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How Masterworks helped establish fractional investments as the latest FinTech trend

With its focus on fine art, Masterworks opened up the idea of fractional investments to the FinTech community at large, spurring a wave of change that has allowed many new investors to enter this space.

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Investing has often been viewed as an intimidating venture — especially when it comes to investing in assets that require a lot of money, such as fine art. Historically, this has limited many investors, keeping them from being able to diversify their holdings simply because they’re “not already rich enough” to get started.

However, that has changed in recent years, in large part thanks to Masterworks. With its focus on fine art, Masterworks opened up the idea of fractional investments to the FinTech community at large, spurring a wave of change that has allowed many new investors to enter this space.

Here’s a look at this innovative company and the philosophy behind fractional investments.

Recognizing Disparity (and Opportunity)

The inspiration for Masterworks largely stemmed from art investing’s long history — paired with a sense of inaccessibility.

As Scott Lynn, founder and CEO of Masterworks explained in an interview with The Peak Magazine, “The art market is centuries old – for example, Sotheby’s is approximately 275 years old and Christies is 250 years old. Art has been bought and sold between the ultra-wealthy for centuries. And when you look at the performance characteristics of the asset class (with contemporary art appreciating at 14 per cent from 1995 – 2020), it’s clear that it deserves a role in almost any investment portfolio. Masterworks is the first way for anyone (both small and large investors) to gain exposure to art without spending millions on a painting, or tens of millions building a portfolio.”

Despite this, Lynn felt that fine art was in some senses more straightforward than other investment assets — and that just like there are investment products for other assets, a similar approach could be done with art.

In an interview with Mission.org, he explained, “Public auctions in the art market had been happening for centuries, but for whatever reason nobody’s ever really built an investment product for the asset class. To me, it was obvious. Why someone else hasn’t done it, I don’t know.”

With this mindset and an appreciation for how his own art collection had appreciated in value, Lynn launched Masterworks in 2017 with the goal of offering fractional investments in art.

Narrowing In On Fractional Investing

Masterworks launched with a unique concept that would allow investors to essentially buy a “share” of a painting that the company owned. Rather than being priced as a whole asset, investors could select a dollar amount to represent the portion of the fine art piece that they owned.

As finance writer Quinlyn Manfull explains, “Fractional ownership is not a new concept broadly speaking — it’s the premise that mutual funds, ETFs, and REITs are all based on. It’s more expensive and time-consuming for an investor to buy a number of shares in 100 different stocks than it is to purchase a share of a mutual fund or ETF which pools that investment with others and gives the investor a slice of a well-diversified collection of stocks and bonds. Fractional shares of fine art or other real assets function similarly — it’s an easy and accessible way to create a diverse portfolio with a new asset class.”

Through fractional art investments, investors don’t have to worry about traditional art ownership concerns such as storage and appraisal. The company that offers the fractional shares is responsible for these and other concerns typically associated with fine art ownership. This enables individual investors to buy shares in multiple pieces of art — similar to how they would buy shares in multiple stocks to diversify their portfolio.

Because pieces of fine art often sell for millions of dollars, fractional investing with relatively low share prices ensured that everyday investors could begin using this asset class as part of their wealth management strategy.

Building a Model for FinTech

Masterworks’ platform has seen rapid growth — and other FinTech startups have taken notice. In a sense, offering fractional investing opportunities with works of fine art has opened the floodgates for FinTech companies to offer similar investments in other asset classes that have also historically experienced barriers to widespread access.

For example, fractional investing in real estate has recently been making waves as a way for individuals to generate passive income, even if they don’t have enough money to rent out a property of their own. 

In the stock market, many FinTech brands have begun offering fractional shares, allowing consumers to purchase a portion of a share from companies like Amazon or Apple, whose share prices might otherwise be too expensive for an entry-level investor. Like Masterworks, these companies allow investors to purchase shares based on dollar amounts, rather than whole share numbers.

A Unique Opportunity

As with any other type of investments, there are ample challenges and opportunities associated with fractional investing, especially with non-fungible, highly illiquid assets like works of art. But as more FinTech platforms offer fractional investment opportunities, more and more people will be able to diversify their assets and invest the way they’d like to invest.

Experience is the greatest teacher. And simply by having the opportunity to invest in areas beyond traditional stocks, everyday investors can find new ways to grow their wealth and achieve financial freedom.

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Written By

Jon Stojan is a professional writer based in Wisconsin. He guides editorial teams consisting of writers across the US to help them become more skilled and diverse writers. In his free time he enjoys spending time with his wife and children.

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