Choosing the right investment platform makes a big difference. Compounding fees and value-added services add up to tens of thousands of dollars over a lifetime.
So when you hear about a company like M1 Finance, which offers free trades, I imagine you’re wondering the same thing as I did.
What’s the catch?
Is M1 Finance safe?
Is M1 Finance legit?
These are good questions to ask.
And in this M1 Finance review, I’ll look at M1 Finance through the eyes of a financial planner — breaking down what’s to like (and what’s not), who the service is a great fit for, and who should stay away.
M1 Finance Review
How Does M1 Finance Work?
With M1 Finance, you get the best of both worlds: it’s a robo advisor that helps you choose the best investment strategies to match your financial goals, as well as an online brokerage where you can invest in individual stocks or ETFs with no trading fees.
For those of you who aren’t completely sure what a robo advisor is, it’s a digital platform that uses algorithm-driven services for your financial planning. Other popular robo advisors include Betterment, Blooom and Personal Capital.
The brokerage part kicks in with M1 Finance because you can invest in individual stocks and ETFs.
M1 Finance is perhaps best known for offering free trades and no-fee ETFs. There are no fees when using the platform for investing in individual stocks or exchange-traded funds, or for utilizing its robo advisor services.
With M1, you can create a custom portfolio or you can go with something that’s ready-made and requires no work on your part.
The one thing you should be aware of is that you can’t invest in standard mutual funds with M1 (only exchange-traded funds). That’s different than with many traditional brokerages, such as Vanguard and Fidelity.
However, M1 offers a “pie” investing system that resembles a mutual fund in that it helps you to diversify your portfolio based on portion allocations. You have the ability to create custom pies, chose professionally-curated “expert” pies, or allocate your investments across a mix of both.
Pie Investing 101
M1 Finance offers the ability to invest in individual stocks at no charge. But the robo investor side is all about pie investing. You’ll choose between a custom-made pie, an expert pie, or a combination of both.
Each of your holdings will constitute a slice of your pie.
With a custom pie, you can develop your own portfolio and choose how big you want each slice to be. Custom is just how it sounds — it’s something you design. If you’re a big Amazon fan and want to invest in the company, you can set it to be a big chunk of your pie. Maybe you’ll want it to be 20%. Then, you’ll select other investments to make up the remaining 80%. With a custom pie, you have full control over your asset allocation.
M1 will automatically rebalance your portfolio, buying and selling shares to match your designated percentages, whenever it gets out of whack. You can then go in and change the allocations whenever you want.
Of course, if you’re a relatively inexperienced investor, you should remember that beating the market is tough if not impossible, and that you’re best off following a passive indexed-based investing approach. So I would recommend limiting custom pies to around 5% to 10% of your total investment. In other words, think of them as a fun and low-cost way to buy a few of your favorite stocks with no trading fees.
To learn more about creating custom pies, check out the below video:
If setting up a custom pie is a little more work than you want to take on, there’s another option: you can go with an expert pie instead.
Expert pies have been professionally curated. You can pick one based on your risk tolerance so that you’ll feel comfortable instead of sitting up at night worrying about your portfolio.
The expert pie area is where you’ll find more of the traditional types of allocations, such as retirement portfolios and general investment portfolios aimed at reaching short-term, medium-term, and long-term goals.
Here are some of the expert pies available to you:
- General investing: You can set this one up to reflect your own risk tolerance and create a diversified portfolio to protect yourself.
- Plan for retirement: You can use this pick for setting up a target retirement date.
- Responsible investing: This is a good pick for those who put a high emphasis on being a socially-responsible investor.
- Income earnings: This one is an option for those who are worried about dividends and income returns.
- Hedge fund followers: This one follows the strategies of reputable and acclaimed investors.
- Industries and sectors: This option lets you invest in certain industries that interest you.
In addition to investment services, M1 recently introduced M1 Spend, an optional checking account that’s linked to your investment portfolio and integrated into the main M1 app.
M1 Spend is FDIC-insured and works like any checking account offered by a major consumer bank — you can accept direct deposits and transfers, deposit checks electronically, and it comes with a Visa debit card. It also gives you the quick and easy ability to transfer funds back and forth between your checking and investment accounts.
There are two versions of Spend to choose from: M1 Standard (which is free) and M1 Plus (which comes with a $100 annual fee for the first year, and $125 each year thereafter).
M1 Standard is a nice feature for those already investing on the platform, but there are certainly better free checking options available. The fact that the investing and bank account is linked and integrated in the same app does offer a degree of convenience, as well as flexibility should you need to access your invested funds. However, if you’re practicing long-term, goal-based investing, there should be little need to transfer your funds out of your portfolio, making this feature less useful than it might seem.
M1 Premium offers 1% cash back on all purchases and a decent 1.5% interest rate on the cash in your balance. But from a financial management standpoint, it’s not a great idea to hold large sums of cash in your checking account — there are simply better-paying places to park your funds, such as a high-interest, no-fee savings account or your investment portfolio.
M1 allows users with $10,000 or more invested in a taxable brokerage account on the platform to borrow up to 35% of their account value at 4.25% annual interest — a very low rate, although M1 calls this a “short-term interest rate that is subject to change.” (Retirement account balances do not qualify you for the program.)
You can use the funds you borrow for any purpose — buying a car, making a down payment on a home, buying a horse, whatever you want with no restrictions. And the terms are extremely flexible. There’s no minimum payment and no timeline to pay the loan back. There’s also no credit check, which can be a huge benefit if you’re someone with limited or poor credit history.
But you need to understand that M1 Borrow’s rates are so low and its terms are so flexible because while it’s advertised as a line of credit it’s technically a margin account. In the simplest possible terms, a margin account is a line of credit that uses your investment holdings as collateral for the loan. That’s why the amount you can borrow is linked to your account balance, and why there’s no set repayment schedule… the loan is secured by your investments, so the lender’s risk is very low.
Margin accounts are typically used for buying stock or other investment products. If you have $10,000 in your account and $3,500 of “margin” (as it’s referred to in investment jargon), then you can buy $13,500 worth of stock. If your shares go up in value, you get to keep the profit from all $13,500 worth of investment.
However, stocks can also go down. And sometimes, they go down by a lot. For this reason, margin accounts can be subject to “maintenance calls.”
A maintenance call occurs when the value of your investment account — not including the amount you borrowed — drops below a predefined threshold. With M1 Finance, that threshold is typically about 30%, although it varies depending on the volatility of your investments.
When your account receives a maintenance call, it’s frozen until you either deposit more cash or sell some of your investment assets.
M1 offers a tool for monitoring your account health and showing you how close you are to receiving a maintenance call:
M1 Finance Fees
Here’s what M1 Finance does and does not charge for.
- They don’t charge trading fees. That’s good news for you. They also don’t charge a fee to invest in custom pies.
- They do charge a $100 termination fee. This is a fee most brokerages charge and is pretty standard.
- There is an inactivity fee. This applies to accounts with less than $20 and no activity for more than 180 days. So, as long as you’re active on the platform, you’ll be able to dodge this fee (even if you have barely any money invested).
How Does M1 Finance Make Money?
M1 is known for its free trades, but that’s a recent development. The company used to charge for trades, but stopped doing so in late 2017.
M1 Finance CEO Brian Barnes explained a little more about the company’s finances and how they make money:
“We make money lending the user-owned securities and cash held in their accounts. In this way, we operate identically to a bank. We also are paid to transact on various exchanges that actually improve the pricing our customers get in a trade. In the coming months, we will introduce margin loans, adding an additional revenue stream for those who opt in,” he said.
So while it may seem risky to do away with trading fees, those fees were only a small amount of the money the company generated before they made the switch.
Plus, it may be a great business move because the free model attracts customers who might not have considered M1 Finance before.
The company still makes (or is aiming to make) profits on the back end. This free model is a different concept than we’re used to, but it’s one that has its perks — both for the company and its customers.
M1 Finance Minimum Investment
Getting started on M1 requires a relatively low threshold of financial commitment. The minimum initial investment is $100, which makes the platform accessible to almost anyone.
But if even $100 is a stretch for you financially, you can open the account, deposit $50 (or some other amount you’re comfortable with), and then add more money each month until you have enough to start actively trading.
If you’re setting up a retirement account, you’ll need to commit more for that initial investment. For those kinds of accounts, you have to deposit $500.
M1 Finance vs. Betterment
|Accounts Available||Individual, joint, taxable, Roth, traditional, and SEP IRAs||Individual, joint, taxable, Roth, traditional, and SEP IRAs|
|Account Fees||None||Starts at 0.025%|
|401(K) Plans||Available||Available, but no i401(K)s|
Betterment is one of the most popular robo advisors out there right now, so it’s natural to want to know the differences between Betterment and M1 Finance.
Here are some of the key differences.
- Betterment is made for the hands-off, set-it-and-forget-it investor. If you don’t want to fuss with the details of your investments, Betterment is a good bet.
- Betterment charges an annual fee. The fee isn’t outrageous — it charges .25% or .40% annually, depending on which plan you go with. But with M1 Finance, you won’t face that fee at all.
- Both are made for the beginning investor. Even if you know nothing about investing, you’ll be able to easily walk yourself through the process. And with M1 Finance, you won’t pay trading fees while you learn about the art of investing in the market.
- Betterment has support for 401(k)s, while M1 Finance only supports IRAs.
- Betterment offers investors automated tax-loss harvesting, which is when certain investments are sold at a loss to reduce your tax liability. Keep in mind, tax-loss harvesting only benefits someone investing in a taxable account.
M1 Finance vs. Robinhood
|Accounts Available||Individual, joint, taxable, Roth, traditional, and SEP IRAs||Only offers taxable accounts|
|Account Fees||None||Free stock trades|
Robinhood is another popular investing service, and is similar to M1 Finance in that they both offer free trades.
But there are key differences between the two.
- Robinhood is aimed at the small investor, and it doesn’t offer IRAs. If you’re checking out investment vehicles, an IRA should be one of your top picks (besides an employer-matched retirement plan).
- If you’ve maxed out your IRA and 401K match, Robinhood is good for beginning investors who just want to invest in one or two stocks. However, if you’re a more sophisticated investor than that, you’d be better off with M1 Finance. Robinhood doesn’t offer rebalancing portfolios or goal-based investing.
- Robinhood has more options for the very active trader than M1. But Robinhood isn’t the best bet out there for people who want to trade a lot either, primarily because it doesn’t have the fastest or best trade routing and execution. That means you might not always get the best price on your shares when you place market orders.
Pro Tip: Robinhood and a few other online trading platforms will give you free stock just for signing up.
M1 Finance Pros and Cons
There are upsides and downsides to using M1 Finance. Let’s look at some of the biggest pros and cons.
M1 Finance Pros:
- There are no trading, maintenance or management fees.
- You can start investing with a minimum of $100.
- It’s easy to rebalance. You can do it yourself, but M1 also offers automatic rebalancing.
- You can buy fractional share purchases. If you can’t afford a whole share of something, you can purchase part of it. This is a major benefit of the platform — especially if you want to invest in stocks like Amazon and Google’s parent company Alphabet, which have high sticker prices.
- They are a member of the Securities Investor Protection Corporation (SIPC).
- You have a lot of investment options and enormous control over your portfolio.
M1 Finance Cons:
- There is no guarantee the service will be free forever. This business model is still new, and while I love the benefits and services startups are bringing to investors, a common path has been to launch free or low-cost services only to change fee structures later on down the road. With that in mind, I’m leery of placing big money in a taxable account with these providers, because you could face significant capital gains taxes if you have to move the account to avoid an unexpected free hike.
- If you use M1 to borrow money, your account may be subject to maintenance calls if the value of your investments decrease.
- You can’t invest in mutual funds (except for exchange-traded funds).
- Sometimes having too many options can be a bad thing. While it’s great that you can choose from a number of portfolios, complexity isn’t always a benefit.
Is M1 Finance Right for You?
There are certain situations where I feel it makes sense for people to use M1 Finance.
Consider going with this investing platform if you are:
- Someone who understands and is committed to investing passively and wants to park their IRA, 401(k) and 403(b) rollovers. This is a great place for you to be (and if you’re not, you might want to read a few beginner books on investing).
- Someone who wants to learn about the market by buying individual shares of stock. My rule of thumb is that individual stocks are OK when you’re limiting your investment to 5% to 10% of your net worth. The market is fun, and you can learn a lot about finance and economics that will help you better manage your money and investments overall. And some people even hit it big. However, this shouldn’t replace a long-term, goal-based approach to retirement investing.
But there are also times when I wouldn’t recommend using M1 Finance.
You might want to steer clear if you are someone who is:
- Committing all their investments to try to beat the market instead of using an index-based approach.
- Looking for a place to put a huge taxable account they’ve taken years to amass.
I personally don’t think it’s a great idea to put too much money in a startup, especially if you’re talking about your life savings in a taxable account.
Startups are too unpredictable for that. They can raise fees, sell out, or morph into something else you don’t like as much. If I had a large taxable account, I’d prefer to stick to a company like Vanguard.
Overall, I like the company and the personal finance tools M1 Finance puts into small investors’ hands. The interface is easy to set up and use, it gives you the option to customize your own investments or rely on expert recommendations, and you can even manage your account on-the-go with their mobile app (which is available for Android and iOS).
If you feel that an M1 Finance account is right for you, click here to open an account.