is gonna play a huge role in this sort of reinvention of the art market.

Edward: Thanks, Ron. Well, Jamie, in that vein, how has the wine and spirit market fared during the pandemic?

Jamie: So, we've been through a massive digital transformation. We were fortunate enough in each of our locations have wine and spirits in our warehouses that we had already inspected and were processing for live auctions. When the stay-at-home orders came, we obviously knew that we weren't gonna be able to convene live auctions with any speed. So, we converted a number of those auctions to online-only auctions. And we sold probably about $8 million worth of property pretty rapidly in 4 or 5 different sales in different locations. So, we were planning... Actually, we recently launched a new auction platform, online auction platform. We're planning to still convert over to that over a period of a couple of years. And essentially, we did a two-year conversion in two months.

So, very, very fast. Yeah, we had multiple challenges but very successful outcomes. Our market has remained very, very strong, very consistent. We didn't adjust any of our auction estimates for any of our sales. And we have set multiple records in the spirits business for the most expensive Japanese whiskey, the most expensive cognac, the most expensive Dalmore. We set records in the wine auction business in terms of the top-end, the most expensive nat fusers, which is actually the bottles of Romanée-Conti. And so our market has been very, very consistent. We just concluded a $23 million series of sales in Hong Kong, which is our third highest series ever.

And so we've been conducting these auctions either online only. We have done some studio auctions, which is where we have an auctioneer performing live in our building, but we don't have any clients attending, so they're taking telephone bids and online bids and using absentee bids. And we actually have one of those coming up this Wednesday. And in Hong Kong, we did revert to live auctions about two weeks ago and we held a series of live auctions while doing the three. I absolutely agree with Ron that technology and the transformation is here. We won't be going back to printed catalogs for the vast majority of our sales. I think that the technology will play the biggest role in terms of the wine and spirits business and how transactions are done going forward.

Edward: Jamie, to follow up on that, how popular, you know, before the pandemic were online auctions in your space?

Jamie: So, it was a transition which we were all sort of slowly going through and navigating. And obviously, you needed a solid platform to be able to do that and we want enough of the tools and the bells and whistles. So, we didn't have all the tools and bells and whistles to do it, but obviously had no choice but to move forward. So, we were on a much slower progression. We've now got in the pipeline of a number of new updates to our technology coming very, very fast to continually improve it. So, I think we weren't fully embracing it beforehand and going on a slower trajectory, and now it's full-speed ahead.

Edward: Thanks. Ron, this is certainly not the first sort of soft times we've seen in these various different markets. Are there things that you can talk to us about some lessons learned that you've learned whether it's, you know, periods after the financial collapse in 2008 or in the '90s? Anything that's a good lesson learned that we can maybe consider going towards 2020?

Ron: Well, it's interesting. If you look back to Black Monday in 1987, that economic upheaval really didn't last that long. The crisis of 2008/2009 was passed pretty quickly. And before you knew it, there were new records being established in the salerooms. Dealers were opening new galleries and new many players were being attracted to the art fairs and to the art market in general. So, in the past, the economic upheavals have pretty much paused the market kind of paralyzed people for a short period of time, but things have always bounced back almost exactly the way they were before. This is very different, though, because I think we have... Every institution of the art market has been completely shut down and is being reinvented now. So, it's a very different and a highly unusual and kind of scary environment. I think the auction house has been really good in kind of leading the way with holding sales and getting some activity, people need to see momentum. I would say the one thing we've learned over the years is this, it's the value of art does not rise and fall with the stock market. Values are affected by matters of taste and demand, really not by Wall Street.

So, I think it's a cliché, but I think art will hold its value. It's just that the mechanism for dealing with art in the market is going to change and I think a lot of people are gonna have to get used to this new reality. And Jamie mentioned, for example, the online catalogs. I would say that before COVID-19, the auction houses were kind of gently trying to coax people to consign property for online sales as though it was a lesser mode of selling. In fact, there were a lot of things that were in the lower kind of value sort of kind of shoved into online sales. Now, that is gonna be the new reality. They're gonna get rid of catalogs, I think, and we're gonna see more and more marketing promotion through digital platforms and online sales. And I think just the recent examples have shown that they can be done very successfully.

Edward: Thanks, Ron. Jamie, is there wine and spirits considerations from the previous downturns or is this something very different?

Jamie: Well, as I said and unlike what Ron was saying, that the wine and spirits, our market does generally track the stock market. We tend to be a leading indicator, the first thing that gets switched off and the first thing that gets switched back on again. So, from the crisis in 2008 when that actually happened, I was in Hong Kong setting up our Hong Kong sales. And the prices went down by about 40% in wine and we were just very, very fortunate that the Asian buyers, particularly the mainland Chinese, came into the market from April 2009 and really brought our market back much, much faster than any of the other markets.

So, we do track the stock market to an extent. I think the... Yeah. With this, we skipped over that downturn. So, we did not have any adjustment to our pricing at all and we still have a strong market today. I think the question is what's gonna happen going forward? We're still selling a lot of wine, but we're not doing the same volumes that we wouldn't do normally. And so with a lower volume, the price is suddenly holding up. And when we did our $23 million series of sales recently, that was the first major, major test of the wine market and, obviously, it held up very, very strongly. So, we're very actually optimistic about the future and having a pretty strong and stable market going forward.

Edward: Thanks. Mary, in terms of technology, a little bit around the virtual and how that could be helpful here, you know, are there other technology solutions that could potentially help the art collectible and wine and spirits markets in this sort of new normal environment?

Mary: Yes. And so the auction houses have really improved the quality of the visual product in terms of scale and moving. And there are also technological solutions where one can actually see how art can look on their wall. And so the auction houses have quickly responded and then very ingenious and inventive with sustaining the art market in very uncertain times. And I fully agree with Ron's comments on, you know, the mechanisms changing and reinventing and also Jamie's comments on the wine and spirits industry, you know, very much driven by supply and demand and perhaps, with restaurants closed down, this is creating part of the opportunity. With buying art online and even pre-COVID, there are so many platforms to buy online as part of art generally becoming more accessible to people, it's really important to know what you're buying. And so, therefore, it becomes even more important to have an experienced art advisor or attorney part of your team when you're buying something that you can't visually see. The auction houses have been organizing personal appointments so you're not buying without seeing the art. And I think these are some of the really interesting trends that are happening and keeping the art market going.

Edward: Thanks, Mary. Ron, you mentioned a couple of other innovations beyond the virtual auctions. Are there other things that you're seeing that's showing through innovation during this time?

Ron: Well, I think that, you know, in many ways, the auction houses have always been very good at sort of reimagining traditional fields of collecting and giving them new punch and new direction. And so, for example, you know, if we talk about areas of growth in the market, obviously luxury goods are becoming much more popular. Watches, wine, even ladies' handbags, certainly jewelry. Whereas the more traditional fields like furniture, decorations, and so forth, those have gone down. So, I think there's gonna be an increased effort to try to reimagine those areas and to give them maybe new marketing and promotion.

For example, I think Christie's had sales recently called, you know, the educated eye or, you know, the masterpiece sale or magnificent objects. And these are basically just repackaging those old traditional fields of collecting like furniture and decorations, but they introduce them in a new way and they bring maybe a freshness to them that they didn't have before. So, I think a lot of what's going on is going to be just how do you bring people more into the market by making things more appealing even if you're not changing the nature of the goods that you're selling? I would say one area that's had explosive growth certainly is watches. It's unbelievable what's happened there. That was always a very strong field. And then, of course, we had the sale a few years ago of that Paul Newman Rolex watch that made $17 million, which was a staggering record. And all of a sudden, Rolex became the watch to have. So, a lot of the developments in the market are driven by sort of the phenomenon of successful sales that kind of focus people on a particular area of the market that they want to now pursue.

Edward: Thanks, Ron. Let's switch gears a little bit and step back and talk about the size of some of these markets. Ron, how would you put a number and a figure to the size of the global market?

Ron: It's staggering. I think Deloitte or one of the big accounting firms does an annual record of the art market in all its diversity and breadth and width and everything. And obviously, untold billions of dollars of turnover per year throughout the world. But all of those numbers are pre-COVID. It's a very different market now. So, to harken back to what it was, it's kind of overlooking the fact that it has changed so much. I think a lot of new buyers will come into the market looking for opportunities, looking for overlooked areas of collecting as a way of kind of launching into collecting. But as far as the size is concerned, there's no question. It's now a global market, players from every corner of the earth are participating. The world has shrunk to the size of a screen on your laptop. There are no secrets anymore. Everything is open for business. You can attend any auction in the world online. So in that sense, the market is really open to everybody now in a way it never was. Like 30 years ago, it was really mostly Europeans and Americans and Asians who were participating. Now it's staggering the growth of the market just in the last few years.

Edward: Where do you... And when you say global market, is that North America going out or is it the rest of the world looking at North America? Or are some of those trends being more cross-border between different countries depending on... Where do you see those trends going?

Ron: Well, I think, you know, traditionally New York was a hub of the art market, London, Paris, and so forth. I think these continue to be very important. And, obviously, Hong Kong is crucial now as well. But I think that people tend to track art in terms of its branded nature, how popular, how saleable it is, how valuable it is. And that cuts across lines. A few years ago, the Chinese were buying mainly Chinese works of art. They were kind of repatriating works that it sold to the west. All of a sudden, we had Chinese buyers bidding on American paintings on works by Georgia O'Keefe, for example, and even Rockwell, which was unheard of. But I think the point is that these have now become kind of global commodities. And people tend to look more in terms of how important the art is, how it's going to hold its value, how branded it is. And in that sense, the borders don't really matter all that much anymore.

Edward: Jamie, what about wine and spirits? Are there areas of growth and decline that you've seen? And then step back a little bit, the size of that market today.

Jamie: So, the auction market, the secondary auction market is around a $500 million a year sales. And we believe from the research we've done that the global fine wine market is about $5 billion a year. And so, really, the auction market is a relatively small part of that, confined to London, New York, and Hong Kong in terms of size. And I think what we've seen is certainly the dominance of Asian buying in our marketplace. You know, we sell well over 60% and have done consistently for a number of years to Asian buyers from our global sales. And so the Asian buyer has been supremely important to us. And our most important sales do happen in Hong Kong. And the reason for that is we do source a lot of wine in Europe and the U.S. and ship it to Hong Kong for sale. So, we've also seen growing markets in Latin America, in North America, and in Europe, particularly with younger buyers. And we've also seen that in the spirits. We're relatively new to the spirits business. We really entered it last year with a $10 million single transaction and have been growing that category very, very fast, which is a very exciting category.

Just so to give you an idea, as part also the technology and the digital transformation, that enables us to reach a new group of buyers who are digitally savvy. And our auctions have been averaging somewhere between 20% and 50% of buyers who are new to Sotheby's. So, 50% was a spirit sale in London. We had 50% of buyers new to Sotheby's. In our Burgundy sell in New York, 50% were under 50. And in our spirits sell in London, in that same spirit sell 42% were under 40. So, we do have sort of a diverse group of buyers. The younger buyers, obviously, don't have wines in their cellars that they can go and get. They need to buy the wines. If they want to taste the rare things, they have to go and buy them and acquire them. And, yeah, rarity is certainly driving the marketplace.

But we've seen a younger demographic shift target. We've seen the digital tools that you can reach these people. And also with the digital tools, yeah, you can target them for... Yeah, you know where they've gone on your website and you know what they've been doing. And so you can use all of that information work, whereas with the printed catalog, you don't know what anyone's done with that. So, I think the technology is gonna drive the change. I think the growth in the market is gonna be a lot of targeting to younger buyers all over the world. We, obviously, do have one thing, which is regulation, which plays probably a bigger role in the wine and spirits market than the art market because it's so regulated. And whether it's tariffs we have in the U.S. right now at 25%, yeah, the regulation will certainly play a big impact in going forward.

Edward: So, on that backdrop, Jamie, I mean, should family and family offices consider art, wine, or collectibles as a distinct asset class?

Jamie: I think so. Yeah. I think in order to invest in the wine and the spirits market, I think you do need to have an interest in it or it's probably too difficult or challenging to understand in terms of the way the market works and all the factors that are involved. But I think there is... We've seen various statistics from various different best of interests that can say that, yeah, the wine market is better than the stock market, the car market is better than the stock market, the watch's market. And sure, we can all create those statistics, but I think, yeah, there is a... Yeah. If you look at the price of Burgundy, for sure, Burgundy has outperformed many different markets. So, I think from my side that there is...but each market is separate, it's individual, and there are different types that drive it. And yeah, you can't necessarily apply all the rules for wine to art or art to wine, etc.

Edward: Mary, given your experience with family offices and working with them, how have they looked at, you know, these different areas and categories as distinct asset classes? What are your thoughts there?

Mary: It is important to view collectibles, even there can be very nuanced whether they're watches or wine, as distinct asset classes, especially if they're quite valuable. And like art, it's good to dialogue amongst the family with what you have and to inventory it. If a life event occurs and there's no proper planning in advance, you could be forced into a situation of disposing of something that's quite valuable and losing a lot of money. So, I think it is important to put these valuables in the same bucket as art and make sure it's inventoried and appraised. There are different appraisals also that are needed for different purposes, whether it's for tax purposes or for insurance purposes. And also, just proper maintenance and storage and, you know, maintaining the value of these collectibles, especially for, you know, wine collection and make sure that it's been properly stored, that, you know, there's so much going on weather-wise in this country right now. It's important to make sure that, you know, the temperatures are not off. And the same with art, Just to make sure you have the right conditions. And that's something that the family office needs to be proactive with in working with the family.

Edward: Thanks, Mary. Ron, to get started, how should a family office get started in building an art collection? Are there some best practices that you've seen and worked with families over the years?

Ron: Yes. Well, I think family offices, as we've seen it, have played an increasingly important role of influence with our clients in this area of art collecting. In many cases, it's reflected more in terms of what the family already has and how to have it properly valued, and vetted, and authenticated, and so on. Often it's part of, let's say, an estate situation, but there's no question that family offices are increasingly important in this area of providing help and guidance to their clients. They don't necessarily take on the role of actively giving advice in this area but they're seeking impartial advice from others.

I would say that they are very aware of the fact that art is really an investment class. When I was at Sotheby's years ago, nobody ever wanted to talk about art as an investment. It was almost like a vulgar term because you were supposed to buy art because you loved it. But there's no question there and we see the values just go bonkers with paintings and sculpture and jewelry and wine and watches and other areas of the market. You cannot ignore this as an area of interest to your clients. So, I think that family offices have probably become increasingly active in holding events where they expose their clients, their families to areas of interest. They might have a seminar about wine collecting, or about jewelry, or about some other area without leaving them in any particular area. But I think it's incredibly important that family offices continue to play a role of being sensitive to their clients in this area of enormous and growing interest to them.

Edward: And Jamie, what about wine and spirits in family offices looking to get started there? What advice would you give them?

Jamie: So, yeah. We do see a number of family offices involved in wines and spirits. But what Mary was saying about the inventorying and storage of wine is critical. So, we see a lot of people come awry with not setting themselves up correctly to manage the inventory and the storage and the inbound. It's very easy to buy wine every day or spirits. It's always available. There's a new vintage, there's a new producer every year. So, like contemporary art, we're always getting a fresh supply. And so I think it's important to essentially set up the structure to manage the inventory part of it. We've actually just started developing a virtual cellar program where people can manage multiple cellars, both in storage with Sotheby's and also in their own cellars. But the management of the inventory is key, obviously, storage. And so when you buy wine, so let's say you're buying futures, you need to track who you bought it from and that you actually get the wine delivered at the end of the day. And then when the wine gets delivered to you, it is the wine that you bought. And then in terms of...

And so, there's this whole inventory management piece to wine, which is, we get spreadsheets of several thousand line items as part of our daily business. And obviously, managing that, yeah, super important. In terms of what to buy. And then we've seen people come unstuck really with getting poor advice. So, someone wanting to sell them things whereby, yeah, they were wanting to sell and they were reportedly getting good investment advice when that wasn't really the case. And so, yeah, the market is not closing as broad as some people would think. And so one has to get advice as to what is a sound investment strategy in the wine market, and also what the time period and horizons are. And all the different costs involved. Obviously, yeah, the auction houses have a buyer's premium. There's shipping costs. There's taxes. There's storage cost. There's insurance costs and then any resell costs. So, it just has to be well thought through and analyzed before people start. And very often when people start and it turns from a hobby into a greater hobby and just you need to manage that process.

Edward: Thanks, Jamie. Mary, given that some or much of this, the acquisition in these areas, whether it's art, wine, or collectibles, is driven by a lot of personal aesthetic reasons that are individual to families, how can and how should family offices support these types of efforts? I mean, you've been there on the front lines. What's a good idea and what are some potential pitfalls there?

Mary: So, I think it's very important, you know, to stay coordinated with the principles, you know, when they make a decision to, you know, these major decisions whether it's buying or selling something. They, obviously, can have tax ramifications depending on how, you know, the structuring of the asset. For instance, it's common to set up an LLC or a best practice for protection. And so, you know, it's important, I think, to understand what's happening up front rather than as an afterthought. It's important, depending on how savvy the principal is and what's being purchased, you know, to include an expert advisor in the area. If the principal is more experienced, probably still it's a best practice to have an expert involved so that they're getting the right, you know, access to the best. And also, you know, just to counsel on pricing and just other factors so that, you know, the principal is getting the best valuation. So, I think the most important thing is really good coordination with a family office, planning ahead in terms of any impact on trust structure or estate planning so that it's considered part of the investment portfolio.

Edward: Thanks, Mary. Ron, let's talk about risk management. I mean, we're gonna talk about risk management from family offices in a lot of different aspects. But what about when they're looking at purchasing art or wine? I mean, there's a lot of issues to consider whether it's provenance, you know, transporting art from one place to another or showing it. What are some good considerations that you've worked with families in these areas?

Ron: There's no question that the art market entails a great deal of concern for risk management. And certainly in buying art, you wanna make sure that you're getting something of value, you're getting something that is what you as identified, and that it's something that is going to, let's say, hold its value over a period of time. I would say the biggest concern is just due diligence in every conceivable aspect of the art market. All too often people are kind of swept up by the hype and the excitement of the market. And certainly, when you go to an art fair, it's like a carnival. It's exciting. And it's easy to get kind of drawn into buying things just because you're kind of in the moment and the excitement is surging and you don't wanna miss out on an opportunity. And the salesmanship in the market tends to be pretty strong and alluring. So, I think it's very important to kind of slow things down and to take a long view to do the necessary due diligence on any acquisition, certainly.

I'm sure we'll talk about this as we go along, but there's no question that paperwork and provenance are excruciatingly important in the art market. We've had many calls recently with family office clients who were interested in selling a work of art that was in the family for quite a long time and there was no paperwork. Let's say it was a painting by an impressionist artist whose market is very well established, and yet, there's no paperwork. There isn't a bill of sale. There isn't a record of where it was acquired. There was no documentation on this work's previous ownership. And that's a problem. That's a red flag. It's like having a house with no title.

And so I think one of the biggest issues for family offices in advising their clients is to make sure that they bring the same kind of discipline to buying something in the art market that they would in, let's say, acquiring stocks and bonds in the financial markets. You have to really do the due diligence. Sometimes it's kind of boring and tedious and not as exciting as kind of being swept along by a quick sale, let's say, at an art fair. But the more you do the homework, the more you basically dot the I's and cross the T's on any transaction in the art market, the happier you're going to be. You wanna make sure that you buy something of value that is as described. And that is not always to be assumed in the art market.

Edward: Ron, on that background, with families that are going to these things and are potential for quick decision, would you recommend that they bring somebody with them? And what should that person look like?

Ron: Yeah. I think it's somebody who is impartial, somebody who is taking a different point of view, somebody who's gonna kick the tires, shall we say, and ask the difficult questions and run the numbers. That's always a good idea. That doesn't mean your enjoyment of that experience is gonna be in any way diminished, but I just think that... I mean, let's face it. Family office clients look to their financial advisors to protect them in the financial markets, which is highly regulated. The art market is not regulated really at all, it's almost like it runs on a gentleman's agreement. There may be some markets like the wine market that are more regulated, but overall, we don't have the same standards and practices that there are in the financial markets. So, therefore, you need to ask the questions and to get somebody else's opinion about somebody to make sure that you're getting the full picture. Without that, you may just sort of jump into the void and regret it.

Edward: So, Jamie, some specifics on the wine and spirits market. What risk management or best practices would you offer up there?

Jamie: We're actually pretty similar to the art market in this respect, in that authenticity is an issue in our business and it has been so for some time. And so, yeah, the provenance condition is another one. So, authenticity is, obviously, if you're buying at the very rare end of the marketplace, you need to make sure you're buying from a trusted source and make sure that that trusted source is somewhat verified. If a lot of people say, "Yeah, it comes from a Scottish seller or an old European seller," yeah, that is very frequently the case. So, checking, verifying the provenance, and understanding the provenance of wines is super important the same way that Ron was mentioning.

Condition, for us, is also another area of concern. So, it needs to be, as Mary was saying, it needs to be stored correctly. And so if it's stored correctly... If it's got the right provenance and it is stored correctly, it should be in excellent condition. And so you wanna make sure that everything you're buying, yeah, the fill levels are important in wine. The labels used to be less important, but with Asian buying driving the marketplace, yeah, even little nicks and scratches and scuffs on the label can affect their desire to bid. And so, you know, one, obviously, needs to make sure that all that is taken care of in terms of condition. And then storage is critical. Yeah, you wanna be keeping your wines at 55 degrees with a reasonable humidity and 60% to 80%, vibration-free in the dark. And that is very, very important.

You also wanna be buying ideally in full cases. Yeah. A full case used to be 12 bottles, much more frequent now is 6 bottle cases. But ideally, you want to be buying in full cases of 6 bottles or 12 bottles or as per the different larger, larger formats that they come. But you want to really put together a collection rather than have various bottles. You wanna be aware of things like people making out composite cases. So, where, let's say, there's 12 bottles of Petrus 1990, but it's actually being collated from the 12 different bottles rather than the full case of it. The seller might be selling it as a case of 12 bottles, but, in fact, they come from different sources. And so you just need to be wary to all of this and to understanding, you know, where wine is moved around, how far it's moved. So, yeah, the full traceable problems of the wine. They're very similar to art.

Edward: Great. Mary...

Jamie: I'm sorry. I would just say one thing on spirits, which is slightly different from wine. So, spirits is super important to have the original packaging. And so with spirits, you want not just the bottle to be in pristine condition, but you want the packaging to be it. So, the bottle on its own without packaging leaves the lots of aspersions as to the authenticity of the actual product. So, the packaging is very, very important in spirits and, you know, we'd be reducing estimate by up to 50-plus percent if the packaging is not there. So, packaging is more like the watches market where that's also super important.

Edward: Right. Mary, in terms of strategic and tax planning that families should consider, what about when they've decided to start collections or they've got an extensive collection in place already? What are some things that they should be thinking about?

Mary: They should be thinking about whether other family members share their same tastes for the art. It's a best practice, aside from means of bringing families together, to educate the next generation as to the art that they hold. Often collectors may just accumulate the art and, I don't wanna say in vacuum, but perhaps it's something that they're passionate about but not everyone likes the same type of art. And so it's important. I think education is a good start and dialogue about taste. And I've seen examples where a younger generation was more interested in social impact investing instead of the art. And there are strategies to plan ahead so that you can optimize the valuation of the art now and redeploy the art proceeds into something that's more meaningful to another family member. What you wanna avoid is a fire sale. A life event happens and the family needs cash or they just don't like the art and there's emotions running high. So, I think it's really important to be dialoguing about taste and to be strategic.

Edward: Thanks, Mary. In that vein, Ron, what about art in lending and collectibles? Where have you seen that work and where are some places where it's sort of for some improvement?

Ron: I think it's certainly something that's on the upswing. As you know, a lot more banks have gotten involved in an area where traditionally they never would have been involved, art lending. At the beginning, I think, years ago, it was Sotheby's and maybe Christie's had art-lending facilities because banks didn't wanna get involved in this. Again, as the value of art has gone up, it become much more mainstream and branded and valuable. Obviously, it becomes easier to put a value on art, to verify its authenticity, and to lend against it.

I think it's a very valuable service. I think it's also something where, you know, it provides a lot of flexibility to families. There may be liquidity issues that they need to address with art that they have that's appreciated in valued and all of a sudden they can use that as a form of a loan. So, I think it's a very important service. But again, you wanna shop around and make sure you're dealing with a very reputable firm. We've heard stories from time to time of, basically, art-lending institutions, not banks, but others that are really kind of more predatory in the way that they conduct business. So, again, you wanna make sure that you're dealing with a very reputable source, but I think it's become a really important area of the art market that offers a genuine and very timely service.

Edward: What about valuation? I mean, it's a very wide area, Ron, in terms of all these different areas whether it's art or wine or collectibles. How have you seen families do this well and what are some best practices that folks should consider?

Ron: Well, I think reality is very important when talking about the value of art. I mean, we have people who very often have insurance valuations that have carried along for a number of years that are kind of inflated, and they maybe do not reflect necessarily the genuine value of something in any given moment in the art market. So, I think managing expectations is probably the most important aspect of any valuation. Again, I'll go back to this issue of authenticity because I think it's just playing an enormously increasing role in the art market because you cannot take for granted the authenticity even of works that were bought from reputable dealers which maybe still need to be vetted before they get sold. We had a client come to us recently about a Calder that he has. And that is a very mainstream market, it's a sculpture by Alexander Calder. He bought it from a reputable source. He paid quite a bit of money for it. It's gone up enormously in value. That is a very hot segment of the art market, very mainstream. Calder was very prolific and he sold his works through the top dealers in the world.

However, the Calder Foundation now is in charge of authenticating and keeping a register of all the known works by Calder. So, to even get that properly registered, they have to see it. Even if it's signed by him, even if the paperwork is pure gold, it still has to be seen by them and included in the catalog, included in the register. So, this is an important aspect that gets back to this whole issue of paperwork and making sure that something is vetted and is confirmed as to its authenticity. That often will determine value. As far as best practices for, I think, family offices and their clients, you wanna engage a reputable firm to do a valuation and you wanna make sure that it's updated from time to time. And also I can't stress enough the importance of insurance. Very often families just don't bother to carry the proper insurance for works that have gone up in value and maybe they carry these things under their household policy and they can be doing themselves a real disservice by not observing, let's say, the necessary insuring of important works of art that are accelerating in value.

Edward: Thanks, Ron. Jamie, in terms of the wine and spirits market, what are some good things that you've seen on the valuation side and what advice would you give there?

Jamie: So, I think, obviously, there are some tools out there for valuing wine collections. Less so with spirits, in fact. But Wine-Searcher is a very good tool for finding out what the values are and what the availability is in the current market. It's an aggregator, wine-searcher.com. And then there are various different valuation tools that are out there and data from the secondary market. And "Wine Market Journal" is probably the leading provider of that information. And so there is information around it. Yeah. You can benchmark your collection against it. And one should always keep up to date with the values and both when you're acquiring, also when you're holding the wine.

One of the issues is the drink-by-dates, which are always notoriously wrong in the wine business. They're generally done when the wines are first tasted and then never updated. So, they're not really current drink-by-dates, which are accurate. But I think the requirement of any wine collection is to maintain an accurate inventory, particularly in third-party storages, and then to verify that inventory. And one of the things which you want to be wary of is if you're storing with someone who's selling wine that your wine is independently marked, indicated, and safely stored, and cannot be accessed by that business to sell it because, yeah, there are many historical cases whereby people have borrowed inventory from storage and with the full intention of replacing it, but that means it wasn't the problems that you originally got. And if they don't replace it, then that solves their problem. But generally, there are tools out there to do it, but it needs to be focused on and is probably one of the most critical things about building a wine and spirits collection.

Edward: Thanks, Jamie. Ron, in terms of records, I mean, you discussed this a little bit earlier. But what should family office executives be maintaining for the art that the family has? And why is this important? And what are some, you know, potential tools to help them do that?

Ron: Well, as you can imagine, with the value of art going up so much, buyers need to be assured that what they're buying is authentic. And one way of showing that is paperwork records. Families should be asked about bills of sale. Where was something bought? Was it exhibited? Was it published? What sort of information do they have about the provenance of something that they own? That is pure gold nowadays, it really is. And increasingly, the auction houses will ask for this. And if they don't have it, it's a red flag. And it may be, as I've mentioned before, a painting in the family that may be completely authentic that has absolutely no paperwork with it. That could go into limbo land to be unsaleable simply because there isn't any paperwork. So, I think the earlier questions are asked about this and that a paper trail can be created for everything owned in a collection, the better.

For example, you know, with jewelry, nowadays, the auction houses really want GIA certificates of jewelry. Even if they already have a certificate that say it's three years old, they may say, "We wanna see a new one," just because the values have gone up so much, they need that kind of constant stream of reaffirmation of value and authenticity. So, I think this is something that family offices need to be especially concerned about because it really bears on not only the value of something but also its saleability. If you don't have the paperwork, you can have a problem with something, otherwise, it's perfectly authentic. I think this gets to the issue of the important role that family offices play in the art market that maybe 20 years ago they didn't. They have become centers of influence like never before in terms of being an authority that their clients can turn to for help or advice or insight. Not that they are providing it directly themselves, that they are providing out, you know, sources of information, impartial advisors, and so forth, who can help their clients. And I think this is a great step forward in the art market. And it gives the family offices, I think, a lot more confidence in having their clients as active participants in the art market.

Edward: Mary, in terms of the next-generation, I mean, can art and collectibles, you know, be an effective tool here or it's sort of a cliché?

Mary: I think as I started to discuss previously, art and collectibles, yes. I think clearly there are trends for wine and watches that I see for the next-gen or the younger generation coming up on something they're really interested in. But even more so, social impact investing, and I'm mentioning that again because I think their tastes are changing. And I think, for the families to have an education session to talk about what it is that interests them and to get them knowledgeable. So to the points we've been hearing about, you know, they're not taking advantage of, you know, on the fly through forgeries, through lack of proper documentation. I think there are new ways to make things more fun and exciting to buy things, especially online. So, I think that, also, family offices can play a key role in terms of helping to educate about potential scams of online buying expensive items. So, I think education is a keyword here in many respects and the family office can play a very important role.

Edward: Ron, where have you seen art and various other collections work for next-generation engagement?

Ron: Well, I think it's definitely the trend is toward maybe hipper, more cool things to collect like watches, cars is a big growth area. There's no question that wine is important. The old traditional English furniture, French furniture that your parents maybe collected is probably not of interest to the younger generation, but there are trendier, mid-century modern furniture. There's Nakashima furniture. There are other things that are much more stripped down and not as flashy, which maybe a younger generation would find a much greater interest. And to answer your question about getting the younger generation involved, I think it's incredibly important. I really do. We have seen so many situations over the years where, let's say, a great collection comes to auction and the family members are just completely indifferent about the sale of the collection. They've never really been sort of brought into the whole adventure of collecting things. Maybe their parents did this as a separate kind of thing, but the children sort of have a giant disconnect and therefore they don't feel it's important to them and they'd just as soon see it sold.

And I think that's really a shame. I think the younger generation should be made part of the experience of collecting. They should know what's there. They should have an appreciation for its value and its connoisseurship and so forth. In certain areas, it's really important. For example, you could have a client who's collected rare coins, which is, you know, very specialized. And unless other members of the family know something about that collection or have been instructed about it, if that person died, the family could be prey to, you know, ruthless, unprincipled individuals who might try to buy this from them for a song because they don't really know what it is or its value. So, I think getting the younger generation involved is incredibly important. And I think encouraging them to take an interest in art no matter what it is.

Edward: Thanks, Ron. Now, I'm curious about everyone's opinions on this one. In terms of finding reliable information or, you know, networking with other families or family office executives for, you know, the art, wine, or collectibles' world, where would you suggest people take a look at? Maybe Ron we could start with you.

Ron: Well, I think you can get lots of information about the art market just from available trade sources, I mean, things like... Just going on an auction house website, you'll learn a lot. What's out there? What are the various areas of collecting? What are the values of things? So, there'll be estimates on items. If you are collecting wine, you can see what a particular, you know, wine value is and what it's selling for. Reading about developments in the art market at places like online publications like Artnet or ARTnews or the art newspaper. You can really learn a lot just by poking around, asking questions, and reading about developments in the market. I think that's a great way to start. And you'll educate yourself in that way. And there are a lot of articles as well just about the practices of the market now. Where is their unscrupulous behavior? Where is their fraud? Where are the wonderful new opportunities for collecting? I think the more you get around and read and expose yourself to some of the sources of information about the market, which are all out there, virtually everything is online, the more comfortable you become in this particular market.

Mary: I would echo what Ron said. And it's unfortunate with COVID that the art fairs are not open, but the art fairs are a wonderful way to go to different booths. For instance, there's Art Basel and then there's the art fair at the Armory in New York. And what a great way to talk to people in the collectibles market and the art market. And so we look forward to those reopening. But in the meantime, also, private dealers. I'm sure you can still make appointments, you know, with them and, you know, find some private art dealers that you enjoy their art and learn more from that. So, those are just some other suggestions.

Edward: Thanks, Mary. Jamie, your thoughts on finding some interesting and reliable information in the wine and spirits market.

Jamie: So, we're pretty similar to Ron, in that you want to look around, you want to develop relationships with people who you can trust. So, whether that's auction houses, you certainly want to ask questions and become familiar with what's going on in the auction world. Find someone you can trust in that environment whose advice you trust and think he's smart. Done the same with wine merchants. Finding a wine merchant who, again, can give you some information. Generally speaking, when buying wine, you can't satisfy all you want to buy in the secondary market or in the primary market. You need a combination of both.

And I think, you know, doing the research. You can always check prices on wine-searcher.com. Yeah, you need to start understanding the marketplace, so both for wines and spirits. So, what makes MacAllan rare? What were the production sizes of different things? Why has Burgundy been more popular than Bordeaux? And so you need to start educating yourself. And yeah, all that information is available in various different formats. I think one of the best ones is also the newsletters that you can sign up for from various different publications in "Drinks Business" or "Wine Spectator". There are many, many different information that provide you daily news on what's going on in the wine market, and just making yourself aware of those is important.

And so building a network of trusted advisors that you can bounce things off each other and understand what they are. And yeah, there's a lot of advisors in our business now. Virtually anyone who's poured a glass of wine is giving advice. And so you need to be a little bit careful about who you're getting advice from and what's in their interest. And so self-interest is obviously prevalent in our business. And you just need to be wary of that.

Edward: Great. All right. Last question, quick one around...in terms of the one piece of advice that you'd like to leave family office executives for your respective areas. Mary, let's start with you.

Mary: One is to make sure you keep good records. And maybe this is the chief financial officer in me, but make sure you have a good inventory management system with all the details that you'll need for insurance or tax purposes and including the provenance documentation that we've heard about a lot. So, I think that's really key. Keep good records.

Edward: Keep good records. Thanks, Mary. Jamie, your thoughts?

Jamie: So, I would 100% agree with Mary. So, I'm glad she checked that one off. I would say that find the advisors that you can trust because they're the people who know the market, they understand what it is. And if you can trust them, then you're gonna get great advice. So, find the best people that you can trust.

Edward: Excellent. And then Ron, your parting thoughts?
Ron: I would agree with the above remarks. I would also say that I think it's important for family office executives to just be very aware of the importance of the art market to their clients, even if they don't know that much about what their interests are in collecting. They need to be sensitive in this area and to ask questions about what they have and the practical questions about, are things insured? Has it been valued? Has it been authenticated? Do you have records? All of the practical issues that would flow from just showing an interest in this particular area that I think is a growing interest to their clients.

Jamie: I would say one other thing is to understand the costs involved in the markets. And when you're buying, what are the all-in-costs that you have to pay and when you're selling? I mean, just as you understand everything about it. We've seen people who have bought, yeah, significant collections and they just don't really understand what the market is and what their cost price was and what their expectations could be in terms of their return.

Edward: That's a good piece of advice. Well, thank you, Jamie. And thank you, Ron and Mary. We appreciate everyone's thoughtful insights today. If you'd like to get in touch with our guests or you have any questions, do drop us an email to familyoffice@bostonprivate.com. I'd also recommend that you check out our website, you'd find numerous resources. Sign up for a newsletter. Get this podcast and much, much more in your inbox and learn about how we help family offices. That website is svbprivate.com/familyoffice. And be sure to subscribe to this podcast on Apple, Spotify, or wherever you prefer to listen. If you'd like to give us a review, we'll definitely appreciate them. Thank you, again, to our panel. And thank you all for joining us today. That's it. And check back for a new podcast in two weeks.

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