The world of investing is changing.
In the beginning, you had full price brokerages charging you an arm and a leg to make stock trades. Then came discount brokers who charge a few dollars a trade and mutual fund companies, like Vanguard, who help you invest in mutual funds for a song.
More recently, you have robo-advisors who help you, through technology, invest in the market for a small asset management fee.
Now there's something new – an investment platform that is part robo-advisor and part brokerage. It gives you the ability to set your portfolio while the service manages the portfolio on your behalf. Whereas with other robo-advisors you're investing in their asset allocation, with M1 Finance you set the “slices of the pie.” They make sure it all works.
Let's take a closer look.
About M1 Finance
M1 Finance was launched in 2015 and is headquartered in Chicago, IL. They're a registered broker regulated by FINRA, licensed to operate in all fifty states and three territories. They're legit.
Their offering is an investment service that's part robo-advisor and part investment broker.
You set your investment strategy through the creation of “pies.” You can think of them as templates for your portfolio. You can create pies yourself or use some of the ones the platform has available (you can't edit their pies, naturally). M1 Finance's pies are based on Modern Portfolio Theory (MPT), which is typical of robo-advisors. There are pre-built pies, with a lineup of securities, but you can also fill your own pie with your own selections. That will give you an opportunity to customize one or more pies based on your own investment preferences.
Once the pie is selected or created, it's fully managed by platform. That includes periodic rebalancing to make sure the asset allocation remains consistent with the target allocation for the pie.
Funds held with M1 Finance are held by Apex Clearing Corporation, which acts as the clearing firm and custodial bank for M1 and a variety of other brokers.
How M1 Finance Works
Once you sign up for the service, a pie with predetermined investment categories – referred to as “Expert Pies” – will be recommended for you. The referral will align with your risk tolerance and is designed to meet a particular investment goal. Each pie will have as many as 100 different components, or “slices”. Each slice can be an ETF, a stock, or even another pie.
M1 Finance has more than 60 Expert Pies that you can choose as a basis for your portfolio. You can then customize each pie, by including your own choice of stocks or exchange-traded funds. Stocks you select for a pie must come from either the New York Stock Exchange, NASDAQ, or BATS. Alternatively, you can even create your own pie portfolio, referred to as “Custom Pies”.
(M1 Finance does not permit the use of mutual funds in the construction of pies.)
In creating custom pies, you can select the securities in the pie. For example, you can set the target rate for each pie slice, which will be filled with a single stock or ETF. The percentage of the slice will determine how much stock or ETF shares will occupy that slice.
As you add money to a pie, M1 Finance will maintain the desired target allocations for that portfolio.
One of the factors that distinguish M1 Finance from other robo-advisors is that they don't require you to complete a questionnaire to determine your risk tolerance. Another is that you are able to purchase both individual stocks and exchange-traded funds (ETFs) in your account. Still another departure is that you can change your investment lineup at any time. This is very different from many competitors who determine a portfolio for you, and don't allow you to make changes.
Creating, Building & Maintaining Pies
You choose your portfolio by determining the stocks, funds and pies you will include in a given pie. Once you do, you'll set percentage allocations for each slice of the pie.
For example, let's say you want to build a pie based on the FAANG stocks. You choose to invest in Facebook, Apple, Amazon, Netflix and Google. You can simply allocate 20% to each stock in the pie. Alternatively, you can come up with a different mix, say 40% in Amazon, and 15% in each of the other four stocks.
You can establish pies based on certain market sectors, such as technology, energy, or socially responsible investing. Those pies can either be Expert (predesigned) or Custom (self-built). You can create an unlimited number of pies.
Once you establish a pie, you can fund it periodically or even establish recurring deposits, such as $100 per week. When you increase funding for a pie, the portfolio will be automatically rebalanced.
M1 Finance uses a tax lot strategy when selling securities. This helps to reduce the amount of taxes you'll pay as a result of capital gains.
When you make a withdrawal from your account, the M1 Finance algorithm determines which securities to sell. They'll be prioritized based on the following sequence:
- Losses that offset future gains.
- Lots that results in long-term capital gains (to get lower tax rates on long-term capital gains).
- Lots that results in short-term capital gains (done as a last resort, since these gains are taxable at ordinary tax rates).
When you open your account, you can determine in advance how much money will be held in the cash portion. Any amounts in excess of the limit you set will automatically be invested. This is to minimize the cash drag of having on investment funds.
M1 Finance Retirement Accounts
M1 Finance offers traditional, Roth, rollover, and SEP IRAs. IRAs require a minimum initial investment of $500. If you need to do a rollover, either from a 401(k) plan or 403(b) plan, or from an external IRA, M1 Finance offers a concierge service with advisors who will handle the entire process for you.
SEP IRAs are commonly used by small businesses to provide for retirement plans both for the business owner and employees of the business. However, SEP IRAs with M1 Finance are only for the business owner. The platform cannot accommodate participation by employees of the business.
M1 Finance Features and Benefits
Here are the basics of M1 Finance:
- Minimum initial investment: $0 to open an account, but you will be required to have at least $100 to begin investing.
- Available account types: Individual and joint taxable accounts, trusts, and traditional, Roth, rollover and SEP IRAs.
- Advisory fee: None! The service is free to use. They don't even charge commissions on trades.
- M1 Finance Referral Program: M1 Finance will give you $10 to invest for each friend you refer who signs up for the service. You can do this by generating a unique link on the M1 Mobile App that you can share with friends by email, text, or social post. Your friend will also get $10 to invest.
- Mobile Access: M1 Finance is available for iOS and Andriod apps.
- Automatic dividend reinvestment: Takes place once dividends received reach a minimum of $10.
- Account protection: Funds held with M1 Finance are covered by SIPC for up to $500,000 in cash and securities, including up to $250,000 in cash. This coverage protects against broker failure, not losses due to declines in market value.
- Customer service: Available Monday through Friday, 9:00 AM to 5:00 PM, Central time.
- Tax information exporting: M1 Finance integrates directly with both TurboTax and H&R Block.
- M1 Borrow: This is another feature unique to M1 Finance compared to other robo-advisors. M1 Finance allows you to borrow up to 35% of the value of your portfolio for any purpose. Your credit will not be checked, and you will not be declined. Once you borrow the money, you can pay it back on your own schedule. You can use the money to make a major purchase, like buying a car, or to refinance existing debts – or any other purpose you choose. As of August 1, 2018, the interest rate is 3.75%.
How to Open an Account with M1 Finance
To open an account, you must be either a US citizen or a permanent US resident (green card holder). You must also be over the age of 18, with a current US mailing address.
You begin the process by entering your email address and creating a password. You'll then be asked to provide the typical information requested in establishing any type of financial account. This will include personal information, like your name, address, and phone number.
Once your account has been established, and you've chosen your pies, you can link an external financial account to your M1 Finance account. This will enable you to move money into the account, or withdraw it electronically. A large number of financial institutions are included in the application process. But you can add any that are not, by including the name of the institution, the type of account, and your account number (or bank routing number, if applicable).
M1 Finance Pros and Cons
- M1 Finance charges no advisory fee, and no commissions for trading.
- The platform combines automated investment management with individual security selection.
- You can open an account with no money, and begin investing once you have at least $100 ($500 for IRA accounts).
- Fractional shares – since you will include individual stocks in a pie, M1 Finance enables you to purchase fractions of shares, rather than whole shares. This enables you to fully diversify a pie even with a small amount of money.
- The ability to borrow money against your account at interest rates that are well below market rates.
- There is no ability to invest in mutual funds.
- M1 Finance does not offer tax-loss harvesting, which is becoming a common feature on many robo-advisors.
- M1 Finance is not a trading account (but it's not meant to be).
Should You Open an Account with M1 Finance?
If you've been fascinated by the idea of robo-advisors, and their ability to manage your investments for you – but you don't like giving up the idea of choosing your own investments – M1 Finance is the investment platform for you. You choose the investments you will make, consistent with self-directed investing, and the platform handles the mechanics of managing your portfolio. It's the perfect blend between robo-advisor and self-directed investing.
You can open an account with no money at all, and fund it with payroll deposits. And best of all, it will cost you absolutely nothing to invest.