Buying art is easy, according to Bank of America’s Drew Watson. Selling, on the other hand, is a different story.
Parting with a prized possession is usually the result of a major—and stressful—life event. Watson, head of the bank’s art financing group, calls them the five Ds: divorce, death, debt, downsizing and decommissioning, the last of which refers to museums removing a work from their collection.
Most banks, including UBS and Morgan Stanley, refer clients to third-party advisers to broker deals with auction houses. But Bank of America is negotiating on behalf of customers to get better terms. The bank is leading a competition with multiple auction houses to sell an Henri Rousseau painting owned by a member of the famous Whitney family of collectors. The bank guaranteed a minimum selling price and negotiated how the house would sell the painting. The painting “Les Flamants” set a record at Christie’s with a price of $43.5 million last May.
Bank of America is the largest lender against art in the business at $34.1 billion, according to Watson. He declined to specify the exact loan portfolio, but said it was growing by an average of $1 billion each year. Consignment consulting is a much smaller practice with about 20 to 25 transactions a year, but there is potential, Watson said. Art and collectibles make up a significant portion of assets for high net worth individuals, with one study putting it at nearly 9%. He believes it will also do much of the $90 trillion wealth transfer over the next two decades. Advising on the sale of these assets is part of Bank of America’s strategy to be a one-stop shop for the art world.
“Bank of America really wants to be the place for all art banking needs,” Watson said. “Broadly speaking, the purpose of consignment services is to more fully integrate art and collectibles into the bank’s wealth management offering beyond lending itself.”
How Bank of America can get better deals for wealthy collectors
According to Watson, who joined Bank of America eight years ago from Christie’s, the bank is able to secure discounts and good deals because auction houses view the firm as a deal aggregator. “If you come in off the street without having had a relationship with the auction house, you don’t have a quantity discount,” he said. “We bring a lot of business together and bring it to them, and in return we get preferred sales terms that benefit our customers.”
When it comes to making decisions about their art collections, customers usually have either time or expertise, but not both, according to Watson. For example, a hedge fund tycoon who understands the art market is probably too busy to approach auction houses. An heir who has inherited art from their parents may not know much about their new possessions.
This is where Bank of America comes in. The client sets the agenda and is brought in for key decisions, but the art consulting group does all the work.
Drew Watson, head of art finance, has joined Bank of America from Christie’s. Courtesy of Bank of America
The bank usually turns to two to three auction houses, such as Christie’s, Sotheby’s and Philips. Watson’s team hosts a pitch day where houses present their valuations and marketing strategies. The bank goes through a scorecard with the client, with factors including forecasts, sales strategy, team experience and financial conditions. Price is only one factor.
“You can’t look at auction valuation in isolation. You have to look at it in the holistic context of the sales strategy and also the financial terms,” explained Watson.
It is up to the customer to select the preferred bidder, and the bank returns to the auction house to try to sweeten the offer.
These negotiations can save up to 15% in fees between the typical 10% seller’s commission, seller’s fees for services such as shipping and photography, and a success fee for exceeding the highest estimate. In addition to guarantees, the bank may insist on an enhanced hammer deal, in which the auction house shares a portion of the buyer’s premium — a fee on top of the sale price — with the seller.
“We’re trying to get them to sharpen their pencils while we still have leverage with the other houses,” Watson said. “After all, it’s a very important feature of our program.”
Consulting work does not end with the signing of the seller’s agreement. Watson’s team works with the auction house until the day of the sale, monitoring interest in the lot and determining the reserve price, or minimum price the seller would accept. The bank can help customers decide whether to accept offers from buyers who want extended payment terms.
Consignment consulting can also attract new clients, as the service is only available to existing Merrill Lynch or private bank clients. The Watson team works with bankers and advisors to help turn prospective sellers into customers. The proceeds of the sale must be deposited with the bank, which collects a single-digit percentage fee. The exact percentage depends on the complexity and market value of the lot, he said. Transactions can vary widely, especially since the bank also advises on consignments of collectibles ranging from $1 million Birkin bag collections to $100 million mansions.
“Sometimes that liquidity stays with the bank, part of the client’s overall investment management, or it can leave the next day,” he said. “It’s completely at the discretion of the client, but there’s this kind of secondary business opportunity.”