Independent Art Advice Matters: Cadell+Co - FCA Regulated Art Advisers

2. STEP Guernsey 2018 Why truly independent art advice matters to Professionals

3. Cadell+Co Ltd • First (and only) art advisers under FCA regulation • Focused on professional advisers • Offer independent, professional, transparent advice • 5 highly experienced Partners (ex Christie’s + Sotheby’s) • Firm Based Approach: work with 30 independent experts • Active in London, Jersey, Guernsey, IoM, Geneva, Zurich and Lausanne

4. The Art Market • Sector Dynamics • Buying • 3. Selling

5. 1. Sector Dynamics A. Unregulated Market • No standard consumer protections • No asset registers • Undeclared conflicts are the industry norm • Concealed or Undeclared Introductory Commissions are standard business development tools • Caveat Emptor: No obligation for full disclosure. • No segregation of funds • Few Art Advisers have Professional Indemnity Insurance • Golden Rule: Assume all parties have a conflict of interest unless proven otherwise, check all facts

6. 1. Sector Dynamics B. ART MARKET MODUS OPERANDI: “TRUSTED ADVISER” • Mission is to “make it personal” by becoming a “trusted adviser” to drive out due diligence and competition – despite a blatant conflict of interest • Art industry exploits knowledge asymmetry to gain advantage • Auction Houses and Dealers are art traders • Art Traders are NOT ADVISORS

7. 1. Sector Dynamics C. BECOMING A ‘TRUSTED ADVISER’. AUCTION • At leading auction houses • Uncompetitive business is twice as profitable • 60+ data intelligence analysts track who owns what and who are the “influencers”; • “Business getters” then focus on beneficiaries and advisers. • Free valuations are used to populate databases, • Relations, friends, curators, professional advisors, “art advisors” etc. are actively and overtly targeted with introductory commission or rebates which your clients pay for.* *http://www.christies.com/selling-services/selling-guide/financial-information/#Agents--consultants

8. 1. Sector Dynamics C. BECOMING A ‘TRUSTED ADVISER’. VALUER/ART ADVISER • “Independent” Valuation firms • Routinely act as prospecting fronts for profitable dealing activity. • “Independent” Art Advisers • Unregulated “Independent Advisors” are often broker/dealers with undeclared conflicts of interest.

9. 1. Sector Dynamics D. Art Sector Red Flags – stop and take advice: • Chinese works of art • Antiquities • Pre-Colombian / Native American / Tribal and Ethnographic • CITES material – endangered wildlife products (e.g. ivory, mother of pearl) • Hazardous materials – mercury, asbestos, arsenic • National treasures

10. Case study 1. Intermediary Risk: Timothy Sammons An example of what can go wrong when trading through a “traditional” intermediary

11. Case Study 2: Thwaites Vs Sotheby’s The $10m Caravaggio An illustration that auction houses are “best efforts” sale channels, not advisers:

12. Sector Dynamics • Buying • 3. Selling

13. 2. Buying – Auction House Auction House = Lower Risk • Warranties offered • KYC / AML managed by the auction house • Demonstrable public clearing price • Key Issues – over bidding and substantial on costs: • Buyer’s Premium 25%, Logistics, Insurance

14. 2. Buying -Dealer Dealer = Very High Risk • Caveat Emptor: Not obliged to declare facts about a work which may adversely affect perceptions of its value • (Non-)comparable transactions cited to inflate valuations • No warranties (unless contracted), 100% downside • Layered Transactions are the norm Your clients wouldn’t buy a house without a survey, legal advice and mortgage valuation?

15. Case Study 3: The ‘Monet’ The art world makes normally cautious people behave differently: • Industrialist billionaire goes to NY art fair, buys a ‘Monet’ from a well known dealer for $1.8m • 1 year later, decides to sell • The market had gone up • Cadell+Co expert estimates value at $600-800k • Very common for individuals who are extremely successful in other sectors to ignore the most basic due diligence checks due to lack of experience and social pressure.

16. Case Study 4: Layered Transaction: Accidia Vs Dickinson. The da Vinci Drawing Buyer (Private) $7m (Acquisition Price) Intermediary A $800k (Dealer) $200k (“Advisor”) $6m $500k (Dealer) Intermediary B $5.5m Seller (Trust) $500k (“Art Advisor”) $5m (Net Proceeds) 18

17. 2. Buying – Cadell Risk Management Acquisition Risk Management = DESK TOP REVIEW (DTR) • Limited, fast turn around, review of the information you have available by an expert to establish if there is an obvious problem with: • Price (independent valuation using transaction comparables) • Provenance • Cost £950 • 20% of DTRs reveal serious issues

18. 2. Buying – Cadell Risk Management • Get legal advice from an art lawyer: • Title/provenance review • Understand Layered Structure, KYC/AML review • Purchase Agreement (inc Warranties) • Art Loss Register check • Tax issues • Additional Provenance Research + Technical investigations

19. Sector Dynamics • Buying • 3. Selling

20. 3. Selling – Common Assumptions • Art offered at public auction automatically turns into cash at the best market rate • Auction houses are the same • Comes down to commercial terms

21. Reality Check 1: “Art turns into cash at the best market rate” • 20-40% of works offered don’t sell • Unsold works lose -31% of value over night • Not a perfect market.

22. Reality Check 2: “Auction houses are the same” • Significant differences in performance at sector/office level between major auction houses • Christies: 19C London/Paris/New York • Sotheby’s: 19C London/Paris/New York Key: Identifying right franchise lowers risk of no sale

23. Reality Check 2: “Auction houses are the same” • One additional bid is +10% • Marketing can influence bidders • Discretionary Marketing promises: Catalogue, Web, PR, Advertising, Tours, Events, Top Client Dinners Key: right combination of marketing + right franchise increases likelihood of bidding

24. Reality Check 3: “Comes down to terms” • Commercial terms • Seller’s Commission is discounted (10%) • Rebate from Buyer’s Commission c. 3-5% • Whereas the difference in outcome is: • Potential downside of not selling: -31% • Potential upside of multiple bidders: 10/20/30%+ • Best terms usually offered by weakest bidders

25. Case Study 5. ‘Old Master’ - Terms How unsuspecting Trustees paid more in fees than necessary • Relationship with auction house via previous deal • Repeated same terms with the auction house on a $17m master piece • Paid substantial commission when should have received a portion of buyer’s premium (out by c.$1.5m)

26. 3. Selling –Cadell Risk Management Key Steps • Selection for Sale – Establish the right works to be sold . Art Traders will target best works – easiest to sell and highest prices, but are often the best long-term investments. • Sale Channel Selection –Conduct a competitive tender process to establish the best: • Commercial Terms (most talked about, usually least important) • Franchise (proven best performance, over time) • Marketing • Project management –From preparing each work for sale (provenance/title/condition/estimates), through the tender/pitch process, sale and on until final payment.

27. “We protect your clients from the conflicts of interest that are endemic in the art market.”