Alternative investments are unique ways to add diversification to your investment portfolio. One alternative investment that has caught some investors’ attention is art investing. But, how do you even get started with investing in art? Are there platforms out there just for this investment? That’s where Masterworks comes in.
The Masterworks’ platform enables investors to buy fractional shares in fine art. This platform aims to make it easy and simple to invest in art and find actionable opportunities. So, if you’re considering getting into the art market, keep reading our Masterworks review to learn everything you need to know about this platform.
What is Masterworks?
Masterworks is an art investing platform that allows investors to invest in blue-chip artwork through fractional investing. Art collectors are usually wealthy individuals that have substantial amounts of money to invest in famous paintings.
The Masterworks platform to this exclusive art world to almost anyone who wants to get into investing in works of art. Masterworks makes this possible by allowing you to buy shares of art pieces.
The company was founded in 2017, so it hasn’t been around for that long. Based out of New York City, the fine art investment platform makes it possible to invest in works from artists like Kaws, Basquiat, and Banksy.
Scott Lynn is the founder of the privately held startup. The first acquisition the company made was of Andy Warhol’s 1979 Colored Marilyn (Reversal Series). Masterworks purchased the piece for $1.82 million.
Masterworks holds works of art for 3 to 10 years. It has purchased and sold shares on over 40 art pieces since launching.
How does Masterworks work?
Masterworks reviews hundreds of art each year to determine which pieces to add to its platform. The Masterworks team has over 75 years of experience working as collectors, dealers, or in auction houses.
It also uses an algorithm that looks at the historical data of over 1 million art auctions. It selects artists that have a proven track record of their works appreciating at a price.
The target annual return that Masterworks looks for is between 9% to 15%. Artwork that Masterworks buys is registered with the Securities and Exchange Commission (SEC).
Masterworks sells shares of artwork to investors. No single investor can own more than 10% of a single piece of fine art.
To invest in artwork, you’ll have 90 days from the time the SEC approves the filing to purchase fractional shares during its primary offering.
The fractional shares for investing in art are typically around $20. There is no minimum investment amount.
Masterworks investors can visit its gallery in New York City to view purchased artwork.
An independent collector or buyer is brought in to find potential buyers. The majority of shareholders must vote in approval before artwork is allowed to sell.
Artwork sold will have the proceeds distributed proportionally to the appropriate Masterworks investor. Masterworks collects 20% of profits as part of the fees from sales.
When investing with Masterworks, the artwork is held for three to ten years. Hence, art investing on the platform means that it could be a long time before you see a return.
There is a secondary market that is among Masterworks offerings. An individual investor who wishes to see their fractional shares can use its market to find buyers.
Keep in mind that there’s no guarantee that you’ll find a buyer for your shares. The prices on Masterworks’ secondary market will also depend on demand.
The secondary market is open to only U.S. citizens that have a U.S.-based bank account.
Masterworks Sign up Process
To open a Masterworks account, you don’t need to be an accredited investor or have large sums of money as you’d find in hedge funds.
You must request an invitation to become a member on its platform. There is a phone interview that Masterworks conducts for all potential members.
It’s a pretty unconventional (and inconvenient) process to require a phone interview. The majority of alternative investment platforms allow you to complete the sign-up online.
Securities and Exchange Commission
The SEC, as it is called for short, is an independent federal government regulatory agency. It is responsible for protecting investors, ensuring that the securities markets are fair and orderly, and facilitating the formation of capital.
Its main functions are overseeing individuals and organizations in the securities markets. This includes brokerage firms, securities exchanges, dealers, investment funds, and investment advisors.
Each painting Masterworks purchases must be registered with the SEC before its offered to investors on its platform.
Blue Chip Art in the Art Market
You might have heard about Blue Chip Stocks if you’ve had some experience with investing. The inspiration for the term “blue chip art” came from the stock market.
Blue chip art refers to any piece of art that’s expected to grow, without regard to economic conditions. Paintings created from artists like Andy Warhol are considered blue chip art market material.
These types of pieces are referring to when the art sells. Its resale value and historical auction data should depict consistent sales and increase in value.
Masterworks at a Glance
Below is a breakdown of key information about investing on Masterworks’ platform:
- Investment type – Fine Art, no self-directed IRAs
- Investor Status – Not limited to accredited investors, open to everyone
- How to invest – Fractional Shares
- Minimum Investment – None
- Typical Holding period – Three to Ten years
- Pricing and Fees – 1.5% annual fee and 20% flat commission on sales
Masterworks claims to be the largest buyer in the art market. According to its website, its track record (from September 27th, 2019, to March 31st, 2022) is 14.3%, net of fees.
Some of its current offerings include pieces by Banksy, Keith Haring, and Pablo Picasso. Below are some of the performances on its painting to date listed on Masterworks’ website:
- Banksy, Mona Lisa – 32%
- George Condo, Staring into Space – 31.7%
- Albert Oehlen, Doppelbild – 33.8%
There is no minimum investment requirement with Masterworks. That makes its platform more accessible to investors interested in alternative investments.
Length of Investment
Expect for Masterworks to hold a piece of art for three to ten years. Short-term investors should consider this factor before purchasing fractional shares.
If you’re ready to sell your shares before Masterworks has sold the painting, you can use its secondary market. That is, if you’re a U.S. citizen who has a bank account based out of the U.S.
You can only buy/sell your Masterworks shares to other Masterworks investors. Your potential pool of candidates is small as a result.
Purchasing famous paintings typically means buying the entire work, which can cost hundreds of thousands of dollars or more. That’s art investing has largely been only an option for wealthy investors.
Masterworks platform allows you to buy fractional shares of art. Fractional shares are parts or pieces of an investment, such as a stock.
For example, if there’s a painting that Masterworks paid $2 million for, you can buy a portion of it for $20 per share.
Masterworks includes educational content on its platform for users to learn about art investing and the pieces they have. Its price database allows you to look at all the artists, their paintings, and returns.
Its Masterworks “Insights” blog includes well-researched and interesting articles. Even a novice in art investing will be able to understand the articles. Topics include art investing ideas, benefits of investing in art, and historical dives into artists.
Artist biographies provide a better understanding of each artist that created a piece. Every painting that you can invest in has a “Deal Sheet.” This contains key information that an investor would likely want to know before investing.
Who is Masterworks best for?
To date, Masterworks has over 400,000 registered users. Not everyone is the right fit for its platform, however. Investors who may benefit from using Masterworks include:
- Have an interest in art
- Wants to diversify your portfolio with alternative investments
- Desires to avoid the risk and costs of buying entire works of art
- Is willing to accept the higher risks of investing in art
- Can hold their investments for several years
Other art investment platforms that investors might consider include Yieldstreet, Artspace, and Otis.
What does Masterworks Cost?
Masterworks charges two fees in its fee structure. The first is its 1.5% annual management fee which is calculated from your total account value.
This annual fee is charged every year and reduces the number of shares you own. There’s no option to pay cash for the management fee.
The other fee that Masterwork charges is a fee for when a piece of artwork sells. Masterworks must hold the fine art for three to ten years for a gain. It charges 20% of the profits.
These Masterworks fees help it offset its costs which include managing artwork, insurance, appraisals, and SEC regulatory fees.
There are no transaction fees. Buying shares of fine art or selling it on the secondary market to another investor will not incur fees.
Masterworks Pros and Cons
Pro: Invest without a Minimum Investment Requirement
Investment opportunities on its platform can be done with little money to start. The Masterworks minimum investment is $0. This opens the world of art investing to the masses.
Pro: Art Investment Research tools are Extensive
The research resources that Masterworks provides its users offer a substantial amount of information. It also has a database that keeps track of its artwork which you can use to find specific artists or view pricing history.
The most recent sale, gross appreciation, and annual investment return are among the pieces of financial information you can find on artwork. If you’re new to investing in fine art, there are also helpful videos and articles to help you learn more.
Pro: Invest in Fine Art with Fractional Shares
A blue chip art piece doesn’t mean that shares will cost hundreds of dollars or more. The platform offers fractional shares that are typically found at $20 increments.
Pro: High Returns Potential
Since artwork doesn’t follow the ups and downs of the stock market, it could be a good investment to hedge against a downturn in the market.
Pro: Secondary Market allows some Liquidity
If investing in art for several years isn’t feasible or something happens where you need access to cash, Masterworks has a secondary market. That provides some flexibility.
The demand for the shares will vary, so there is no guarantee that they will sell.
Pro: Can view Masterworks Artworks
As a member of its platform, you can head to NYC to view million dollar artwork. It’s a nice perk that isn’t available to the general public.
Pro: Platform is User-Friendly
Masterworks’ usability is very good and well-designed. The Masterworks website is simple and clean. Information on different art pieces is easy to find.
Pro: Artwork is securely stored and insured
When you’ve invested in a piece of blue chip art, you want that asset to be safe. Masterworks ensures all its pieces and keeps them secure to provide peace of mind.
Pro: Prevets the Artists and Artwork before Purchases
Masterworks does its best to ensure that the artists and artwork are expertly vetted before they are bought. That provides more assurance that you’re investing in art that is more likely to be a good investment.
Pro: Accessible Platform for all Investors
Investing in fine art or artists like Andy Warhol or Claude Monet isn’t only for the wealthy with Masterworks. You don’t need a hedge fund either with investing with Masterworks.
Any investor can buy shares of a piece of art without having to pay upfront for the entire cost. Accredited investor status is not required to be on its platform.
Con: No access to Investment Advisors
Masterworks doesn’t offer professional financial advice on this alternative asset class. Therefore you’re responsible for building your portfolio.
If you’re an investor that’s well-versed in the art world, this might be a non-issue. You may understand and keep up with current trends happening in fine art.
However, this is a disadvantage for investors who aren’t familiar with the art market. You’ll need to do your own research to determine whether to invest in a piece of work. Masterworks does vet each piece, which helps mitigate some risk since they only list art that has the potential to be a solid investment.
Con: Untested Business Model
The company has only been around since 2017. While the returns so far have been solid, there’s no guarantee that the investments will continue to perform. Its business model hasn’t existed for long enough to build up a solid track record.
Con: Lacks a Mobile App
Nowadays, there seems to be an app for almost everything. But Masterworks is only available on a web platform.
Con: Taxes are Higher on Art
Taxed as a collectible, artwork is on the long-term gain gains tax rate. At 28%, that’s 8% higher than more conventional investment assets, which is incurred for the wealthiest.
Con: Must be a U.S. Citizen to access Secondary Market
Only U.S. citizens with a U.S. bank account can buy and sell shares on its secondary market. International investors will miss the opportunity to take advantage of this major feature.
Con: Must complete a Phone Interview
If you’re interested in joining Masterworks, you’ll need to have a phone interview with their team. Masterworks uses the interview to get to know you, answer questions, and make investment recommendations.
Some potential investors will find it inconvenient to undergo this process.
Con: Long Lock-Up Periods
When you buy shares of a piece of art, you’re likely going to have to hold it for several years before you see a return. If liquidity, consistent cash flows, or short-term investing are your primary goals, Masterworks might not be the right fit for you.
Con: Investments aren’t Diversified
Masterworks only offers a single-asset type. This creates some additional risk. Investors should have other types of investments to diversify their portfolios.
Con: High Risk Factors
Investing in art has high return potential. With that comes just as much risk. You will only see a return if an investment is purchased for a higher price several years later.
There are no interest payments, dividends, or other ongoing cash flow sources. If you want to sell your shares before the piece of art is sold, you can sell it on its secondary market. There’s no guarantee that your shares will sell, however.
FAQ: Masterworks Review
What commissions and fees does Masterworks charge?
Masterworks charges an annual management fee of 1.5% and can collect up to 20% of profits when it sells artwork. The annual fee and cut of profits is high compared to other types of investments. However, it does seem to be similar to costs of other illiquid assets.
Is Masterworks easy to use?
The platform is well laid out and easy for anyone to pick up and use. There is no mobile app available, so users must have a desktop or desktop to access the website.
What features does Masterworks include?
Masterworks has a great vetting process and an experienced team that reviews all works of art before purchasing. Investors can feel good about investing in artwork found on the platform.
Masterworks files each piece of art with the SEC and offers fractional shares to its users. There’s a marketplace where investors can sell their shares if they wish to cash out before an artwork is sold.
Does Masterworks offer customer service?
The customer service team at Masterworks can be reached by phone when you call 203-518-5172. Its team is available 9 a.m. to 6 p.m. EST. You can also send an email to email@example.com.
Another unique feature of Masterworks is that each user gets their own dedicated representative. This personal representative will help support and answer your questions.
Bottom Line: Masterworks
Art investing is a very speculative space. Even the works of greats like Van Gogh can potentially lose their value. It’s also not a choice for investors looking at retirement options or short-term investing.
If you’re an investor that is willing to take some risks for potentially high returns, wants to diversify with alternative investments, or has a passion for works of art, Masterworks could be a good investment.