Is Masterworks the next influencer disaster? Masterworks review: legit or scam
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- เผยแพร่เมื่อ 19 มิ.ย. 2024
- Art is often seen as opaque and difficult to invest in. Masterworks promises to democratize art investing. They have a strong social media presence and have used influencer marketing, which is not always a good sign. But, is Art a scam? Is Masterworks legit?
It turns out that they appear to be a genuine company. However, there are issues with fees and conflicts of interest (both of which they disclose). And, investors should fully consider these before investing.
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Time stamps:
* 0:00 Masterworks and art
* 1:13 How does Masterworks work?
* 2:07 An example: A Basquiat offering
* 4:15 Does masterworks look legitimate
* 10:01 Fees!
* 14:02 What do returns look like?
* 19:26 Risks
* 21:31 Would I invest?
#Masterworks #Art
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MW is all HYPE. I worked front line sales, the first sales call after you initially give your info on their site. Extremely high turnover for this role bc the work conditions / training are subpar. Their broker staff is so lazy they hire temp workers "literally off the street" to "do the frontline sales call" instead of themselves. Millennial, Juvenile Fratboy culture is what I saw at MW. - Former "temp" salesperson.
OMG! Thank you for this information! I am retired and was looking for a way to protect my money so that it lasts as long as I do! I did have the call scheduled but felt a bit uneasy due to all the scams that materialized in the age of easy money!
Thanks and I know how you feel! The idea of investing in something 'safe' is attractive.
Art might look safe-ish. But, it's not clear to me that it will necessarily do better over the long term than the stock market (especially after fees). To give Masterworks some credit, they do aim to select 'blue chip' artists that are more likely to appreciate. But, this is not guaranteed.
I have also done a call with them. They are nice enough. But, I prefer seeing numbers in front of me and I don't really like the idea of a call and of making financial decisions of that nature over the phone. At least when I was on the call, it seemed you had to make an investment over the phone for them to activite your account (so you could make further investments). I didn't particularly like that as I'd rather do some research on pricing myself if I'm going to invest rather than just rely on the offering price. However, they might change the call process over time and perhaps your experience will vary. If you do the call with them, you might ask them to walk you through the fee structure and what the returns might look like and be prepared to say that you want to see/evaluate what is on offer before committing to anything.
I see Masterworks as almost as good of investment as a time share. At least with a time share you get to use the product while being ripped off.
The incentives certainly seem very weighted against the investor. The discussion around 8:50 is very concerning. They get paid a yearly fee for holding the artwork for you, can rent it out in the meantime (the profits of which you will never see), charge you 1.5% of your investment each year, and then on sale take 20% and offload the tax burden onto you the investor. You could potentially pay a large sum of money for masterworks to buy artwork which they rent out for their own profit, then if they feel like it they sell it for some unknown amount which if there's any profit could mean you lose over 50% of any returns.
I wonder how they will scale as well. If they get enough investors they will dominate the art buying market. There's surely only so much art that can be bought, and only so many buyers.
I thought it sounded too good to be true. Was happy to find your video when checking it out.
I became interested and signed on but I had my doubts. I’m an artist myself and it made me skeptical. And yes, I received a phone call which for me was a red flag. Thanks for this video.
It's a scam. Established Titles is too.
Just the fact they appeared on shows with Jim Cramer and Kevin O'Leary is a huge red flag.
Thank you for saving my TH-cam channel. I was about to sign up Masterworks. The last thing I want to do is recommend a bad investment to my subscribers.
Mark
Every Man Has a Srory
No worries, I don't want to get in the way of creators' incomes. For e.g., I don't blame the creators who promoted FTX (after all, if regulators and sophisticated VCs were tricked, how are finfluencers supposed to know more than the regulator!)
Regarding Masterworks, they did respond to my video via email. They stated:
"I did want to clarify a point about our fees and performance. Of the 11 paintings sold, 9 of them were sold last year in 2022, during an incredibly difficult economic environment. The net annualized returns are after all of our fees, you can see the payout distribution on the SEC's website"
[they then provided a snapshot of the Masterworks Net Income], which they follow up by stating
"Our share dilution management fee on an $8M painting was $55,122 for 4+ years of insurance, storage, filings, reporting, employees, etc., and is a net loss for us. We make our money on the 20% carry, which means we are entirely performance based.
Concerning our membership calls, we do suitability in person for every investor to ensure that that no one invests more than 15% of their overall investable assets. It’s to ensure investors 1) don’t lose money they can’t afford to lose, and 2) shields us from suitability liability, ie: Robinhood. "
I think the explanation regarding the management fee is plausible-ish. I don't deny that they use the funds for valid things. I'm not sure that it is good for investment returns though. Indeed, VC funds often struggle to get by on management fees unless they have 100m+. I also can understand where they are coming from re the calls. But, I think it would be better handled if they had a call to check suitability. Then let the person invest in their own time.
I'd also note that the Net income can come from other sources (including, seemingly the gap between what they pay for the art and what they sell it to the public for via the offerings).
I would still like clarity over how they decide on their initial buyer's "fee" (i.e., gap between what they pay and what they sell it to you for).
One thing I should have added in my video is that the art index performance might be slightly ungenerous to Masterworks. There are a lot of people who play with art for fun, networking, or because they feel like it's the thing to do. So, repeat-sale index returns might be slightly negative. And, the performance of a sophisticated investor might be higher.
If you sign with them, I'd recommend you appropriately caveat the recommendation. You could say "the fees are a little high, and there are always risks when investing in art, but if you want to be able to invest in a Basquiat (or whatever artist), there is not much other way, and you can leverage their art selection". It's always tough for creators to find brand deals, so if you can find a way to take the deal and fully inform your audience, that might be the best of both worlds.
Srory lol
With a 20% commission and 1.5% maintenance fee, they’d have to find a seller who’s willing to pay 24%+ for a speculative asset just for you to break even. Art collectors are very knowledgeable about their collections, and it doesn’t seem likely at all.
I think the fees make it tough to do well with Masterworks.
The 20% fee is on the profit (as opposed to a commission per se). But, there could easily be other sales commissions..and there's the initial "true up" which at least 10% from the beginning.
I'm not sure how many of their pieces will be profitable (notably, only some of their pieces have been sold, and in weird market conditions)
Common, just say it. It's a real business, but due to the bad conditions offered and ludicrous fees it's an outright scam.
See, I love the concept. I like that it makes the "ownership" accessible but I also think that the business rides a lot on the romantic notion of owning art as a main selling point. Thanks for the coverage.
Yeah, their pitch is enticing. And they do a great job making it look like they are democratizing an otherwise walled off asset class...But, I see a whole host of issues...
I know there are some other alternative asset platforms. But, I haven't looked at them in much detail at all the other platforms.
One pitched to me last year. They seemed to have a decent business model (for the equity investors in the platform). But I cannot remember their fees.
@@financemark I just never even considered that the loaning and displaying conditions built in to the business model could mean that the asset can be damaged by a drunk person with a lot of red wine. (or maybe a child with a wayward sticker like on your spooky hallway painting)
I always assumed that it would be held in a secure facility.
In reality , it quite possibly is (if only due to a tax ruling, as far as I can tell). But, their offering document seems to make it possible for an executive to display the art in his/her home. And, then, it would look like you're paying for someone else to 'enjoy' the art while simply hoping for a return sometime in the future
@@financemark what tax ruling?
According to some other videos I've seen on the topic, art can be quite difficult to sell at market value - which means that it would (in theory) be quite easy for Masterworks to simply keep holding the art, collecting the equity fees and claiming (rightfully or wrongly) that they can't find a buyer for a profitable sell. In the meantime, the administrator could keep lending out the art to make money aswell, in addition to the equity fee (although I don't know how profitable that could even be, given how difficult insuring art can be).
To answer the question as to "why is there such a major marketing push by the company now?" The answer is that they want to get as many people on board as soon as possible before the actual returns come to fruition. Investments have a minimum of a 3 year duration. At the moment it's all speculation about what the returns could be. However, in 3 years actual results start coming through and if they are not going to be good it will become very, very hard to onboard new speculators. Therefore, it's now or never!!
NOTE: Those example returns which the company has presented have occured within a short term, much less than the 3 - 10 year investment duration.
Fantastic video! Thank you for doing the research for your subscribers! 😇
Thanks so much! I glad it was helpful :)
Good explanation of masterworks, thanks for the video.
Their ads feature the classic bait and switch. Lots of images of art by the best known artists that are not for sale. On that alone I think they’re scanning people.
Fair comment. I find their advertising cringe, tbh: the advertising is very optimistic and seems to imply both access to such art AND similar returns.
They've even appeared on programs with clowns!
No investment vehicle marketed to the general public directly is worth buying.
Never buy a treasure map.
Great video!
Thanks a lot!
This is a classic example of money moving from the gullible to financial sharks! Think FTX before investing!
Disasterworks! 😂
Paddy Doyle promotes them in 1of his vdo
I'll have to check it out.
I don't begrudge influencers doing ad reads , per se. But there's a line between an ad read and it being misleading.
your shirt is moving
have you considered going outside to get some Vit D?
At least art is tangible, whereas that crypto crap is, well, crap.
Sadly, while it appears that you tried to give an honest review and made a few fair observations, most of the important stuff you say in this video is totally incorrect and highly misleading. If you had really spent time reading the offering circulars and materials, you would understand a ton of the stuff you got wrong, like the fee structure (which is far different than you describe it), reporting, governance, what MW does (far more than you understand) vs VC funds, etc.
In what way in particular is it incorrect? I looked at the offering documents. I read this from the SEC materials. However, I am happy to be corrected.
You'll also find that many other youtubers have the same concerns (see eg The Plain Bagel).
I'll give you an example. Here is the recent offering circular for a Cecily Brown piece: www.sec.gov/Archives/edgar/data/1966602/000149315223008122/form253g2.htm
Now, my reading of it is that there are a few layers of 'fees' or implicit 'fees'.
1. MW states they will pay 4.184m for the painting. It is then sold for 4.645m. This is an initial 'cost'.
2. MW gets a 20% profit interest
3. To the administrator, MW will "issue Class A preferred shares to the Administrator at a rate of 1.5% of the total Class A shares outstanding" (see page 5).
This is materially the same as with the Basquiat offering, as far as I can tell. And, given that it is in the SEC filing, I am not sure how it is incorrect.
@@financemark I don't need an example - I wrote it!! Every deal has an expense allocation of 10% of the offering amount. That amount covers all of the costs of sourcing the art (we fly around the world to do that), research (we maintain one of the largest most sophisticated databases of art market info in the world), negotiating the deal (with in-house legal), FX, financing (we use our balance sheet for the commitment), transport, handling, storage, insurance, securitizing the art (forming the Del issuer, the Cayman sub, SEC filings, etc.), all of the distribution, advisory services, payment mechanics, investment platform, compliance, State filing fees (did you know we need to make filings and pay fees in every State? etc. (I understand why you were confused about underwriting - but those amts were never charged directly or indirectly to investors - those disclosures are the result of a silly FINRA rule). While 10% for all that stuff may seem like a lot to you, consider that an underwriter of an IPO charges 6% for just DISTRIBUTION and thats only for large deals and any art intermediary would charge ~15 - 50% just for SOURCING. That 10% gives investors the protections of the U.S. Federal Securities Laws (99% of Alts are sold Reg D and those investors have ZERO protection). Our 1.5% management fee includes all other ongoing costs (insurance, accounting, audit, SEC reporting, account management, tax reporting, compliance, trading costs (including brokerage account fees) and internal sale costs (we have a full dedicated sales team... EVERYTHING, and its paid in equity bc there is no cash to pay it - that enables an efficient structure. For every other alt product in the world all of those expenses are charged to the investment vehicle (and indirectly to investors) - so, its really not fair to just talk about these economics as straight "fees". Also - in Masterworks deals, nothing is hidden - there are no separate fees, costs or charges - there is no way to hide anything, bc there is no cash in the mix (for other alts, like RE, the manager earns fees by trimming the lawn, etc.). We also get a 20% profit share - which, together with the equity based management fee, makes us more aligned with investors than any other financial product you have ever analyzed. You claim we don't do as much as VC firms - that's totally incorrect. You realize most VCs are 5-10 people - we have 215 employees and growing - believe me, they are very smart and they do lots of stuff.....
There are probably a couple of things to dissect here:
1. I termed the 1.5% p.a., 20% profit share, and the true up as fees or implicit fees. You might want to characterize them differently (i.e., whether they are straight fees). However, the net result is that they reduce the investor's net profit.
2. You might well be right that Masterworks is not getting rich on these fees. The fees might well just cover MW's costs. Indeed, funds' management fees often barely cover running costs. However, that is tengential to whether it is a 'good investment' (i.e., high fees can be fine if the manager/asset generates high returns. Low fee percentages can be awful if the manager or asset is bad).
3. Most VCs have more than 5-10 people. I know because I work in the industry. Good VCs actively work with portfolio companies to enhance the firm. It is implausible to me that holding an artwork in storage requires the same level of effort as working with a startup. But, again, this is tangential. All that matters is the post-fee return (not how much effort the manager exerts or whether the manager is also getting rich). If manager sleeps all day but still beats the benchmark (controling for risk etc) that's better than a manager who works non-stop but generates bad returns.
4. The notion that a 20% profit share "makes [MW] more aligned with investors than any other financial product you have analyzed" seems to assume rather a lot. But, tautologically, if you had a 99% profit share, you would be even more aligned, but then investors would hardly gain. I'll also note that a situation where the 1.5% p.a. comes in the form of equity can actually have a perverse incentive to increase the holding time so as to obtain more equity (I'm not alleging that MW does that, rather than from a incentive modeling perspective, that's a consideration).
@@financemark The True Up is not described as a fee by Masterworks - that's how you describe it (fwiw we have changed the description in recent deals). It is a cost / expense allocation - just be honest with your readers - If you want to call it a fee, at least inform your readers that its partially / fully offset by the fact that there are NO other expenses charged to the SPV (or investors) - please name for your audience an example of another securities investment product (alternative or otherwise) that does not, directly or indirectly, (itself or through the portfolio investments) have expenses? Yes, I agree with you that regardless of what you call it, it does diminish returns - rent expense for a corporate issuer reduces returns, but its not characterized the way you present it here.
I get the fact you think MW just sticks a painting in storage and just sits around and waits for a buyer. Does a VC fund continuously file reports with the SEC like a public company? Does the VC fund provide a fully operational investment platform? Does the VC fund even deal with retail investors and take on all of the risk and effort that entails? Does the VC firm sell securities publicly and take on the risks associated with that (Do you understand the difference between Reg A and Reg D)?Does the VC fund provide prospectus level disclosure? Does the VC fund provide free brokerage accounts?, free trading? audits, tax reporting, transfer agent, valuations, compliance, .....etc. none of which are not charged to the SPV? The alignment point was not related to the 20% profit share (which is relatively common in alts) - the comment relates to the fact that we take the management fee in the form of equity as opposed to cash - which is unique to Masterworks and it does in fact enhance alignment. As far as incentives to hold longer, etc. - yes, as we've disclosed, there are potential conflicts of interest inherent in the structure (similar to any VC fund), but unlike VC Funds cloaked in secrecy, we afford investors additional protections that rarely exist in other alts (including most VC funds) - we are managed not by an external "manager" but by a board of managers and officers, including an "independent" manager that have fiduciary duties to shareholders.