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M1 Finance Review: Is it Really Free to Invest?

M1 Finance is my favorite low-cost investing platform but there are a few drawbacks to the website

It’s been just over four months since I started using M1 Finance for our 2019 Stock Market Challenge and I wanted to update you with a review of the investing platform. I love the no-cost investing platform but there are some things new users need to watch.

Overall, I would recommend M1 Finance for any investor, beginner or more experienced. It doesn’t work well for day trading but I don’t recommend trading for most investors anyway so it’s not really an issue.

I’ve got investment accounts on seven platforms and recently created a video on the top five investing sites in different categories from low-cost to best for stock market research. M1 Finance won in the low-cost category, because no-cost is about as low as it gets, but check out the video to see which platform is right for your investing needs.

m1 finance reviews

How is M1 Finance Different from Other Investing Sites?

M1 Finance combines a lot of the benefits we’ve seen on other sites but have never gotten in a single website. Most investors will be immediately attracted to the platform on its no-cost trading for stocks and funds.

You can buy, sell and rebalance any stock or your entire portfolio on M1 Finance at no cost. You’ll pay annual management expense on any exchange traded funds (ETFs) you own in the portfolio but that’s it. It costs nothing to start investing.

In fact, that was what drew me to the investing site initially. I was looking for a no-cost platform to start our 2019 Stock Market Challenge portfolio. I knew I would be buying and selling more often than I normally do in my own long-term portfolio on Ally Invest so I didn’t want the trading fees to eat into returns. Opening an account on M1 Finance meant I could buy and sell stocks in the portfolio without worrying about losing all our returns on fees.

When you’re trying for stock market returns and competing for those gains, fees are a killer!

Best Dividend Income Stocks for 2019
My 2019 Dividend Portfolio on M1 Finance already up 24%

I also looked at Robinhood for this purpose, a very popular no-fee investing site, but Robinhood doesn’t offer a retirement account option. Since I was going to create a dividend portfolio with cash yields above 4% annually, it was critical that I be able to open an IRA or Roth. By opening a Roth account on M1 Finance, I’ll collect the dividends and won’t owe taxes on them at the end of the year.

Having to pay taxes on your dividends and capital gains each year is the second biggest killer of returns, next to fees!

Another feature that I wasn’t even aware of when I opened the account but am glad it’s available is the ability to buy fractional shares. That means I can buy shares of a company even if I’m investing less than the full price of one share of stock.

For example, I started the challenge with $1,000 in the portfolio and selected 10 dividend stocks for about $100 in each. Without the ability to buy fractional shares, I wouldn’t have been able to buy any stocks with a price of $101 or more. In fact, I wouldn’t even have been able to buy one share of Amazon at $1,911 per share for the entire portfolio!

With fractional shares, you tell M1 Finance how much you want to invest in any stock and it will put that much in your portfolio. If you invest $100 in shares of Amazon, you’ll have 5.23% of a share in your portfolio.

The final feature M1 brings to the table, and another reason I recommend it to all long-term investors, is complete investing automation. You can set M1 Finance to automatically invest any cash above a certain amount into your portfolio, across every investment you own.

Even better for long-term investors, you can rebalance your portfolio with one click and the platform will redistribute money according to the percentage you want in each stock or fund.

Let’s look at an example because this is one of the most underappreciated features on the platform.

Let’s say I start with just three funds in my portfolio; a stock fund (65% of my portfolio), a real estate investment trust (25%) and a bond fund (10%). This very simple portfolio gives me good exposure to three asset classes and not too much an stocks in case there’s a crash.

how to use m1 finance to rebalance

But what happens after a ten-year bull market? The stock fund has zoomed higher by 134% while the real estate fund has produced a 48% return and the bond fund has remained flat except for the dividend yield.

If I did nothing with my portfolio, I would now have 76% of my investment in the S&P fund with 19% in real estate and just 5% in bonds. I’m glad the stocks did so well but a stock market crash could wipe out nearly everything I gained and I’ve got almost no protection in real estate or bonds.

m1 finance review of features

With M1 Finance, I can simple click the ‘Rebalance’ button and my money would be redistributed back to the original percentages. The platform would sell some of the stock fund and buy in the other two funds, all at no cost to me.

I’ve essentially taken some profits from stocks and spread my risks back across the three asset classes.

Learn more about M1 Finance and get started today

Is M1 Finance Really Free?

The first question I get from most investors is, “Is M1 Finance really free? How do they make money if there are no fees on investing?”

It’s a legitimate question and you’re right to be skeptical. No investing platform is set up out of the goodness of the founders’ hearts. They have to be making money somehow. Understanding how M1 Finance can be free for investors means understanding how platforms are operated.

All investing platforms make money by lending out shares held in accounts to short-sellers. These are the investors that borrow shares to sell, hoping the price will go down. Then they can buy back the shares to cover their borrowed ones at a profit.

Investing sites earn fees and interest on these borrowed shares from short-sellers. It keeps track of which portfolios have lent the shares out and which have borrowed. It doesn’t affect your portfolio and every website, fee and no-fee, does it to make money.

M1 Finance also makes money on any uninvested cash sitting in your account. The automatic investment feature is great but it doesn’t reinvest your money until the cash balance is over $10 or until you deposit money. That enables M1 to earn a little interest without it costing customers anything.

Finally, M1 also makes money on its new M1 Borrow feature. For accounts above a certain amount, you can borrow up to 35% of your balance at a rate of 3.75% annually. Some investors reinvest that money into their account while others take the money for other purposes. Either way, the platform earns a return on the borrowed funds.

So you see, it is possible for an investing platform like M1 Finance to offer completely no-cost investing while still making money.

How Does M1 Finance Work?

Investing on M1 is pretty much the same as on any other platform. You choose up to 100 stocks or funds for your portfolio. On the platform, these are called ‘pies’ and represent a slice of your portfolio.

how does m1 finance work

You then tell the platform what percentage of your money you want in each; i.e. the percentages in our example portfolio above. You can always have more or less than these percentages in each investment if you want. The percentage targets just make for a benchmark for one-click rebalancing if you use the feature.

Once you’ve made your selections, M1 Finance will automatically invest your money across the stocks or funds in the amount you designated.

For a professional portfolio and without the stress of picking stocks yourself, M1 Finance also offers selections of its own. The platform separates its professional portfolios into eight categories, each with different portfolio choices you can use for your account.

  • Diversified Investing – offers investment choices based on your specific risk tolerance and investing needs.
  • Retirement Planning – offers target date retirement options designed for your age and needs.
  • Responsible Investing – offers options for socially responsible investing.
  • Income Earners – offers portfolios based on dividend income and high-yield investments.
  • Hedge Fund Followers – invests in stocks and fund strategies used by hedge funds and portfolio managers.
  • Industries and Sectors – offers options to invest in specific parts of the economy.
  • Stocks and Bonds – builds a portfolio on just two funds for stocks and bonds.
  • Other Strategies – offers additional strategies for one-click investing.

Click to check out the professional portfolio options on M1 Finance

You can combine ‘pies’ investing in stocks or funds from different options or buy and sell whenever you like. The professional portfolios selection is nice for beginner investors though experienced investors will mostly want to pick their own stocks.

Once your account is set up, any new deposits or if your cash balance reaches a certain point, the platform will automatically invest it across the portfolio.

The biggest drawback to M1 Finance, what I don’t like most about the platform, is that it only carries out buying or selling once a day. That means you might tell the platform to buy or sell at anytime but your investment will only be made at that particular point, starting at 9am and going until all trades are made.

It’s not a big drawback for long-term investors because a few hours really doesn’t matter. This is how M1 Finance is able to offer fractional share investing, because it lumps orders together to buy and sell. It’s why the platform doesn’t work for day traders though, because you don’t have that immediate execution you get on some other platforms.

M1 Finance Features and Tools

I’ve actually covered most of the features on M1 Finance already.

  • No-cost investing
  • Automated investing of cash and deposits
  • Professional portfolio selections
  • M1 Borrow at just 3.75%
  • Regular and Retirement accounts available

A few of the features we haven’t covered include market news, the stock screener and watchlist. The platform also offers SIPC coverage up to $500,000 in case the broker fails but this is standard across almost all platforms.

The market news and research available is enough for most beginner investors. In fact, most people would do well to ignore stock market news and just invest in a simple portfolio. For experienced investors or anyone wanting deep research into individual stocks, the platform leaves a little wanting.

Part of the downside to no-cost platforms is you won’t find free research from other firms or much in the way of analysis. For this reason, I haven’t transferred all my money into my M1 Finance account and still keep accounts on Ally Invest and ETrade.

Pros and Cons of M1 Finance

No investing platform is perfect but M1 Finance definitely checks a lot of the boxes. With fees being the single biggest limit to investor returns, the no-cost investing alone makes it a strong competitor. The easy one-click rebalancing and retirement account options makes it a clear choice over some of the other no-fee platforms and the few drawbacks won’t be an issue for most investors.

Pros of M1 Finance

  • Truly no-cost investing with automated investment and rebalancing
  • Professional portfolios available or choose your own
  • Regular and retirement account options available
  • Borrow on your account at just 3.75% up to 35% of your portfolio

Cons of M1 Finance

  • Limited trading window each day makes it a non-starter for day traders
  • No mutual funds available, though there are 2,000+ ETFs available

Should You Use M1 Finance?

I recommend M1 Finance to most investors that ask. Just on the no-cost option, it will save most investors thousands of dollars. The availability of retirement accounts will save you on taxes every year and no other platform makes rebalancing as simple.

Get started with M1 Finance today and get bonus cash on your account

Traders or investors looking for more research will need a different platform but for just about all others, M1 Finance gives you some of the best features you’ll find and on one website. The platform offers everything a long-term investor could want and with no-costs or commissions to eat away at your returns.

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