M1 Finance Review
- Commissions and Fees
- Ease of Use
- Investment Options
A good robo-advisor could make a huge difference when it comes to stock trading. M1Finance could be that good robo-advisor you’ve been looking for. With loads of features that allow you to take your portfolio into your own hands, M1Finance’s popularity is only growing.
- About M1 Finance
- How M1 Finance Works
- Account Requirements
- M1 Finance Pricing and Fees
- M1 Finance Platform
- M1 Finance Investing Tools
- Key Differentiators
- Who is M1 Finance Best Suited For?
- How Does M1 Finance Compare to Alternatives?
About M1 Finance
M1 Finance is a unique robo-advisory platform that enables investors to take a larger role in the construction and management of their portfolios. A do-it-yourself (DIY) robo-advisory platform is an oxymoron as most are structured to minimize direct involvement with portfolio content, since humans tend to emotionally over react (panic) on headlines and market volatility. Additionally, M1 Finance also invests directly in stocks using fractional share purchases up to 1/1000th of a stock as well as exchange-traded-funds (ETFs).
Most robo-advisors tend to be very rigid in terms of manual portfolio creation since human discretionary investing and market timing can backfire. M1 Finance assumes investors can keep a cool head and places investors in the driver’s seat. This is great for seasoned investors but could be disastrous for newbies.
M1 Finance was launched by Brian Barnes out of Chicago, IL. His brainchild was to create a platform that would empower self-directed investors frustrated with the lack of accountability on Wall Street as retail investors were constantly mislead and overcharged for transactions. He references the book “Where Are The Customers’ Yachts” which points out that the brokerage industry and works thrive consistently regardless of how well clients make out. The 2008 financial meltdown was the turning point where Barnes’ disillusionment drove his mettle to rollout an automated investment platform as a tool for investors to take control of their financial destiny powered by cutting edge algorithmic innovations that would handle the tedious legwork and enable investors to stay invested.
How M1 Finance Works
M1 Finance allows users the option of selecting pre-built portfolios categorized by themes and sectors or create their own portfolios using stocks. It falls under the category of robo-advisors like Wealthsimple, Betterment, and Acorns.
Portfolios are called ‘pies’ and ‘slices’ are the stocks that comprise them. The users select the target allocations per slice and then let the platform construct the pie during market hours by purchasing fractional shares. Investors can choose to auto-invest as well as set-up a funding schedule. Auto-dividend re-investment and auto re-balancing are also available.
Unlike other robo-advisory services, this platform doesn’t ask financial questions to create a user financial profile. Instead it offers a more customizable solution that caters to a broader range of investment strategies.
This is really where M1 Finance shines. The company has done a great job of offering a simple platform without compromising advanced features.
Most traditional robo-advisors will build a non-customizable portfolio based on a user’s risk threshold and investment objectives. While M1 Finance offers pre-built portfolios, they take things a step further by offering customization.
Investors can build portfolios based on their investment objectives, industries of interest, or individual stocks of interest. They can also choose from pre-built portfolios if they prefer a more hands-off approach.
We’ll discuss this in more depth later on in our M1 Finance review.
M1 Finance is only available for U.S. residents of at least 18-years of age. The minimum starting balance is $100.
M1 Finance Pricing and Fees
M1 Finance is free to use. There are no management fees and trades are commission-free. M1 Finance doesn’t allow employer-based 401k retirement plans and outside assets to be transferred. They allow taxable investment accounts and traditional, Roth, individual and joint IRAs set-up on the platform.
I appreciated that M1 Finance’s CEO Brian Barnes went out of his way to write a blog post about how the company makes money. As most diligent traders and investors know, the term “free” usually comes with a catch and many investors were surprised to learn how companies like Robinhood make money. While M1 Finance follows the same practices as most brokers, their transparency is refreshing.
The company makes its money from interest on cash, lending securities, lending money, payment for order flow, and membership fees. Realistically, none of these should have noticeable impacts on the casual investors who the app was designed for.
M1 Plus Membership
The M1 Plus premium membership costs $125-per year but is priced at a discounted $50 for the first-year enrollment fee. Members get access to digital banking services through its M1 Plus program. This includes an interest-bearing checking account (M1 Spend) earning 25X the national average at 1.5% APY and 17X on the savings account. M1 Plus members also receive the M1 Plus Visa Tungsten metal debit card that comes with a 1% cash back feature and 0.25% discounts on M1 Borrow.
For investors opting to include ETFs in their pies, keep in mind these carry separate management fees aka expense ratios. Passive domestic and global benchmark ETFs tend to carrier annual expense ratios ranging from 0.04%-to-0.25%. These fees are out of M1 Finance’s hands, so they need to be considered, especially when selecting pre-built theme-based pies.
M1 Finance Platform
M1 Finance can be accessed online and through mobile devices using Android or iOS. They raised the stakes in the robo-broker industry by eliminating management fees and making the platform completely free, except for M1 Plus membership.
The platform is very basic as you would expect for a service that is focused on simplicity. This type of platform is ideal for traders and investors who prefer ease-of-use to advanced functionality.
M1 Finance Investing Tools
M1 Finance is a do-it-yourself platform that enables investors to do basic research on the underlying stocks. However, there’s limited depth in terms of charting or detailed research reports. Self-directed investors will have to do their own homework to generate their own insights and rationale for investments. That said, that’s pretty much the purpose of M1 Finance. It appears that the company’s goal is to make investing simpler for casual investors.
M1 Finance does have a Blog with compelling articles relating to finance and investing.
Investors can construct and customize their own portfolio pies by selecting from over 6,000 stock slices and their allocation percentages. M1 Finance provides nearly 100 pre-built portfolio pies ranging from Technology to Green-themed, Real Estate or Stocks and Bonds. Investors have a choice every step of the way. Here are some of the categories:
Within each category there are a range of different pre-built pies. You can track the performance of each pie and assess the risk level. Here is an example of the pies in the “Hedge Fund Followers” category:
M1 Finance has some of the most diverse portfolios you will find from any robo advisory service. Unlike other services, these portfolios are not limited solely to ETFs. Investors can build a portfolio using both ETF’s and stocks. M1 Finance does a good job of creating even splits by selling fractional shares.
Here’s how it works. If your portfolio has $1000 and you want to build a “pie” with 10% of AAPL’s stock (currently ~$200/share), M1 would allow you to buy half a share for $100. This is an exciting feature for two key reasons.
First, it allows investors with smaller accounts to buy any stocks they like. You no longer need a couple grand to become an Amazon shareholder.
Second, the fractional shares allow for an impressive level of diversification You could literally split your portfolio across hundreds of stocks and ETF’s, regardless of your portfolio size.
Depending on the portfolio composition, performance will vary greatly between individual investors due to the customization. M1 Finance expert portfolios incorporate the principles of Modern Portfolio Theory and manage to diversify investments with stocks and ETFs when applicable to the theme of the portfolio.
The performance of M1 Finance portfolios can’t be analyzed the same way we analyze the performance of other robo-advisors since M1 Finance offers so much customization. M1 Finance users have the ability to build their own unique portfolios, meaning the performance is attributed to the user instead of M1 Finance.
For example, I could create a portfolio consisting of stock in Apple, Amazon, Snapchat, Facebook, Twitter, Google, and Adobe. M1 will facilitate this but that doesn’t mean they endorse it. If the portfolio doubles in the next year, the accolade is mine. If the portfolio loses money, I am also responsible.
Of course, M1 Finance also offers an impressive selection of pre-built portfolios. Most of these are more unique than the risk-based portfolios offered by competing firms. For example, with a single click, you could invest in a portfolio that mirrors Warren Buffett’s Berkshire Hathaway portfolio. You could also invest in a portfolio consisting of 50% bonds and 50% stocks if you wanted to balance potential risk and return.
M1 Finance offers a broad range of high-performing portfolios that are unrivaled by most competing firms.
When individual assets exceed the selected target allocation percentages, M1 Finance will reduce the position by selling shares and buying shares of stocks or assets that are underweighted. It will sell-off overweight slices and buy underweight slices. Fractional shares enable precision rebalancing.
M1 Finance will auto-invest funds whenever the cash balance surpasses the $10 threshold. Users can opt to increase or decrease that level. Here’s where the benefits of automation shine as human investors can get emotional or lazy if they must be reminded (or persuaded) to invest weekly. The platform enables investing schedules that are completely customizable and automated.
When withdrawing assets, M1 Finance will sell positions that are overweight past threshold ranges with no taxable gains first then sell stocks with long-term then short-term capital gains to minimize the tax liability. While there is no active tax-loss harvesting, this tax efficient strategy is viable towards lowering potential tax liabilities.
M1 Borrow: Portfolio Line-of-Credit Borrowing
M1 Finance outfits investors with taxable accounts over $25,000 with M1 Borrow portfolio line-of-credit. This enables investors to borrow up to 35% of the value of their portfolio at significantly low rates typically below 4% interest. There’s not paperwork or applications to fill out, it’s just a matter of clicking a few tabs.
M1 Finance combines the automation of a robo-brokerage with the flexibility of do-it-yourself participation for self-directed investors. Unlike traditional robo-advisories, M1 Finance charges no management fees or commissions on trades. The only fees come from interest on borrowed funds with the M1 Borrow or if you upgrade to M1 Plus membership for digital banking services.
M1 Finance also offers a competitive rate for savings accounts and the ability to purchase fractional shares (a feature that is not offered by many robo-advisors).
M1 Finance deposits are FDIC-insured up to $250,000 and up to $500,000 on securities as a member of SIPC. Their clearing firm also has additional insurance in the event SIPC limits get exhausted. All data is protected with 4096-bit Military-grade encryption. They also offer two-factor authentication.
As of March 2019, M1 Finance had $500 million in assets under management and was growing at a rate of $3 million AUM daily. While this number is relatively small compared to the company’s competitors, it’s no chump change. With over $500 million in AUM, M1 Finance is more than just a hot investing app. The company is serious about becoming an all-in-one solution for money management.
The company also goes out of their way to point out that they have “best-in-class” security.
Who is M1 Finance Best Suited For?
M1 caters to more experienced and self-directed investors that want to be in control of their investment decisions (investment pies) but desire automation in terms of maintaining and managing the legwork (automatic rebalancing). Enabling commission-free trades and fractional share trading further improves this flexibility and most importantly liquidity.
How Does M1 Finance Compare to Alternatives?
Every diligent investor will compare multiple platforms and investment options. There’s no clear winner because every investor has different needs. Here is how M1 Finance compares to the competition.
M1 Finance vs. Robinhood
Robinhood and M1 Finance are two of the fastest growing investment apps. Robinhood has a head start, but M1 Finance is quickly becoming a recognized leader in the space. So, which one is better?
First things first, it’s not an apples-to-apples comparison. While both apps specialize in simplified investing, they don’t have the exact same functionality. Robinhood is a traditional broker that simply eliminated commission fees. When Robinhood first launched, this was a revolutionary move, however most online brokers removed commission fees in October 2019. That said, Robinhood still does a great job of simplifying investing. Traditional brokerages have complex investment apps and a broad range of features whereas Robinhood sticks with the basics.
M1 Finance is more of an investment tool. While the firm offers many of the features you’d expect from a traditional broker, they also offer features you won’t find at Robinhood. For example, M1 Finance is famous for their investment “pies” which are diversified portfolios. Users can choose a pre-built portfolio or customize their own.
M1 Finance also allows investors to purchase fractional shares of a company, which improves the diversification of a small portfolio. For example, at the time of writing this, Amazon’s stock is priced at about $1800/share, which may be too expensive for some investors. M1 Finance allows investors to choose how much money they’d like to invest in a particular stock and then allots a fractional share accordingly. If you were to invest $180 in Amazon, you would own 1/10 of a share. Robinhood has plans to launch fractional shares, but the program is not live yet.
While there are a handful of key differences between M1 Finance and Robinhood, you can decide which one is best for you by answering one simple question. How actively do I plan on trading?
If you want to create an investment or retirement portfolio that you check a few times per year, M1 Finance is the clear winner.
If you want to actively manage your portfolio (or trade options), Robinhood may be the better bet.
M1 Finance vs. Betterment
M1 Finance and Betterment are two leaders in the robo-advisory space. If you’re new to the concept of “robo-advisors,” just know that they replace in-person financial advisors with automated strategies. For example, instead of asking your financial advisor to create a retirement portfolio, you would simply select that same objective in the robo-advisory app or website.
Both M1 Finance and Betterment have similar offerings (they both offer automated investing solutions). Betterment is a much larger company, but M1 Finance is growing quickly.
The biggest difference between the two is the level of customization. M1 Finance is far more customizable and offers more features.
When you create an automated investment plan with Betterment, you simply specify your risk level and Betterment will allocate your funds across a few appropriate ETFs.
M1 Finance offers far more customization. First, you can choose from a range of unique, pre-built portfolios. Second, you can build a portfolio of stocks you select individually. Lastly, you can choose to invest in fractional shares.
For example, if you wanted to create a portfolio comprised of shares in Apple, Amazon, Microsoft, Twitter, and Facebook, you could do so at M1 Finance but not at Betterment.
If you value customization and the ability to invest in specific companies, M1 Finance is the better option for you.
If you prefer to keep things as simple as possible, Betterment may be a suitable option.
M1 Finance vs. Acorns
M1 Finance and Acorns are another group of seemingly similar robo-advisors. While M1 Finance is a “full service” robo-advisor, Acorns was built around one key feature – rounding up purchases.
Acorns grew in popularity because they offered away for everyone to get involved in investing. Users could download the Acorns app and have all of their credit/debit card purchases rounded up and put into an investment account. For example, if you bought a coffee for $1.50, you would see a charge of $2 on your credit card, $0.50 of which was added to your Acorns investment account.
Acorns builds portfolios in a way that is similar to Betterment and other robo-advisors. Users can specify their risk thresholds and investment objectives and Acorns will build a portfolio of ETFs. While I’ve been impressed with the performance of my Acorns portfolio, the platform is nowhere near as robust as M1 Finance.
Once again, M1 Finance offers features you won’t find in Acorns, such as the ability to choose your pre-built portfolio, customize your portfolio, and invest in specific stocks.
Acorns is best suited for casual “investors” who otherwise wouldn’t think much about investing. If you struggle to put money aside every month, Acorns can automate the process and help you grow your investment portfolio.
If you prefer to have more control over your investments, M1 Finance is the way to go.
M1 Finance vs Vanguard
M1 Finance and Vanguard shouldn’t be directly compared because they are two separate business models. Vanguard creates funds whereas M1 Finance is a robo-advisor that helps people invest in funds. In fact, many robo-advisors will allow customer to invest in funds created by Vanguard.
When comparing M1 Finance and Vanguard, there is one overlap. Both companies specialize in helping investors choose from pre-built portfolios of stocks, bonds, and ETFs.
The process is slightly different, but the end result is similar. Vanguard may create a mutual fund consisting of 100 top dividend stocks, whereas M1 Finance may offer a pre-built “pie” consisting of a similar group of stocks. Vanguard’s mutual fund will have a management fee and commission fee for buying and selling, whereas M1 Finance doesn’t charge a direct fee (although some of the funds invest in ETFs that have management fees). Vanguard funds can be purchased from multiple brokers, whereas M1 Finance funds can only be purchased at M1 Finance. Here is how the fees may look:
- Vanguard: 0.10% Expense Ratio (Management Fee) + $20 Commission to Buy/Sell Shares
- M1 Finance: Free
The biggest differentiator is customization. Vanguard only offers pre-built funds (in the form of mutual funds or ETFs). M1 Finance offers customizable funds in which the individual investor can choose the portfolio allocation.
For example, let’s assume you wanted to build a portfolio of tech stocks. Both Vanguard and M1 Finance have options for investing in a pre-built fund of top-performing tech stocks, however only M1 Finance offers the ability to choose your own stocks and allocation. If you wanted a portfolio that consisted of 25% Apple stock, 25% Amazon stock, and 1% of stock in 50 other tech companies, this would be doable through M1 Finance but not Vanguard.
As mentioned earlier, it doesn’t make too much sense to compare M1 Finance and Vanguard directly.
Vanguard offers a great service for investors who want mutual funds and ETFs with low expense ratios.
M1 Finance offers a feature-rich platform for investors who want to customize their portfolios and build advanced automated investment strategies.
- No fees or commissions for investors (unless M1 Plus member)
- Fractional shares enable more accurate rebalancing and liquidity
- Flexible platform enables robotic automation of tedious tasks
- Impressive 1.25% APR on checking accounts through M1 Plus
- Best of both worlds: Robo-broker and online broker
- Customizable portfolios “pies” and nearly 100 expert pies
- Intuitive and simple interface
- Too much flexibility is dangerous for new investors
- No tax-loss harvesting function