It’s not often that Wall Street comes out with something new and earth shattering. In many cases it is the same product in new wrapping paper to make it look new and exciting. But every now and then, something comes along to change the game and disrupt it. Right now the disruption is M1 Finance.
What is M1 Finance you ask? They are a new hybrid robo-adviser that is changing the way people invest their money. And the change is a good thing.
In this detailed M1 Finance review, I’ll show you why this company is the future of investment management and why you should seriously consider investing your money with M1.
Summary M1 Finance is the future of investing. A hybrid robo-adviser that allows you to have control to create a customized portfolio if you life. And best of all, investing is 100% free! M1 does not charge any trading commissions or annual fees. Click here to get started with M1 Finance.
M1 Finance Review Summary
M1 Finance is the future of investing. A hybrid robo-adviser that allows you to have control to create a customized portfolio if you life. And best of all, investing is 100% free! M1 does not charge any trading commissions or annual fees. Click here to get started with M1 Finance.
My Comprehensive M1 Finance Review
Who Is M1 Finance?
M1 Finance was founded in 2012 by Brian Barnes and has been available to investors since 2015. He became excited to invest at a young age during a school project but quickly realized that the process of investing wasn’t that great and, for an investor without a lot of money, it was expensive!
So he decided to create his own company and not only use the latest technology, but make investing simple and cost effective for investors who didn’t have a lot of money.
That is the summary of his journey, but you can read the entire fascinating story here.
For you as an investor, M1 Finance is a hybrid between current robo-advisers and traditional financial advisers. M1 automates the process of investing, but at the same time it allows you to have control by creating customizable portfolios.
The process to invest with M1 is detailed below. If you are short on time however, here is a great video.
How To Invest With M1 Finance
To get started with M1 Finance, you create your free account and begin to make an investment portfolio.
You can choose an investment pie that M1 created in any of the following categories:
- General Investing: a diversified portfolio based on your risk tolerance.
- Plan for Retirement: invest for your future retirement date.
- Income Earners: build a portfolio based on dividends and income returns.
- Industries and Sectors: ability to invest in specific sectors and industries.
- Hedge Fund Followers: mimics strategies from some of the most successful investors and reputable hedge funds.
- Responsible Investing: investing options for the socially responsible investor.
- Just Stocks and Bonds: build a diversified portfolio with two ETFs, focused on stocks and bonds.
- Other Strategies: additional strategies based on your interests.
Within these categories are various portfolios for you to choose from to invest in. For example, if you choose to invest in the income earners category, there are many portfolios M1 created for you to pick from.
Below are the pies within the general investing category.
But it doesn’t stop there. You can customize any of these portfolios to meet your needs. So if you find a portfolio you like but it has an investment within the portfolio you don’t want, you can simply remove it.
In addition to this, you can create a completely customized portfolio just for you without using any of the pre-built models.
Here is a sample stock-only portfolio I created. As you can see, you have complete control over the weight I give to each holding.
If M1 sounds like it makes sense for you, here is the link to sign up!
So the question is, what can you invest in with M1 Finance? The answer is any stock that trades on the exchanges, bonds, and exchange traded funds. You cannot invest in mutual funds with M1.
After you create your portfolio, you then choose your account type, determine how much you want to invest, and start an automatic transfer. From there M1 takes care of the rest.
This is a major difference between M1 and other robo-advisers. With other robo-advisers, you answer a questionnaire to determine your risk tolerance and then they suggest a portfolio for you.
With M1, you decide your goal and choose a portfolio that matches it.
As you invest new money, M1 will invest it based on your portfolio. As time goes on and your portfolio gets out of alignment, which happens as investments rise and fall in value, M1 will invest any new money to rebalance accordingly.
This means new money might only get invested into one or two of your holdings as opposed to being spread out across all of your investments. While this might sound counter-intuitive, it is a smart way to help you keep your ideal asset allocation.
To get started with M1 Finance, click here.
Advantages Of M1 Finance
Here is a list of the many advantages M1 Finance offers to investors.
Many account options. You can open a taxable or joint account, a traditional IRA, a Roth IRA, SEP IRA, a rollover IRA, or a trust.
Large pool of investments. As I mentioned above, you can invest in 99% of the stocks, bonds, and over 2,000 exchange traded funds listed on the stock exchanges. However, you cannot invest in preferred stock.
Free to invest. Yes you read that right. It doesn’t cost you anything to invest with M1 Finance. There are no trading commissions or fees they charge you to have an account. However, if you invest in exchange traded funds, you will pay the management fees for the funds. But you pay this regardless of where you invest your money.
Dividend reinvestments. M1 will reinvest your dividends for free. The catch here is that they need to total at least $10. Anything less and they will be reinvested once you have a $10 cash balance. Also, the money won’t be reinvested back into the stock or fund, it will be spread across your portfolio.
Active rebalancing. M1 will invest new money into the investments in your portfolio that need it and not across your entire portfolio. This lessens the number of taxable events in your portfolio and saves you from losing money to taxes.
Free consultation. If you have any questions, you can schedule a free consultation with a specialist and they will walk you through how to use M1 to its fullest.
No cash holdings. Once your cash balance reaches $10, it is invested in your portfolio. This ensures your money is working for you at all times.
Fractional investing. No more having to wait until you have enough cash to buy a full share of a stock. You can buy fractional shares for free with M1.
Disadvantages Of M1 Finance
Nothing is perfect and M1 Finance is no exception. Here are some of the downsides to the broker.
Narrow trading window. Trades are placed once per day at 9am Central Time. While this is a big issue for some investors, considering you can invest 100% free, it is not that big of a deal.
No Tax Loss Harvesting. M1 doesn’t offer tax loss harvesting for investors. In its place is their tax minimization strategy used on all of its accounts.
This strategy makes it a point to sell your investments in the most tax efficient way possible. Here is a brief summary of how it works.
When you sell from your account, M1 will prioritize the sale in the following manner:
#1. Sell lots that do not result in a tax liability.
#2. Sell lots that result in a long-term capital gain.
#3. Sell lots that result in a short-term capital gain.
By following this strategy you are ensured to pay the least amount of taxes possible.
No cash holdings. I listed this as an advantage above because it is, for long-term investors. But if you want to build up a cash holding and invest when the market drops, you are going to have to put the money into a savings account and transfer it to M1 when you want it invested.
In reality though, since you cannot time the market, you are better off investing all of your money and not waiting for a pull back. Nonetheless, I list this as a negative for those investors who want to build a cash reserve to invest at a later date.
No mutual funds. This isn’t a huge deal since you can invest in over 2,000 exchange traded funds, but if you want to invest in mutual funds, M1 isn’t for you.
M1 Finance Costs
Just how much does it cost to invest with M1? The answer is nothing. That’s right, it is completely free to invest with M1 Finance.
You might be wondering what the catch is, as they have to make money somehow. The reality is the larger brokers make most of their money by offering other products and services. In other words, any trading commissions they earn don’t really pay the bills.
Take for instance Charles Schwab. They offer low trade commissions and tons of no-fee exchange traded funds. How do they do this?
They make money from your cash balances. Any cash you have in your account, they invest at a higher rate than they pay you. Even at low interest rates, when Schwab has a mountain of cash, they make a healthy income from it.
So how does M1 Finance make money? Here are a few ways:
- Earning interest on cash.
- Earning interest on margin accounts.
- Fees for other services the company offers.
- Lending securities they hold.
Rest assured M1 Finance does make money. They just don’t charge you to invest your money, which is an amazing thing.
M1 Finance Security
Before you invest your money with any company, you need to make sure they are legitimate and secure. To save you some time, I did most of the research for you.
Overall, M1 Finance uses the latest available technology to keep your personal information safe and secure. Here are some highlights of their security features:
- Regulatory Oversight: M1 Finance is a member of FINRA and the records show no complaints against them.
- SIPC Coverage: As with other reputable brokers, your money is protected to the fullest extent of the law by coverage with SIPC.
- 256-bit SSL Encryption: M1 uses the same level of encryption as major banks and brokers to ensure your information is kept private.
- Third-Party Custodian: M1 uses a third-party, Apex Clearing Corp, as a custodian of your money. So you can rest assured knowing that investing with this company is not like investing with Bernie Madoff.
Who Is M1 Finance A Fit For?
There are many investors who M1 is a perfect fit for. This includes the following:
- New investors: they do all the work for you, but as you learn more about investing, you can tweak your portfolio to your liking.
- Investors without a lot of money: you can open your account for free and start investing with just $10.
- Dividend investors: you can create a dividend portfolio and trade almost any stock for free. Good luck finding this somewhere else.
- Long-term investors: you can invest for the long-term without paying any fees. This allows more of your money to get invested and grow over time.
Who is M1 not a fit for? There really are only 2 types of investors that M1 is not a fit for. The first is active traders. Since you can only place trades once a day with M1, it is not a viable option for you.
The second is anyone who wants to invest in mutual funds. Again, without this investment vehicle as an option, M1 is not for you.
If either of these investor types are you, keep reading for the best alternatives to M1 Finance.
Alternatives To M1
So what are some alternatives to M1 Finance?
Motif Investing: the former leader of the low-cost, customized portfolio until M1 came along. Considering you can do everything with M1 for free that Motif charges you for, you are better off with M1.
Stash: a low-cost robo-adviser that is a great fit for many. But you cannot customize your portfolio like you can with M1. However, you can invest on a regular basis with just $10. You can learn more here.
Betterment: one of the original robo-advisers. The main advantage they have over M1 is they offer tax loss harvesting. But they charge an annual management fee and you cannot customize your portfolio. You can learn more here.
Wealthsimple: another great robo-adviser. They have similar features offered by Betterment. The main difference over Betterment is that your first $5,000 invested during your first year is free. You can learn more here.
To conclude this M1 Finance review, you cannot go wrong by investing your money with them as long as you aren’t an active trader or want to invest in mutual funds.
Otherwise, the only reason to not choose them is some investors might get overwhelmed with picking a portfolio and if it should be tweaked or not.
For most investors just picking one of the general investing or retirement portfolios will serve you nicely, and M1 walks you through the process making it simple to get started.
But if it still sounds too overwhelming, then your next best option is to invest with Betterment.
At the end of the day, M1 Finance is the future of wealth management. I wouldn’t be surprised to see other brokers go the route of free investing as well.
To get started with M1 Finance, click here.