The development of automated tools and online investing platforms has made it possible for people to start investing without the prohibitive costs of traditional brokerage services. Gone are the days of paying 1.5% of your total investable assets to a random financial advisor.
Personal finance tools and services are more accessible and less expensive thanks to low—or even non-existent—management fees and the Internet.
As an investor, educating yourself about these platforms is critical to your financial health. As my old friend, Benjamin Franklin said,
An investment in knowledge pays the best interest.
One of the most popular investment platforms is M1 Finance. This platform allows investors to create diversified portfolios and access a wide range of financial tools. M1 Finance is known for being a low-cost option, with a $3 monthly platform fee, making it accessible to individual investors. Additionally, M1 Finance offers a premium tier with extra benefits for those seeking more advanced features.
That said, M1 Finance does have some downsides. And, you should be aware of both the good and the bad before you create an account.
What is M1 Finance?
M1 Finance is an investment management platform that provides powerful automation that puts you in control of building your own customized investment strategy.
The Chicago-based company behind it was established in 2015 by Brian Barnes, Founder & CEO. It has managed to attract an impressive number of investors.
Currently, the financial tool has 250,000 funded accounts and holds over $9 billion in client assets. The average user has about $4,000 of assets in his or her M1 Finance account.
The way M1 Finance sets itself apart from other tools and platforms like Robinhood and Wealthfront is by combining elements of traditional online brokerage and automated investor tools.
When you sign up for a standard account, you will be asked a series of questions to determine your risk tolerance and investment goals.
Based on all the information you provide, the tool will recommend a portfolio that includes a variety of investments.
While these tools can be a great place to start for aspiring investors, they can also be limiting because they draw their portfolio recommendations from the same ETF indices.
Generally, investors with a lower risk tolerance will have more bonds and those that are less risk-averse will have more stocks.
M1 Finance Compared to Robo-Advisors
Minimum Investment:
$100
Management Fees:
$0
Promotion:
Low cost investing
Tax Loss Harvesting:
No
Portfolio Rebalancing:
Yes
Assets Under Management:
$1 billion
Minimum Investment:
$0
Management Fees:
0.25%
Promotion:
Invest free for up to 1 year
Tax Loss Harvesting:
Yes
Portfolio Rebalancing:
Yes
Assets Under Management:
$21 billion
Minimum Investment:
$0
Management Fees:
$0, $5 Gold monthly subscription
Promotion:
Get a free stock
Tax Loss Harvesting:
No
Portfolio Rebalancing:
No
Assets Under Management:
10 million users, company valued at $7.6 billion
Getting Started: M1 Invest
Portfolio Construction with Custom Pies
Starting an account with M1 Finance is similar to getting started with other investment platforms. First, you will set up your account and establish your portfolio preferences.
You don’t have to transfer any money into your account to get started and customize your investment portfolio.
When you begin using M1 Finance, you will notice that the tool is mostly centered on the idea of “pie investing.”
What’s Pie Investing?
Pies serve as the basis for users’ investment portfolios and demonstrate the distribution of assets and holdings. These pies make up various categories of investments intended to offer the ideal balance for your portfolio.
M1 Finance allows you to view a security’s performance, price history, expense ratios, and more.
After signing up and creating your account, M1 Finance allows users to build their own custom pie or select from pre-made model portfolios that are suitable for your specific profile.
The platform has a selection of dozens of prebuilt pies from which you can choose. You can also personalize your pie by making adjustments to your portfolio and reallocating some of your investment categories.
Customizing Your Portfolio: The Golden Butterfly
Because M1 Finance lets you build a portfolio that mirrors some of the world’s leading brokerages and advisors, my wife and I used M1 to curate a customized version of the Golden Butterfly.
Below is a picture of our personal automated setup using M1 Finance.
Ours tilts towards Socially Responsible Investing (SRI) by swapping out Vanguard’s Total Stock Market Fund (VTI) and replacing it with the Goldman Sachs JUST U.S. Large Cap Equity ETF.
This portfolio is a socially responsible version of the Permanent Portfolio with one additional asset class. This is done to incorporate some of the characteristics of a few other notable lazy portfolios.
We wrote a detailed post examining the Golden Butterfly portfolio vs Ray Dalio’s All Weather portfolio model which you can read here.
Choose Your Investment Account
After you finish building your pie, you’ll need to decide which kind of investment account you want. As long as you’re a U.S. resident with a current domestic address, you can select from several IRAs and brokerage accounts.
When you are finally ready to complete your account, you must provide some personal information, such as your Social Security number and birthdate. Financial institutions are required to gather this information as part of the USA Patriot Act.
They're perfect for DIY investors who prefer a hands-off approach but can still pick individual stocks and funds. We specifically use them for the Golden Butterfly portion of our portfolio.
Because of Securities and Exchange Commission rules, you will also be asked some additional questions about your income and assets. The Patriot Act or SEC rules require all the questions asked by M1 Finance—you won’t be asked anything more than what’s required by law.
Funding Your M1 Finance Account
Finally, you’ll fund your account. You can do this by linking your M1 Finance account to your bank account. This is done via a third-party tool that ensures the encryption of your login credentials and account information.
You can then directly transfer funds in and out of your account by linking your bank.
M1 Finance = More Liquidity
One of the perks of using M1 Finance instead of other investment platforms is the fact that assets managed by the platform tend to be more liquid, which makes for quicker processing times when it comes to transfers.
Typically, the funds you transfer through M1 Finance are available in one business day.
Fractional Shares
To start your investment account, you will need to add a minimum of $100 to it. Because M1 Finance uses fractional shares, the application can purchase stocks and bonds in the exact proportions that you specified when you initially built your investment pie.
What Is a Fractional Share?
A fractional share is a portion of a full share of stock. If you’re buying a stock with a share price of $50, but you only have $35 to spend, you can purchase a fractional share worth $35 of that stock.
Another impressive element of M1 Finance’s use of fractional shares is that you don’t have to worry about money sitting idle in your account without being invested. Every dollar you use to finance your account will be allocated accordingly.
M1 Finance offers powerful rebalancing tools that make it easy to maintain your portfolio’s target allocations. With a single click, you can manually rebalance your portfolio, instantly selling overweight holdings and buying underweight ones to realign your investments in one transaction. Alternatively, you can utilize dynamic rebalancing with auto-invest, which gradually rebalances your portfolio over time.
As new deposits are automatically invested into underweight holdings, your portfolio naturally moves back towards your target allocations without the need for selling, helping you avoid potential tax implications from rebalancing trades.M1 Finance Details and Features
As you set up your account, you can read descriptions of various investment categories to help you build your investment pie. There are several different investment categories you can choose from, including:
- General investing
- Socially responsible investing
- Retirement investing
- Sector-specific investing
- Stocks
- Bonds
M1 Finance offers many account options, including traditional and Roth, rollover, and SEP IRAs, as well as trusts and joint accounts.
The platform takes care of automatic portfolio rebalancing and offers features like socially conscious investing, fractional shares, and automatic deposits.
You can access M1 Finance online, from an iPhone mobile app, or an Android app. It enables you to check in on your investments from just about anywhere.
If you encounter an issue with the platform, you can get in touch with a customer service representative by phone or email.
Benefits of Investing with M1 Finance
| Benefits | Drawbacks |
|---|---|
| No fees for trades | No tax-loss harvesting (10) |
| No annual fee | Investment vehicle restrictions |
| Automatic rebalancing | No outside holdings—such as employer 401(k) or other investment brokerages |
| Low barrier to entry ($100) | U.S. only platform |
| Automated investing | |
| Many risk profiles | |
| Fractional shares | |
| More liquidity | |
| Tax minimization |
** M1 offers tax minimization when selling
After you fund your account, you can continue making new contributions and transfers through the app. Continually investing, even small sums, will grow your portfolio and build your assets.
M1 Finance will invest new funds whenever the cash balance in your account is $10 or more. All of the trading done through M1 is conducted within a trading window.
This window is at 8:30 am Central Time on days when the New York Stock Exchange is open. If you transfer your funds to your account outside this window, they won’t be invested until the next trading window.
M1 Finance offers two trade windows each day. Accounts with $25,000 or more in equity can take advantage of both trade windows in a single day. For accounts with less than $25,000 in equity, you can choose which trade window to participate in.
There are no commissions or fees associated with trading and selling your securities within your investment pie.
Dynamic and Automatic Rebalancing
As your portfolio grows and your investments fluctuate in market value, M1 Finance provides powerful rebalancing tools to help maintain your target allocations. For a more detailed explanation, you can refer to M1’s article on rebalancing.
Imagine you have a pie evenly divided between four different investments: Stock A, Security B, Stock C, and Security D. If you fund your account with $400, each investment receives $100.
Now, if Security D loses value while Stock A, Security B, and Stock C increase in value, M1 Finance will automatically prioritize purchasing more of the underperforming asset, Security D. This helps realign your portfolio to match the target allocations you originally set.
When you want to withdraw assets from your investment portfolio, M1 Finance will sell the assets in your portfolio that are overweight to maintain your desired asset allocation.
Another distinct aspect of M1 Finance is the strategy the platform uses when it comes to selling shares and assets within your specific investment categories.
Unlike other platforms that sell shares in the order they were purchased, M1 Finance uses a tax minimization strategy. When you sell assets, M1 prioritizes selling those with the lowest tax impact first. It starts with assets that have a short-term or long-term capital loss, then moves to those with no gain or loss, and finally sells assets with gains, starting with long-term gains before short-term gains.
This approach helps reduce the amount of taxes you owe when selling investments. Note: For crypto accounts, M1 uses the FIFO method (first in, first out), meaning the earliest purchased currency is sold first.
M1 Borrow
M1 Finance’s flexible portfolio line of credit lets you borrow up to 50 percent of your portfolio and pay back on your schedule. It’s a simple, low-cost way to borrow money. However, you must have a taxable brokerage account with at least $50.
Drawbacks to M1 Finance
M1 Finance certainly has a lot to offer people who are looking for a
One of the most pressing concerns among investors is tax loss harvesting (TLH). In essence, TLH is a practice used to offset income and gain taxes without any significant shifts in a portfolio.
Platforms that offer TLH will sell securities that have sustained a loss and replace them with similar options to keep a portfolio balanced while minimizing taxes.
Because of the value of TLH, many
Unfortunately, M1 Finance does not. The platform does use strategies geared toward minimizing users’ tax liability. However, the fact that it doesn’t offer TLH is a dealbreaker for some investors.
Another factor to consider before signing up for M1 finance is that its investment options are limited. Although you can invest in ETFs and individual stocks through the platform, you cannot purchase any mutual funds.
M1 Finance still allows you to maintain a diverse stock portfolio, but not other investment classes.
If you currently have an employer-sponsored investment portfolio, like a 401(k) retirement account, M1 Finance won’t recognize it.
The platform does not take your current outside holdings into account when creating an investment portfolio. Because M1 Finance doesn’t recognize external accounts, your portfolio will be balanced based solely on your M1 Finance investments.
In other words, you cannot manage external investments with the M1 Finance platform.
Is M1 Finance Right for You?
There are a lot of people who may benefit from using M1 Finance to establish an investment portfolio. The tool is an excellent fit for those who are just getting their feet wet with investing.
If you don’t have any active investment portfolios, it might be just what you need to get started. The platform will help match you with an investment pie that suits your circumstances, preferences, and goals.
And, M1 Finance will automatically maintain a proportional investment allocation.
You may also benefit from choosing M1 Finance if you want more control over your investments.
The bottom line is that M1 Finance offers the right balance between completely automated investment platforms and personally controlled and completely customized portfolios.
M1 Finance Is Best for New and Hands-Off Investors
You can make choices about the allocation of your funds. But, M1 Finance takes care of a lot of the work for you. You don’t have to spend all your time worrying about moving investments around or balancing your portfolio.
But, at the same time, you still get some say in how your portfolio gets structured and allocated.
Not for Super Active and Complex Trading
Unfortunately, M1 Finance tends not to be very suitable for active traders. If you’re a day trader interested in consistent investment trading, then you may want to look elsewhere.
M1 Finance is best for individuals who are interested in a passive investment strategy. You need to be OK with waiting for a trading window to allocate your funds.
When thinking about the merits of M1 Finance as an investment tool, keep in mind that it’s a low-cost platform.
There may be some downsides. Like the fact that it doesn’t offer TLH, but you can also get a lot of value from the platform. And, you don’t have to pay to use it.
For that reason alone, M1 Finance is worth a try.
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Andrew Fiebert is a thirty-something father of twins, data nerd, and has prior Data Engineer for Barclays Capital and iHeartRadio. He's spent the past six years growing this site into a multi-six-figure business with over 500 hours of free personal finance education that reaches over 1 million people every month. Andrew has a B.S. in Computer Science and has been featured in Quartz, Forbes, Business Insider, and The Telegraph.Current Project: Making bloggers money with Lasso.
