Masterworks Review

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  Masterworks

  • Basics: Masterworks is an investment platform that lets everyday people invest in fine art. Investors can buy fractional shares in art pieces, then wait three to 10 years for Masterworks to sell the piece for more than they bought it for. Investors can also try to sell their shares on Masterworks' secondary market for a profit, however, there's not too much activity in the secondary market.
  • Pros: Masterworks is available to both accredited and non-accredited investors, investing in fine art has a solid track record, and the platform has a great user interface.
  • Cons: Your profits dilute over time (1.5% annually), you can’t touch your investments for three to 10 years, and you have to pass an initial screening before being able to invest.
  User Experience 10/10

   

  Fees 10/10

   

  Investment Options 9/10

   

  Research Tools 10/10

   

  Tax Options 7/10

   

  Investment Liquidity 5/10

   
  • Minimum Investment:

    Varies

  • Fees:

    1.5% annual fee and 20% of profits

  • Accreditation Required:

    Initial phone screening required

  • Lock-Up Period:

    3-10 years

What is Masterworks?

Masterworks, or “Masterworks.io,” is an investment platform that allows everyday people to invest in an asset previously only available to the one percent: fine art.

Unlike other investment platforms I’ve reviewed in the past, Masterworks is in no way related to the stock market, real estate, or cryptocurrency. This makes it unique, but unique doesn’t always mean a good investment.

In this review, I’ll walk you through how Masterworks operates and how you can buy a share of an art piece, step by step. I’ll also discuss the pros and cons of investing in fine art, as well as who may or may not want to consider investing through this platform.

This review is for educational purposes only and should not be taken as investment advice; if you choose to invest, please do so at your own risk.

Masterworks Features

How Does Masterworks Work?

This is how Masterworks operates:

• First, Masterworks determines which artists’ work has the best investment potential in the midterm.
• Masterworks then chooses a specific piece from that artist to target.
• Afterwards, Masterworks forms a limited liability company (LLC) for that piece, funds the LLC, then purchases the targeted piece.
• Investors can purchase Class A shares in the LLC, while Masterworks purchases Class B shares. This results in an 80-20 split, in favor of the investors.
• According to Masterworks, each art piece will then be sold after three to 10 years.

Artist Research

According to their website, Masterworks first determines which artists’ work has the best investment potential in the midterm. Masterworks does this based on “proprietary data” in their database. If you’re a member, you can access this here to do your own research.

You can use this database (pictured above) to search for a specific artist, or you can view example datasets that show auction sales for a recent year, historical return, or risk-adjusted return.

Art Piece Research

After Masterworks decides on an artist, it then chooses a specific piece from that artist to target.

LLC and Purchase

Masterworks then forms and funds a limited liability company (LLC) for that selected art piece before purchasing it.

Afterwards, Masterworks files an offering circular (like the one above with the Securities and Exchange Commission (SEC). This allows them to offer shares in the LLC to Masterworks investors.

Masterworks Minimum Investment

Masterworks does not publicly disclose a minimum investment amount, however, based on comments from my Masterworks Review video, it appears that Masterworks may present different investment minimums to different investors.

For example, if it appears that a particular lead has more available capital to invest, they may present them with a higher “minimum.” Alternatively, they may present somebody with less capital with a lower minimum. Again, this is based on the YouTube comment thread on my Masterworks video.

Sign Up

Fees

1.5%Annual Management Fee

Profit Split

80-2080% to investors, 20% to Masterworks

True-Up Payment

Varies

Masterworks Fees

The table below is a quick summary of Masterworks’ fees. I’ll explain these more in depth as I go continue the fees portion of the walkthrough.

Masterworks Profit Distribution

Masterworks investors can purchase Class A shares in the LLC, which means that investors get 80% of the profit recognized upon sale of the piece. Masterworks holds Class B shares, which means it receives the remaining 20% of the profit. This results in an 80-20 split in favor of investors.

However, Masterworks also receives a “True-Up Payment,” which covers research, acquisition, general operational expenses, and the expenses associated with filing with the SEC. For the piece I invested in, this amount was $2,200,000.

On top of that, Masterworks receives 1.5% of Class A shares each year as an administrative service and as an expense reimbursement fee. In other words, Masterworks takes 1.5% of the Class A shares outstanding each year, then issues new Class A shares to investors. Ultimately, this means that investors’ profits dilute by 1.5% each year.

The Math Behind These Fees

Masterworks claims it will sell each piece after 3-10 years. What does this look like in terms of profit? I did the math so you don’t have to.

Currently, Masterworks 058, LLC, is offering up to 22.2 million Class A shares at $20 per share. Imagine Masterworks investors purchased 1.1 million of these Class A shares. After the first year, Masterworks would get 1.5% of those shares as its management fee and re-divide the shares so that there are 1,116,500 Class A shares. Investors would still own the same 1.1 million shares, while Masterworks takes the rest as its 1.5% fee.

In other words, after one year, investors would only own 98.52% of Class A shares.

If the piece in question sold with a profit of $30 million after three years, 80% of that profit ($24 million) would go to Class A shares. However, after three years, investors would only own 95.63% of Class A shares, for a share of $22,951,608 – only 77% of the total profit.

If the piece sold after 10 years, investors would only own 86.17% of Class A shares, which means they would receive about 69% of the total profit.

In this example, the longer the hold period, the more investors’ profits interest is diluted.

Investors Purchase 1,100,000 Class A shares

Annual share dilution = 1.5%

After 1 year, # of total Class A shares = 1,100,000 + (1,100,000 x 1.5%) = 1,116,500

After 2 years, # of total Class A shares = 1,116,500 + (1,116,500 x 1.5%) = 1,133,248

After 3 years, # of total Class A shares = 1,133,248 + (1,133,248 x 1.5%) = 1,150,246

Investors still own 1,100,000 Class A shares

But after 3 years, investors now own (1,100,000/1,150,246) x 100% = 95.63% of Class A shares

Sale price of piece after 3 years = $30 million

80% goes to shares: $30m x 80% = $24 million

Investors own 95.63% of shares: (24m x 95.63%) = $22,951,608

Investors share of total profit = (22,951,608/30m) x 100% = 77%

Overall

These fees seem enormous compared to the .03% expense ratio of VTI, but whenever you invest in anything other than passive market index funds, you’re going to end up paying fees to the entities managing your investment.

In fact, an 80-20 profit split is fairly standard for hedge funds. For example, the first hedge fund in the US, established by A.W. Jones in 1949 took 20% of profits. While hedge fund fees are decreasing, it’s still typical for hedge funds to take 20% of profits with a 2% management fee.

Overall, the Masterworks fee is actually lower than traditional hedge fund fees since it only has a 1.5% management fee.

Is Masterworks Safe and Legit?

Masterworks is a legitimate investing platform based in New York City. Scott Lynn, an entrepreneur, founded the company in 2017 and has since then developed a list of notable consultants for the platform. Advisors include Eli Broverman, Co-Founder of Betterment, and Dan Miller, Co-Founder of Fundrise.

But whether or not Masterworks is a “safe” investment is a different question. The concept of making fine art more accessible to invest in is still fairly new, but it appears to be an interesting investment opportunity for those looking to diversify away from traditional asset classes, like stocks. However, this does come with certain downsides, as mentioned in this article.

How Have Masterworks Investments Performed?

Masterworks claims that its investments have performed well in the past with high net annual returns and access to blue-chip art. However, the platform is still fairly new, so I would take this claim with a grain of salt.

About Blue-Chip Art

When you sign up, the link will take you to the Masterworks homepage which says, “You’re invited to join an exclusive community investing in blue-chip art.”

In stock lingo, a “blue-chip stock” is a stock that’s become a household name and has proven itself able to weather both good and bad. The Dow Jones Industrial Average, for example, has 30 blue-chip stocks, including American Express, Apple, Boeing, Cisco, Chevron, etc.

Blue-chip art refers to art created by renowned artists whose art has tended to increase in value over time. While the value of this art could go down, history has shown that it tends to increase over time.

However, remember that all investing carries risk – whether you’re investing in the stock market, fine art, or the future of soybeans.

Masterworks Track Record

On Masterworks’ homepage, you can also see its track record. From inception through the end of Q2 2021, Masterworks claims a pretty high net annual return of 16%. While that hasn’t beaten the S&P 500 over the past few years, it’s a good hedge amount if the stock market suddenly starts to experience declines. Again, though, remember that no one can predict any market with complete accuracy; the best we can do is discuss likelihoods.

Disclaimer

Beneath its track record, Masterworks also has a disclaimer, which states that Masterworks itself determines the value of investors’ shares based on quarterly fair market value appraisals of art Masterworks investors are investing in, which are prepared by the Masterworks Acquisitions Department.

Because art is unique and not publicly-traded, you can’t just Google its value, like you would with other stock; rather, it has to be appraised.

I’m not going to discuss this at length, but if you’re interested in learning more about this, you can read the disclaimer on your own here.

Pros and Cons

Investing in fine art isn’t for everybody, but Masterworks makes it easier for anyone who wants to. Here are the platform’s pros and cons to help you decide if it’s right for you.

Masterworks Pros

Masterworks Cons

How to Get Started with Masterworks

In this section, I’ll walk you through the Masterworks platform. If you’re interested, you can follow along using my Masterworks link here.

If you’d like to see me actually sign up for and use Masterworks on my screen, check out my video walkthrough below!

Account Setup

To get started, click “Request Invitation” at the top right (this button will appear as “Skip Waitlist” if you click via my link), fill in some basic information, click “Request Invitation” again, answer a few questions, and then click “Finish.”

After that, Masterworks will ask you to schedule your membership interview. For my interview, I was able to talk to Peyton Fair, Masterworks’ Vice President of Membership, who answered some questions I had about Masterworks and then asked me a few questions to make sure Masterworks was a good fit for me.

These questions, which they ask in every membership interview, concern your investing experience, risk tolerance, and amount of liquid assets. If Masterworks decides you’re a good fit, your account will be approved and you can begin investing in art.

What Your Account Will Look Like

Offerings

After you log in to Masterworks, you’ll first see the “Offerings” tab. This is where you can find current investment opportunities which are updated every few weeks. At the time I signed up, there were three available: Untitled #12 by Agnes Martin, Twelve Hawks at 3 O’Clock by Joan Mitchell, and All Colored Cast (Part 2) by Jean-Michel Basquiat.

I’m not an art expert, but I found Basquiat’s All Colored Cast (Part 2) more interesting than the other two. After doing some research on my own, I found that his 1982 work, Untitled, sold for $110,500,000 – the largest sum ever paid at auction for work by an American artist – at a 2017 auction. While this doesn’t guarantee anything, it was enough to convince me to invest in this piece rather than the others.

Information About Pieces

On Masterworks, you can view more information about each piece.

Investment Thesis

First, Masterworks shows you an investment thesis consisting of a few bullet points about why Masterworks considers that piece to be a good investment.

For example, the investment thesis for the All Colored Cast (Part 2), summarizes the meaning of the piece, its appraisal, the appreciation of similar works, etc.

Deal Sheet and Offering Circular

On the Offerings page, you can also view deal sheets for each piece. This provides a closer look at the piece itself, including its sales history, information about the artist, a picture of the piece, and some disclosures. Here, you can also access the offering circular that I mentioned previously.

Database

Finally, if you click “View” next to “Repeat Sales,” you can see Masterworks’ database of the artist’s other works, which shows the price of what that particular piece was purchased for at one time, along with the most recent sales price for that piece.

This list, available for all Masterworks’ pieces, includes buyers and sellers around the world and is organized in descending order of appreciation.

Funding Your Investment

After choosing a piece, you can easily invest by clicking “Invest Now,” inputting the amount of money you want to invest, and clicking “Continue.” You’ll then be asked whether you’re investing as yourself or through an entity, trust, or joint account.

After this, Masterworks will present you with several funding options. You can fund through your bank account, credit or debit card, wire transfer, ACH, or you transfer from an IRA. I chose to link my bank account, which, like many investment platforms, Masterworks does through Plaid.

The Risks

After choosing your payment method and clicking “Continue,” Masterworks shows you the subscription agreement, which I recommend you read in its entirety.

The first paragraph discusses the risks of investing, saying, “This investment is suitable only for persons who can afford to lose their entire investment and such investment could be illiquid for an indefinite period of time.” Again, you can theoretically lose your investment in anything, and investing in art is extremely illiquid.

Finalizing Your Investment

After agreeing to the subscription agreement and clicking “Continue” again, you’ll be asked to verify your identity by answering a few questions.

Masterworks then asks if you’re an accredited investor, who is someone with an annual income of more than $200,000, joint income of more than $300,000, or net worth of more than $1,000,000 (excluding your primary residence). This question is optional, but Masterworks just wants to ensure that your investment is less than 10% of your net worth if you’re not accredited.

You can then complete your investment by clicking “Complete Purchase.” After you fill out any special reporting obligations, you’re finished making your investment!

Trading

With Masterworks, you have the ability to trade your shares or purchase other people’s shares, which you can access by clicking on the “Trading” tab.

If you scroll down on this page, you’ll see open sell orders. These are orders from Masterworks investors who want to sell their shares in various pieces.

The “Quantity” column shows the number of shares they want to sell, while the “Ask” column shows the price they want for each share. Masterworks also does a calculation of the implied painting value, which is the implied worth of the painting if each share were worth the asking price.

The “Buy” side works in a similar fashion, but it shows you the buy orders for various pieces. You can sort these offers by the asking price (for sell orders) or the bid price (for buy orders).

To actually trade here, you have to open up a new bank account. I didn’t choose to do this because I prefer to buy and hold, however, this secondary market does offer a bit of liquidity to your investment since if you want to liquidate, you may be able to find a buyer as soon as 90 days after the official closing of the piece you invested in.

Masterworks Customer Support

I didn’t contact Masterworks after my initial interview, so I can’t say anything definite about how they handle further customer support. However, based on the fact that my initial interview was with a real person, I can assume that the Masterworks customer support process is accessible and more personal than other investment platforms out there.

You can contact Masterworks’ customer support via email ([email protected]) or by phone at 203-518-5172.

For experienced investors, Masterworks might be a good opportunity to diversify a small portion of your portfolio and hedge your other investments.

4/5 Rating

Invest Now

Is Art a Good Investment?

It depends on the investments you have already. Below, I’ll note the upsides and downsides to investing in art, so you can decide for yourself.

The Upside of Investing in Art

In my opinion, your portfolio should be mostly made up of stocks and real estate, and most of my net worth is in these two categories. Other asset classes, like fine art, work best when paired with these assets; they aren’t highly correlated with either market, so they can serve to diversify your portfolio and protect you from inflation.

For example, in December of 2020, Citi released a report showing the correlations between art and ten other global asset classes.

According to the chart above, there’s only a .12 correlation between “All Art” and developed equities, meaning there’s not much correlation between the stock market and the art market. This low correlation holds true between “All Art” and almost all other non-art asset classes, making art a practical hedge against more traditional asset classes.

The Downsides of Investing in Art

Investing in art comes with its benefits and sophistication, but there are drawbacks.

Liquidity

If you own publicly-traded stocks or ETFs, you can sell them quickly and easily if you’re in need of money (although you should have an emergency fund for such purposes).

But if you own fine art, the selling takes time; you have to find a buyer or sell it at an auction somewhere. Although Masterworks has features designed to increase your investment’s liquidity, it’s still not as liquid as investing in the stock market.

Returns

While you might beat the market by investing in art, you might also lose to the market by investing in art. It’s much easier to invest in index funds like the Vanguard Total Stock Market ETF (VTI) and the Vanguard S&P 500 ETF (VOO), which might even end up outperforming art.

Taxes

If you choose to invest through Masterworks, your tax situation might get more complex. When you invest in stocks, you receive a 1099 package each year that most tax softwares find easy to input. But when you invest through Masterworks, you’re buying shares in an LLC, which gets taxed as a partnership for income tax purposes.

Because of this, Masterworks will issue you a Schedule K-1 like the one below, which can be more complicated to include on your tax return. This may also cause your tax software program to charge you more.

How Has My Investment Performed?

To be frank, it’s hard to tell at this point because of the nature of the asset. Unlike with an investment in a particular stock, there’s no accepted, real-time market price, and Masterworks’ internal secondary market isn’t mature enough at this point to depend on for valuation.

Realistically, unless the secondary market matures, how well my investment did really won’t be known until it’s sold. This is definitely a downside, but it’s a downside of investing in fine art in general – with or without Masterworks.

Is Masterworks Worth It?

Who Masterworks is Best For

In my opinion, Masterworks is best for somebody who already has an established stock or stock and bond portfolio. If this is you, Masterworks may be a good way to diversify a small portion of your portfolio and hedge your other investments.

Who Masterworks is Not For

On the other hand, if you’re new to the investing game, you may want to wait until you have a solid stock portfolio before hedging with Masterworks. If you’re still getting established financially, I recommend getting your maximum 401(k) match, or maxing out your HSA or IRAs before investing in something like art.

Final Thoughts on Masterworks

Masterworks is a unique (and potentially worth it) investment opportunity for those with developed portfolios and investing experience. However, I wouldn’t recommend Masterworks if you’re just starting out in your investing journey.

If you want to learn more about investing, check out my article on how to invest for beginners and these seven investment terms you should know.

Frequently Asked Questions

• Is Masterworks a good investment?

  Masterworks could potentially be a good investment if you’re an experienced investor with a developed portfolio. Otherwise, I would not recommend Masterworks to you if you’re just starting out with investing.

• Can you make money on Masterworks?

  You can make money through Masterworks if you get a good return, but keep in mind that Masterworks holds your investment for three to 10 years before selling it.

• How much should I invest in Masterworks?

  If you choose to invest with Masterworks, consider investing the minimum amount. Based on comments from my Masterworks review video, it appears that the minimum investment amount varies depending on your income and investment status.

  However, how much you should invest in Masterworks depends on your overall net worth and investment portfolio – is your financial situation stable enough to allow you to invest in fine art?

• Who is behind Masterworks?

  The person behind Masterworks is Scott Lynn, an entrepreneur who founded the platform in 2017. Masterworks also has a notable list of consultants and advisors such as Eli Broverman, Co-Founder of Betterment, and Dan Miller, Co-Founder of Fundrise.

• Is investing in art a good idea?

  Investing in art can be a good idea if you’re an experienced investor looking to diversify your portfolio. Otherwise, if you’re just starting out in your investing journey, investing in art might not be the safest or best bet.

• How many shares can I buy with Masterworks?

  Through Masterworks, you can buy Class A shares through an LLC, which will get you 80% of Class A shares while Masterworks gets 20% of Class B shares.

• How does Masterworks choose its paintings?

  Masterworks chooses its paintings by determining which artists’ work has the best investment potential. This assessment is based on demand, risk market, and appreciation rate.

• Is it risky to invest with Masterworks?

  It’s not risky to invest with Masterworks since it’s a legitimate platform. However, in terms of getting a good return, I would say that investing in art is fairly risky if you’re just starting out with your portfolio – with or without Masterworks.