M1 Finance Review: Investing Made Simple

By: Bob Haegele

October 22, 2020

In a nutshell: M1 Finance is uniquely positioned amidst a crowded field of investment firms.


Its pie-based investing and dynamic rebalancing is ideal for those who want to build custom portfolios.

Pros:

  • No minimum balances
  • No monthly or annual fees
  • Dynamic portfolio rebalancing

Cons:

  • No tax-loss harvesting
  • Only supports IRA for retirement accounts
  • Creating multiple pies could be easier

In a nutshell: M1 Finance is uniquely positioned amidst a crowded field of investment firms.


Its pie-based investing and dynamic rebalancing is ideal for those who want to build custom portfolios.

Fees

$0

Account Minimum

$0

Pros:

  • No minimum balances
  • No monthly or annual fees
  • Dynamic portfolio rebalancing

Cons:

  • No tax-loss harvesting
  • Only supports IRA for retirement accounts
  • Creating multiple pies could be easier

M1 Finance is a perfect platform for anyone to start investing. Whether you have a large amount of cash to invest upfront or you are just starting to save, M1 has something for you.


As long as you have $100, you’re ready to start building your portfolio.


Really, that’s all it takes to get started. And M1’s ability to purchase fractional shares as small as 1/100,000th of a share means no investment is out of reach for the average investor.

What is M1 Finance?

M1 Finance is an investing platform that combines features of various other investing services. The company is based in Chicago, IL and was founded in 2015. Its parent organization is M1 Holdings Inc.

 The company’s CEO, Brian Barnes, created M1 Finance because “The financial services industry has lacked any meaningful innovation for far too long, and I decided it was time for change,” Barnes said.

Whether or not you agree that there was a lack of innovation in the financial services industry, it’s true that Barnes was able to create a unique, innovative product.

 While M1 Finance automates your investments, it also allows you to hand-pick your investments--something most other robo-advisors don’t offer.


What is similar to other robo-advisors is that it directs users to a questionnaire that helps assess their level of risk.


But where other robo-advisors may use this questionnaire simply to determine your stock/bond allocation, M1 Finance uses it to suggest different portfolios.

 

Those with lower risk tolerance will have more bonds; those with higher risk tolerance will have more stocks. These are only suggestions, however. You are still able to create your own custom portfolio from the ground up.


M1 Finance is a member of FINRA and each portfolio is covered for up to $500,000 in securities plus up to $250,000 in cash.


How Does M1 Finance Stack Up?

Monthly Fees

$0

Minimum Investment

$0

Promo
Tax-Loss Harvesting

No

Dynamic Rebalancing

Yes

Monthly Fees

$0

Minimum Investment

$0

Promo
Tax-Loss Harvesting

Yes

Dynamic Rebalancing

Yes

Funding Your Account

When you run through the setup process, you won’t be required to make an initial deposit. However, in order to actually start investing on the platform, you will have to make at least a $100 deposit. Retirement accounts require an initial deposit of $500.


Also note that if you want to enable automatic deposits, there is a minimum of $10 for each deposit.

M1 Finance add bank account

During the setup process, you will be prompted to add your bank via Plaid. You’ll see a list of common banks, or you can search for your bank if you don’t see it.


You also have the option to add your bank manually using your routing and account numbers.

M1 Invest: Building Your Portfolio

The main feature that sets M1 Finance apart from other investing platforms is its investing pies.


This is the key feature of its main product, M1 Invest.


These pies are exactly what they sound like: they are made up of individual “slices,” which can be either individual stocks or exchange-traded funds (ETFs).

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What is Pie-Based Investing?

Pie-based investing allows investors to create "pies" where each asset is one slice. Those slices can be stocks, bonds, or ETFs. Each time you invest, M1 will automatically balance each slice to match your target allocation.

When you first sign up, you’ll be prompted to make three selections from a list of popular stocks, funds, and expert pies. You can also search for your own if you prefer.


There are thousands of stocks, bonds, and ETFs available on M1's platform, which is why it gives you a few popular choices when you are first signing up.

M1 Finance Portfolio

Expert Pies


The platform has several “expert pies” tailored to various goals. These help you reach various investing goals, including:


  • General investing
  • Plan for retirement
  • Responsible investing
  • Income earners
  • Hedge fund followers
  • Stocks & bonds
  • Other strategies

Each expert pie can contains combination of stocks, ETFs, or bonds. You can use an expert pie as-is or you can make it a percentage of your pie, then add other slices to it.


M1 uses a quantitative analysis on all traded ETFs to determine the best ones for each pie. According to the M1 Finance, website, "Our selection model takes into account the fund's cost, volume, size, and tracking error (how well the fund tracks the benchmark it seeks to replicate)."


The result is that each pie leaves you with the best combination of diversity and performance.


When you view each expert pie, you can also see a performance chart, letting you know what to expect. Here are a few examples:


General Investing - Aggressive Allocation

Aggressive

Responsible Investing

Responsible Investing

Income Earners - Domestic Dividend

Domestic Dividend


Managing Your Portfolio


Your portfolio can contain several pies, as shown above. However, note that if you want to create separate allocations, you have to create an entirely new account.


To give an example, let’s say you have a diversified portfolio that is 80% stock funds (ETFs) and 20% bond funds.

M1 Finance Pies

But you’d also like to separately invest in a few stocks just for fun. Maybe you buy some Apple shares, some Tesla shares, and some Microsoft shares.


If you want to do this, it’s not possible to add them to your portfolio without changing your 80/20 allocation.


And this is important because if you were to change that 80/20 allocation, it will affect all of your investments going forward.


If you change it to 70/20/10, where 10 is your “fun money,” now any time you invest, 10% of it will go to those individual stocks.


So if you wanted to create another allocation of a few fun money stocks without affecting your main ETF/bonds portfolio, you have to create a whole new account within M1 Finance.


This isn’t terribly inconvenient, but it seems that technology should enable this all within one account. In this case, it does not.


Asset Performance


Like most investing platforms, M1 gives you basic performance indicators for each stock/bond. This includes several key pieces of information, such as the number of holdings, expense ratio, performance, and the share price.

M1 Finance Asset 1
M1 Finance Asset 2

This screen will also show you the top holdings for funds, and you can add each asset to your watch list if you’d like to monitor its performance before adding it to your portfolio.

Account Types

Generally you will open a brokerage account if you are investing in M1 Finance, but that isn’t the only type of account you’re able to add.


In addition to brokerage accounts, M1 supports the following account types:


  • Traditional, SEP, & Roth IRA
  • Rollover IRA accounts
  • 401k accounts rolled into an IRA

Other types of accounts, such as a 401k, 403b, or 457b are not currently supported.

M1 Finance Mobile App

One of M1’s strong points is that it has an excellent mobile app that doesn’t sacrifice much. The experience when moving between the desktop site and the mobile app is seamless.

Mobile App

Indeed, you can do just about anything via that app that you could do on the desktop site.


As you can see from the screenshot above, you can purchase new investments, access M1 Spend and Borrow, transfer money and see investment research.


The app supports biometric (fingerprint) login, and the system has military-grade 4096-bit encryption, keeping your investments safe.


You can also optionally enable two-factor authentication for added security.

Dynamic Rebalancing

Another nice feature of M1 is its built-in rebalancing. Because each slice of your pie has a percentage allocated to it, M1 will distribute each deposit you make so that it fits your allocation.


If one of your assets is outperforming all the others and you make a deposit, that asset will get less of the deposit than usual so that the others can “catch up.”

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What is Dynamic Rebalancing?

Dynamic rebalancing is a method of automatically rebalancing your portfolio with changes in asset value. In the case of M1, this is done by allocating money deposited to any assets that are lagging until each one is as close as possible to your target allocation.

Going back to our 80/20 allocation, if your stocks are performing exceptionally well and your portfolio is now 85% stocks, more of your deposited money will go to bonds until your portfolio is back to 80/20.


Having that built-in rebalancing is nice - especially if your pie has dozens of slices.

And when you sell your shares, M1 also does so in a way that helps balance your portfolio.

M1 Finance Rebalancing

Source: M1Finance.com

As you can see in this illustration, money that is withdrawn will not necessarily affect every security. How money is withdrawn depends upon your current portfolio allocation compared to your target allocation.


Tax Efficiency


M1 Finance doesn’t have tax loss harvesting like some other platforms, but it does have features built in to help minimize tax implications when selling shares.


In particular, when you sell your shares, the system will sell them in this order:


  1. Losses that offset future gains
  2. Lots that result in long-term gains
  3. Lots that result in short-term gains

While this is not the same as real tax-loss harvesting, it is better than the system selling shares in a totally random order.

Fractional Shares

M1 has fractional shares which means you’ll never have cash sitting on the sidelines until you can afford another share. You can purchase pieces of a stock as small as 1/100,000th of a share.

"A fractional share is equity in a security that is less than one full share. M1 splits every share into 1/100,000th of a share so you can trade exact amounts of each based on the targets set in your portfolio."

Say you want to buy a share of Facebook stock, which is $274 at the time of writing. If you only have $100 to invest, on a traditional brokerage, you’d have to save up until you have $274 in order to purchase one share.


That’s not the case fractional shares. As long as what you want to buy isn’t smaller than 1/100,000th of a share, you’re good to go.


Cash tends to lose purchasing power over time due to inflation, even when put in high-yield savings accounts. Therefore, being able to invest all of the cash you set aside for that purpose is a big win.

M1 Finance Costs & Fees

A basic M1 Invest account is completely free. There are no monthly fees, no minimum balances, and no trade commissions.


Of course, M1 still wants to make money. It does so through fees on its other services, M1 Spend and M1 Borrow, which we'll cover in more detail shortly.


M1 Plus


M1 Plus works as an upgrade to what you get with a free account. For $125/year, it either adds new features or upgrades existing ones.

M1 Plus

M1 Plus does provide benefits that may appeal to some, such as cash back and check account interest. That said, these benefits can be had elsewhere without an annual fee.


If you’re an active trader, the higher daily ACH limit may seem appealing. In addition, the 2% base rate on M1 borrow could prove useful for some.


All in all, whether the $125 annual fee is worth paying will depend on your spending/borrowing/investing habits.


M1 Spend


M1 Spend is M1’s free checking account and can serve as a place to hold cash that you’d like to set aside but aren’t quite ready to invest. The account earns modest interest for M1 Plus members, but none for basic account members.


You will receive a debit card in the mail if you opt in for M1 Spend. If you incur ATM fees, M1 will reimburse you once per month (or up to four reimbursements with M1 Plus).


M1 Borrow


M1 Borrow allows you to borrow up to 35% of your portfolio’s value. The base interest rate for these loans is 3.5%, or 2% for M1 Plus members. This could make them an attractive borrowing option for anyone making a large purchase.


In order to borrow against that balance, you must have a brokerage account with a balance of at least $10,000.


On the plus side, there is no payment schedule, and interest accrued may be tax deductible if you itemize your tax deductions.

M1 Finance Support

For the most part, M1 doesn't have the most comprehensive support. This is to be expected, especially for free users.


Still, it's tough to complain too much given that you can use M1 Invest without paying any fees.


If you do have an issue and need help, there is a chat box at the bottom of the website that is available at any time.

Summary

Overall, M1 Finance is an excellent investing platform with very minimal fees. It simplifies the investing process and makes it easy for the passive investor to maintain a healthy, balanced portfolio.


We say passive investors primarily because M1 only has one trading window (9 a.m. central). That means trades are only executed during this time. If you transfer funds into your account after that time (or on the weekends), they won’t be invested until 9 a.m. the next business day.


That said, if you’re looking for a simple solution that will demystify investing and create a diversified portfolio that helps you grow your investments with minimal intervention, M1 is for you.


In fact, if you enable automatic deposits, your portfolio will require virtually no ongoing maintenance. That is all thanks to M1’s dynamic rebalancing.


It’s always good to check it from time to time, but checking it every day - or even every month - might be unnecessary.


Regardless of your goals, M1 Finance is a great platform for all kinds of investors, and one worth checking out for anyone who wants to start investing.

About the Author:

Bob Haegele is a personal finance writer, entrepreneur, and dog walker. Bob has been writing about personal finance for three years and now manages several personal finance sites, including The Frugal Fellow, Modest Money, and Blooming Wealth. You can also find him contributing to popular websites such as Millennial Money, Club Thrifty, and The Good Men Project. Bob has a passion for investing and growing his net worth and wants to help others do the same.

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