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Written by Matthew Cerminaro on January 5, 2022
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How Does M1 Finance Make Money?

Not too long ago, investing in the stock market was an activity reserved for people with both significant wealth and several years of experience in the finance sector.

Day traders were on a roller coaster of ups and downs, tracking their stocks minute by minute, often in a flat-out panic. But soon enough, people began to realize that the most significant way to make money – and decrease their anxiety medication intake – was to focus on long-term investments.

Long-term investing is an excellent way to earn passive income as your portfolio grows over time.

Things have also changed for those of us wanting to get into the stock market with a smaller pot of money. The good news is want-to-be investors no longer need thousands of dollars to set up a portfolio and start earning money.

The other piece of good news is that investors of all skill levels can succeed thanks to new investing tools and platforms.

To the rescue are several robo advisors that ease the stress and take much of the guesswork out of setting up your portfolio. There are so many advantages to using these algorithm-based trading platforms, not the least of which is a tiny minimum investment.

M1 Finance is one of these saviors. This article will focus on how this finance super app makes money. This is a question that is often asked since there is no fee to investors like you and me for using the platform.

What Is M1 Finance?

M1 Finance is a relatively new investment platform that was launched in 2015 in Chicago. How successful is it today? The financial tool has more than 500k accounts and holds more than $5 billion in client assets. That is a ton of growth in just a few short years.

To learn more about M1 Finance, feel free to check out our full review of M1 Finance here.

The first and most important aspect of M1 Finance we need to discuss is that setting up an account is free. That’s right, M1 Finance is free for its users.

The founders of M1 Finance had the foresight to see that free investing services are the future of personal finance. They’ve since gone full steam ahead with their own free platform.

However, many investors are skeptical of this free investing model. We get questions all the time such as... "Is M1 Finance Legit?" "Is M1 Safe?" "Are They Stealing My Data?"

Short answer: M1 Finance is SIPC insured and 100% safe and secure, it is not selling your data, and yes, it is a legitimate platform.

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From Low Fee to No Fee

When M1 Finance first started, the platform came at a small fee for investors.

It has been years now since the company has opted for a 100% free approach instead. M1 Finance decided it made more sense for them to make money in different, more creative ways instead of just charging investors a fee or placing commissions on trades.

M1 Finance has clearly taken the industry by storm. But understanding how the company makes money is important for its many users.

Even though the investing platform is free, that doesn’t mean the company isn't looking for other, more sophisticated ways to generate revenue. Charging investors, many of which are often cash poor, seems like a losing strategy when so many other platforms are completely free.

You may think charging commissions is the key to a successful brokerage, but actually that’s only a small piece of the pie. Brokerages typically make 10% - 30% of their revenue through direct charges to clients.

M1 Finance has an offer that seems to be a dream come true for newbies in the game. But you don’t have to waste any time second guessing because it truly is commission-free trading.

Minimum Balance

You also don’t need a hefty account balance: the minimum is just $100 ($500 for retirement accounts).

Keep in mind that M1 Finance operates a very lean business. The company doesn’t have the many fancy locations and a huge array of well-paid advisors like you might see with Charles Schwab or some of the other brokerages out there. It also handles all communications electronically, which significantly cuts down on costs. This business model lets it pass along savings to investors like us.

How Does M1 Finance Make Money?

M1 Finance has several ways that it generates revenue without disadvantaging its users. Take a look below to find out how!

M1 Borrow

M1 Finance makes money in a couple of different ways. The first way that M1 Finance makes money is by offering a feature known as M1 Borrow.

M1 Borrow allows investors to take out a portfolio line of credit. The investments in your M1 Finance account serve as the collateral. M1 Borrow allows you to borrow up to 35% of your M1 Finance account balance at an interest rate that varies based on your membership level.

This money can be used for a variety of purposes. For example, buying stocks on margin, paying for medical bills, or funding a much needed vacation.

Basically, M1 Finance extends a loan to you, and if you don’t pay it back, they can go right in and sell your investments to cover the loan. The risk for M1 Finance loaning you money is relatively low, so this is easy money for them.

Since this is secured debt, the interest rates are quite low. M1 Borrow is typically around a 5% interest rate for M1 Basic account holders and 3.5% for M1 Plus members.

To put it into perspective, unsecured personal loans on other platforms can be upwards of 20% or more in interest. One way that M1 Finance makes money is by collecting interest payments from M1 Borrow users.

Interest from Lending Securities

Short sellers are those who borrow shares to bet against them.

Short selling is a relatively complicated subject and is a topic for another article. However, M1 Finance can loan shares held by investors to short sellers and profit from doing so.

Don't worry, if M1 loans out your shares and loses them you are covered under something called SIPC insurance. This gives you $500k in coverage. Pretty much every major brokerage out there loans out shares to short sellers as an easy way for them to make a few bucks.

According to its site, M1 Finance lends out less than 5% of the total securities held within the platform. When shares are loaned to short sellers, interest is paid to the lender of those shares. Since M1 Finance is lending out the shares, they are entitled to receive interest payments from the investors.

Short sellers continue paying interest each month on borrowed shares until they are returned. This makes for a pretty profitable activity for brokerages.

Investing Unused Cash

Like a typical bank, M1 Finance takes the cash that its members deposit and invests it for a gain.

Depending on what brokerage you are using, you may or may not be earning interest on your cash. Free investing platforms like M1 Finance don’t offer interest on the cash in your account.

So, instead of charging investors fees, M1 Finance loans out the cash balance of its users to banks and collects interest in the process. The company is essentially making your money work, which is a benefit to them.

Again, under SIPC insurance you are covered for up to $250k of cash held within a brokerage account. So no need to worry!

If you want to earn interest from your money, consider ultra-short-term government bonds. While they are not FDIC insured, they are as safe as the US government and they can provide you with returns on your cash balance with minimal risk.

However, if you just leave your cash sitting you won't earn any interest. M1 Finance will though!

Payment for Order Flow

Brokerage accounts like M1 Finance can receive commissions or compensation for directing orders to different parties for execution.

With payment for order flow, the brokerage receives a small payment for funneling orders to various parties.

Think of it this way, when M1 Finance has a buy or sell order it can choose which market maker to send that order to.

Some of these market makers pay the company a small amount of money, fractions of a penny per share, for sending orders their way.

This is not a lot of money for a few shares, but when millions of shares trade hands on the platform, it adds up.

M1 Spend

M1 Spend is another way the M1 Finance generates revenue. M1 Spend is a checking account and debit card that integrates directly with your M1 Finance account.

This feature is available to both paying a non-paying members alike though the features available vary.

There are two ways that M1 Finance can make profits through M1 Spend:

  1. M1 Finance earns interest on the cash balance held within the M1 Spend checking account, similar to cash held in the brokerage account.
  2. M1 Finance receives some fees from merchants when you use your M1 Spend or M1 Plus debit card.

M1 Plus

For those looking for a full suite of benefits, an M1 Plus membership can be obtained by paying $125 per year. With this membership, users have access to lower interest rates on borrowing, higher interest rates on saving, extended trading windows, and access to the all-new M1 credit card without the $95 annual fee!

Without a Plus membership, M1 Finance charges $95 as an annual fee for the Owner's Rewards credit card.

The platform makes money from this membership fee in addition to the other methods above. Access to M1 Plus is completely optional and the features offered through the basic account are still an incredible benefit.

Should You Invest With M1 Finance?

M1 is an ideal platform for those who want to automate their financial life. The automated rebalancing combined with recurring deposits means you can put your entire investment portfolio on autopilot.

In general, we find that M1 is good fit for:

  1. Long-term, portfolio-based investors
  2. Dividend investors (since they offer portfolio level DRIP)
  3. Passive investors who want to invest in the expert (prebuilt) portfolios
  4. Retirement investors

That being said, M1 is not a good fit for active or day traders.

How Does M1 Finance Make Money: Final Thoughts

In summary, M1 Finance makes money by engaging in the following practices:

  1. Receiving interest from borrowed cash
  2. Receiving interest from borrowed securities
  3. Investing unused cash
  4. Payment for order flow
  5. M1 Spend
  6. M1 Plus fees
  7. Annual fees for the Owner's Rewards credit card

In none of these methods is the user being charged any money (with the exception of those who sign up for M1 Plus). This platform is free to use and investors can take comfort knowing that all of their money is insured by both the SIPC and the FDIC.

M1 Finance is safe to use and offers a great option for investors looking to jump in!

Don't forget to grab your free stock worth up to $200 from Robinhood today!

Article written by Matthew Cerminaro
Matt is currently attending Union College pursuing a Bachelor of Arts in Economics. He participates in the student investment fund and is a member of the Union College football team. Matt runs his own personal finance Instagram page and market-related blog where he writes about economics and general wealth accumulation tips.

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