It’s no secret that investing can be complicated. So anytime it can be made easier, folks get pretty excited. That’s why there’s been a lot of hype about M1 Finance.M1 Finance is a completely free automated investing robo-advisor brokerage hybrid.
Table Of Contents
- What Is M1 Finance
- Why M1 Finance
- Investing With M1 Finance
- M1 Borrow
- M1 Checking Account
- How To Get Started With M1 Finance
- Pros Of M1 Finance
- Cons Of M1 Finance
- How Does M1 Finance Make Money?
- M1 Finance Alternatives
- Who Should Use M1 Finance?
What Is M1 Finance?
M1 Finance was founded out of pure frustration by Brian Barnes. He (and many others) believe most financial services are not acting with the investor's best interest at heart, even worse they are unnecessarily complicated and cumbersome. Brian researched the investment platforms that were out there but couldn't find what he was looking for.
What I was trying to do seemed relatively basic. I wanted to be able to pick my investments, and have recurring deposits automatically added to those allocations. I hated the idea of idle cash, so I wanted a platform that put all my dollars to work. Unfortunately, the seemingly simple solution just didn’t exist.
So he created it–a totally free (more on that later), robo-advisor brokerage that lets investors manage their money through automated investing.
Why is this so revolutionary? Well, let’s dive into the details of M1 Finance to find out.
Why M1 Finance?
Jonathan made a video explaining why we at ChooseFI love M1 Finance.
Investing With M1 Finance
ETFs & Stocks
M1 offers ETFs and stocks through three major exchanges: NYSE, NASDAQ, and BATS. Sure, this sounds like every other trading site, but, thanks to the site’s innovative design, it’s not.
When you first invest, you start by making a “pie” where each investment you choose makes up a slice. You then set up the target weight of each slice. Or, you can choose from already made pies that professional investors have designed. Now all you have to do is add money to your account and M1 assigns the money to each investment based on your asset allocation. That’s it.
You can add, remove, or edit these “slices” whenever you’d like. You can keep track of your investments on M1's easy to use app. We have a video below that shows exactly how to sign up and get started with Paul Merriman's Ultimate Buy And Hold Strategy.
Perhaps the best feature of M1 Finance is that it’s completely free for investors! No really, it is. Part of M1’s mission is to offer commission-free investing. There are also no maintenance fees on your account, so every penny you put in is fully invested.
You do have to have at least $100 in your account to invest, but that's nothing compared to similar services that require thousands. M1 Finance does this by allowing you to buy fractional shares of ETFs, which is one of Jonathan’s favorite things about M1.
Other Investing Options
Along with ETF and stock options, you can open a retirement account. M1 Finance supports Traditional, Roth, and SEP IRAs.
You can also open a Trust, LLC, or Corporate investment account. You must have a minimum of $5,000 to open an LLC account.
Asset allocation and rebalancing is an important part of your investment strategy. M1 Finance automatically uses new contributions to the pie to buy assets that are underweighted in your pie.
For example, let's say you have a pie that is 50% stocks and 50% bonds. Your stocks have done well and the value of that section of your pie has gone up. Your allocation is now 60/40 due to this. When you contribute money, M1 Finance will automatically buy bonds with this new money to bring your pie back into a 50/50 balance.
It's like an autopilot making small course adjustments so that the plane stays on course and gets you to your final destination.
You can also rebalance manually at the click of the button if you wish.
Tax Loss And Capital Gains Harvesting
As with other investment platforms, you can optimize for tax-loss or capital gains harvesting, depending on your tax situation in any given year. In a year where your tax rate is low, you can harvest capital gains by selling the highest appreciated assets without a significant hit on capital gains tax.
Conversely, in a year where your taxes are going to be high, you can harvest a tax loss by selling assets with the biggest losses and using those to offset your taxes
One of the coolest parts of M1 Finance is their “pie” style investing. A “pie” is M1 Finance's term for a portfolio. You can create a custom pie or choose from pies that have already been set up. As you invest, the new money coming into the portfolio is used to keep your pie in balance.
We recently had Paul Merriman on the show and he discussed his “Ultimate Buy And Hold Strategy.” His strategy is wonderful but a little complicated for the average investor who wants a “set it and forget it” type investment.
The good news is that Paul actually has created customized pies on M1 Finance that you can use! You can use M1 Finance to easily take advantage of Paul Merriman's investment strategy! M1 Finance even automatically rebalances your pies for you so it really is a hands-off investment.
Paul's recommended pies are:
- UB&H WW 100% Equity For Taxable (UB&H stands for Ultimate Buy And Hold)
- Merriman UB&H Bond Allocation (Taxable)
- UB&H WW 100% Eq. For Tax Deferred
- Merriman UB&H Bond Allocation (Tax Sheltered)
M1 customers can borrow against their portfolio if they need a loan. Instead of filling out a traditional loan application, customers can apply for a loan directly from their M1 account.
M1 claims they won’t deny anyone who’s already a customer. They also don’t check your credit, which can be useful if your credit has taken a dive and you need to borrow money quickly.
The interest rate is 3.5% for basic users and 3.25% for M+ customers. This rate is variable and depends on the current Federal Reserve interest rate. The interest rate will go down for M1 customers if the Fed cuts rates and vice versa.
Currently, the rate is lower than average rates for credit cards, personal loans, and home equity lines of credit.
Investors can borrow up to 35% of their portfolio and use the money for debt consolidation, medical bills, wedding expenses, home down payments and more.
M1 Checking Account
M1 offers an FDIC-insured checking account with two different tiers:
|ATM fees covered||Once per month||Four times per month|
Both tiers have no minimum balance, and both integrate with M1 investment accounts. The basic M account comes with every M1 account.
While the M+ account includes a high-interest rate, it also comes with an annual fee of $125. There’s no way to avoid this fee.
M+ may be worth the fee for some customers. Users need to have an average balance of $8,300 in their account or spend more than $1,029 a month to out-earn the $125 fee. M+ account holders will also receive a slightly lower interest rate if they borrow money through M1.
A customer with an average balance of $15,000 who spends $1,000 a month using their M1 debit card will earn $225 in interest and $120 in cashback.
While this is a great offer, there are banks that offer 1% cashback on checking accounts without charging these high fees. You can replicate both the high interest rate and cashback options by pairing a 1% cashback checking account and a separate high-yield savings account.
How To Get Started With M1 Finance
Jonathan has put together this tutorial on how to sign up, start investing with M1 Finance, and set up your Paul Merriman Ultimate Buy And Hold strategy.
You can reach M1 Finance’s team via:
Pros Of M1 Finance
First things first, when you open up m1finance.com, you’ll notice how nicely designed the site is–it’s “just beautiful to look at,” says Jonathan. In addition, some more pros are:
- Commission-free investing
- No management fees
- You can purchase fractional shares of ETFs
- Create your own portfolio or choose from one made by professionals–making M1 great for newcomers and investment veterans alike.
- Automated investing–you choose your investments and M1 does the rest
- Easy to use app
- You’ll receive $10 to invest when you refer a friend
While M1 is a truly great service, it’s not without its issues. The biggest drawback is one that Jonathan points out:
You can't access mutual funds, so you will not be able to get VTSAX on this platform. But one of the problems with the VTSAX is that you have to get a $3,000 minimum in order to buy into it.
While this may not be a problem for seasoned investors, for anyone who can’t come up with the $3,000 minimum to invest, M1 Finance is a perfect fit.
One other aspect of M1 Finance that may be an issue for some is that you can only see the assets you have with them. There’s no way to track all your accounts in different places like you can with management sites like Personal Capital. While this can be annoying, it shouldn’t sway you against M1 Finance.
Luckily, you can use Personal Capital to manage all your accounts, including M1 Finance. So, using Jonathan’s suggestion, you can use Personal Capital as your dashboard, while still having the easy to use M1 Finance app for your accounts solely based with them.
How Does M1 Finance Make Money?
So, if M1 Finance is free for investors, how do they make money? That's a good question. Brian shared with us that M1 Finance makes money through securities lending, payments for directed order flow, and cash management.
M1 Finance also offers investors the option to get a fixed loan at a low 4.25% rate (as of June 2019) on up to 35% of assets in taxable accounts that are invested with them. This is a game-changer and is a huge improvement over a HELOC which typically offers a variable rate tied to the prime rate and isn't an option for renters.
M1 Finance Alternatives
Before creating an M1 Finance account, check out these other services to see what works best for you:
This robo advisor syncs with your bank, credit card and investment accounts to track your net worth, spending and investment goals.
Personal Capital breaks down investments into sectors such as US stocks, international stocks, US bonds, international bonds and alternatives. It can also analyze 401(k) fees to determine if you’re paying too much.
Like M1, Personal Capital has an FDIC-insured cash account that offers 1.55% APY with no minimum balance.
They charge .89% a year for investment management accounts under $1 million, which is a higher rate than M1 Finance. Customers need to have at least $100,000 in their accounts to qualify for professional help.
Betterment is a popular robo advisor for new investors. They offer traditional, Roth and SEP IRAs, charging .25% annually on their investment accounts.
One difference between M1 Finance and Betterment is that the latter offers one-on-one help with a financial advisor. Customers can choose from one-time help for a flat fee between $199-$299, or an ongoing relationship with unlimited support, which comes with an annual fee of .40%. Customers need to have an account balance of $100,000 or more to be eligible for both tiers of service.
Unlike M1 Finance, Betterment doesn’t let users borrow against their investment portfolio. Betterment automatically rebalances portfolios and provides tax-loss harvesting. People who have a large nest egg and want more guidance with their investments might be better off with a service like Betterment.
Wealthfront is a leading robo advisor offering retirement accounts such as traditional, Roth and SEP IRAs. They also allow investors to save for their children's education with a 529 account, which M1 does not support.
They offer tax-loss harvesting for all accounts with no minimum requirement. M1 Finance does not offer any tax-loss harvesting.
Wealthfront has a cash account with 1.82% APY. This money is insured by the FDIC, like a checking or savings account from a traditional bank. This is free to open, and there are no maintenance fees.
The account minimum for investing is $500, the same as M1, and the minimum for Wealthfront cash accounts is only $1. Wealthfront charges a .25% fee on all investment accounts.
Like M1, Wealthfront also lets eligible customers borrow money against their accounts, up to 30% of the total value. Interest rates on this line of credit range from 3.90% to 5.15%.
Robinhood is a commission-free trading platform for people who like to sell stocks regularly. Customers can buy stocks, ETFs, gold, options or cryptocurrency. Robinhood only offers brokerage accounts, not retirement accounts like IRAs.
There’s no minimum required to open an account. Robinhood doesn’t let customers borrow from their margin accounts, which M1 does. Active investors who prefer trading stocks regularly will benefit from Robinhood’s mobile app.
Robinhood currently has a waiting list for its cash account, which will offer 1.8% APY when it launches. It’s not yet clear when this program will launch or what other features it may have.
Acorns is a micro-investing robo advisor. The service invests the money it rounds up from your purchases. If you spend $2.68 at a coffee shop, it will round the purchase up to $3 and invest that 32 cents in your portfolio.
The app creates an IRA and sets up a portfolio based on your age and retirement timeline. Customers who sign up for Acorns can also set up automatic contributions from their bank account to put more money in their retirement accounts.
Acorns has three different tiers of service and charges $1, $2 or $3 a month depending on the option you choose.
Customers who have 401(k)s may benefit from Blooom, the only robo advisor that focuses on employer-sponsored retirement accounts. It’s not a competitor to M1; customers should consider opening both a Blooom and M1 account because M1 doesn’t support 401(k)s.
Blooom analyzes 401(k) fees, makes investment recommendations and rebalances portfolios. They sync to 401(k) accounts and determine what changes need to be made based on the consumer’s retirement timeline. It’s completely hands-off for customers who don’t have to make any changes themselves.
The service offers a free basic assessment and charges $120 a year for complete 401(k) management and monitoring. Extra accounts cost $90 annually.
Who Should Use M1 Finance?
M1 Finance is great for both new and seasoned investors.
For those starting out the $3,000 minimum to the highly recommended fund VTSAX can be a stumbling block. It can be hard to make your very first investment with such a high dollar amount. Most people prefer to start with smaller amounts.
M1 Finance allows new investors to get started in Vanguard Total Stock Market Exchange Traded Fund (VTI) for as little as they want to test the waters. With just a $100 minimum, getting started is easy.
Once a new investor gets started, the chances of them continuing to invest across their life are very high. They are building a habit that will help them save and invest even more when they make more money.
For more seasoned investors, M1 Finance gives them the opportunity to give a more sophisticated tilt to the Simple Path to Wealth by layering on more value and small-cap stocks.
They can follow the recommended investment portfolios of experts like Paul Merriman, or further customize it based on their own research. So it’s still the Simple Path to Wealth, but with a smidge of complexity to increase the likelihood of maximizing returns.
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