Get our FREE Guide: 21 Days to a Better Financial Life!
If you’re ready to start investing, the first step is opening a brokerage account. While there are countless options to choose from, today I am covering what I think is one of the best: M1 Finance. In this M1 Finance review, I’ll cover why I like M1 Finance, as well as where I think it could stand to be improved.
What is M1 Finance?
Kicking off this M1 Finance review, M1 Finance is a crossover between a traditional brokerage firm and a robo-advisor. Whereas a conventional brokerage allows you to choose just about any investment your heart desires, M1 Finance offers only stocks and ETFs. However, they also provide automated investment advice, similar to other robo-advisors.
This is what sets M1 Finance apart from pure brokerages (like Robinhood) or pure robo-advisors (like Wealthfront and Betterment). It has most of the automation of Wealthfront and most of the choice of Robinhood.
How Does M1 Finance Work?
First and foremost, M1 Finance is an investing app, though it does have other features I’ll cover a bit later.
M1 allows you to invest in an entirely self-directed fashion, use their pre-built portfolios, or both. This is where M1 differs from other brokerages and robo-advisors.
Self-Directed Investing
Let’s start with the self-directed option. M1 Finance gives you an extensive selection of 6,000+ stocks and ETFs in which you can invest. You can choose specific ETFs or individual stocks to meet your needs.
One perk of investing in M1 is that they allow you to purchase fractional shares. Fractional shares are where you buy part of a share of stock.
So, if, for example, Amazon stock is trading at $3,000 per share, you’d have to invest $3,000 to buy one share. For most people, that doesn’t make sense if they are trying to achieve diversification. Instead, you could buy say 0.1 shares for $300 using fractional shares. That’s the power of fractional shares – they allow you to achieve more diversification with the same amount of money.
However, as I’ve mentioned before, I stick to purely index funds, and that’s the approach I think makes sense for most people who are looking to invest. Index investing gets you diversification benefits, so the fractional shares concept isn’t as important (except that it helps remove any cash drag on your portfolio).
Pre-Built Portfolios
If you choose to go with a pre-built portfolio, M1 Finance offers 80 portfolios from which you can choose.
These portfolios are designed based on modern portfolio theory (i.e., a well-known concept to maximize risk-adjustedreturns). The portfolio options designed by M1 Finance give you choices based on your risk tolerance, investing goals, and preferences.
One cool thing about M1 Finance is you don’t have to choose between all individual securities or all pre-built portfolios. You can do a mix. Doing a combination of individual stocks and the pre-built portfolios may be an interesting option if you want to do say 80% in index funds and 20% in “mad money” where you choose individual stocks.
What are M1 Pies?
M1 Finance has a concept called a pie, which means setting the weightings of each stock or fund in your portfolio. You select each stock or fund you want in your portfolio, and then you set a target weight for each slice.
Let’s say your target portfolio is a simple two fund portfolio:
- 67% domestic stock
- 33% international stock
Once you set these weights in your pie, any money you add to M1 Finance will allocate to investments using this weighting. As you continue to add or money, M1 Finance will rebalance your portfolio to align with your desired weightings.
The way M1 Finance works, you can choose to create custom pies, or you can select from their expert pies designed using modern portfolio theory – this is where the robo-advisor comes in.
The pies cover a wide variety of investing goals from retirement to sector-specific to socially responsible, so you’ll be able to find a pie that aligns with your investing goals.
Automation
As you may expect, M1 Finance allows you to automate contributions (i.e., if you want to invest a specific dollar amount every month). It can automatically invest and rebalance your portfolio for you so that you don’t have to worry about placing trades manually every time you want to invest.
Additional M1 Finance Services
While this M1 Finance review is focused on M1’s investing service, there are some additional services M1 offers that make it unique. In addition to its investment services, M1 Finance aims to be a comprehensive money management app with solutions for saving, borrowing, and earning. Bringing together these solutions in a straightforward app sets M1 Finance apart from its competition.
M1 Borrow
M1 Finance has a solution that allows you to borrow relatively inexpensively once you have $10,000 invested in the platform.
You can borrow up to 35% of your portfolio value at low rates. There are some risks, though, that you need to consider with M1 Borrow:
- If your portfolio declines in value, maintenance calls may be triggered, causing a portfolio sale to cover the loan.
- The interest rate is variable. If interest rates rise, so will your borrowing rate.
- If you use the proceeds to buy additional securities, you will magnify potential losses.
While I would never recommend buying stocks on margin (borrowing money to purchase securities), it is a unique feature that sets M1 apart.
M1 Spend
M1 also offers an integrated checking/debit account solution. While many big banks offer investing platforms, what sets M1 apart is that its investing service is free, and it comes alongside an excellent banking solution.
With most of the big banks that offer trading platforms, you will pay trade commissions along with other fees.
M1 Spend allows you to move money around just like a regular checking account, and you are issued a debit card to use with the account.
Having your checking account in the same place as your investing account can simplify your financial life.
M1 Plus
You may be wondering how M1 Finance makes money. While their primary earning mechanism is interest income through products such as M1 Borrow, they also make money through M1 Plus, their premium service offering. Key benefits include:
- High-interest checking (the checking account with the free service does not earn interest)
- 1% cashback on qualifying debit card purchases (an uncommon debit card perk)
- Better borrowing rates through M1 Borrow (a savings of 1.5% as of the time of this writing)
- An afternoon trade window (when you have more than $25,000 in your portfolio; I will explain this a bit later)
As of now, this service costs $125/year. Is this service worth it? In my opinion, no. There are countless great solutions for high-interest checking, and you’re better off earning cashback with a credit card. The lower borrowing rates could help justify M1 Plus, but again, I recommend you don’t borrow through M1 Finance.
You can view a detailed comparison of M1 Plus and the basic M1 account here.
M1 Finance Fees
One of the best features of M1 Finance is that there are zero management fees or trade commissions. This is what sets M1 Finance apart.
Yes, there are other commission-free brokerages. However, M1 Finance is one of the only ones with a robo-advisor feature that has ZERO management fees. The pre-built portfolios are a great way to build a diversified portfolio at zero cost.
If you’re looking for a robo-advisor, M1 Finance is one of the best options to consider, because it is FREE.
Account Setup
When opening an account with M1 Finance, you have the option of opening up an individual, joint, IRA, or trust account. In other words, you can open up whatever type of account best fits your needs.
You can open an account with M1 and get started with as little as $100.
The setup process is as you’d expect. The first step is to build your first pie, at which point you will provide your personal information to open and fund the account.
User Experience
While it’s hard to do justice to in this M1 Finance review, M1 has a very well-designed mobile app. All main functions can be completed from the app, including opening an account, funding an account, and allocating funds to pies.
M1 also has a website that mirrors the mobile app. It works well and is easy to use.
Again, one of the cool things about M1 is that you can invest, bank, and borrow all from the same place – be it the website or the app.
Customer Service
M1 Finance provides customer service by phone and email. M1 does not have personal financial advisors to consult, as their pre-built portfolios are designed to meet a wide variety of goals. The telephone and email support are primarily for technical issues.
There is also an education center on how to use the M1 Finance platform. The education center should help answer many of the questions that you may have when you’re just getting started with the platform.
M1 Finance Pros & Cons
Recapping this M1 Finance review, here are some key pros and cons of the platform.
Pros
Zero Commissions or Management Fees
M1 Finance doesn’t charge any commissions on trades. Additionally, it doesn’t charge any management fees. M1 is one of my favorite robo-advisors because it doesn’t charge management fees.
Self-Directed, Robo-Advisor, or Both
M1 allows you to choose individual investments that you prefer, use its expert portfolios based on modern portfolio theory, or do some combination of both. The ability to combine these options makes M1 one of the most flexible brokerage options around.
While fractional shares are becoming more prevalent, this unique feature allows you to buy slices of expensive stock shares and gain increased diversification.
Tax Efficiency at Asset Sale
M1 Finance has an algorithm to determine which shares it should sell to help reduce your tax burden.
Tax Reporting
M1 Finance integrates directly with TurboTax and H&R Block, which should hopefully help speed things up at tax time.
Cons
No Tax-Loss Harvesting
One thing I don’t like about M1 Finance relative to other robo-advisors is that it does not offer tax-loss harvesting (TLH). Tax-loss harvesting is an advanced feature provided by many other robo-advisors that sells securities at a loss to offset gains on other securities. Tax-loss harvesting reduces your overall tax burden.
Tax optimization at asset sale is a useful feature, but comprehensive tax-loss harvesting is a missing feature relative to other robo-advisors. The lack of TLH is likely the most significant negative of M1 Finance.
No Mutual Funds
Of the investable assets on M1 Finance, there are no mutual fund options (individual stocks and ETFs only). Candidly, I don’t view this as a big negative, as you can gain the same diversification of mutual funds using ETFs. However, if a mutual fund you are interested in doesn’t have a comparable ETF, you may be out of luck.
One Trading Window Per Day
M1 Finance uses a trade window where it executes all trades for its user accounts once per day; this means you can’t day-trade on the platform. Having one trading window is how M1 keeps costs down and offers low fees to its end users. If you go with M1 Plus, this does open up an additional afternoon trading window.
Keep in mind, if you’re investing for the long run, you shouldn’t be day trading.
No Consolidation of Outside Accounts
If you were hoping to include outside accounts in calculating your portfolio allocation, this is currently not possible. For example, if you have $1,000 invested in domestic stock at Schwab, M1 Finance won’t know about this, nor will it account for it in tracking your portfolio allocation.
No Other Asset Classes
M1 Finance does not offer investment classes besides stocks. So, if you want to invest in bonds, options, futures, etc., you’re out of luck.
Common Questions about M1 Finance
As part of this M1 Finance review, I also want to address some common questions people have about the platform.
Is M1 Finance Good for Beginners?
M1 Finance is great for beginners! If you are just getting into investing, its pre-built pies provide best-in-class diversification and get you started investing even if you have limited experience.
Additionally, you can grow with the platform, in that you can exercise more control over your investments once you know what you’re doing.
Is M1 Finance Trustworthy?
M1 Finance is a trustworthy brokerage, and they take many steps to keep you and your money safe. In February 2020, M1 passed $1 billion in assets on the platform. It is one of the fastest-growing investing apps on the market, having reached the $1 billion mark faster than Acorns, Betterment, Stash, and Wealthfront.
Security-wise, M1 Finance uses military-grade 4096-bit encryption for all of its data systems. They also offer two-factor authentication on all of their accounts.
All accounts are covered by SIPC insurance that protects against the loss of cash and securities held by a customer. SIPC insurance covers you up to $500,000, which includes a limit of $250,000 in cash. SIPC insurance does not cover price declines in securities you own.
M1 Finance’s clearing firm also purchases additional insurance to cover cases where SIPC limits may be exhausted.
Finally, M1 Spend accounts are FDIC insured up to $250,000.
Which is Better: Robinhood or M1 Finance?
One of the most common questions I get is whether you should invest with Robinhood or M1 Finance. Robinhood is an online brokerage account that also offers commission-free trades.
With Robinhood, you are responsible for making all of your investment selections – there are no automation or pre-built portfolio options like there are with M1.
Robinhood has a greater selection of investments. Additionally, if you are day-trading, Robinhood is the way to go because M1 Finance processes all investments once a day.
However, there are some key reasons to choose M1 Finance instead. If you want to use an automated investing service that provides pre-built portfolios, choose M1.
One other benefit with M1 is even if you do want to choose your portfolio, M1 automates the rebalancing based on your desired portfolio allocation. With Robinhood, on the other hand, you’d have to go through the time-consuming process of manual rebalancing.
If you want to learn more, check out this comparison – M1 Finance vs. Robinhood: Which Investing App is Right for You?
Which is Better: M1 Finance or Acorns?
Acorns is the opposite of Robinhood in that offers only a robo-advisor service, with limited choice in your investments.
Additionally, Acorns does charge a management fee, which, while small, is high on a percentage basis if you don’t have much invested.
Unless you’re looking for a “spare change” investing app because you don’t have much to invest, M1 Finance is superior for more sophisticated investors.
M1 Finance Review Wrap-up: Should I Use M1 Finance?
Hopefully, after reading this M1 Finance review, you can understand why M1 Finance is one of the unique investment apps to come to market in recent years.
It offers something truly unique by providing more investment choices (self-directed, robo-advisor, or both), as well as integrating other money management features like a checking account and borrowing.
While many others offer commission-free trades, M1 is one of the only ones that provide a robo-advisor option with no management fees. So, if you’re looking for an automated investing platform that gives you flexibility if you want to do individual stock picking, M1 Finance is worth considering. It’s one of the best financial tools around!
Have you tried M1 Finance? Let us know in the post comments below!
