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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 canโt touch your investments for three to 10 years, and you have to pass an initial screening before being able to invest.
- Minimum Investment:
Varies
- Fees:
1.5% annual fee and 20% of profits
- Accreditation Required:
Initial phone screening required
- Lock-Up Period:
3-10 years
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Table of Contents
What is Masterworks?
Masterworks, or โMasterworks.io,โ 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 Iโve reviewed in the past, Masterworks is in no way related to the stock market, real estate, or cryptocurrency. This makes it unique, but unique doesnโt always mean a good investment.
In this review, Iโll walk you through how Masterworks operates and how you can buy a share of an art piece, step by step. Iโll 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
Masterworks requires an interview through a phone screening before you can invest | |
Undisclosed. May vary depending on the investor | |
1.5% annual management fee and 20% profit split | |
Low | |
3-10 years | |
Visual fine art | |
LLC Partnership | |
Schedule K-1 | |
No | |
Before or after making an investment, you can view investment theses, deal sheets, databases, and more for each art piece. | |
[email protected] | |
203-518-5172 | |
9 a.m. to 6 p.m. (EST) | |
53 Beach St. 2nd Floor, New York, NY 10013 |
How Does Masterworks Work?
This is how Masterworks operates:
- First, Masterworks determines which artistsโ 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 artistsโ work has the best investment potential in the midterm. Masterworks does this based on โproprietary dataโ in their database. If youโre 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.โ 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.
Fees
1.5%Annual Management FeeProfit Split
80-2080% to investors, 20% to MasterworksTrue-Up Payment
VariesMasterworks Fees
The table below is a quick summary of Masterworksโ fees. Iโll explain these more in depth as I go continue the fees portion of the walkthrough.
1.5%. Masterworks holds Class A shares, which means it receives 1.5% of Class A shares each year as a management fee. | |
80-20. Masterworksโ profits are split 80-20 in favor of investors. Masterworks holds Class B shares, which means it receives 20% of the profit. | |
Varies. This 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. |
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 โTrue-Up Payment,โ 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 investorsโ 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 donโt 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 โ 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 investorsโ 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, youโre 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, itโs 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 โsafeโ 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, โYouโre invited to join an exclusive community investing in blue-chip art.โ
In stock lingo, a โblue-chip stockโ is a stock thatโs 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 โ whether youโre investing in the stock market, fine art, or the future of soybeans.
Masterworks Track Record
On Masterworksโ 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 hasnโt beaten the S&P 500 over the past few years, itโs 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 investorsโ 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 canโt just Google its value, like you would with other stock; rather, it has to be appraised.
Iโm not going to discuss this at length, but if youโre interested in learning more about this, you can read the disclaimer on your own here.
Pros and Cons
Investing in fine art isnโt for everybody, but Masterworks makes it easier for anyone who wants to. Here are the platformโs pros and cons to help you decide if itโs right for you.
Masterworks Pros
- Fine art could be worth the investment. Will fine art outperform more traditional investments like the stock market? No one knows. However, art does appear to have a solid track record, and it isnโt highly correlated with the stock market, so it can be a good hedge.
- Itโs relatively accessible. Unlike many other alternative investment funds that only serve accredited investors, Masterworks is open to both accredited and non-accredited investors.
- Great user interface. In my opinion, the Masterworks interface is extremely well done and easy to navigate.
Masterworks Cons
- Your profits dilute. While the 80-20 profit split seems like a good return, the investorsโ share of the profits grow more and more diluted over time due to the 1.5% annual fee.
- Masterworks investments lack liquidity. Even though Masterworks has a secondary market where you may be able to sell your shares, in general, Masterworks investments lack liquidity and canโt really be touched for three to 10 years after your investment.
- You have to interview first. Masterworks has a somewhat involved sign-up process that includes a phone interview. Some might consider this a pro since it gives you the opportunity to speak to someone at Masterworks, but itโs an extra step that isnโt required for most other online investing platforms.
- You wonโt really know how your investment is doing. As of right now, Masterworks’ internal secondary market isn’t mature enough to depend on for valuation. Unless the secondary market matures, how well the investment did won’t be known until itโs sold. This is really just a downside of investing in fine art in general, though.
- Thereโs no specific minimum investment amount. But based on comments from my Masterworks Youtube video, it appears that the minimum amount depends on your capital.
How to Get Started with Masterworks
In this section, Iโll walk you through the Masterworks platform. If youโre 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 โRequest Invitationโ at the top right (this button will appear as โSkip Waitlistโ if you click via my link), fill in some basic information, click โRequest Invitationโ again, answer a few questions, and then click โFinish.โ
After that, Masterworks will ask you to schedule your membership interview. For my interview, I was able to talk to Peyton Fair, Masterworksโ 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 youโre 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, youโll first see the โOfferingsโ 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 OโClock by Joan Mitchell, and All Colored Cast (Part 2) by Jean-Michel Basquiat.
Iโm not an art expert, but I found Basquiatโs 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 โ the largest sum ever paid at auction for work by an American artist โ at a 2017 auction. While this doesnโt 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 โViewโ next to โRepeat Sales,โ you can see Masterworksโ database of the artistโs 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 Masterworksโ 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 โInvest Now,โ inputting the amount of money you want to invest, and clicking โContinue.โ Youโll then be asked whether youโre 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 โContinue,โ Masterworks shows you the subscription agreement, which I recommend you read in its entirety.
The first paragraph discusses the risks of investing, saying, โThis 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.โ 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 โContinueโ again, youโll be asked to verify your identity by answering a few questions.
Masterworks then asks if youโre 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 youโre not accredited.
You can then complete your investment by clicking โComplete Purchase.โ After you fill out any special reporting obligations, youโre finished making your investment!
Trading
With Masterworks, you have the ability to trade your shares or purchase other peopleโs shares, which you can access by clicking on the โTradingโ tab.
If you scroll down on this page, youโll see open sell orders. These are orders from Masterworks investors who want to sell their shares in various pieces.
The โQuantityโ column shows the number of shares they want to sell, while the โAskโ 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 โBuyโ 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 didnโt 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 didnโt contact Masterworks after my initial interview, so I canโt 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 Masterworksโ 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.
Is Art a Good Investment?
It depends on the investments you have already. Below, Iโll 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 arenโt 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, thereโs only a .12 correlation between โAll Artโ and developed equities, meaning thereโs not much correlation between the stock market and the art market. This low correlation holds true between โAll Artโ 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 youโre 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 investmentโs liquidity, itโs 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. Itโs 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, youโre 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 itโs sold. This is definitely a downside, but itโs a downside of investing in fine art in general โ 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 youโre new to the investing game, you may want to wait until you have a solid stock portfolio before hedging with Masterworks. If youโre 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 wouldnโt 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?
- Can you make money on Masterworks?
- How much should I invest in Masterworks?
- Who is behind Masterworks?
- Is investing in art a good idea?
- How many shares can I buy with Masterworks?
- How does Masterworks choose its paintings?
- Is it risky to invest with Masterworks?
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
This was a great article that influenced me to contact Masterworks. Like the comments on your YouTube video, I can confirm that the minimum investment amount varies depending on income and investment status. Essentially, the more money you have in liquid investments (e.g., cash, equities, etc.), the more money that Masterworks wants you to invest with them to get started. If you have a large amount of liquid investments, Masterworks will try to pressure you to make a larger initial investment in a single artwork. The person on my phone interview dismissed my diversified asset strategy of investing smaller amounts (e.g., $500 – $750 monthly) across a variety of paintings over the course of a few years. Instead, they want a substantially larger sum on the initial investment to get started. Their offering circular says $15k (and that they’ll make an exception on a case-by-case basis), but the more you earn and/or your net worth, the closer you need to be to that number.