Working both ends
November 8 2012
Picture: New York Times
In New York, mega-dealer Larry Gagosian is being sued by a collector for allegedly under-selling their Roy Lichtenstein painting. According to the NY Times, the vendor says it was unlawful for Gagosian to take a commission from both sides without fully disclosing the financial relationship. The picture was sold for $2m, and Mr Gagosian took a commission of $1m.
A central question in the case has been whether Mr. Gagosian in essence worked both ends of the deal — not disclosing to Mr. Cowles that his gallery had a relationship with the buyer and that it was trying to get a favorable price for that buyer. In a deposition made public on Wednesday, Mr. Gagosian said that he frequently represented both the seller and buyer in a deal without disclosing that fact to either party. “To be honest with you, the question hardly ever gets asked,” he said. “I never get asked the question, ‘Are you representing both sides.’”
The case is an interesting one, because in the art world some dealers (and worse, 'advisers') often do work both ends of the deal, as the NY Times puts it, without disclosing the fact. This obviously creates a significant conflict of interest. Happily, in the UK this practice is now illegal, due to the introduction of the new Bribery Act (and if you think about it, working for 'both ends' is a sort of bribe). All the Old Master dealers I know in London would only take a commission from a seller.
The problem with taking a commission from both buyer and seller, even with full disclosure, is which party is your primary responsibility? For example, the major auction houses take commissions from both buyer and seller quite openly - but in whose interest should they really be working? The standard seller's premium at Sotheby's and Christie's is 12%, but the buyer's starts at 25% (which with Vat adds 30% to any hammer price). Often, with really valuable paintings, the vendor will pay little or no premium, and the auction house's profit will come wholly from the buyer's premium.
However, auction houses work overwhelmingly in the interest of the seller. Rarely have I felt, as a prospective buyer, that an auctioneer is working to get me the best deal. The very process of bidding (and especially sham bidding up to the reserve) is designed to work against the interest of the buyer. The price can only ever go up. Reserves are agreed with the seller, and not disclosed to the buyer. Auctioneer's terms and conditions can give buyers little comfort in the event of a duff attribution, and then, especially in the world of Old Masters, there is the question of a picture's condition, which is rarely if ever given the full attention it deserves by auctioneers (and I've seen major auction houses provide condition reports that are little more than works of fiction).
So shouldn't auction houses only take a commission from vendors, as (Mr Gagosian excepted) most dealers do?
Update - a reader from the financial world sends this interesting insight:
Auctioneers already protect themselves by defining very limited responsibilities towards buyers, so the question of commissions is surely one of efficient pricing. If we all acted rationally, the split of commission between buyer and seller would make absolutely no difference - buyers would adjust their bids in line with the commission to be added on top. In the real world, buyers might experience more 'sticker-shock' if the full price (including commission and VAT) were bid in the room, rather than a number almost a third lower than what they will have to pay. On the other side, sellers perceive their commission to be the price they're paying, and will focus more on that than on the buyers' premium - which also reduces the portion of the price that they will receive. The classic example given in economic research in this area is printers, which are sold below cost price but with eye-wateringly expensive ink cartridges increasing lifetime cost.
I'm not sure they're doing such a great job for vendors either. Academic research suggests that it's really hard to incentivise agents to maximise prices - they are much more focused on doing the deal rather than getting the highest possible price. If a sale falls through, the vendor keeps the asset, but the agent gets nothing. If it sells below fair market value, the vendor nurses a loss, but the agent gets a commission. For the vendor, the difference between a fair price and a good price is really important. For the agent it's a matter of a few percentage points.
I agree with you about the inadequate discussion of condition, although that's not restricted to the trade. Academic art history rarely discusses condition adequately, and museums almost never mention condition in wall text - which has always struck me as one of the most useful things they could explain.
