Times have changed, and investing in the stock market is not the same as it was 10 years ago. The rise of the robo-advisor and algorithm-based trading have taken the brokerage industry by storm. One of the most established examples of this trend being M1 Finance.
In recent years, the offerings for individual retail investors have gotten a lot better. Brokerages like Webull and M1 Finance learned that by handling everything electronically and not having brick and mortar locations, they could offer their services for free.
M1 Finance is truly a brilliant investing platform that mixes commission-free trading with great features and benefits for investors.
They have created a full-service platform where you can save, borrow, and invest your money. It is a one-stop-shop where you can plan your finances. In this review, we will be doing a deep dive of the M1 Finance investing platform. We will be taking a comprehensive look into the M1 Invest, M1 Borrow and M1 Spend features.
M1 Finance offers one of the best free platforms available to investors today. The tax minimization, fractional shares and smart rebalancing make this platform far more sophisticated and advanced than other free investing apps.
M1 Finance has a great platform for long term investors. The ideal user for M1 Finance is someone who is a somewhat passive investor, relatively fee sensitive and does not want to spend a significant time managing their investments. M1 Finance offers a greater amount of flexibility because you can choose exactly what you invest in. With other robo-advisors, you are only able to invest in a handful of ETFs.
M1 Finance is also a great platform for dividend investors. M1 Finance will automatically reinvest dividends back into your portfolio once the cash balance exceeds $10.
Account Types: Individual, joint, Traditional IRA, Roth IRA, SEP IRA, Trust
Fees: $0 trading fees or account management fees
Minimum Investment: $100 ($500 for retirement accounts)
Investments: ETFs and stocks
Top Features: Automatic rebalancing, fractional shares, dividend reinvestment, tax minimization, zero fees, free pre-built portfolios (expert pies).
|Minimum Investment||$100 ($500 Retirement Accounts)|
|Account Types||Taxable, Retirement, SEP, Checking|
|Rollover||Yes, They Offer Rollover Concierge Service|
|Tax Strategy||Tax Minimization - Assets Sold In Most Tax Efficient Manner|
|Rebalancing Strategy||As You Buy/Sell Assets Are Automatically Rebalanced|
|Recurring Deposits||Daily, Weekly, Monthly|
|Dividend Reinvestment||Yes, When Your Cash Balance Exceeds $10|
|Fractional Shares||Yes - As Little As 1/10,000th Of A Share|
|Advice||Free Prebuilt Portfolios, No In Person/Robo-Advisor|
|Tax Loss Harvesting||No|
|Trading Window||1 Per Day (2 With M1 Plus)|
M1 Finance was launched in 2016 and is an online robo-advisor and brokerage hybrid for everyday people who want to invest in stocks or exchange-traded funds (ETFs).
M1 Finance combines features of a traditional brokerage account with a modern robo-advisor. First, you select your investments and your allocations. Each of these allocations makes up a slice of your overall pie. Then, you automate the entire portfolio!
You can set up recurring weekly or monthly deposits.
Through M1 Borrow, you can get a low-interest loan borrowing against the securities in your M1 Invest account. Now, with the addition of M1 Spend, you can have a checking account with them allowing you to earn cash back while having your money ready on the sidelines to invest.
Say goodbye to the three day transfer when moving funds to your brokerage account! With M1 Spend, you can funnel money into M1 Invest that same day.
M1 Finance focuses on low-cost passive investing with additional features such as automatic rebalancing of your portfolio and tax minimization strategies. The only fees you pay are the fees associated with any ETFs you invest in or fees paid to FINRA and other regulatory agencies. M1 Finance is a completely free investing platform!
M1 Finance operates by creating portfolios of stocks and ETFs called “pies”. Each pie can be customized, meaning you can choose specific stocks and ETFs that you want to add. For example, you could build a pie with 50% Tesla stock and 50% Google stock.
Within each pie, you can have up to 100 stocks or ETFs. Each stock can carry a different weight in the portfolio. There is no limit on the number of pies you can have in your M1 Finance account! For example, you could have one growth oriented pie and one income oriented pie in your M1 Finance account.
As an M1 Finance investor, you have the choice between investing in a custom pie or an expert pie. Here is our step by step guide on how M1 Finance works.
The M1 Finance platform offers expert pies as well as custom pies.
These expert pies are created by M1 Finance and are offered to provide increased diversification as well as low-cost alternatives to some of the other investment options on the market.
Expert pies may be a suitable choice for beginners who do not want to build an investment portfolio from scratch. These expert pies can make up your entire investment portfolio or just a portion of it. These expert pies are also perfect for retirement accounts and passive stock market investors.
M1 Finance creates these professionally built pies based on generally accepted investing principles as well as past performance data. They offer a variety of expert pies, each composed of 2 to 20 securities depending on the type you choose. Expert pies are designed by M1 Finance investment professionals as well as third party partners such as Cambria Investments. The M1 Finance platform offers 9 different categories of expert pies.
M1 Finance has a quantitative model for choosing the specific ETFs within each expert pie. This model takes into account variables such as fees, assets under management, and tracking error of standard deviation. These variables result in low-cost ETFs that track the underlying benchmarks better than most other ETFs in their category.
It is completely free to use M1 Finance expert pies. However, we must remember the underlying ETFs have small fees for holding the fund called expense ratios. M1 Finance aims to select the best tracking ETFs while identifying the lowest expense ratio funds. Fee transparency is a benefit of the M1 Finance platform.
If you are a do it yourself or hands-on investor, you can decide to build your own portfolio from scratch.
As mentioned earlier, you can add any stocks or ETFs that trade on the NYSE or NASDAQ.
Each pie can hold up to 100 stocks or ETFs. For example, you could create a portfolio where the allocations are 50% VOO, 30% Amazon, 10% Apple and 10% Microsoft.
VOO is the Vanguard 500 Index Fund, which is an ETF. The rest are technology stocks. With most other brokerage accounts, you would have to make sure the stocks you are purchasing fit within your budget. The good news is that with M1 Finance, the fractional shares feature makes the share price totally irrelevant!
One of the most valuable features offered by M1 Finance is the ability to purchase fractional shares. This feature is 100% free and included for everyone.
If you have been exploring the M1 Finance app, or researching the platform online, you have probably come across this term fractional shares.
To put it simply, a fractional share is a fraction of one share of a company.
But wait a second... a share of a company is a fraction of that company. So, why do we need a fraction of a fraction of a company?
The answer: not all shares are created equally.
Take Amazon for example. Right now, there are around 500 million shares of this company. The market capitalization, or market value, of this company is around $1.2 trillion (as of May 11th, 2020). As such, each share is valued at around $2,400 per share.
Now, let's consider Ford. Right now, there are around 3.91 billion shares of this company. The market capitalization, or market value, of this company is around $20 billion (as of May 11th, 2020). As such, each share has a value around $5 per share.
What we have here are two popular stocks with a drastically different share price. This is where fractional shares come in; one of the most valuable features M1 Finance offers investors.
So, let's say you are an investor and you like Ford and Amazon. You want to own an equal amount of Ford stock and Amazon stock. You are just starting with investing, so you have $3,000 to invest.
In a perfect world, you could invest $1,500 into each stock. However, most brokerages would not allow you to do this!
In most cases, you are only able to invest in whole shares of each of these stocks. Your only option is to invest $2,400 in one share of Amazon stock and invest the rest in Ford stock. After buying your share of Amazon stock, you have $600 left. You are able to purchase 120 shares of Ford stock.
Instead of being 50/50 in Ford and Amazon, you have 80% of your money in Amazon and only 20% in Ford.
Wait a second... you liked both of these companies equally! You wanted to invest half of your money in Amazon and half of your money in Ford. Now, you are overweight in Amazon and underweight in Ford.
This exact situation has been a frustrating predicament for investors for years. You set your goals for diversification, but that pesky share price causes your actual allocations to change.
M1 Finance splits every share into 1/10,000th of a share. This allows you to trade the exact amount and achieve your portfolio allocation goals.
This means that with M1 Finance, you can set your allocations for each stock and meet those allocations regardless of the share price.
For the Ford and Amazon example, putting $1,500 in each stock would mean you own roughly 0.625 shares of Amazon and 300 shares of Ford.
Now share price is no longer a barrier for smaller investors to create their target portfolio.
This also ensures that you aren't sitting on too much cash on the sidelines while you wait for enough to buy a full share, you can toss it back into fractional hares at any point.
Using a simplified method of tax loss harvesting, M1 Finance offers options to sell positions in the most tax-favored way.
This means that you can make your buying and selling decisions while knowing that M1 is keeping the tax consequences in mind.
When you withdraw money from M1, they sell stocks/ETFs prioritizing them by:
Some brokerages offer tax loss harvesting and that is different. With tax loss harvesting, assets are sold and similar ones are repurchased to create artificial losses. These losses are used to offset capital gains. M1 does not offer this feature.
Another key feature of M1 Finance is smart rebalancing. Using smart rebalancing, all deposits will be automatically invested into your pie without your manual input. When withdrawals are taken out of your account, it will automatically rebalance your pie so it has the correct weight of your holdings at all times.
Rebalancing is a crucial aspect of investing. Rebalancing ensures your portfolio has the correct ratio of holdings and makes sure you are not taking more or less risk than you originally planned.
For example, if you held a portfolio of 50% stocks and 50% bonds and the stock portion grew faster, your portfolio is now 60% stocks and 40% bonds.
Your risk has increased by not rebalancing your account because you are more exposed to stocks. To tone back risk, you would sell off some of the stocks and buy bonds to get back to your 50% stock and 50% bond portfolio. If you invest with a platform like Robinhood, you will have to manually rebalance your portfolio.
M1 Finance does this automatically, for free! When you add money, they buy whatever you are low in. When you take money out, they sell whatever you have too much of.
In essence, they're buying low and selling high on your behalf! You don't need to hold yourself to making those tough decisions because M1 is doing it for you.
Here's our full article explaining the automated rebalancing feature of M1 Finance.
The automation features allow you to set your portfolio and forget about it.
If you use the recurring automatic deposit feature and set up your portfolio, you can put your investing on autopilot. M1 Finance will automatically reinvest your deposits as well as any dividends within your account. This way you don't need to worry about investing each of your deposits every week and you can ensure you will be fully invested. You can also turn off this auto invest feature at any time if you wish.
This is a huge plus for passive investors!
Portfolio automation is nice for streamlining the investing process, but M1 Finance recently rolled out an even more advanced feature to save you even more time called Smart Transfers.
The difference between Portfolio Automation and Smart Transfers is that with Smart Transfers, you can set logic-based rules. For example, if you want to keep your checking account at $1,000 and invest any cash above that mark, you can set up a Smart Transfer to do just that.
As an example, every time your checking account is over $1,000, M1 could move excess cash to your investments. This keeps your finances extremely efficient and ensures that things are working exactly how they should without requiring your active involvement.
You can also set up Smart Transfers in the other direction. For example, if you want the dividends your investments pay to go straight into your checking account, you can make that happen. This would allow you to take full advantage of the 1% APY that M1 offers on their checking account.
It is also possible to integrate your Smart Transfers with M1 Borrow. This could allow you to set up automatic payments towards your Borrow account every time your Spend account reached a certain dollar threshold.
Currently, Smart Transfers are only available to M1 Plus users, but the feature may roll out to other users as time goes on.
One feature that is unique to M1 is that they only offer one trading window per day. This is a cost cutting measure and something that allows M1 Finance to make money.
This trade window opens each weekday at 10 AM EST when the market is trading. This trade window can be accessed by all M1 Finance clients.
This trade window opens at 3 PM EST and is reserved only for M1 Plus members. Clients with the “standard” M1 accounts will only have access to that 10 AM window.
M1 Finance looks out for its clients by offering a “Client Success Line” that can be readily accessed by its clients.
This phone line is available 9:30 AM - 4:00 PM, Monday - Friday, when the market is open and trading.
One caveat to this is on certain holidays that fall on weekdays, but the market is closed. Some examples include Memorial Day, Independence Day, and Labor Day.
This is one area where M1 really shines in comparison to their competitors, some of whom are known for notoriously bad customer service. In 2020 alone, M1 Finance grew their customer support team by 500%, quite a respectable ROI for a year.
All dividends that are paid out to clients sit in an account until the account reaches a minimum value of $25. When the $25 minimum is hit, the dividends are automatically reinvested into your portfolio.
This dividend reinvestment plan is portfolio-level as opposed to stock-level. That means that if you get a dividend from Apple, it won't just be reinvested in more Apple stock. Instead, it will be re-invested across your entire portfolio following the Smart Rebalancing feature.
Here's our full article on what happens with dividends on M1 Finance.
M1 uploads all of its clients’ tax documents on its website. Once navigated to M1 Finance’s main website, m1finance.com, click your name at the top right of your screen and select “settings”.
Next, select the “Documents” tab, check the “Tax Forms” checkbox and you will see the various tax forms there.
M1 will also send you an email when your annual tax documents have been uploaded so look out for that at the beginning of the year.
Here's our full article on M1 Finance taxes explained.
One of the key benefits with M1 Finance is that they offer a variety of different account types to investors.
M1’s Individual Brokerage Accounts support stocks, bonds and ETFs in a taxable account.
This is a tax-advantaged retirement account that incentivizes you to both save and invest on a tax-deferred basis.
Before the age of 50, clients are allowed to contribute up to $6,000 per year. After the age of 50, they can contribute $7,000 per year.
M1’s Roth IRA account allows its clients to make after-tax contributions that allow for investors to benefit from tax-free deposits and withdrawals.
This type of account is especially appealing to younger investors who are currently in a lower tax bracket. By planning for the future at a young age, it is possible to amass millions of dollars in a retirement account by the time you leave the workforce.
M1’s Simplified Employee Pension IRA only pertains to small business owners and self-employed clients. The contribution on this type of retirement account is higher, allowing for larger sums of cash to flow into the account.
If you run your own business or you work as an independent contractor, it may be worthwhile to look into setting up a retirement account for your business.
If you decide to choose M1 Finance as your retirement account holder, you can “rollover” your account with no fees. This means that you can transfer your personal retirement account from your original broker to M1 Finance’s for no extra cost.
A trust occurs when two parties contractually agree to sign one of their assets to the other. The trustor will give the trustee the contractual right to his or her assets based on the trustor’s personal standards. These types of accounts are usually used when parents are looking to assign their children’s name to their assets at the time of their death.
M1 Finance supports this type of account and clients can utilize it if they are looking to participate in this contractual agreement with another individual or party.
If you are planning on creating a trust, this is a very involved process that requires the help of a lawyer.
There are no trading commissions or mark up fees for using M1 Finance as long as you open a brokerage account and fund it with a minimum of $100 ($500 for retirement accounts).
M1 Borrow has a variable interest rate and a required account maintenance balance of 35% of your initial loan. M1 Borrow allows you to borrow against the securities in your account.
M1 Spend allows you to make M1 Finance a full-service banking platform in addition to a brokerage. You have the ability to use M1's debit card at stores, deposit your paycheck, and pay bills. M1 is also offering a premium version of M1 Spend when you upgrade to M1 Plus. This debit card is a game changer because it allows you to earn cash back on your purchases!
All M1 users are able to access the basic functionality of M1 Spend. This includes:
Accessing additional features like a high-yield APY and cashback on your purchases will require an M1 Plus subscription.
One significant perk that M1 Spend offers is that you no longer have to wait for three days to invest when transferring funds to your brokerage account. Your money is ready when you are with M1 Spend! With one simple click within the app, you can transfer money between your M1 Spend checking account into your M1 Invest account.
You're also able to set up Direct Deposit with your M1 Spend account. This allows you to turn M1 FInance into the central hub for all of your personal finances if you do not want to manage accounts with multiple financial companies.
The M1 Plus program allows you to earn cash back rewards on your M1 Visa debit card Yes, finally there is a debit card where you can earn rewards.
M1 Plus allows you to integrate your free brokerage account with an easy way to actually use your cash.
For an annual fee of $125, you will get:
M1 Finance offers a way to take out a margin loan called M1 Borrow.
This is simply a loan against the stocks/ETFs within your account. They serve as collateral, so if you don't pay the loan back M1 takes these assets to recoup the loss. Since this is a secured loan, the interest rate is far lower than an unsecured loan.
If you have a balance of $10,000 in your M1 Finance brokerage account, you will be able to take out a margin loan against your account balance. There are risks involved with margin loans, such as margin calls when you will be forced to sell positions if your account value dips below a predetermined amount.
This line of credit can be used for investing, but that's not a requirement. You can use M1 Borrow to finance an investment in a business, pay for school, or any other investment. Having access to a low-interest line of credit is a feature that sets M1 apart from many of the other free investing apps on the market.
For more information, here is our full review of M1 Borrow.
In a nutshell, M1 Finance is just as safe as any other brokerage out there.
M1 Finance is a member of the Financial Industry Regulatory Authority (better known as FINRA). The purpose of FINRA is to protect you, the investor. FINRA is a not for profit organization authorized by Congress to protect America's investors and regulate brokers like M1 Finance.
FINRA has written rules that all registered broker-dealers and registered brokers in the United States must follow. These rules are written and enforced by FINRA.
FINRA offers a free tool called BrokerCheck where you can learn more about brokers and broker dealers operating in the United States. Here is the BrokerCheck filing for M1 Finance.
Second of all, M1 Finance is a member of the Securities and Investor Protection Corporation (SIPC).
When a brokerage firm is closed, SIPC steps in and, within certain limits, works to return your cash, stock, and other securities you had at the firm.
Being a member of SIPC, you will be insured in the event that M1 Finance goes out of business or goes financially insolvent.
Each account at M1 Finance is insured with up to $500,000 in coverage ($250,000 for cash). It is important to understand that SIPC does not insure you in the event of a decline in the value of your M1 Finance investments.
Your investments are your responsibility, so if you make a bad investment, the SIPC is not going to be able to do anything for you.
You might be wondering if M1 Finance is FDIC insured. Only M1 Spend is covered under FDIC, since this is a bank account. Investments are not insured by the FDIC, that is where the SIPC comes in.
M1 Finance is a regulated brokerage account that is in compliance with both the SPIC and FINRA. If you have any doubts about this platform, read the BrokerCheck report here.
M1 Finance offers one of the best free platforms available to investors today. The tax minimization, fractional shares, and smart rebalancing make this platform far more sophisticated and advanced than other free investing apps. Depending on how you decide to use this platform, it's possible to automate much of the manual work you are currently doing with your investments.
M1 Finance has a great platform for long term investors. The ideal user for M1 Finance is someone who is a somewhat passive investor, relatively fee sensitive, and does not want to spend a significant time managing their investments. M1 Finance offers a greater amount of flexibility because you can choose exactly what you invest in. With other robo-advisors, you are only able to invest in a handful of ETFs.
M1 Finance is also a great platform for dividend investors. M1 Finance will automatically reinvest dividends back into your portfolio once the cash balance exceeds $10.
That being said, M1 Finance is not an ideal platform for short term traders. It is also not ideal for investors in over the counter stocks or executing other unique investment strategies such as hedging or short selling.
Simply put, the M1 platform is not designed for short term trading. There are only 1 to 2 trading windows per day.
Through the automated portfolio rebalancing, you are taking advantage of a powerful economic force known as dollar cost averaging. By regularly accumulating shares over a long period of time, you are paying the market average price for these shares. This helps to smooth out any hills and valleys over time.
For long term investors, passive and dividend investors, M1 is a great option to consider.