Online investing has drastically changed over the last decade. Now there are countless investing apps, robo-advisors, and traditional brokerage firms to choose from. In this article, we compare a titan of the brokerage industry, Vanguard, against a new player to the game, M1 Finance.
Vanguard is the largest provider of mutual funds in the world, with over $6.2 trillion in assets under management.
M1 Finance is an up and coming brokerage offering online trading of stocks and ETFs to investors all commission-free and fee-free. Currently M1 Finance has just over $2 billion in assets under management
So the question is, which platform is better for investors?
M1 Finance is a commission-free app that combines many of the features of a modern robo-advisor with the functionality of a standard online brokerage account. On the platform, you are able to choose between constructing your own portfolio from scratch or taking advantage of the dozens of pre-built portfolios. Both options are completely free to investors.
Users will also have access to tools like dividend reinvestment and tax minimization to further automate their investing.
Vanguard is one of the largest and most well-respected discount online brokerages. With a focus on providing low-cost investment opportunities, Vanguard has made a name for itself over the past few decades. On this platform, you will be on your own to design your portfolio from scratch and will have access to additional asset classes that you won't find on M1 Finance.
Vanguard will provide investors with a greater level of flexibility which may be an advantage for more experienced investors, but a disadvantage for newer investors.
M1 Finance Review 2021: Best Free Investing App?
||Download M1 Finance|
Vanguard Brokerage Review 2021: Best Investing Platform?
||Invest With Vanguard|
|Minimum Balance||$100 ($500 Retirement)||$0|
|Fees||None||$20 Service Fee (Waived With Electronic Statement Delivery)|
|Assets||Stocks, ETFs||Stocks, ETFs, Mutual Funds, Bonds, Options, CDs|
|Automated Rebalancing||Yes||Offered On High Value Accounts|
|Trading Window||1 Per Day (2 With M1 Plus)||Open|
|Best For||Automation Features||Buying Stocks/ETFs As Well As Vanguard Funds|
M1 Finance is a relatively new investing platform that launched in 2015. This app is designed to be a brokerage/robo-advisor hybrid, offering a number of features that allow investors to automate their entire investment portfolio. These automations make the platform attractive to investors in search of a more hands-off investing experience.
Vanguard charges management fees and creates funds that have expense ratios for investors. M1 Finance takes a different approach to making money. Instead of charging fees and commissions, they make money in a few different ways. Here's our article on how M1 Finance makes money!
It is easy to open an account and you can begin investing with as little as $100. You start by creating your portfolio which M1 Finance calls a pie. You can customize your pie with a variety of stocks and ETFs offered on M1’s platform, including Vanguard ETFs. All trades are 100% commission-free.
We are going to highlight some of the key features here. If you want to read about all of the features, check out our comprehensive M1 Finance review here!
M1 Finance is 100% free to use. As long as you meet the $100 account minimum ($500 for retirement accounts) you can start using M1 Finance for free. There are no fees charged to use its platform.
When you buy shares of stocks or ETFs with M1 Finance, you are buying fractional shares.
In fact, you can purchase as little as 1/10,000th of a share of any stock or ETF that trades on the platform.
This is very handy for stocks that trade at a high share price like Amazon. This stock is currently over $3,000 per share. Other brokerages would require you to purchase an entire share. With M1 Finance, you can buy as little as 1/10,000th of a share.
If you wanted to, you could invest $10 in Amazon stock with this platform. If you buy shares of Amazon through Vanguard, you will have to purchase whole shares.
When you set up your M1 Finance portfolio, you'll create target allocations. For example, maybe you want your portfolio to be 50% Apple stock and 50% Amazon stock.
Then, whenever money is added to your portfolio, M1 Finance will automatically rebalance your portfolio. This means that if your portfolio drifts away from 50/50, they will bring you back to your target location any time you deposit funds or receive dividends.
They will accomplish this by buying more of what you are underweight in and less of what you are overweight in.
They will also rebalance as you sell. This is accomplished by selling more of what you are overweight in and less of what you are underweight in.
Most investors forget to rebalance their portfolios, or they do it very infrequently. This could result in your portfolio being too conservative or aggressive. M1 Finance does their best to keep you as close to your target allocations as possible.
You also have the option to initiate a rebalance at any point within the app. If you manually choose to rebablance, M1 will execute a series of buy and sell orders to bring you back to your target allocation. Keep in mind that this will likely cause tax consequences.
Beyond automated rebalancing, M1 Finance offers a host of other features to streamline your investing. One of the most notable of which is Smart Transfers.
With Smart Transfers, you're able to set threshold-based rules to automatically move money between your accounts. For example, if you wanted to keep $2,000 in your checking account and invest the rest, you could set this up with Smart Transfers. Anytime your checking account balance reached $2,000, the rest would go straight into your investments.
This can be a particularly attractive feature for investors who don't want to spend much time on their investing and instead would prefer to opt for a fully hands-off solution.
Investors can also set up automations involving M1 Borrow. For example, they could choose to use their excess cash to pay down the balance of their loan instead of investing it.
M1 Finance has made it clear that they plan to expand on the Smart Transfers in the future so that investors can continue to simplify their investing.
Currently, Smart Transfers is only a feature available to M1 Plus members, so without that membership, you won't be able to take advantage of them.
If you want to build your own portfolio from scratch, M1 Finance allows you to do that with the Custom Pies feature.
However, if you are looking for some help when it comes down to what to invest in, they offer over 30 different expert portfolios that are completely free to invest in.
This includes stock and bond portfolios, target-date retirement funds, and more. Most of the ETFs in these portfolios are offered by Vanguard, BlackRock, or iShares. These are all reputable fund companies known for having low fees.
These are particularly attractive for investors that want to be as hands-off as possible. By choosing to invest in a target-date fund, M1 Finance will automatically adjust the risk levels over time as you approach retirement without you having to do a thing.
By taking advantage of a retirement account, you're able to defer or potentially eliminate all taxes that you would owe on your investment gains. All retirement accounts have a different set of rules, but in general, you'll only want to use these types of accounts if the money you are investing is meant for your retirement.
M1 Finance offers retirement accounts both for individuals and for small businesses. If you are self-employed, there is a special type of retirement account called a SEP IRA that you are eligible for which is offered for free on M1.
Additionally, investors on the M1 platform have access to trust accounts. These are useful tools for estate planning and passing down wealth to future generations.
M1 Finance offers a feature similar to tax-loss harvesting which they call tax minimization. This feature prioritizes your capital gains and losses by first selling losses that offset future gains, then selling lots that result in long-term gains, then selling lots that result in short-term gains.
By doing this, they are able to help reduce (or eliminate) the taxes you owe on your investment gains at the end of the year. All the while you don't need to think about the tax consequences and you can rest easy knowing M1 has you covered.
When you earn dividends on M1 Finance, those dividends go towards your cash balance. If you have auto-invest turned on, that money will be automatically invested across your entire portfolio once your balance exceeds $25.
This is considered to be a portfolio-level DRIP or dividend reinvestment plan.
When your dividends are reinvested, they are done so in a way that also rebalances your portfolio. This in turn automatically ensures you are following Warren Buffet's advice of buying low and selling high!
In addition to their core offering, M1 Finance also provides investors with supplemental features called M1 Borrow and M1 Spend. While some investors will choose not to use them, they remain a useful perk for some M1 users.
M1 Borrow allows investors to borrow against part of their portfolio at a relatively low interest rate. This is a useful service for individuals who need to borrow cash on a short-term basis at a lower rate than you would see on a personal loan. This money can be used to invest in stocks, buy a car, or even buy a house!
M1 Spend is a checking account that gives investors the ability to aggregate their entire financial life on the M1 platform. You can set up direct deposit into your M1 Spend account and then automatically move money to your investments to streamline the process. This allows you to create a one-stop-shop for your finances with M1.
For investors looking for a few more advanced features, upgrading to M1 Plus is an option offered on the platform. By upgrading, investors gain access to M1 Spend perks, M1 Borrow perks, and an additional trading window.
With a traditional M1 Spend account, you won't receive any interest or cashback. By upgrading to M1 Plus, you'll receive 1% APY on the account and 1% cashback on all debit card spending.
Margin rates on M1 typically start at 3.5%. By upgrading to M1 Plus, the base rate drops to 2%. For context, you'll be paying significantly more in interest elsewhere as Vanguard's base rate is 6%.
The cost of M1 Plus is $125 per year.
For users that plan to take advantage of these features, they could find themselves paying for the cost of the service. However, for most M1 users, it won't be necessary to upgrade.
Vanguard is the largest mutual fund provider in the world and the second-largest provider of ETFs.
They are a massive fund company with over $6.2 trillion in assets. They were founded by John Bogle.
Vanguard still holds true to their original mission statement, which is to take a stand for all investors, to treat them fairly, and to give them the best chance for investment success. The goal of Vanguard has always been to make money for the clients.
One of the ways they have pioneered towards this goal has been through offering low-cost investment options for the public. Vanguard continues to offer some of the lowest-cost ETFs on the market and is well-known for providing straightforward and affordable funds.
As an investor, you can purchase Vanguard products in a number of different ways.
Vanguard offers many features typical of larger well-established online brokerages.
All stocks and ETFs trade commission-free. This is new as of January of 2020.
You are also able to trade individual stocks and ETFs at any time during the trading day since Vanguard has an open trading window.
There is a $0 minimum to open a Vanguard brokerage account. However, the minimum investment for most Vanguard funds is $1,000.
The minimum to invest in stocks or ETFs is the cost of a single share, since they do not offer fractional shares.
Vanguard does offer some basic research tools for stock and fund analysis, however, a common complaint about this brokerage is the lack of research tools.
To do effective fundamental or technical research, you'll need to go through another provider and only execute your purchases on Vanguard.
Vanguard offers 529 College Savings plans that investors can use to prepare and invest for college. Most States within the U.S. provide college savings plans, Vanguard is one of the cheapest plans available.
A major advantage of 529 plans is that they allow for earnings to accumulate tax-free if used for qualifying education purchases.
If you have a child who you expect to go to college, setting up a 529 plan now could be an effective way to put aside money to cover the rapidly increasing cost of college.
When comparing M1 Finance and Vanguard, it's necessary to comment on the drastic difference in the mobile experience. While M1 Finance was built mobile-first, it is clear that Vanguard was not.
While they have been working on improving their mobile app, it is still notoriously bad. Currently, the app has a 2.4 rating on the Android app store and thousands of upset reviews to show for it.
M1 Finance on the other hand has a much smoother user experience and boasts a 4.6 rating on both the Apple and Android app stores.
For some investors, the mobile experience may not matter much. But if you plan to monitor and manage your investments on the go, make sure you know what to expect from both brokerages.
When comparing the desktop interfaces, Vanguard competes more closely with M1. However, M1 still comes out ahead for its modern design and ease-of-use.
Vanguard offers commission-free trading for stocks, options, and ETFs.
M1 Finance offers commission-free trading for stocks and ETFs.
The minimum to get started with Vanguard is $0 while M1 Finance has a $100 minimum for taxable accounts and a $500 minimum for retirement accounts.
That being said, you do need to purchase whole shares on Vanguard. M1 Finance offers fractional shares, meaning you can buy as little as 1/10,000th of a share.
If you decide to purchase the Vanguard Index Mutual Funds through the site, pay attention to the fees. In most cases, the fees are actually higher for this product. It is also significantly more required as an upfront investment. For most Target Date Funds there is a $1,000 minimum and for most of the other funds it is a $3,000 minimum.
M1 Finance is very transparent about how they make money. They do not make money by charging customers hidden fees.
If you do end up going with Vanguard, make sure you opt for electronic delivery of statements. If you do not, you will end up paying a $20 annual account service fee.
M1 Finance offers a number of different options for customer service. The service team is available during the open market hours, which are typically Monday to Friday from 9:30 am to 4:00 pm EST. They offer phone support during set hours and email support.
Vanguard offers similar options, offering both phone support and email support. However, their phone support hours are Monday to Friday from 8:30 am to 9:00 pm EST. This is a greater time window.
Both M1 Finance and Vanguard are designed for long-term passive investors. If you are an active trader, neither platform is going to be a good fit for you. For that, we recommend the free trading app Webull. M1 just isn't going to cut it with the 1 trading window per day, and Vanguard is severely lacking when it comes to research tools.
M1 Finance is known to offer a number of features that long-term, passive investors have found to be very helpful. Most of the expert pies that are offered on M1 Finance actually hold Vanguard ETFs in the portfolios since the fees are so low on these funds. This allows you to get many of the perks of Vanguard without taking on the negatives.
M1 Finance offers a variety of features that appeal to investors such as...
If you are someone who wants to minimize the amount of time you need to worry about your investments, M1 Finance will likely be a good move.
If you are just strictly looking to trade stocks and ETFs commission-free, as well as invest in Vanguard funds directly on their site, the Vanguard brokerage account may be better for you. This is largely due to the open trading window. Those who have larger amounts to invest (over $3,000) may also find the Vanguard platform more accessible due to certain fund minimums.
In the end, both platforms are free so it costs nothing to make an account on both and see which you prefer. What's most important is that you make a choice and start investing. The sooner you get started, the sooner your cash will be out there working for you.