M1 Finance review: Choosing the right investment provider makes a big difference. Compounding fees and value added services add up to tens of thousands over a lifetime.

So, when you hear about a company like M1 Finance, who 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?

And how does M1 Finance compare to popular providers such as Betterment or Robinhood?

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, what’s not to like, who it’s right 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 and a brokerage all in one.

For those of you who aren’t completely sure what a robo advisor is, it’s a digital platform using algorithm-driven services for your financial planning.

Popular robo-advisors include Betterment, Blooom, and Personal Capital.

The brokerage part kicks in with M1 Finance because you can invest in individual stocks/ETFs.

M1 Finance is perhaps best known for its ability to offer free trades. There are no trading fees or fees to invest in their robo advisor platform.

With M1, you can create a custom portfolio or you can go with something that is ready made and requires no work on your part.

The one thing you should be aware of, however, is that you can’t invest in mutual funds with M1. That’s different than many traditional brokerages, such as Vanguard and Fidelity..

The pie investing system it offers gives you a lot of choices if you go for an expert pie and you can set it up however you want if you opt for custom.

Pie Investing 101

So, as I said, M1 Finance offers the ability to invest in individual stocks at no charge. But the robo investor side of it is all about pie investing. You’ll choose between a custom-made pie or an expert pie.

Every one of your holdings will constitute a slice of your pie.

You can choose how big you want each slice to be with a custom pie. Custom is just how it sounds – it’s something you design yourself. If you’re a big Amazon fan and want to invest there, you can set it to be a big chunk of your pie. Maybe you’ll want it to be 20 percent. Then you’ll have to select other investments to make up the remaining 80 percent.

The portfolio will automatically rebalance to the percentages you designate whenever it gets out of whack. That means less work for you.

Of course, you can go in and change the percentages you want whenever you think another investing strategy would benefit you more.

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.

These pies have been designed professionally. You can pick one based on your risk tolerance so you’ll feel comfortable instead of sitting up at night worrying about your investment.

The expert pie area is where you’ll find more of the traditional type pies – retirement pies and general investing pies for short-, medium-, and long-term goals.

You can go after a lot of goals with this type of pie, and you can make it as risky or low-risk as you like.

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 the most successful investors in the world.
  • Industries and sectors: This option lets you invest in certain industries that interest you.

Using a pie setup can make investing a lot of fun. Who doesn’t like to set up goals and watch yourself inch toward realizing them?

M1 Finance Fees

Whenever you use a service, you should know what fees you’re going to be facing. Otherwise, you could be out quite a bit of money just by not doing some basic research.

Here is what M1 Finance charges you for and what they don’t.

  • They don’t charge trading fees: That’s good news for you. They also won’t charge a  fee to invest in custom pies.
  • They do charge a $100 termination fee: This is something small investors will want to know about.
  • There is an inactivity fee: This applies to accounts with less than $20 and no activity for more than 180 days. So, if you plan on staying active with barely any money invested, you’ll be able to dodge this one easily.

How Does M1 Finance Make Money

In addition to the fees they’ll charge you, you’ll want to know how M1 Finance makes their money. It gives you a better insight into their business model.

They are known for their free trades, but that’s a recent development for them. They used to charge for trades, but they stopped doing it in late 2017.

M1 Finance CEO Brian Barnes has 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.

While it may seem risky to many consumers to do away with trading fees, those fees were only a small amount of the money they 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.

People are always on the lookout for ways to get freebies and M1 Finance is meeting that demand.

The company still makes (or is aiming to make) profits on the back end. The free model is a different concept than what we are used to, but it’s one that has its perks both for the company and its customers.

M1 Finance Minimum Investment

The good news is that you don’t have to have a lot of money sitting around to use M1 Finance. You don’t need much of an upfront investment to begin actively trading. With just $100, you can start. So it’s accessible to anyone because that’s not much of a financial commitment.

If that seems like a big stretch for you financially, you can open the account, put $50 in there or some other amount you’re comfortable with. You can add more money to it each month until you have enough in there to start with the active 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. That’s not much either when you’re looking at a retirement vehicle.

M1 Finance vs. Betterment

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 offers tax-loss harvesting. That’s a great thing if you have a taxable account. M1 Finance only offers tax minimization.
  • Betterment is made for the set-it-and-forget-it investor. If you don’t want to fuss with anything, Betterment is a good bet. But remember, M1 Finance is a hybrid which gives you the best of both worlds. You can’t invest in individual stocks with Betterment – it’s all goal-based investing. If you feel you may want to branch out with individual stocks, maybe M1 Finance would be a better choice for you.
  • Betterment charges an annual fee. The fee isn’t outrageous with Betterment – it charges .25 percent or .40 percent annually, depending upon which plan you go with. But with M1 Finance, you won’t face that fee at all.
  • Both are made for the beginner investor. Even if you know nothing about investing, you’ll be able to easily walk yourself through the process with either one of these companies. 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) while M1 Finance just has IRAs.

M1 Finance vs. Robinhood

Robinhood is another popular investing site, and it is similar to M1 Finance in that they both offer free trades.

But there are key differences between this company and M1 Finance.

  • Robinhood is aimed at the small investor, but it doesn’t offer IRAs. If you’re checking out investment vehicles, an IRA should be one of your top picks (besides a 401(k) employer match).
  • If you maxed out your IRA and 401K match, Robinhood is good for beginner investors who just want to invest in one or two stocks. 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.

M1 Finance Pros & 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 fees.
  • You can start investing with a minimum of $100. Most people can scrape together $100 fairly quickly if they make some sacrifices or get creative when it comes to earning money.
  • It’s easy to rebalance. You can do it yourself or you can automate it.
  • You can buy fractional share purchases. If you can’t afford a whole share of something, you can purchase part of it.
  • They are a member of the SPIC.
  • You have a lot of control over your portfolio.

M1 Finance Cons

  •  There is no guarantee they will be free forever. This business model is still new. You may want to be careful when investing a big taxable account in case they ever decide to start charging fees again.
  • You can’t invest in mutual funds.
  • It’s easy to move between portfolios and change strategies constantly. This may seem like a weird item to have in the cons list. But sometimes having too many options can be a bad thing. Constancy is one of the best things you can do for long-term investing – just parking your money and leaving it alone.

Is M1 Finance Right For You?

At the end of the day, only you can decide if M1 is right for you.

But there are certain situations where I feel it makes sense for people to use M1 Finance.

Considering going with this outfit if you are:

  • Someone who gets 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 are not, you might want to read a few beginner books on investing). You have the use of a robo advisor and no fees.
  • Someone who wants to put some play money into the market, buying either individual shares or following a specific strategy. If you want to learn the market, this is a painless way to do it. You won’t be sweating bullets if you don’t invest a lot. You can enjoy the learning process while not betting the farm.
  • Someone who likes automating or has a flexible income.

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 start-up, especially not if you’re talking about your life savings.

Start-ups are too unpredictable for that. They can raise fees, sell out, or morph into something else you’d don’t like as much.

If their fee structure changes, you could be in trouble as selling the portfolio may result in a large taxable gain.

My preference would be to go with a company like Vanguard.

Overall, I like the company and the tools they put into small investors hands.

If you feel M1 Finance is right for you, click here to open an account.