M1 Finance Review – Why It May Be Right For You

If you are new or relatively new to investing…….  

and looking for help on how to get started on the right foot, you’ve come to the right place.

As I said before in a previous article, I’m not a fan of financial advisors. because most of them are not any more financially adept than you are yet charge you exorbitant costs for their “expertise”.

Are Financial Advisors Good For Your Wealth?

However, what can help you are all the new robo-advisors that have come out in the last 5-10 years. They offer a plethora of information and the majority of them do not charge any fees unless you sign up for premium plans.

One of the best ones I have come across is M1 Finance.

What Is M1 Finance?

M1 Finance is a hybrid robo-advisor, broker, and investing platform that gives you total flexibility to invest in what you want (like a broker) and at the same time, allows you to automate the entire process (like a robo-advisor).

The company was founded in 2015 and is based out of Chicago, IL. If you want to do more research, the parent organization is M1 Holding, Inc. M1 Finance currently has about $5 billion of assets under management (AUM).

M1 Finance is also a member of the Financial Industry Regulatory Authority (FINRA for short). FINRA is a government-authorized not-for-profit organization that oversees U.S. brokers and dealers. FINRA helps average investors like you and me by ensuring market integrity and protecting investors from unscrupulous organizations.

Each investment portfolio is also covered up to $500,000 by the Securities Investor Protection Corporation (SIPC).

On top of that, M1 Finance does not charge trading commissions.

If new to investing and not sure how to invest in stocks and ETF’s, M1 Finance is a great place to start.

M1 Finance is like other robo-advisors in that the company uses a questionnaire to get you started to help assess your risk tolerance. The risk tolerance assessment is also used to determine your stock/bond allocation and to suggest various pre-determined portfolios (including publicly traded stocks and low-cost index funds) to invest in.

Like other robo-advisors, M1 Finance also allows investing in companies using fractional shares. A fractional share is buying a portion of a share of stock. For example, let’s say you wanted to invest $100 in Berkshire Hathaway (stock symbol of BRK-B) but cannot afford an entire share ($300 per share as of the writing of this article). What to do?

With M1 Finance, you can invest the entire $100 and buy 0.33 of a share of Berkshire Hathaway. In fact, M1 Finance allows purchasing fractional shares as small as 1/100,000^th of a share!

This way all your money can be invested and not sitting on the sidelines losing money by the day due to inflation.

Pretty sweet isn’t it?

Getting started is also super easy. You need just $100 to open a traditional brokerage account and only $500 to open a retirement account.

Lastly, M1 Finance takes a lot of precautions to protect your data using military-grade 4096-bit encryption on its sites and two-factor authentication for account logins.

But how is M1 different from other robo-advisors? We’ll cover that next.

How Does M1 Finance Differ From Other Robo-Advisors?

Where M1 Finance sets itself apart (and is superior IMO), is through its low-cost fee structure, the ability to hand pick investments, its customizability (its ability to automate and automatically rebalance), and its use of pie chart based financial analysis.

For starters, M1 Finance sets itself apart from other robo-advisors through its pricing strategy. M1 Finance’s standard account does not charge commissions for stocks, bonds, index funds, or any assets under management (AUM).

That’s right. No monthly management or trading fees with M1 Finance for a standard account. They also do not charge for the automatic wealth management services that most other platforms charge for.

However, M1 Finance is a business and does offer upgrading to a premium service called M1 Plus. For $125/year, M1 Finance offers exclusive features and rewards that help investors earn more as well as receive more perks and discounts.

Some of the perks include 1% cash back on debit card purchases, custodial accounts, and high annual percentage yield (APY) checking accounts. In addition, M1 Plus adds a 2^nd afternoon trading window at 3PM Eastern. We’ll go into more detail later in the article.

If you aren’t sure if you want to take the plunge into premium services, don’t worry. You receive a free trial just for joining M1 Finance.

In addition to its premium services, M1 Finance also offers convenient borrowing and spending services.

M1 Borrow allows investors access to a portfolio line of credit and can borrow up to 35% of the portfolio’s value with rates as low as 5.75%. Also, M1 Plus members can receive an even lower rate of 4.25%.

M1 Spend gives investors digital banking perks and a credit card to use.

We’ll dig more into these 2 items later in the article.

Combined, all these low-cost services make a compelling investing choice.

What Unique Features Does M1 Finance Offer?

With M1 Finance, a user can handpick for their portfolio virtually any publicly traded stock, bond, and index fund on the market. Most of its competitors do not offer this ability. 1 of the things you cannot invest in is mutual funds, but that is ok by me. IMO, index fund investing is a much better way to invest because of its low-cost fees and superior investing performance.

What about crypto investing?

As of this writing, M1 Finance just started allowing the investment of cryptocurrency. Dubbed M1 Crypto, you now are allowed to research crypto and build crypto pies (we’ll touch on pie analysis later in the article) to be used when developing a personalized crypto portfolio.

According to M1, you also are able to:

• Integrate M1 features into your crypto account to keep target allocations on track.
• Invest in up to 10 coins including Bitcoin (BTC), Ethereum (ETH), and other large-cap cryptocurrencies
• Invest in crypto commission-free
• Setup recurring deposit and investing schedule
• Setup automatic rebalancing
• Automate trades

M1 Finance also offers several ways to automate investing and automatically rebalance.

Automatic Rebalancing

Rebalancing involves buying the asset class that is underweight and selling the class that is overweight.

M1 Finance allows setting up portfolio rebalancing with a single click. To do so, all you have to do is click “rebalance” under your portfolio pie and M1 will automatically execute trades that match your target allocations.

On top of that, M1 also automates efficient rebalancing.

It works by setting your ideal portfolio structure which is called “pie investing” (we’ll discuss more later in the article). Every time you add money to your portfolio, M1 Finance automatically buys the most underweight asset and then sells the most overweight asset.

It’s that simple.

Smart Transfers

A perk for M1 Plus members is Smart Transfers. This feature allows you to automatically make transfers from your M1 Invest to your M1 Spend account or vice versa based on setup rules.

Smart Transfer allows rules to be setup such as transfer every dollar over $500 from your M1 Spend to your M1 Invest account.

Likewise, if you goal is to build up an emergency fund, you could reverse the rules to allow every dollar over $500 to be moved from your M1 Invest to your M1 Spend account.

You could also setup your account to take out a margin loan if your cash account drops below a certain threshold or move cash to several different accounts. You can even setup rules to move money from 1 savings goal to another. The possibilities are endless and frees up your time to focus on making money not managing it!

Next, let’s discuss what I think is M1’s best and most powerful differentiator … its pie-based analysis.

What is Pie Analysis?

For novice investors, M1 investing can be confusing. While you have carte blanche’ over your investing decisions, it may be difficult to figure out where to start.

Enter M1’s finance pies.

Pie investing allows you to build an easy-to-maintain, customized portfolio tailored to meet your specific needs.

A “pie” is the major tool used to manage your portfolio. Pies allow you to create your own investment funds, customize how funds are allocated, and make investments exactly the way you want it done.

The total number of slices of any pie is no more than 100. These slices can consist of any combination of stock, bonds, and index funds. Each time you invest, M1 will automatically balance each slice to match your pre-selected target allocation and risk tolerance.

Plus, a portfolio consists of slices or other pies totaling no more than 100 with the overall portfolio graphically shown in a pie form (think pie chart).

Confused?

Think of the general hierarchy as the following:

Portfolios > Pies > Slice > Individual Stocks, Bonds, and Index Funds

For example, let’s assume you had a retirement portfolio that consisted of stocks, bonds, and index funds. Your customized portfolio could contain the following:

• Bond Pie consisting of 5 equally weighted separate bond funds. The total portfolio allocation is 20%
• Apple stock since you are a devout Apple lover and think they are going to continue to do great things. The total portfolio allocation is 20%.
• A Dividend Pie consisting of 10 equally weighted Dividend Aristocrat stocks that you use to generate income. The total portfolio allocation is 30%.
• An Index Pie consisting of your 5 favorite index funds. The total portfolio allocation is 20%.
• Lastly, you invest in the Vanguard Total Stock Market Index Fund. The total portfolio allocation is 10%.

In this case, the portfolio “pie” is split into 3 uniquely created smaller pies, a stock, and an index fund.

Then each of the smaller pies are split into various slices of stocks, bonds, and index funds.

You can create an endless number of unique pies (aka “My Pies”) that can be of various shapes and sizes. For example, you could create large pies for different purposes (i.e., retirement, emergency fund, kids’ college fund). Then you could create smaller investment pies that are located inside the major pies.

The possibilities are literally endless.

Not feeling financially savvy enough to create your own pies? Don’t worry, M1 Finance has more than 60 pre-built pies (aka “expert pies”) that you can pre-select for your needs.

Expert pies are built based on the strategies of successful brokerage firms. These expert pies can be used to help you meet your specific investment goals.

Some examples of expert pies include:

• General Investing – a diversified portfolio based on your risk tolerance
• Retirement Target Date Funds – pick your expected retirement date and it does the rest
• Responsible Investing – Invests only in companies that score high in Environmental, Social, Governance (ESG) principles
• Income – pays regular dividends
• Hedge Fund Followers – mimics popular hedge funds such as Berkshire Hathaway
• Stocks / Bonds of various ratios
• Industries / Sectors – invest in anything from technology to financial to staple products
• Other Strategies – including ARK Invest, Cannabis, Value & Growth, etc.

You can use an expert pie as-is or include as a percentage of a custom pie.

Here is the best part, M1’s automatic balancing allows each dollar to be split up proportionately as designed without you lifting a finger every time money is invested.

Referring to the previous example, let’s assume $100 was allocated to your custom pie. The bond pie would receive $20 to invest and the dividend pie would receive $30 to invest. The bond pie would take the $20 and split it equally among the 5 bonds its invested in ($4 each) while the dividend pie would take the $30 and split it equally among the 10 dividend stocks its invested in ($3 each).

While it does require some work to initially setup, M1 Finance does all the heavy lifting for you the way you want it done, every time. M1 Finance can automatically take the money from your account and distributed it to all your investments for you. No extra work on your part! 😊

If you want to learn more about how pie analysis works, here is a great video tutorial by DLITZTV that you can view.

Think this is all M1 Finance has to offer? Think again.

What Other Services Does M1 Finance Offer?

As I said above, M1 Finance offers several other services other than investing.

M1 Spend

M1 Spend is a free reward checking account that pays 1% cash back and 2.50% APY if you are an M1 Plus member. The APY earned from M1 Spend is currently competitive with other high-yield savings accounts.

M1 Spend also gives you a Visa debit card for transactions.

Other perks M1 Spend offers is:

• Early direct deposit (up to 2 days early)
• $0 balance requirement
• 1 free ATM withdrawal per month (4 per month if M1 Plus member)
• Up to $250,000 in FDIC insurance on your account (as offered through M1’s partner, Lincoln Savings Bank)

M1 Spend members also have access to the Owner’s Reward Card. This is an exclusive card available to M1 Plus members that lets you earn up to 10% cash back from select retailers.

There is a $95 annual fee for this card but could be worth it depending on how much business you do with those select retailers. The fee is also waived for M1 Plus members.

M1 Borrow

With M1 Borrow, customers can use their investment as collateral and borrow money against these investments. This is effectively opening a portfolio line of credit (also called a margin loan) with extremely low borrowing interest rates.

The credit line that can be opened is equal up to 40% of your portfolio value.

The borrowing rate, IMO, is reasonable at 6.5%. If a M1 Plus member, the rate would be 5%.

The payment schedule is flexible and does not have a monthly minimum loan repayment amount. You can also create an automated payback schedule to gradually pay off the loan.

M1 Borrow is available for margin accounts with a minimum of $2,000 invested. M1 Borrow is not available with retirement, custodial, or trust accounts. No credit check is required to start since the portfolio is used as collateral.

M1 Plus

While anyone can sign up for a free account, M1 Finance also offer a premium service call M1 Plus. For a $125/year annual fee, it either adds new features or upgrades existing ones.

Here is what the annual fee buys you:

• Access to custodial accounts – UGMA or UTMA accounts to make contributions on behalf of your child
• Smart Transfers – allows rules to be setup and enacted automatically
• Margins loans at discounted rates – See M1 Borrow for details
• 1% interest on cash management account balances
• Up to 4 ATM withdrawal fees reimbursed monthly
• All international fees reimbursed
• Owner’s Reward Card annual membership fee waived

Depending on how you use your accounts, the extra fees may be worth your time to pursue.

Research Material

The M1 Finance website not only offers unique features and services, but they also provide educational material to help you on your investing journey.

For starters, the M1 blog site offers articles on everything from budgeting guides to investing guides to economic conditions analysis. They also talk heavily about financial wellness, financial planning, and their own insights on the future of banking.

M1 Finance also offers webinars and YouTube videos, an M1 glossary guide to teach you financial terms and what they mean, and even quick start reference guides.

These reference guides walk you thru how to setup auto-investing, how to build your 1^st pie, and so much more!

What Does M1 Finance Need To Improve?

For all its great benefits, there are areas of opportunities they can add or improve on in the future.

No Live Financial Advisor To Talk To

While M1 Finance does offer a customer support number where you can talk to a live rep from 9AM to 4PM EST, there do not have live financial advisors to walk you thru how to get started and to start planning your financial journey.

While I love all the research materials and video tutorials they offer, sometimes it helps to have a live person to bounce ideas off and talk through any problems you experience.

No Tax-Loss Harvesting

M1 Finance does not offer tax-loss harvesting on its accounts. For those not familiar with this term, tax-loss harvesting involves selling losing investments to offset the gains of other investments. This strategy helps to reduce the overall taxes you pay out each year.

Other robo-advisors (i.e., Betterment and Wealthfront) do offer versions of this.

What M1 Finance does offer is what it calls tax minimization. This process involves reducing your tax burden by categorizing your investments by their tax effect and helps you to sell investments in the most tax favorable way. It’s not the same as tax-loss harvesting, but it can reduce your taxes to a certain extent.

Here is how it works.

Whenever you sell an investment, M1 prioritizes the sale in a way that minimizes your taxes.

 The order of assets sold looks like this:

• Lots that do not result in a tax liability
• Lots that result in long-term gains
• Lots that result in short-term gains

Does Not Allow Stock Options / Futures Investing

For all its benefits with fractional share investing, pie development, and helpful tools, unfortunately, you cannot invest in stock options, futures, or other derivatives.

M1 Finance focuses on the basics for its investors and that’s ok.

However, if looking to use more advanced techniques, you’ll need to find a brokerage that allows stock options and derivatives investing (i.e., Fidelity, Robinhood, and Webull are a few examples)

How To Open An Account

We’ve talked about a lot of things today. Now for the $10,00 question: how to get started.

First off, visit the M1 Finance website to start the application process. Once you apply, you should receive an email within a day to let you know if your account has been approved. In some cases, M1 may ask you to submit identity verification documents.

The following types of accounts can be opened with M1:

• Individual accounts
• Joint accounts
• IRAs (traditional, Roth, SEP)
• Trust accounts
• Custodial accounts (M1 Plus users only)

M1 Finance will allow users to open multiple accounts under the same login. The current limit per individual is 5 accounts.

When you go through the setup process, no deposit is required. However to start investing, you must deposit at least $100 for a taxable investment account and $500 to start a retirement account.

The setup process will prompt you to link your bank account. In addition to a list of common banks, you can also search for your bank if you don’t see it. Then if needed, you can add your bank routing and account numbers to add your bank.

After that, you can begin investigating stocks, bonds, index funds, and expert pies to decide how to setup your portfolio.

Is M1 Finance Worth It?

M1 Finance is a mash-up of a robo-advisor and brokerage firm that offers a great combination of features that can suit a wide variety of clients from beginners to more financially savvy investors.

• The flexibility to both emulate portfolio pies of seasoned investors and design your own portfolio either from scratch, or a little bit of each.
• The ability to automate your financial life from investing to cash management to spending.
• A plethora of webinars, blog posts, and other research material to boost your financial knowledge.
• M1 Plus, a premium service, available to expand your available features and offerings.

As strong as this service is, it is not for everyone.