TL;DR: M1 Finance is an excellent take on the robo-advisor model that offers fractional investing along with standard auto-balancing features. M1 Finance Has also recently added several more traditional consumer bank products.
When it comes to investing, passive income is the name of the game. Passively managed funds are a cheaper and effective way to grow your wealth.
Robo-advising is here to help. Robo-advisors utilize the power of AI to automatically manage your funds—at a fraction of the cost of traditional brokerages. M1 Finance is a new service that combines a robo-advisor with the services of a traditional bank.
But how good is M1 Finance, really? Is it worth trying out and can it help you make money? We will cover the pros, cons, and costs of this unique service.
M1 Finance: Overview
M1 Finance is an investment platform that combines the robo-advisory model with more traditional banking products. M1 Finance stands apart from a lot of other robo-advisors for its high level of customization and flexibility. It allows customers to create diverse profiles and offers a wide range of financial tools.
M1 Finance was founded in 2015 by current CEO Brian Barnes with the aim of providing clients with total choice and control over their investments. A major shortcoming of the emerging robo-advising trend is that many robo-advisory services do not let you customize portfolios. M1 Finance bucks this trend by basically giving your full portfolio control.
With M1 Finance allows you to create portfolios with low-cost ETFs or individual shares—or both if you choose. Target dates on their various funds are aimed at the long-term horizon so M1 Finance is oriented towards passive investors.
Since its founding, M1 Finance has funded over 250,000 accounts and holds over $500 million in assets under management. The average M1 Finance use has approximately $4,000 in their account. The firm has recently branched out and started providing more traditional
How Does M1 Finance Work?
Like most robo-advisors, M1 Finance will require you to give some personal information such as your name, social security numbers, and identifying information. Unlike many other robo-advisory services, M1 Finance does not start you off with a questionnaire. You are basically on your own once you sign up and make an account. This is not a problem if you have some experience investing but it can be a bit intimidating if you are new to the game.
You will then be presented with a selection of prebuilt template portfolios. You can pick a prebuilt portfolio or you can customize one with your own selections. M1 Finance lets you customize up to 80% of your portfolio allocations so you have a very high level of control compared to other robo-advisory services.
M1 Finance also allows you to build “pies” which are basically visually pie chart representations of your current portfolio allocations. Slice of the pie can stand for stocks, ETFs, and even other pieces. There are about 70 template pies to choose from or you can build your own from scratch
Here are some of the pies that M1 Finance offers:
- General Investing
- Planning for Retirement
- Responsible Investing
- Hedge Fund Followers
- Industries & Sectors
- Income Earners
- And more
M1 Finance is a robo-advisor which means that it performed automatic rebalancing. When your assets fall out of the predetermined allocations, the algorithm will automatically buy and sell assets All workings of the algorithm is based on Nobel-laureate Harry Markowitz’s Modern Portfolio Theory (MPT) MPT seeks to find the right balance between risk and return for portfolio size.
All of this is to say that M1 Finance is designed based on cutting edge economic science, so you can be sure that your assets are being spread in the proper manner.
One final word. M1 Finance has a unique business structure, which explains how they are able to give you such flexibility over your portfolio structure. However, the catch is that all trades are performed in bulk during a single trading window once a day. That means that asset prices can shift between the time that you list the trade and the time that the trade actually goes through. That is the trade-off for having such a flexible portfolio structure.
M1 Finance Features
M1 Finance has a lot of features for a robo-advisor. Here are just a few key ones.
Account types. M1 Finance offers the basic kinds of investment accounts and a few others for more unique ventures.
- Standard taxable accounts
- Traditional IRA
- Roth IRA
- Rollover IRA
- SEP IRA
- Joint taxable accounts
The one thing they are missing is standard solo 401(k) accounts. None of these accounts have a minimum balance and they all have 0% management fees as well.
Fractional shares. One of M1 Finance’s more unique features is its focus on fractional shares. Instead of buying a full share of equity you can buy a small partition of equity. Fractional shares are a good addition to the robo-advisor model because it allows you to have a well-diversified portfolio even if you do not have much money in your account.
Automatic dividend reinvestment. True to the robo-advisor ethos, M1 Finance also offers automatic dividend reinvestment. If you have some dividend stock then M1 Finance will automatically take those dividend yields and reinvest them. Most experts agree that dividend reinvestment is the smartest way to maximize your wealth.
M1 Spend. M1 Spend is M1 Finances’ take on traditional checking accounts. M1 Spend lets you use your brokerage account as a pseudo-bank account. You even get a nifty metal debit card when you sign up. Checking accounts have no minimum balance and they do not charge any fees for debit transactions. You can also create joint checking accounts for spouses.
M1 Borrow. Adding to their repertoire of traditional banking products is M1 Borrow. M1 Borrow lets you borrow money against the funds in your brokerage account. You can borrow up to 35% of your brokerage total balance with a relatively low 4.25% APY. This feature is only available for those who have more than $10,000 in their brokerage account, however.
Tax reporting. M1 Finance can be integrated with several popular tax software providers such as H&R Block and TurboTax. That way you do not have to worry about entering all of your dividend and capital gains information.
M1 Plus. M1 Plus is M1 Finance’s premium account. It comes with more features than a standard free account such as more trading windows through the day, 1% APY on your checking account, and 1% cashback for purchases made using the M1 debit card. Plus account subscription fees start at $100 for the first year then cost $125 for each year after. If you want to use M1 Finance as a traditional banking service, then the Plus account is a good option.
Educational articles. Lastly, M1 Finance has a large library of educational articles on topics in investing. You do not even have to be an M1 customer to use these resources. Anyone can go and learn some stuff about stocks and investing. That is why M1 Finance is a good choice for beginner investors; they give you a lot of information to help get the ball rolling.
What Kind of Fees Does M1 Finance Charge?
M1 Finance has virtually no fees. There is no minimum account balance, they do not charge management fees, and they also do not charge any commission on regular day trades. M1 Finance is about as close as you can get to a 100% free robo-advisor.
There are a handful of things that they charge for though; specifically smaller individual services like IRA conversion and subscription fees from M1 Plus accounts. They also make money through interest on borrowed money.
Of course, any ETFs you are invested in will incur expenses on the asset level. Typical ETF expense ratios hover between 0.05%-0.20%.
Is My Money Safe With M1 Finance?
M1 Finance is a registered broker with FINRA and they are also an approved member of the SIPC. Your account funds are insured through the SIPC for up to $500,000 in investments and $250,000 in cash. The company also has supplemental insurance to reimburse you for any losses that exceed those amounts.
As far as data security, M1 Finance encrypts all financial data using a 4069-bit bank-grade encryption and they use 2-factor authentication to access accounts. In other words, hackers would have an easier time getting into the Pentagon than they would M1 Finances. So you money is just as safe as it would be at any other physical banking branch.
Of course, like any brokerage service, there is the possibility of losing money through poor investments.
M1 Finance Pros & Cons
- No-fee structure. M1 Finance has virtually no fees. There are no account management fees, commission fees on day trades, or overdraft/minimum account balance fees. The only kind of regula recurring fee they charge is M1 Plus subscriptions.
- Highly customizable portfolios. M1 Finance lets you fully customize up to around 80% of your portfolio’s contents. Most other robo-advisors do not give you anywhere near that kind of flexibility.
- No minimum deposits. There are no minimum required deposits for any account type so you can start investing with whatever amount you want.
- Fractional shares. M1 Finance offers fractional shares which are an excellent way to diversify your portfolio even when you do not have much funds.
- Banking features. M1 Spend and M1 Borrow are the firm’s tale on traditional banking products and make a nice addition to the core robo-advisor service.
- Limited asset classes. Currently, you can only invest in stocks and ETFs. It is not clear whether M1 Finance will allow for more asset types in the future.
- Single trading window. You can buy and sell assets throughout the whole day but M1 Finance will make all trades at once during a single trading window. This means that share prices can fluctuate before they are actually bought or sold.
- No tax services. Aside from importing data to tax software, M1 Finance does not offer any tax services such as tax-loss harvesting.
So, is M1 Finance worth checking out? If you are a fan of passive investing and want to have a high level of control over your portfolio, then yes, M1 Finance is a very good option. The low-cost model is good for beginner investors and the flexibility is good for more experienced investors. The extra banking services are also a nice addition. However, we would like to see a few more features from M1 such as an expanded list of investable asset-types and other features such as tax-loss harvesting.