This M1 Finance review was last updated on 04/25/2018. Updated with the two latest announcements. Buy/sell individual securities/pies and cash controls.
We learned of some game-changing news in the online brokerage industry recently. One of the most innovative modern online brokers in the space, M1 Finance, announced they have eliminated all fees for all investors. So I wrote this M1 Finance review to introduce readers to the platform and share my experience so far.
M1 Finance is now the top no-fee investing platform designed for long-term investors. The move puts more pressure on the larger established brokers like Fidelity and TD Ameritrade and gives Robin Hood a serious run for its money.
I’ve been active on the platform since November 2017 (see screen-shots from my actual portfolio below). While it’s different than a traditional brokerage in the way you interact with it, it’s more intuitive for beginners. Now that fees are gone, it’s the perfect place to dollar cost average into both individual stocks and index ETFs (all varieties).
You can start investing with just $100 dollars. It’s available for both desktop and mobile app.
How M1 Finance Works (Easy as…)
M1 Finance was started in 2012 by a 25-year-old Stanford graduate named Brian Barnes. He couldn’t invest the way he wanted to on existing platforms. So he created his own and assembled a team of experienced securities industry executives to launch it.
Instead of a traditional brokerage where investors buy and sell and pay a commission for each trade, M1 Finance has you create “Pies”. A Pie is simply a group of individual stocks or ETFs.
With Pies, you choose your investments as “slices”, then allocate a percentage of your total portfolio toward each slice.
When you deposit cash into your account, the platform automatically allocates your money based on how you’ve set up your Pie.
Here’s a brief introduction video:
Customizing Your Pie
You can build your own portfolio from scratch adding as many stocks or ETFs as you like. Or create sub-Pies if you choose, and add those to your main Pie portfolio.
The Discover tab empowers you to search and filter to find the right stocks or ETFs (more than 1900 ETFs available at the time of writing). Or choose from Expert Pies crafted to meet particular goals or investment themes including income earning, socially responsible, industry or sector, and hedge fund following portfolios.
Chose your perfect strategy and modify any time you wish.
To keep costs low, M1 Finance utilizes batch trading, meaning that all its trades are executed in a big batch transaction once a day. Fractional shares are OK. Because of the batch processing, this is not a platform for day traders.
M1 Finance is often called a robo-advisor because of two special features. The platform intelligently rebalances your portfolio every time you deposit money. Or you can rebalance your portfolio at any time with the click of a button. Add or remove investments as you please.
There’s also a Tax Minimization feature built in which chooses the highest cost share lots when you decide to remove a holding from the Pie (sell), ideal for tax-loss harvesting.
My First M1 Finance Pie
M1 Finance uses pie visualizations to help investors better understand their investing strategy.
Below is a look at the first Pie I created with my account last month. I built a simple portfolio consisting of:
- 50% Vanguard Total Stock Market Index (VTI)
- 50% A Pie called “Five Stocks” containing five individual slices (stocks), equally weighted
The five stocks are in their own sub-Pie, and that sub-Pie is part of my main portfolio Pie. Here’s a screenshot of my portfolio:
Now take a look at the Five Stocks Pie within the main portfolio:
For the five stocks, I chose mostly companies that have long been on my “must own” dividend watch-list that I’ve never pulled the trigger on.
Each stock is weighted at 20% inside the Five Stocks pie. But when combined with VIT, each accounts for 10% of the overall portfolio.
The final allocation when I finalized my portfolio was this:
- 50% Vanguard Total Stock Market Index
- 10% Altria Group (MO)
- 10% Cardinal Health (CAH)
- 10% Ross Stores (ROST)
- 10% Starbucks (SBUX)
- 10% Visa (V)
Below is the more traditional Holdings view. Price fluctuations have skewed the weightings.
My first Pie only scratches the surface of what is possible on the platform for this M1 Finance review. These Pies can hold many more holdings. For example, you could make a Pie that contains all the Dividend Aristocrats, and make that just 20% of your main portfolio. Then add whatever else you want to the remaining 80% of the portfolio.
Supported account types include Individual, Joint, Traditional IRA, Roth IRA, SEP IRA, Custodial, LLCs, Corporations, and Partnerships. M1 Finance accepts transfers from outside individual brokerage accounts, IRAs, and 401(k) rollovers.
What Happens When You Add More Funds?
With M1 Finance, you can add new funds ad hoc or automatically on a set schedule. This is perfect for dollar cost averaging and they’ve made it super easy. Schedule new deposits weekly or monthly on any day.
Automatic rebalancing is built into the platform.
Every time new money is deposited into the account either through new deposits or dividends, the platform will direct those funds appropriately into underweighted slices. This brings the underperforming slices up to the set allocation levels of the Pie.
As the size of each slice changes over time due to normal market drift, the investments remain properly balanced through this automation process.
You can always modify the Pie allocations or add new or remove slices.
You must hit a minimum threshold of $10 in cash before the next batch purchase. So if, for example, you receive a $5 dividend, it will sit idle until you receive another $5 or more. Once it hits $10, the purchase is made according to your allocation.
There are a few options to manage your cash including a setting to turn off automatic investment on the Funding/Overview tab.
Looking at my Five Stocks Pie, Ross Stores rose almost 20% since I made the first purchase. The next time I add money, the portfolio will add less to Ross Stores and more to the other stocks to rebalance the Pie.
Or I can manually rebalance at any time.
To initiate a manual rebalance the portfolio, you simply click the Rebalance button then choose either the Waterfall or Single method. The Waterfall method rebalances the entire portfolio back to your original percentages. Single is only the top level pie.
Can You Buy or Sell Individual Holdings on the M1 Finance Platform?
As of April 25, 2018, yes, M1 Finance customers can now buy and sell individual securities within your portfolio. A new button was added next to the Rebalance and View Details. See the image below.
Now you can choose to buy or sell an individual stock or pie piece outside of your regular allocation. They’ve designed this feature to be smooth and easy. Just click the button and make your selection.
After you’ve bought or sold an individual position or pie, subsequent deposits will be allocated to your portfolio’s percentages in the normal way. But there’s another new feature to help put more control on your cash balance.
What’s really cool about this feature is they’ve also added a new capability to the Funding tab. You can now hold cash in your account without automatically making purchases upon the sale of a security or new deposit.
So when you want to make a single purchase or wait to make a large purchase, the money is there in cash. You can also use this as an opportunity fund to wait for lower valuations. Cash on hand does not earn interest.
The new features are available on both desktop and mobile.
What Happens When You Remove a Holding or Withdraw Funds?
When you eliminate a holding from your pie, the system sells the security during the daily batch processing. You’ll see the slice of the Pie go away. But in the background, the platform is making a normal sale where the cost basis is recorded and reported to the IRS.
The M1 Finance platform has also built in a Tax Minimization algorithm to your account. Here’s how it works.
The system uses a lot allocation strategy when selling securities to help reduce the amount owed on taxes… automatically.
When you request a withdrawal from your account, the algorithm knows which securities to sell based on your allocation percentages. Then instead of using the normal FIFO (first in, first out) order of sale, the algorithm prioritizes the sale of lots 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.
This helps to minimize your tax liability when removing a holding or withdrawing money. But this should not be confused with tax-loss harvesting that you’ll find at more established robo-advisors.
One thing to keep in mind with an investing platform like this is the more active you are and more changes you initiate, the more consequences you’ll have at tax time.
For example, if you create a Pie with 50 Dividend Aristocrats in 2017 and remove half of them in 2018, you’ll need to report 25 sell transactions on your tax return. This is OK, but it can cause a bit of extra work for you at tax time.
I haven’t changed the Pies in my portfolio or gone through tax season with this account yet. But I was assured by customer service that M1 Finance has seamlessly built this into the tax reporting system so it should be very straightforward.
Just watch out how big and complicated you make your Pies to avoid tax time headaches.
M1 Finance Mobile App Review
M1 Finance is completely accessible both through a PC desktop and dedicated mobile App. When you sign up for M1 Finance from your phone, you’ll be immediately directed to the app stores.
The user experience is very similar on mobile. Here are some screen-shots to get acquainted. These screenshots are taken from my personal account in February 2018. Since opening my account in November 2017, you can see the increases in values.
First are the three main Portfolio views when you sign into the mobile app:
Below is the third Portfolio view followed by the Market Overview and Discover views:
Lastly, I’ve included screenshots of the Holdings view followed by the My Pies/Target view which is where you can select or adjust your allocation percentages.
M1 Finance Review Cons
Before yesterday, I would have told you that the fee structure was the biggest con. They used to charge 0.25% on accounts with assets of $1,000-$100,000 and 0.15% for accounts with assets over $100,000. Accounts with less than $1,000 were free.
Now that’s in the past. M1 Finance is FREE.
The biggest con now is that it takes a little bit of time to acclimate to Pie investing. Experienced investors may not like this kind of interaction. You can’t simply buy or sell like you’re used to. DRIP (dividend reinvestment plan) investors or former Loyal3 customers will feel more at home, but with far more capabilities.
Also, the once-a-day batch trading process does not allow for real-time pricing. As I mentioned, this platform isn’t for frequent traders. There are no market or limit orders. Just the batch sales and purchases. So you won’t know what price you get until the trades are complete.
How Does M1 Finance Make Money?
Since the product is free for customers, how does M1 Finance make money? According to the CEO Brian Barnes, the larger brokers make less than 30% of revenues from trading fees. That means more than 70% of revenues come from other sources.
A few other sources bring in revenues for M1 Finance. Brokers can lend shares to investors looking to sell shares of a company short. M1 Finance collects a modest fee for lending out shares to short sellers.
The company also earns interest on cash balances. Over many customers, this amount can be significant and should grow as customers grow and place holds on cash.
Lastly, margin lending is a big opportunity in the future. Investors will be able to borrow from their securities account to help with monthly cash flow needs or for short-term investing purposes.
Since M1 Finance is a new lean company with modern technology, they are free of bloat that can affect a larger organization. The company is taking an incremental approach to growth to gain customers and momentum in a controlled manner.
M1 Finance Review – The Future of Personal Finance is Free
The announcement yesterday is a BIG DEAL for investors looking for a no-fee alternative to their primary brokerage or a replacement for trading-based Robin Hood.
M1 Finance is for long-term investors, not traders, which makes it very good for both dividend and index investors.
Here’s some cool insight from the Founder Brian Barnes:
After all, personal finance is largely free now. Most people’s personal finances revolve around the checking account and the credit card, which are typically free and often even incentivize use through interest, points, or cash back. The investing account is the final component of personal finance to go free.
Now that the platform is built, M1 Finance believes they can make plenty of money through the back channels of the securities industry. More from Founder Brian Barnes about making money:
Brokerages make money via lending securities they hold, interest on cash held in a brokerage account, extending credit through margin to customers, and getting paid for distributing certain funds or to transact on various exchanges. These revenue streams are more than enough to support a strong, vibrant company.
This is also true at M1, and we will make more money from transactions and holding the assets than we would from our fee. The number one driver of M1’s success over time will be the number of users and assets managed. If going free puts M1 in more people’s hands and empowers them to manage more of their money on the platform, the move to free is a win-win.
The company has indicated more revenue producing features will be added in 2018. Perhaps margin and a cash position that can earn them interest are in the pipeline. But the core investing platform will be free going forward. Here’s the full manifesto.
They believe that most investing tools will be free in a matter of years. Since they’ve built their platform with this in mind, their cost structure is dramatically lower than the legacy brokerages.
M1 Finance is the future of investing, today.
M1 Finance Review
M1 Finance is now free making it a top online brokerage. The user experience takes some time to get used to. But once you get the hang of it, it’s ideal for long-term investors who like to dollar cost average into stocks and ETFs.
Thanks for checking out my initial M1 Finance review. I’ll add to this review as my experience on the platform ages. As always, if you have any questions about the platform, please leave your comment below or contact me privately if you prefer.
Disclosure: Long VTI, CAH, V, ROST, MO, SBUX, BRK-B
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