Masterworks Review: Fine Art Investing

Investing in fine art takes substantial wealth.

Privately held company Masterworks offers an alternative as its digital platform lets investors acquire art through fractional investing.

Fine art investment through Masterworks gives investors a market for purchasing ownership stakes in original works of art, like those from contemporary masters Banksy and Jean-Michel Basquiat.

By the looks of it, Masterworks is well-designed, easy to use, and has excellent research and support tools. This makes it a tempting platform for those who want to diversify their baskets through art acquisitions but do not want to take a huge chunk out of their coffers by doing so.

Users of the platform can buy and sell ownership stakes in artworks considered “blue-chip” by the company.

Masterworks is helping the art world become more accessible by giving regular investors a chance to own a piece of these extremely expensive investments.

Is it successful? And should you invest in fine art through the platform?

See how it compares to other investing options for American expats.

If you want to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44–7393–450–837).

Some of the facts might have changed from the time of writing, and nothing written here is formal advice.

For updated guidance, please contact me.

Fine Art Investing

Diversifying a portfolio, protecting against inflation, and possibly increasing wealth are all possible with fine art.

But there are risks and difficulties associated with investing in fine art as well:

· The art market is not always stable.

· Art is quite illiquid.

· It is challenging to forecast long-term profits because the value of art is arbitrary.

· Authenticity problems

· Exorbitant costs

· Due to their vulnerability to loss or damage, artworks require safeguards like insurance and safe storage facilities.

Is fine art a good investment?

Art’s value is based on subjective factors such as cultural significance and the artist’s reputation, which makes the market more volatile and illiquid than stocks or bonds.

For art investments to be successful, a long-term outlook and setting targets are necessary.

Investing in fine art frequently entails buying pieces from well-known artists or art movements that have historical weight and are more likely to increase in value with time.

What is Masterworks?

If you want fine art for portfolio diversification but are put off by the high price, high risk, and high inconvenience of purchasing individual pieces, Masterworks may be a good platform for you.

The Citi Global Art Market chart, cited by Masterworks, showed that over the past 25 years, investments in contemporary art have outperformed the S&P 500, with an annual return of 14% vs 9.5%.

Nevertheless, past results are no guarantee of future achievement.

There are currently over a million investors using the Masterworks platform.

However, Masterworks may not make a profit on the sale of an artwork for up to 10 years. There is no assurance that the artwork will be worth more too.

More aggressive customers seeking a greater reward for a higher level of risk can consider Masterworks.

Masterworks may not be a good fit for those merely trying to earn passive income or those who have a more simple and conservative investing approach.

It is also a bad option for investors who intend to use their funds and cash out quickly. It is possible, albeit not guaranteed, that you will be able to dispose your shares on the Masterworks secondary market for cash.

Until the platform sells the artwork in which you have invested, it is best to only invest what you can afford to keep locked up for years or even lose.

What is Masterworks minimum investment?

$15,000, usually. But some clients can request for a lower option.

How does Masterworks work?

The firm’s research team looks at the work of up-and-coming modern artists and buys pieces that they think will appreciate.

Masterworks submits paperwork to the United States Securities and Exchange Commission after acquiring a modern work of art so that investors can buy small fractional interests in the artwork.

Then, investors can buy a piece of the artwork for at least $20 on the Masterworks website. The organization claims to release new artwork every four to five days on average.

Since all artworks are registered with the SEC as “qualified investments,” both retail and accredited investors can invest in Masterworks.

Once an individual artwork’s SEC filing is given the go-ahead, Masterworks conducts a primary offering of its shares to its members over a 90-day period. Shares can be purchased at the market price in any quantity chosen by the investor.

On average, an artwork spends between three and 10 years in Masterworks’ storage. Meanwhile, the gallery looks for a buyer in the contemporary art market.

Once an artwork is sold, Masterworks will issue the money to investors who purchased shares in the artwork, based on the number of shares they own.

Shares can be bought and sold amongst Masterworks users, but there is no assurance that there will be a buyer for your shares when you decide to sell. The demand from other Masterworks clients is the sole basis for secondary market prices.

The Masterworks secondary market is restricted to US residents who maintain a financial institution account in the United States.

Masterworks fee structure

There are two prices to consider when investing in fine art through Masterworks.

There’s an annual maintenance fee of 1.5% of your account’s entire value. They take this hit to equity every year, cutting down the number of shares you own by a small amount. Cash payments are not accepted for this service.

Masterworks will get 20% of the profit from an artwork sale made on the open market between three to 10 years following acquisition. The firm uses these to settle SEC regulatory fees, art storage, insurance, and appraisals.

There are no hidden costs when making a purchase. There are also no fees associated with the initial purchase or subsequent resale of the shares.

Is Masterworks worth it?

Let’s explore some benefits of the Masterworks platform:

Investors can learn easily about art investments

Users can find excellent contemporary art and fine art market research materials on the platform. They have a database where prices of modern art are indicated.

Information such as the artwork’s most recent sale price, its gross appreciation, and the yearly investment earnings are all included in the database.

Investors can diversify their baskets by learning about how to invest in fine art

Investing in artwork typically yields a larger return than investing in stocks, bonds, or property.

Adding artwork to your investment portfolio can help spread out your risk.

The Masterworks platform is user-friendly

The interface is uncluttered and expertly crafted. You can also use a mobile app to get into your account.

Fine art becomes more accessible for investors

There are currently no mutual funds or ETFs specific for fine art.

Therefore, that there are shares in works of art that individual investors can directly acquire via Masterworks offer a lot of versatility and accessibility.

You don’t need to be a high-net-worth individual or accredited investor to use their platform.

Customer service is available via phone and email too.

Masterworks cons

No guidance towards creating art investment portfolios is provided

Amid Masterworks’ hefty annual management charge, your portfolio’s fractional shares are completely up to you.

This may not be a big deal for those with a keen eye for modern art. But if you aren’t up-to-date, you can miss out on some excellent options.

It is thus highly recommended that you seek the services of a trusted financial advisor who can help you craft a portfolio you are happy with and manage your art investments long term.

Investing in Masterworks isn’t less risky

Fine art is high-risk. Unlike other investments, artwork does not yield regular revenue streams like interest or dividends.

Masterworks does not promise an ROI because it will all depend on a future buyer willing to pay more for the artwork.

There is a secondary market on the platform that allows users to cash out early, although doing so is risky. You can try to offload your shares, but you will need to find another Masterworks user who is also interested in buying.

There is also the matter of the additional duties on every artwork you purchase. As a collectible, fine art is subject to the same long-term capital gains tax rate of 28 percent as any other collectible.

That is a higher rate than even the highest rate of long-term CGT on traditional investment assets in the US, which is now at 20% plus a net investment income tax of 3.8%.

There are barriers to entry

Masterworks is only available to US citizens who have a US bank account to buy and sell shares. This may prevent foreign investors from using a vital part of the platform.

Should I invest in Masterworks?

Investors in Masterworks are expected to allocate a certain sum to purchase any artwork. Any individual investor’s shareholding is capped at 10% for every art piece.

Masterworks gets 20% of the sale price plus a 1.5% annual maintenance cost. The offering materials will outline any other fees that may be assessed.

Although the management fee and 20% of profit are typical for a hedge fund, they are more pricey vs other investment options like index funds that monitor the market.

However, while fine art has elevated risks, rewards are also potentially higher.

Anyone interested in art investing can visit the Masterworks website and apply for membership, which includes a phone interview to discuss investment targets and risk appetite.

Although it is tempting to get your hands on a famous work of art at a reasonable price, remember that buying art is a long-term venture. You must be willing to risk losing your money.

The resale value of an artwork is susceptible to market whims of and the popularity of the artist or style. Even though Masterworks verifies artists and artworks in advance, the art market as a whole is significantly less regulated than the financial market.

If you want to get involved with this type of investment, it is important that you first identify what type of investor you are.

Even better if you can seek a financial advisor or wealth management specialist who can help you make thorough financial decisions as you mull over investing in art.