M1 Finance Review: Best Free Investing Platform?
Investing Simple is affiliated with M1 Finance and Betterment. This relationship does not influence our opinion of these platforms.
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 has taken the brokerage industry by storm. One of the most established examples being M1 Finance. Traditional online brokerage platforms have costly trade commissions, on average ranging from $4.95 to $6.95 per trade.
In recent years, the offerings for individual retail investors have gotten a lot better. Brokerages like Robinhood and M1 Finance learned that by handling everything electronically and not having brick and mortar locations they could offer their services for free, resulting in lower fees for investors. M1 Finance is truly a brilliant investing platform. The best part, they offer their services to investors for free.
M1 Finance offers 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 doing a deep dive on the M1 Invest, M1 Borrow and M1 Spend features.
What Is M1 Finance?
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. Then, you automate the entire portfolio! M1 Finance has become the go to app for the modern day passive investor.
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. M1 Finance is a completely free investing platform!
How Does M1 Finance Work?
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 expert pie. Here is our step by step guide on how M1 Finance works.
M1 Finance Expert Pies
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 composing 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 Expert Pie Portfolios
- General Investing: Choose from risk levels ranging from ultra conservative to ultra aggressive.
- Plan For Retirement: Invest for your target retirement date. Your portfolio allocation will adjust over time to become more conservative as you approach retirement.
- Responsible Investing: Socially conscious investing. This investment category invests in companies that are concerned about financial obligations as well as social and environmental obligations.
- Income Earners: Contains dividend and interest paying securities.
- Hedge Fund Followers: Pies that track public funds such as Berkshire Hathaway and Icahn Enterprises.
- Industries & Sectors: Invest in one segment of the overall economy.
- Stocks & Bonds: Multiple options of diversified stock and bond exposure.
- Other Strategies: Other investment options like blue chip stocks, domestic growth, domestic value and more.
- Trinity Portfolios: Portfolios created by Cambria Investments.
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.
M1 Finance Custom Pies
If you are a do it yourself or hands on investor, you can 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, here is a custom pie we created within our M1 Finance account. The allocations are 50% VOO, 30% Amazon, 10% Apple and 10% Microsoft.
M1 Finance Fractional Shares
One of the most valuable features offered by M1 Finance is the ability to purchase fractional shares. We are going to go into a lot of detail explaining this in the next section. If you want the simple explanation, keep scrolling. For those who want to know the nuts and bolts of fractional shares, we have provided an in depth explanation below!
M1 Finance: Fractional Shares (In Depth Explanation)
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 488 million shares of this company. The market capitalization, or market value, of this company is around $935 billion as of August 14th 2018. As such, each share is valued at around $1,916 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 $37.7 billion as of August 14th 2018. As such, each share has a value around $9.64 per share.
Now, we don’t know exactly how many shares of Ford or Amazon are out there, so that results in some price deviation. But what we have here is 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. (Spoiler alert, you can)
The Problem With Buying Whole Shares
BUT! You are only able to invest in whole shares of each of these stocks in the past. Your only option is to invest $1,918 in one share of Amazon stock and invest the rest in Ford stock. After buying your share of Amazon stock, you have $1,082 left. You are able to purchase 114 shares of Ford stock. On top of that, you end up with $3.56 left over.
This is what your investment portfolio would look like…
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.
Enter M1 Finance.
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.
Back to our example, let’s consider Amazon stock. With M1 Finance, you can buy as little as 1/10,000th of a share of this stock. Each of these fractional shares would have a value of 19.18 cents.
Now, your $1,500 investment in Amazon stock would actually be about 78% of one whole share. (7,819/10,000 for the math people)
This means that with M1 Finance, you can set your allocations for each stock and meet those allocations regardless of the share price.
M1 Finance: Fractional Shares (Simple Explanation)
M1 Finance allows investors to purchase fractional shares. The fractional share allows small investors to invest in stocks with a high share price. Traditionally, you could not buy Amazon stock unless you could afford a whole share. Now, you can invest in as little as 1/10,000th of a share for free. This also allows investors to better diversify their portfolio without ending up overweight in a certain stock simply due to the share price. Finally, fractional shares also allow investors to remain fully invested.
Remember that $3.56 left over from the first example? While it may seem insignificant, that is money that is sitting in cash that is not being put to work through investment. With M1 Finance, you could invest that money in fractional shares.
Now, did M1 Finance invent this concept of fractional shares? The answer is no. In the past, brokers have offered fractional shares to investors but they would typically charge a fee for this convenience. M1 Finance does not charge a penny.
What Is M1 Spend?
M1 Spend allows you to make M1 Finance a full-service banking platform. 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 called M1 Plus. This debit card is a game changer because it allows you to earn cash back on your purchases!
M1 Spend: M1 Plus Checking Account
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. You don’t have to wait for three days to invest like you have in the past when transferring funds to your brokerage account. Your money is ready when you are with M1 Spend! With the simple click within the app you can transfer money between your M1 Investing account into your M1 Spend checking account.
For an annual fee of $125 ($50 in the first year), you will get…
- 1.5% APY per year on the cash sitting in your account
- M1 spend gives you 1% cash back on all purchases
- $0 minimum balance requirement
- 4 free ATM withdrawals per month
- FDIC insured up to $250,000
What Is M1 Borrow?
M1 Finance offers a way to take out a margin loan called M1 Borrow. 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. Here are the interest rates offered by M1 Borrow. This interest rate is set monthly and is subject to change.
Is M1 Finance Safe/Legit?
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.
You might be wondering if M1 Finance is FDIC insured. They are not, as FDIC insurance is only for bank holdings.
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 Fees & Requirements
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.
Beyond that, these are the requirements to open an M1 Finance account:
- You must be a US Citizen
- Investors must be permanent US residents
- You must be 18 or older
- Investors must have a US mailing address
M1 Finance has very basic requirements and a low minimum account balance, making this investing platform very accessible for new investors. This is one of the key benefits of investing with M1 Finance.
M1 Finance Features
Using a simplified method of tax loss harvesting, M1 Finance offers options to sell positions in the most tax-favored way.
However, there are alternative robo advisors that offer more effective tax loss harvesting strategies. If you are interested in this feature, we recommend checking out Betterment, the most popular robo advisor.
Tax loss harvesting in Betterment involves the platform offsetting any gains by selling losing securities in your portfolio and replacing them with a similar security. For example, say you have $2,000 in realized capital gains in your portfolio. You also hold Lowes stock in your portfolio which has a potential loss of $2,000 if you sold it today. To offset your gain, Betterment will sell Lowes stock to realize the loss and buy back a similar security such as Home Depot!
Unfortunately, this feature is only available through a robo advisor like Betterment. It is important to remember that Betterment charges an annual fee of 0.25%, while M1 Finance is 100% free!
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!
The M1 Finance automation features allows 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. This is a huge plus for passive investors!
The M1 Finance platform offers free Individual Retirement Accounts. This feature is very valuable as most investing platforms charge annual fees for IRA accounts. Within M1 Finance you can open a Traditional or Roth IRA. If you would like to roll over your 401(K) to an M1 Finance IRA, M1 Finance offers a free rollover concierge to assist you with your rollover. They will guide you through the paperwork and help you make the transfer as easy as possible.
What Are The Pros Of M1 Finance?
- M1 Finance is a 100% free investing platform with a wide array of features and benefits that go above and beyond other free investing platforms out there
- This platform can be set up as 100% passive
- M1 Finance offers complete flexibility with the custom pies
- For those looking for some hand holding, M1 Finance offers expert pies
- Automation of your portfolio takes your emotions out of investing
- M1 Finance offers retirement accounts
- You can automate bank deposits
- M1 Spend allows you to invest without a three day transfer
What Are The Cons Of M1 Finance?
- Investments are limited to ETFs and stocks trading on the NASDAQ, NYSE or BATS, so no mutual funds
- Other robo advisors offer more efficient tax loss harvesting, however they charge a fee for using the platform
- Market orders are automated, you cannot use any other types of buy or sell orders
- M1 Finance only offers one trading window per day
Who Is M1 Finance For?
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. Other free investing platforms like Robinhood do not offer any kind of automated dividend reinvestment. Brokerage accounts that offer dividend reinvestment and fractional shares typically charge a fee for this service.
Who Is M1 Finance Not For?
M1 Finance is not an ideal platform for short term traders or mutual fund investors. It is also not ideal for investors in over the counter stocks or executing other unique investment strategies such as hedging or short selling.
Trading is the goal of profiting off of short term price fluctuations in the market. Trades are usually executed over periods of weeks, days, or even minutes. Many traders use price analysis called technical analysis to exploit predicted movements in the market. We prefer Webull for active traders.
While using technical analysis, there is no consideration of underlying financial stability of a company. Instead, technical analysts use trading patterns, volume and price movements to predict future market prices. Trading is highly speculative and can be extremely risky if you don’t know what you are doing. As a result, M1 Finance is not the ideal platform for an active trading investment style.
M1 Finance Comparisons
M1 Finance vs Robinhood
In our M1 Finance vs Robinhood article, we compare two of the most popular free investing platforms. While Robinhood is a great investing platform, M1 Finance really takes it a step further. M1 Finance offers fractional shares, meanwhile you have to purchase whole shares on the Robinhood platform. M1 Finance also offers retirement accounts which is not available on the Robinhood platform. Finally, you can reinvest dividends back into your portfolio through M1 Finance. Robinhood currently does not offer any kind of dividend reinvestment plan or DRIP.
M1 Finance vs Webull
The main difference between M1 Finance vs Webull is that Webull is geared toward the active trader. Both M1 Finance and Webull are free but the ideal user for each platform is completely different. Webull offers the potential user an array of research tools, mainly geared towards charts and technical analysis. M1 Finance on the other hand is meant to be a long term investing platform. If you are an active trader, M1 Finance is probably not for you.
M1 Finance vs Stash
When comparing M1 Finance vs Stash, it is important to consider that M1 Finance is free and Stash charges an asset management fee. While it may not seem like much, those fees add up quickly. Both Stash and M1 Finance offer prebuilt portfolios, but we are leaning towards M1 Finance because they do not charge any fees. In our opinion, Stash does not add any benefits that make paying a fee worth it.
M1 Finance vs Vanguard
Looking at M1 Finance vs Vanguard comes down to personal preference. You can invest in Vanguard ETFs fee free through M1 Finance or directly on the Vanguard website. The one downside to investing through the Vanguard website is you will only be able to purchase Vanguard products. You can’t invest in individual stocks or non Vanguard products directly through Vanguard. Rather, Vanguard will process your order with one of their trading partners. You will have greater flexibility with M1 Finance.
M1 Finance Review: The Verdict
M1 Finance offers one of the best free platforms available to investors today. The tax minimization, fractional shares and smart rebalancing make this platform superior to other free platforms such as Robinhood. M1 Finance is our top free investing platform and our #1 pick for beginners due to its simplicity. Now with the addition of M1 Spend, M1 Finance offers you a one stop shop for your saving and investing goals.
We believe M1 Finance’s investing philosophy focuses on investing for the long term, and earning returns over time while minimizing fees.
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.
Lastly, the automated reinvestment of dividends will allow you to earn compound interest. M1 Finance will use your dividends to purchase more stocks. As a result, you will be earning more dividends from each of those shares.