Users Must Design their Own Art Investment Portfolios
While Masterworks charges a high annual management fee, you are ultimately the one who picks the fractional shares that make up your portfolio. Contrast this approach with a robo-advisor or a mutual fund, where experienced, professional money managers select the investment assets that make up your portfolio.
For investors who have a strong interest in contemporary art, this might not be a major disadvantage. But if you’re not well informed about current trends in the market for fine art, you could be at a disadvantage when it comes to making the best choices.
That said, Masterworks experts vet the quality of each piece and they only list those that they think have good investment potential. But at the end of the day, you need to decide which works are the best fit for you.
Fine Art Investments Carry Big Risks
Masterworks itself warns that investing in fine art carries big risks. Artwork does not generate any ongoing cash flows, like interest payments or dividends. The only way to make a good return on your investment is if someone ends up buying the piece for a higher price years down the road, something that is not guaranteed by Masterworks.
The platform’s secondary market provides users with a way to cash out early, but that also carries risks. While you can try selling your shares, there must be another Masterworks user looking to buy, and that’s not guaranteed either.
Higher Taxes on Fine Art
Fine art is taxed as a collectible, subject to a long-term capital gains tax rate of 28%. That’s higher than the long-term capital gains tax rate on conventional investment assets, which tops out at 20% for the wealthiest Americans.
Requires a Phone Interview
Before you can join Masterworks, you need to have a phone interview with one of the company’s specialists. The interview is not a way to reject some applications; on the contrary, it provides a way for Masterworks to get to know you better, answer your questions and recommend investments.
For some potential users who prefer an online-only investment experience and want to get started right away, the interview process might be annoying.
Secondary Market Only Available to U.S. Citizens
To buy and sell shares on the Masterworks secondary market, you must be a U.S. citizen with a U.S. bank account. This could block international investors from one of the platform’s key features.