Is Masterworks a scam? If you are looking for some new investment opportunities to diversify your portfolio, you may have come across Masterworks, which is an alternative investment platform.
If you are not sure if you should do this kind of unconventional investment, this review of Masterworks will help you make the decision.
To be transparent, I am NOT an affiliate of Masterworks. So you can rest assured that my opinions are unbiased and honest.
In this Masterworks review, I will cover the following:
What is Masterworks?
Similar to some crowdfunding real estate platforms, Masterworks is a unique investment platform that enables you to buy fractional shares of fine art. It was founded in 2017.
It offers investors to diversify their portfolio into alternative investments. And its selling point is that you don’t have to invest millions of dollars but just buy some shares of famous artworks.
Masterworks uses blockchain to sell different shares of artwork to many investors. Each share is worth $20. Thar means you can invest in a painting for as little as $20. And you will be able to track the price of the artwork over time using the technology.
The minimum investment with Masterworks is $1000, but you don’t have to invest $1000 in any individual artwork. There are fees you need to pay to use their service. Here are the 2 types of fees charged by Masterworks:
- Annual management fee: You need to pay a 1.5% annual management fee every year. This is for art insurance, storage and transportation
- Profit-taking: Masterwork will take a flat 20% commission for the artwork sold.
The investment period is quite long, which is 5 – 10 years.
You will be able to select the specific investments to make as Masterworks has several artworks in their gallery.
How Does Masterworks Work?
You don’t have to be an accredited investor to use Masterworks. But you need to request an invitation and there will be a phone interview with you.
Masterworks has 17 professionals to analyse millions of art auctions in order to pick some great artists whose artwork may give you a historical 9% to 15% annual return.
After Masterworks purchases the artwork, it will register with the SEC and issue shares. Each individual investor will not be allowed to hold more than 10% of the shares of an artwork.
Masterworks has a members-only gallery in New York City where it stores the artwork purchased.
Masterworks will search for an independent collector or buyer for you. When potential buyers make an offer of an artwork, it must be approved by a majority shareholder vote. The proceeds of the sale of artwork will then be distributed to all investors proportionally.
However, Masterworks alone will share 20% of the profits as part of the fees.
Masterworks Pros and Cons
Pros of Masterwork
- You can invest a little money to get started.
- Artworks are vetted by Masterworks
- Artworks are stored securely in a museum-lie gallery by Masterworks
Cons of Masterwork
- Service charge is heavy: the fee is so high that it is comparable to investing in a hedge fund.
- Liquidity is low: shares cannot be sold early
- Need a phone interview to create an account
- Long payback period: it will take around 3 to 7 years for Masterworks to sell the artwork.
- The selling mechanism is complicated and may discourage potential buyers.
- The price of art is very subjective
- Masterworks portfolio only consists of paintings. To rely on a single type of asset is very risky.
- Masterworks is very new. It’s an untested model.
- Performance depends on whether Masterworks can sell the paintings
- You will rely entirely on Masterworks’ management experience as most people don’t know about fine art
Masterworks Fees and Pricing
Members of Masterworks are invited to join for free. Their annual fee is similar to that of a hedge fund. All members pay this fee as equity, plus 20 percent of any gains from any paintings in their portfolio if they are sold for a profit.
A Masterworks subscription gives you access to their platform, trading capabilities, and built-in indices. In addition, the website has tons of information about high-end artwork.
Masterworks Sign-up Process
An account can be created relatively easily on the Masterworks platform; all the necessary information must be provided, such as a name, email address, and phone number.
While Masterworks’ offerings will receive a green light from the Securities and Exchange Commission (SEC), investors can sign up today to reserve shares in the listed offerings the company has in its portfolio.
For now, an investor can reserve shares or receive updates from the platform as they remain awaited by investors who have reserved shares. This allows them to catch the art investment wave whenever they want but is slightly behind investors who have reserved shares.
Masterworks: Investment Risks
The difference between art investing and stock market investing should be understood before investing in high-end artwork. Although both revolve around the principle of buying low and selling high, comparing the two reveals some key differences.
Capital Appreciation: An asset’s value increases over time but when it comes to art you can’t see return on investment until masterworks sell their holdings. If a stock increases in value along with dividends, you’ll likely not see a profit on your investment until Masterworks sells its holdings.
Liquidity: The liquidity of an asset is how easily you can buy or sell it. Stocks are liquid, and many brokers offer stock trading services. Rare artwork, however, is very illiquid, and Masterworks may need to search for years to find a suitable buyer.
Value: A lot of the time, stock values are easy to assess because there is a lot of backing data available, but assessing a true or fair value for artwork is much more difficult since it is both personal and unique.
Is Masterworks a scam? Why don’t I recommend it?
Masterworks is not a scam. But Investing in fine art is very risky.
Firstly, Masterworks is very new and untested so there is not enough historical data to analyse its performance. You may be able to make some money in a few attempts, but lose it all in the other attempts.
And it’s actually very hard to predict the gain and loss of artworks. Even paintings from top artists like Claude Monet and Vincent Van Gogh may not appreciate in value all the time. Sometimes, the behaviour or news of some living artists will also affect the value of the artwork, which is unpredictable like gambling.
Moreover, artwork value is very subjective. There’s no guarantee that you will make money with the top artists’ work. The value of stock and gold are determined by the market demand and supply and the general economy. But for artwork, the price is just determined by the buyer’s offer.
Apart from the risky nature of artwork, Masterworks charges heavy fees for their service. It charges both an annual fee of 1.5% and 20% sharing of profit from artworks sold.
Therefore, I would not recommend investing with Masterworks to make passive income.
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