When you’re ready to begin investing, you usually have to make the choice between a robo advisor and a traditional broker. But what if you could have both? Find out if this robo advisor with a twist is right for you in our M1 Finance review.
Have you ever found yourself investing with a robo advisor and needing just a little bit more customization?
For example, maybe you just wanted to add one specific stock or ETF to your portfolio, but you couldn’t.
On the other hand, have you ever had an account with a more traditional broker and wished there was some way to add more automation and direction to your portfolio?
I’ve experienced both, which is why I was excited to learn about M1 Finance.
Although you may have never heard of M1 Finance, they’ve been around for about three years now. M1 Finance is a robo advisor with a twist–they offer some of the benefits that a traditional broker does.
Because they fall somewhere between a robo advisor and a traditional online broker, we’ve decided to go more in-depth on the company so you can determine if it’s a good fit for you or not.
In this M1 Finance review, we’ll discuss some of the key features, the pros and cons, some basic pricing information, and who the broker is best suited for. Let’s start with some of the most exciting features M1 offers.
M1 Finance Features
Investment pies are the foundation of how M1 Finance invests your money. These investment portfolios, known simply as “pies”, determine your risk tolerance for investing.
Based on Modern Portfolio Theory, these templates vary in their makeup and you customize your portfolio as much or as little as you’d like. You can choose pre-determined pies or pick your own investments for your pie. It’s basically a simple way of looking at asset allocation.
One of the nicest features in using pies is that M1 will maintain that asset allocation for you until you change it. This is a really nice benefit and avoids you having to constantly check and rebalance your portfolio.
When you sign up for M1 Finance, you’ll be given options to select a pre-built pie with as many as 100 different “slices” (a “slice” is simply a security–i.e., stock or ETF–in your portfolio). But again, you can choose your own investments and fill your pie with as many slices as you’d like (okay, now I’m getting hungry).
On the pre-built side, you can find pies that, for example, target a specific retirement date or focus on socially responsible stocks. If you want to build your own, you can choose from close to 2,000 ETFs or individual stocks.
One thing I found particularly cool is you can actually split your pie up between a pre-built section and a custom section. M1 really lets you get creative with your asset allocation.
M1 Finance just released a new feature for their account holders–M1 Borrow. This is a system that allows you to borrow up to 35% of the value of your portfolio at a very low interest rate–4%.
The benefits here are pretty solid. Compared to other types of loans like a HELOC or credit card consolidation loan, the M1 Borrow loan is quick and pretty cheap. There’s also no rigid timeline on when you have to pay it back, as long as you meet the qualifications to have the loan.
Since you’re using your investment portfolio as collateral, M1 won’t do a credit check, involve an application or loan officers, and you won’t be denied. To qualify, though, you need to have a taxable investment account with M1 Finance and have at least $25,000 in the account.
There are risks to taking a loan like this, though. Your loan is based on the value of your portfolio–so if that drops, your ability to borrow may as well. If you’re unfamiliar with investing, that increases the risk. Remember you may have to pay money immediately to get your loan back to that 35% of total value mark if your portfolio balance drops below a certain level.
I would definitely recommend speaking with a financial professional before taking a M1 Borrow loan, but as long as you know what you’re getting into and you can manage the repayment, it’s a great offering and would be an excellent option for consolidating things like student loans, HELOCs, credit cards, or even reinvesting in something.
Automating your finances is important. We all know that. But automation with investing is something that’s becoming a necessity. M1 Finance does a great job with automation in a few ways:
- Recurring investments. I love this feature because you can set an auto-deposit to occur whenever you want. That money goes into your M1 Finance account and becomes automatically invested for you, based on your pie.
- Automatic rebalancing. I mentioned this above, but to go a little further, M1 will make sure your deposits are intelligently allocated to the proper pie slices so you won’t stay out of balance with your targets. In the old days, you had to manually calculate this and determine how much to send to which piece of your portfolio. Now you don’t even have to worry about it–just set it and forget it.
- Tax efficiency. M1 uses what’s called “Tax Minimization” on all of their accounts by using a lot allocation strategy. What this does is automatically prioritize the sale of a security to be of the most benefit to you, from a tax-perspective. This allows you to reduce the amount you’ll pay in taxes for selling securities (automatically of course).
Is M1 Finance for You?
If you’re someone who is either new to investing or simply don’t have time to track all of your investments and don’t want to worry about every dollar every day, M1 Finance might be a great fit for you.
Because it’s like a robo advisor, you deposit money and tell M1 how you want to invest, and they’ll do the rest for you. I see this platform working very well for busy professionals, parents who don’t have the time to manage their portfolios, and people who want to save money by handling their own investments but don’t want the hassle of evaluating individual stocks (although M1 Finance also allows you to select individual stocks if you so choose).
On the flip-side, if you’re someone with a deep knowledge of investing and you subscribe to stock selection methodologies like value investing, this probably isn’t for you. Again, M1 Finance does give you the capability of selecting individual stocks, but its main value comes in simplifying the investing process. Overall, this is for someone who wants to set it and forget it.
M1 Finance Pricing
One of the best parts about M1 Finance is that there are no fees when you open an account and meet the minimum qualifications. And those qualifications aren’t steep either–a $100 minimum balance for a taxable account and a $500 minimum balance for a retirement account. This allows you to make trades with no commissions, which is a pretty sweet deal.
The downside to not having fees is limitations to the types of securities you can actually invest in. While you can invest in stocks and ETFs, M1 Finance does not offer options, mutual funds, bonds, CDs, forex, or futures. If that’s important to you, then avoid M1.
- Recurring deposits. A great “set it and forget it” feature, you can set up auto-deposits and M1 will automatically allocate it for you.
- No fees. Having no type of management or commission fees is a nice feature for an online broker. This alone can save you thousands of dollars over time. One thing to note–you’ll still pay the expense ratio of an ETF.
- No minimum deposit. Technically you don’t have to deposit a dime to open an account with M1 Finance. You may appreciate this for the fact you can open an account and go in to play around with the system before “committing”. Once you’re ready to invest you’ll need at least $100 ($500 for a retirement account).
- Flexibility in investment selection. Unlike some other robo advisors, M1 will allow you to customize your “pie” and add in your own stocks and ETFs. This added layer of customization will allow you to have more of a say in how your portfolio looks.
- Big selection of ETFs. Currently, M1 has a selection of close to 2,000 ETFs for you to choose from. You can add up to 100 “slices” in your pie.
- Cash investment. M1 doesn’t let cash just sit there and collect dust. Once your account reaches $10 in dividends, it’ll invest that money for you. You just have to set your maximum cash balance and M1 will take care of the rest.
- Fractional shares. This reminds me of my old-school ShareBuilder account, but M1 allows you to purchase fractional shares of a stock. What this means is if you deposit $500 and you buy a stock that costs $200 per share, you’ll end up with 2.5 shares with no cash left over, instead of 2 shares and $100 left over. That’s an over-simplified example, but it should help you understand the point.
- There is a learning curve. Other robo advisors take the decision-making almost entirely out of your hands. Some look at that as a benefit. M1 allows a lot of decision-making and customization, so there is definitely a learning curve to using their system.
- No recognition of other portfolios. Your overall asset balance will be weighted by what you have in your M1 portfolio. That’s fine if this is the only account you have, but if you have a 401(k) or accounts with other brokers, you can’t connect those accounts to M1 to see a more holistic view of your asset allocation.
- No professional advice. M1 Finance doesn’t have any licensed financial professionals available for you to speak with. While this may not seem like a big deal when you’re starting out, you may eventually want to talk with someone when your account reaches six figures. They do have customer service, but nobody who can help guide you in your investment strategy.
- Terrible for day traders. If you’re someone who likes to make multiple trades a day, stay away from M1. The way that M1 can keep their trading platform free is by only trading once per day at the same time through what they call batch trades. Because they’re moving such large volumes, it allows them to offer this for free. There’s also risk in this as you may not get the best buy or sell price due to timing.
M1 Finance Alternatives
To me, the best comparison to M1 Finance is Betterment. Betterment is slightly more expensive (because they do charge minimal fees), but they offer more options. Betterment has licensed advisors on staff for you to speak with if needed, for instance. They also don’t offer as much portfolio customization as M1 does, so that may be a pro for some and a con for others. You can read our full Betterment review to determine which is a better fit.
M1 Finance is an interesting broker. They are different than many other robo advisors and have some things to offer that others don’t.
If you’re looking for a low-cost way to start investing and you want to at least have the option of customizing your portfolio, M1 Finance is a great option. Make sure you’re okay with not being able to talk to a licensed financial professional, though. Also, due to the lack of investment options, you will be limited to ETFs and stocks (which is fine for some).