Masterworks: Is It Legit? – NerdWallet

Masterworks is an online platform that allows you to invest in shares in artwork. Since it hit the market in 2017, Masterworks has offered over $700 million in investments in contemporary artwork pieces that have track records of success and strong reputations. Masterworks features artists such as Banksy, Yayoi Kusama, Jean-Michel Basquiat and Andy Warhol.

• Access to a historically inaccessible sector.

• Lack of transparency on the Masterworks website.

• Fee structure is difficult to understand.

• Higher risk than traditional investments like stocks and bonds.

Getting started with Masterworks is a bit more involved than with other platforms. Masterworks requires you to request an invitation by providing your email address and filling out some personal information, such as the size of your liquid investment portfolio, how much of it you would consider investing in blue-chip art and how soon you plan on investing.

After that, you schedule a call with a Masterworks adviser who can help walk you through making your first investment. After you make your first investment with an adviser, you can later make investments on your own online.

If you’re considering investing with Masterworks, here are a few things you may want to consider.

Masterworks’ investment minimums can be a little confusing. Masterworks advisers will not make a recommendation for you if you have an income of less than a $40,000 or if you have less than $10,000 in investable assets. Individual pieces of art, within their investing circulars, state a $15,000 investment minimum, but the advisers can lower that minimum if it’s appropriate for the investor. Generally, Masterworks recommends allocating 5% of your total assets to art, and diversifying across multiple pieces.

For example, if you have a $100,000 investment portfolio, an adviser may recommend that you invest $5,000 total in art, with $1,000 apiece going into five different works of art, waiving the $15,000 minimum for each piece.

Masterworks lists three fees on its website, though these fees are only fully explained in the company’s ADV filing:

Here’s an example of how those fees break down: If Masterworks offers a painting for $1,000,000, there is a $100,000 expense fee embedded in the offering amount to cover sales and use tax, shipping, sourcing, and conservation (the 10% expense allocation fee). Masterworks then charges 1.5% per year on the $1,000,000 (which is earned by giving Masterworks itself shares in the vehicle) plus 20% of the profit when the painting sells. (So, for example, if the painting sells for $2,000,000 in the future, then Masterworks would earn an extra $200,000.)

So how do all those numbers shake out in terms of profit? Masterworks gives a few examples.

One particular work by Banksy has enjoyed a 32% annualized net return. According to Masterworks, if you had invested $10,000 and held the investment for 378 days, you would have made a profit of $3,300 after all fees. But if you had invested in a particular Andy Warhol piece instead, you would have made only a 4.1% annualized return, earning $300 after 282 days.

And of course, these numbers are important to keep in mind in the context of Masterworks’ stated minimums. If you were to invest 5% of your total portfolio and diversify that across five pieces of art, in order to actually put $10,000 into that 32%-returning Banksy you would have to have a total portfolio value of $1,000,000. And if you were investing with far smaller amounts, that potential $3,300 profit would shrink too.

And all of that depends on you actually picking the Banksy over the Warhol — just like picking individual stocks, predicting which one will give you the higher return is a gamble.

Increasing the diversification of your portfolio can help reduce your overall risk. If you invest strictly in the oil industry, and the oil industry tanks, so will your investment portfolio. If you invest in the oil, tech, health care and commodities industries, and the oil industry tanks, your portfolio will be bolstered by the other sectors. Fine art is a further diversification, plus, the performance of art hasn’t historically correlated with the performance of more traditional assets.

Investing in fine art may be riskier than investing in stocks, bonds, or index funds. Art, unlike stocks, is based on taste, not cold, hard performance in a capitalist market. Stocks’ values are determined by investors who can analyze a company’s revenue and spending decisions. In short, it’s pretty easy to tell if a company you want to invest in has historically turned a profit. Of course, predicting if a company will continue to be profitable in the future is an entirely different venture, and a difficult one at that.

With art, the value is based on people’s opinions about whether it’s “good” or not — and there is no arguing about taste. This makes it hard to guess at a specific piece of art’s future value. Art also comes with the risk of forgery, theft or damage, though Masterworks does store its artwork at two climate-controlled storage facilities that specialize in housing art and other valuables. Both facilities are waterproof and fireproof. All of the artwork listed on Masterworks is also insured.

Some investments are difficult to buy and sell on your own timeline. With Masterworks, you can buy into an offering from when it launches until all of the artwork’s shares are sold. When an offering is sold out, you can buy and sell shares on Masterworks’ secondary market at any time. In order to invest on Masterworks’ secondary network you need to have a “Masterworks wallet,” which is just a brokerage account.

While you can buy and sell whenever you want, similar to stocks, that may not be the best tactic.

“We tell people to think of these as three-to-10-year illiquid investments, from a regulatory perspective, as part of our suitability process,” says Scott Lynn, CEO of Masterworks. “We do guide people to think of these as long-term investments.”

It’s always a good idea to consider possible tax ramifications when adding a new asset to your portfolio. Masterworks states that any investments made through the platform are taxed at the collectible gains rate, which is your tax rate — but capped at 28%. For instance, if your tax rate is 22%, then the gains you earn on Masterworks investments would be taxed at 22%. If your tax rate is 35%, your Masterworks gains would be taxed at 28%. And depending on how long you hold your investment, it may be taxed as long-term or short-term capital gains.

Of course, everyone’s tax situation is unique, and it may be worth speaking with a tax expert if you’re considering adding an alternative investment to your portfolio.

Masterworks employs advisers who have a Series 65 or Series 66 license; they can provide personal investment advice and have a fiduciary duty to their clients — meaning they must work in your best interest are not compensated extra if you become a client or invest in the artwork they recommend.

“As an RIA [Registered Investment Adviser], we have a fiduciary obligation for all of our financial advisers to onboard people into investments that we believe are suitable,” says Lynn. “So our financial advisers don’t make commissions, and they look at how someone is investing today, what their risk tolerance is, what the portfolio size is, what their income is, and they make a recommendation based on that.”

Advisers are available Monday to Friday from 9:00 a.m. to 6:00 p.m. Eastern time by phone, email and text.

And while the firm can give you personalized investment advice, it has only been providing this service since June 2023.

Masterworks comes with similar risks as other higher-risk investment platforms. Masterworks itself is not registered with either the U.S. Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). Masterworks does have a subsidiary called Masterworks Advisers that is registered with the SEC, and each artwork has its own SEC filing that you can view.

The advisers you speak with do have a fiduciary duty to their clients, and the Masterworks Advisers’ ADV filing explicitly states that advisers will let you know if a particular offering is unsuitable for you. However, the advisers can’t give advice on other asset categories. So if you’re looking for a more well-rounded advisory relationship, you may want to consider working with a financial adviser who can speak to your investments in a more holistic way.

Masterworks is a legitimate company that can help you invest in art, but there are no guarantees that the singular pieces of art you invest in will take off. In that way, it’s similar to investing in individual stocks, since there is no guarantee that a single company will outperform in the future.

A less risky investing strategy is to invest in index funds or exchange-traded funds. These are baskets of investments that you buy all at once, and since you own many stocks instead of just one, there is less risk to your portfolio if one of those companies goes out of business.

Masterworks has a compelling claim: The company allows individuals to participate in an exclusive, high-priced market. However, the warning remains similar to buying individual stocks: Don’t put all your eggs in one Basquiat. If the neo-expressionist painter’s work doesn’t sell for more than you bought it for, you’re out of luck. Betting on art is especially speculative, since there aren’t as many financial fundamentals, such as revenue or a PE ratio, to help guide your choice.

If you’re curious about investing in art, you have some extra cash and a healthy risk tolerance, and you can stomach the higher-than-average fees (compared with other alternative investing platforms), Masterworks could make it fairly easy to diversify your portfolio with fine art. A good rule of thumb is to allocate no more than 10% of your overall investment portfolio (meaning all your investments in your 401(k), an IRA and/or standard brokerage account, for example) to alternative assets such as art. Plus, it could be fun to say you own a slice of a Banksy original.

If you don’t already have an investment portfolio made up of more traditional (and less risky) assets, you may want to start there before you dip your toes into the art world.