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.
What Is M1 Finance?
M1 Finance was founded out of pure frustration by Brian Barnes. He (and many others) believe that 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.
What M1 Finance Offers
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)
How To Get Started With M1 Finance
Jonathan has put together this tutorial on how to sign up and 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 ETF
- 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
Cons Of M1 Finance
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 offer a variable rate tied to the prime rate and aren’t an option for renters.
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 is very high. They are building a habit that will help her save and invest even more when she makes 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 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.