Today's Art Market, Next-Gen Collectors, and NFTs

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This is Greg Bartolis, editor-in-chief of Barron's Wealth and Asset Management Group. This week on The Way Forward, we have a very special guest. If you have an interest in the art market and finance, then you are listening to the right podcast. Evan Beard runs the Art Services Group at Bank of America Private Bank. In this capacity, he works directly at the nexus where art, investing, collecting, lending, and technology all meet. Evan, who has been with the bank since 2016, assumed a new role this year leading specialty segments. Evan, welcome. Hey, Greg, good to be here. Thank you, first of all, for joining us. Very happy to have you here. Please tell us about your new job at Bank of America Private Bank. What are the specialty segments you're serving and why do they matter to wealth management?

Yeah, so look, every private bank in this market has core products. And every bank places a few bets in a few areas on where they really want to distinguish themselves or differentiate themselves. So, you know, I have a portfolio of services that are a little unique. We have the art services group where we're really focused on collectors, and there's a suite of services around that, like art lending, consignment services, art planning. We have a business owner services group where we're really focused on early-stage transitions. Many of our business owner clients are in the process of selling their company or getting ready to sell. So we have a group that works with them. And ultimately, you know, we partner with our investment bank to execute those transactions. And then like all banks, we have a next-gen focus. So we have a team that really is focused on how we can evolve the bank to be more relevant to this next generation that are very digitally savvy and, you know, expect different things from their private bank. And it's not the mahogany conference room and the white glove service that maybe past generations expect.

Are you getting the sense either anecdotally or through hard numbers or even both that this, um, digitally oriented interest, uh, from the next gen is more here to stay or is that a little more to be determined?

No, it's definitely here to stay. And I think if you look at any private bank or wealth management firm, the biggest loss of assets if you were to make a pie chart each year. It's not competition coming in and taking you out. It's not, you know, bad service. It's really that transition period where one generation's transitioning the wealth to the next. You know, most of the time the incumbent bank loses a lot of those assets and you have this new fintech landscape where the expectations of how a checking account works, how a deposit account works, how you do your lending, They want ease of use, they want sort of digital channels, they want very clean access. And so the service model's changing quite dramatically. And COVID has only accelerated this across all these areas, across investment banking, consumer banking, wealth management, private banking. So we're trying to stay ahead of that curve.

Right, I mean, with COVID the galleries, obviously took a hit, but it looks like the online auction world certainly saw a lot more activity.

Yeah, look, in the art market, pre-COVID, coming into 2020, we were still in an art market that functioned almost the same as it did in the late 19th century. You had galleries that were staffed by individuals doing handshake deals, auction houses that were still functioning from rostrums with a room full of bidders, and sure, there were telephones, phones and art advisors with a group of clients. In about a 6-month period, we saw literally a decade worth of innovation investment and new channels, new hybrid auction models, new virtual viewing rooms, new digital auction channels, new startups that are all digitally based. So the art world has been dragged kicking and screaming, and suddenly I think It surprised everyone. People are willing to transact in a digital environment. And then of course, we had this crazy rise of digital art and non-fungible tokens, which I'm sure we'll get into a little bit.

Yeah, I mean, one thing that's just astonishing, I think, is that, you know, in and of itself, the whole NFT phenomenon, et cetera, but then especially when you contrast it with the kind of the, the old school auction house world, if you will. I mean, I believe they've been around since what, the 1700s or something, right? So you have this very long history where, I mean, there's of course been innovation, but this has been like just kind of like a thunderbolt. I mean, lightning. It's just pretty incredible, I'm sure, the impact it's having.

Yeah, look, a few things are driving it. The dirty little secret in the auction world is these are not great businesses fundamentally. It's a pretty brutal— Getting supply and getting consignments is an expensive process. It's very competitive. Everything's negotiated. And if you were to compare it to the fashion business, the fashion houses, they sell the mass products is where they make money. The couture, which were the runway products that they showcase in Paris, are loss leaders. The auction houses are almost 100% couture. So you have a loss leader model. And so what the leadership at all the houses are trying to do is one, expand revenue streams, get more throughput at the base of the pyramid, build out their wine and luxury and some of their lower-value objects that are much higher margin, maintain a presence in the couture, which are your multimillion-dollar flat works of art, and then invest in areas like financial services and advisory. Try and turn these auction houses into global brands with multiple revenue streams rather than just sort of the auction model, the traditional auction model.

So they're adapting, and what are the, for the fall art auction season, what are you detecting or seeing?

Yeah, so we have a group called Consignment Services. We have a team that work with collectors to actually negotiate deals at auction. We structure the deal, we shepherd them through the process,. We structure guarantees or something called enhanced hammer, and we push the houses on the marketing commitments. So we're in this game a bit. And, you know, over during COVID demand has been quite high. You've had low interest rates, you've had, you know, the wealth effect from stock markets around the world doing quite well, and you've actually had a surprising strong economy, partly due to monetary and fiscal policy that's been inflationary. What we haven't had is good supply coming through. Collectors have been less willing to sell during COVID Um, that's about to change. So this fall auction season, we're going to both have a strong demand base, but for the first time since COVID started, we're going to have a very strong supply base, a lot of major collections coming up for auction. And I think you're going to see a blowout season. Wow.

Can you tell me more details about the nature of these collections? From where? Are there any artists overly represented or periods? Et cetera?

Yeah, a few things. One, we're in a very strong contemporary art market where there's just high demand and people are taking advantage of this. So, you know, a lot of the hot young artists, many of them identity-driven artists that have very strong secondary markets, you're going to see, you know, from Basquiat to sort of lesser well-known artists, those markets continue to be strong. You're going to see a lot of supply come into this market because there's just a depth of bidding. At the same time, you've had a lot of estates and single collections that have maybe held off during COVID because they wanted the full rollout with the global sales tour to Hong Kong and London. They wanted the dinner parties and the cocktail hours and the bonanza around the collection. So this season you have a few major collections. One that's been announced already is the Cox Collection out of Texas that's coming to Christie's, you know, great post-impressionist collection with Van Goghs and Caillebots, and you're about to see some others. We're working on a few right now. So I just think you're going to see some very large single-owner sales that are going to make headlines around the world, and you'll see some big prices.

And is that September or October, any month in particular, or it's just going to roll out over time?

Yeah, look, I mean, September will be the the return of the art fair season, and it'll be interesting to see. We have the Armory Show in New York in September, we have Art Basel in Basel in September, and then you get into the auction season late October, November, where the evening auctions will be held. And, you know, the season will really culminate down in Miami for Art Basel Miami, where we're expecting a real blowout down there. You know, many of our clients are planning to go down there. We know a lot of dealers are saving some of their best material to unveil both in Basel as well as Miami. So all of this is COVID-dependent, by the way. We could see another variant, but for now, there's pent-up demand and pent-up supply, and I think that bodes very well for the market in the near term.

Acknowledging this positive macro backdrop, where are there areas of weakness, or perhaps it's even relative weakness, or even an absence of growth, if you will?

Yeah, look, in the art market, We have an interesting macro environment, as you said, hyper-low interest rates. So the opportunity cost of owning a cash-negative asset that doesn't pay you a dividend like art is low. And monetary policy that's long-term inflationary, which tangible assets like art and gold tend to perform quite well in inflationary environments. So we're seeing capital coming into this space. Where I think we may see softness are in a few areas. There's a lot of focus on identity-driven art right now. So some of the more traditional segments of the market from American art, like Hudson River School art or early American modernism, or these are softer segments, whereas 10, 15 years ago, they were much stronger. We're also seeing some softness in I hate to put it this way, but sort of your traditional post-war masters that, you know, tended to have really strong run-ups over the last, you know, decade or so, like Andy Warhol, Christopher Wool, some of these artists that, you know, may have gotten slightly overheated. And as some of the action has shifted to looking for second-generation Abstract Expressionist female artists or young Black diaspora artists and things like this, you just don't have the depth of bidding in some of those areas. So look, these things all go in cycles and we're in the age of identity right now. It will shift at some point. Another area that has just gotten so overheated during the depths of COVID are collectibles, everything from non-fungible tokens to sneakers, to sports cards, I think a mixture of boredom and sort of nostalgia have just driven these markets into the stratosphere. And we expect some, I think, some leveling off, if not some softness or recalibration in all these sort of tangible asset areas from collectibles to sports cards to some of the craziness in the non-fungible token space. Right.

I think, but also if rates go higher, that obviously might be a headwind as well. But what else can you tell me about, you know, NFTs? I mean, I think it's— they're obviously capturing the public's interest, making headlines, and you're appearing— actually, the Wall Street Journal had a story today about the cautionary element of it. But just let me step back and let you take the floor here.

Yeah, look, NFT, non-fungible tokens, for those who haven't sort of heard of them. This is literally you buying a certificate on a digital ledger that lets the world know that you're the owner of a digital intangible image. There's no physical object. It exists on the blockchain, and you can point to it saying you are the owner of this image. This image can be reproduced. You definitely don't necessarily own the copyright or the trademark of the image. You just own So it's a very interesting thing that I think caught the broader art market by surprise. And in March of this year, a new continent was discovered. This artist that was really under the radar to the traditional art market, but had a really interesting digital crypto bro following, if I could put it that way, a guy named Beeple, sold a work, which was really a series of his works of digital images at Christie's. And it made $68 million, which is just insanity. It makes him like the third or fourth highest valued living artist in the world. So this created a huge sort of gold rush. And what you've seen since is a mixture of, I think there's three types, maybe four types of NFT collectors. The biggest are a lot of folks who have high concentration of cryptocurrency, that were early in this and they have the digital wallet of cryptocurrency, they're buying NFTs with their Ethereum and they're diversifying their crypto holdings. So non-fungible tokens are actually acting like digital currency in a way. The second group, there is a group of art collectors who see this as the next frontier of conceptual art and they're drawn towards it and they wanna be, you know, one of the first enterprising collectors in this space. And then there's a couple of collectors that just are content-driven. They want the LeBron James dunk or they want the Damien Hurst non-fungible token. All of this, I think we're in, you can't say we're in a bubble, but 99% of the NFTs being minted will be worthless. So you have to be very cautious. Some will represent this time and have real value, but most will be worthless.

[Speaker] Yeah, and tell me about the generational divide because it just, it appears that many people, skew older have trouble understanding paying for something that's not tangible, whereas many younger people are used to paying for virtual things. And to them, it's not such a big deal. It's more understandable to them. Can you just kind of discuss that divide a little bit?

The divide's interesting because you look at everything from our next-gen strategy to our business owner services group to really our art group. We're all learning across these three verticals and every private bank and wealth management firm is learning that there is a generation of digital native, smart, sophisticated young folks where the traditional status of owning a Picasso or owning this piece of material, this is a generation that a segment of them have grown up in a digital environment. They've been playing video games. There's this digital ecosystem where the status structure is completely different. So being able to point to a blockchain or being able to sort of say that you have this amount of cryptocurrency is sort of status signaling in a way that to sort of older generations, it's not. The other thing is this is a generation that's very experience-driven. It's a generation that wants ease of use and unfussiness, and they tend to be very egalitarian. All of that makes sort of, it's turning banking on its head. Private banking used to be based on a model of exclusivity and status, and you can use this credit card if you have this cert. All of that's being turned on its head. People want ease of use on their cell phone, sort of easy transfer money here or there. And so we've had to learn how to service this new generation of sort of digital natives. And that's why I think, you know, this whole ecosystem of non-fungible tokens and digital art, we couldn't understand it at first because we couldn't wrap our mind around that anyone would want, you know, something that isn't even in the physical realm, you know, spending millions of dollars on something that you'll never be able to kind of roll out and put on your wall. It will just exist digitally. But there is this sort of ecosystem out there. With that is status signaling to folks. And they grew up in this. So this is an area that I think all of wealth management and banking is trying to wrap their head around. We're all trying to become more digitally leading with our clients. And it's going to only accelerate as this young generation becomes sort of the generation running things.

Yeah, I think that's fascinating. And one aspect to this, I think, involves reach, if you will. So if you have a valuable painting that's something coveted by collectors, uh, you know, in the past it might be a close friend or family and you show it to them and the rest of the world might not really know. It's your private collection, your private business. And the— what you're describing in terms of the status, that in a way it seems correlates with reach and exposure, right? So Having the million-dollar painting that no one sees doesn't help on that level. Whereas if you have something digital, the whole world in theory can see it. And that, I don't know, that just seems like a fundamental issue, you know, massive change.

Look, the art world was way behind this. If you look at the M&A world and sort of M&A exits, this article written now, it's been 6 or 7 years that software is eating the world. You know, people were looking for traditional businesses that you could go in and digitize and reach scale. So maybe they had a brand or maybe they had some IP and, you know, they were getting these big multiples and everyone was racking their mind. Why are these businesses sort of these traditional 1.0 manufacturing firms, et cetera, you know, getting these big multiples by these private equity firms that were doing roll-ups? Well, they were going in and digitizing. And so the first wave was sort of just expanding that reach using software. Now, the next wave became sort of the Netflix, Amazon wave of, okay, now that software is learning about you and it's becoming more sophisticated through artificial intelligence and it's learning about its users and it's adapting and sort of its growth is becoming even more compounded as it sort of becomes more precise. The next phase is sort of beyond artificial intelligence, and it's now being able to sort of transact, you know, purely in the digital realm. And you see actually a whole digital ecosystem. You saw that Facebook has sort of a Zoom network that's completely digital, where you even have digital avatars around a table of 5 people sitting at home that can actually go to a digital office with their digital avatar and have a meeting. Well, guess what? You now have digital art galleries in a digital ecosystem selling digital art, and there's someone living in their basement that has their own digital avatar that's going into those digital art galleries and presenting the digital art. And that's sort of status signaling to a subset of our population. So look, there's a lot we can learn from this, and it's having impact on all parts of the economy. And, you know, Big banks like Bank of America and big private banks like Bank of America Private Bank, we're paying attention to this and trying to become relevant.

So how are you doing that kind of two-track approach? I mean, you have to cater to your traditional constituency and kind of pivot as well. What are you doing specifically on that level?

Yeah, look, at the macro level of the private bank, we're making large investments on our digital infrastructure. I think A private bank needs to present an experience. The experience used to be, as I said, sort of a status structure, white glove making. It was almost like the university club model. You wanted to signify to people that you want to be part of this club. And once you have sort of the wealth and the complexity and the needs, we can sort of bring you into this club. That model doesn't work as much. For the younger generation, it's we have a model that's super quick, ease of use. You can transfer funds here or there. The younger generation tends to be very self-directed. You know, they're on Robinhood, they're using Zelle, they're using— they want to transfer their money yesterday very easily. So it's about taking as much friction out of the process while staying within the regulatory framework that you can. The other thing is these are very conscientious It's a very sort of, I would say, conscientious generation. Generations past had no expectations that their bank would really stand for anything. Now this generation, you know, all brands, they want their brand not just for utility. They want their Coke to taste well, but they also want their soft drink to mean something. It's true of banking as well. So we've had to become more relevant in terms of certain segments of both demographic segments that expect certain things, art collectors expect certain things. So this whole rise of ESG, sort of socially conscious investing, we have to pay attention to that. And we have to make sure that our clients know that the bank isn't just sort of a nexus of contracts there to sort of move your money around. It really is sort of a conscientious partner that can kind of help you live your life.

I can imagine, though, there's a structural challenge, which is a lot of these people are more conscientious, if you will, younger people. There's a little bit of a skepticism about institutions in general. So I think that's every company, I think, has to deal with that, right? It's like you have to demonstrate you are, but at the same time, a company is a company.

So it's 100%. And you could go way overboard on it as well. Companies that have, I think there's a lot of obvious examples over the last 10 years, which I won't name specifics of companies that got ahead of their skis, tried to sort of overdo it on the social justice angle or this conscientious angle. And it comes off as artificial or pandering. And look, at the end of the day, if you're not functionally utilitarian and serving your shareholders, and if you go overboard on some of the other stuff and you, you, you lose your functional use on your core mission, uh, you can both alienate and offend your base. So it's threading a needle. It's, yeah, it's a much more challenging environment than it was 20 years ago.

Right. And I guess with the internet and social media, everything's under a microscope, so you have to be particularly careful.

Everyone's looking to— yeah, it's— everyone's looking to make a big thing about this. So you're right. And, uh, Some of it's warranted and some of it is just folks wanting to make noise.

Yeah, so I wanted to ask you about the business owner angle. What are the big issues facing them right now?

Look, there's a generation of owners, and COVID I think caused a lot of business owners across the country to kind of rethink their priorities in life. Everyone lost some money. Someone they knew, whether it's a grandpa or a cousin or an uncle to COVID. And, you know, they've— one of their children is usually their business. You know, they've cultivated and incubated and grown it, and it's probably— and many times they've spent a lot more time thinking about that than anything else in their life. So, at the private bank, we have several thousand business owner founders that have grown these companies. Some of them have been in the family for generations. So we have a team here that really works with them at the early stages as they contemplate an exit. We have a team that is, as they sit down at the, they finally get across the Rubicon psychologically, which is always the biggest thing. And they say, okay, now's the time to transition this company. Maybe it's to the next gen, maybe it's to sell. We sit down with them and we say, okay, are you structured to do an IPO? Would a sale to a strategic make sense? Are you a candidate to be taken out by private equity or a sovereign wealth fund? And we come in and we look at the company. Do you have the quality of earnings? Are they recurring enough? Do you have key person risk? Do you have the right auditing firm? And so in the early process, we're there to really kind of advise and work with them to get the company ready. And then, you know, we have this very large investment bank at Bank of America and a big focus of ours in the investment bank now is to really build out this middle market investment banking group. We call it our emerging growth and regional coverage. So, we're there to kind of walk our clients through this process and then partner with our investment bankers to execute the deal. And then post-sale, work with our clients on the philanthropic, on the investments, what to do with the transition of the wealth. Is it going to fund a trust? So, what we're trying to do is these are very important transactions, in many cases, the largest transaction that any of our clients will go through in their entire life. And for most of them, it's a one-shot deal. They'll only do this once in their life. The serial entrepreneurs have plenty of advisors around them. So, yeah, we have a team that works with them on this whole process. And it's a really fun process because there's a psychological and emotional component. There's obviously the planning and the sophisticated tax and entity structuring component. And then there's the investment banking M&A transaction, running the bake-off component, and then the post-sale, helping them on the philanthropic and the legacy and the investment side after the liquidity. So, these are really fun, interesting transactions. And our business owners, once they go through it, they're a client for life after that.

I wanted to ask you about family engagement. You talked about next-gen. Tell me about the importance of connecting with the broader family, because you have a lot of, let's say, the parents who might have a lot of money in art, older art, if you will, and the next gen might have no interest in that and might be more interested in digital, and you have a real gap to, you know, a bridge to divide, if you will, to address. Can you just speak briefly about that?

Yeah, look, like many private banks on the street, we have a next gen team. Led by a man named Jesse Mandel. And what we're trying to do is solve an issue that has beleaguered every bank on the street. It's that transition period from one generation to the next when the wealth is transferred. There's always losses and outflows there. The younger generation oftentimes, they want something different than what their parents expected from the bank. So what we're trying to do is put a lens across our private bank from how we engage clients with technology to how we engage the children and make sure that they can get the right mortgage and investments that make sense for them to even through the transfer of wealth, what that process looks like. So, it's a focus of ours. And I would say one area that you mentioned that I think is really that a lot of, I think, financial institutions overlook are the family dynamics. So, we have partnered with family therapists to really look at how to keep the wealth in the family and how to keep the family intact and what the best practices are for families that have complex wealth. There are so many issues that pop up as wealth sort of grows within a family. In many cases, it destroys and can tear a family apart. So, what we're trying to look at is what are the best practices on training the next generation to be shepherds of wealth, to not view this as a burden but something that can be legacy building, to enhance the family dynamic and not create strife and divorce and family rivalries. So, this is an area as well, we've partnered with therapists. And psychologists at Ivy League universities, and we work with our families on this. And then we have actually used it to inform some of the training and the financial education that we deliver to the next gen. So, look, we're not the only bank on the street doing this, but I think, you know, private banks are moving beyond just, you know, we can manage your wealth and we're really trying to become an extension of the family and work on the complex issues that they're dealing with.

Well, we're nearing the end of our discussion. I wanted to ask, for those who are interested in diversifying their assets, maybe away from stocks, bonds, what key questions should everyone ask themselves if they're looking to invest in art? I mean, just if there are any universal rules, if you will, that you think should be top of mind.

Yeah, look, I mean, it's an important question. The first thing I would preface is that most of our art collecting clients did not start collecting art for investment purposes. They were led to this area for maybe it was aesthetic or pleasure or lifestyle hobbies, or it was a way to differentiate themselves beyond just the daily grind of working as a lawyer, a doctor, or an investment manager or private equity executive. And this art world is not an art world. I mean, it's the humanities side of life. It's not the hard sciences. And that's very inviting to a group who work in the hard sciences. So I would say the first thing is it's probably not a space if you want pure risk-adjusted return. There are better tangible assets than the art world because part of the expected return is the visual pleasure you'll derive from the art. But if you've made a decision that you want to diversify and art is going to be part of your balance sheet, you definitely want to slow down, take stock. There are galleries that are serious high art galleries that deal in artists that they're going to be invested in over the life of these artists, and these artists will have secondary markets. You want to understand the distinction between that, which are artists that have a real resale market, and art that is more consumer art, more high street art, that is art that the moment it leaves the gallery, it's going to go near to zero and it's going to be very difficult to sell. So paying attention, I think the first thing is understanding what segments of the artwork of the art world have a secondary market, and then working with an advisor. We have a team of art specialists. There's lots of art advisors out there. Working with them to set some objectives on what it is you want to be as a collector, what drives you aesthetically, what segment of the art world, which is thousands of sub-markets, do you want to become an authority in and really learn and discover and spend a lifetime uncovering things. Maybe it's contemporary art, Maybe it's a slice of the old masters segment. And then, you know, focus from there, because you want to have an angle. And I think you want information, knowledge in this space. It's an unregulated market in many ways. It's a market that is, that information does matter.

Well, that's excellent advice. Thank you for being so generous with your time. We've been speaking with Evan Beard, Head of Art Services at Bank of America Private Bank. And if you have any questions, comments, or suggestions, please shoot me an email at greg.bartalis@barons.com.

Thank you.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.