Pros: Where M1 Finance stands out
Automated investing and investing pies
The real draw for investors at M1 Finance is the ability to set up an automatic investing plan and then have it run the way you want. It’s like having your broker run your financial plan on your behalf, and you can kick back and do something you find much more meaningful. It may be a great choice for those who want to build their own custom portfolio and then let it ride.
Unlike a robo-advisor, which builds a portfolio for you, M1 Finance lets you select what you want to invest in. You create a “pie” – think pie chart – with the investments that you want. Your pies can consist of thousands of stocks or ETFs available on the platform, and you can weight the slices in your pie however you like. You can create multiple pies for different strategies even. It's useful to know what you want to invest in, because you’re basically on the spot to pick your slices.
If that’s a bit too daunting, you can select from professionally created pies. Turn to a general investing pie, for example, and select one that fits your risk tolerance (conservative, moderate, aggressive and others). M1 helpfully shows the returns of these pies (over the last one, three and five years), shows the funds that comprise the pie and explains what the specific pie hopes to achieve. So even newer investors can select a pie that fits their needs. These general investing pies are typically constructed with funds from Vanguard, so they’re low cost.
You’ll also be able to select from expert pies that include socially responsible investing, dividend and income portfolios, a basic stock-and-bond blended portfolio, a target-date portfolio for retirement planners and pies that mimic popular hedge funds, among others. In each case, you’ll see the longer-term returns of the pies and their objectives, so that can help you gauge your selections.
Once you’ve selected what you want to invest in, you can set up auto-invest and buy your pies automatically. If you want to buy individual stocks or funds in your portfolio, you can turn off auto-invest at any point and simply buy any stock or fund that’s in one of your pies.
In order to reduce its costs, M1 places trades during a “trade window” each day. The morning trade window begins at 9:30 a.m., so you’ll need to have your order in before that to have it executed that trading day. You may also have access to an afternoon window starting at 3 p.m if you’re a member of the M1 Plus program (more below).
It won’t take a lot to get started investing. You’ll need $100 in a taxable account of $500 in a retirement account to get going. And M1 Finance allows you to buy fractional shares, so you’ll be able to get fully invested with your money.
You’ll get all these features in the standard plan with no commission or trading expense. However, if you’re invested in funds, you’ll still have to pay the fund’s management expenses.
M1 Plus
While anyone can sign up and access M1 Finance’s standard plan for free, the robo-advisor really packs in the extra features with what it calls M1 Plus, its upgraded plan at $125 a year. (However, you may be able to get a free year of M1 Plus when you sign up for the program.)
Here’s what that annual fee buys you:
- An extra afternoon trade window (in addition to the morning window)
- Custodial accounts
- Smart transfers (more below)
- Margin loans at a discounted rate
- 1 percent interest on the balance in your cash management account
- 1 percent cash back on your debit card purchases
- Up to 4 ATM withdrawal fees reimbursed monthly
- All international fees reimbursed
Depending on how you actually use your account, that extra fee may be worth it for you. But some features such as reimbursed ATM fees are available at other robo-advisors for free.
Smart transfers
Smart transfers are M1’s way to help you automate your financial life. You can set rules and allow your account to act automatically. For example, you can set smart transfers to keep a minimum balance in your cash account and move the rest of your money over to invest.
You could set up your account to take out a margin loan if your cash account drops too low, or you could move cash to several different accounts, a taxable account and an IRA, say. You can also set them up to move money from one savings goal to another. The point is, you’re able to automate so much of your financial life that you won’t even need to think about it any more.
It’s a cool feature, for sure, and rivals such as Wealthfront have rolled out similar features. But if there’s a downside, it’s that you have to be a member of M1 Plus to avail yourself of this perk.
Rebalancing
While M1 doesn’t automatically rebalance your portfolio, you can click a rebalance button to get that done. It’s worth noting that this move may create tax liabilities, since you’ll be selling some positions to buy others. But absent a rebalance order, your auto-invest program will add money to your underinvested stocks and funds, helping you to rebalance without the tax issues.
Margin loans
M1 Finance offers you the ability to access a margin loan, and it’s what the robo-advisor calls M1 Borrow. What makes the plan a superstar is that the interest rate is so low. Crazy low.
In its basic plan, the robo-advisor charges just 3.5 percent – near the high end of the range compared to the portfolio line of credit offered at Wealthfront, (attractively low in its own right). But if you’re part of M1 Plus, the robo-advisor drops its rate to a mere 2 percent. That’s truly hard to beat.
And you won’t need $25,000 (as you would at Wealthfront) to access a margin loan. At M1, you’ll need just $5,000 to take out a margin loan, and you’ll be able to tap the account for up to 35 percent of your account’s value. This line of credit is available in taxable accounts.
Like other margin loans, M1’s margin loan has no fixed repayment schedule, and as long as you have an outstanding balance you’ll accrue interest expenses. However, if your account value declines, you may be on the hook to replace the borrowed money, depending on the equity in your account and how much you’ve borrowed. Again, this is standard for margin loans.
So this feature allows you to remain invested and be able to tap your funds, when needed, at a low interest rate. If you’re thinking about going with a broker instead, Interactive Brokers offers a low margin loan rate without having to buy in to a specific plan, like M1 Plus.
Is the extra fee for M1 Plus worth it for the interest savings? While the annual fee of $125 does get you some other perks, let’s assume the lower cost of margin is what you’re really after. You’ll start to break even on margin expenses with an average outstanding balance of $8,333 over the course of a year. You’d need an account of nearly $24,000 at max leverage to break even.
But M1 Plus does get you some other features, as mentioned above, that may draw you in.
Cons: Where M1 Finance could improve
No advisory services or financial planning
While this review has spent a lot of time discussing how M1 Finance is like a robo-advisor, it’s necessary to mention that it is not a robo-advisor, nor does it employ financial advisors to work with clients. In this regard, it’s more like a traditional broker. And that means it doesn’t offer real financial planning to help you meet goals, for example. It lets you mimic professional portfolios or helps you design your own, but planning how your money fits into your life is up to you.
If planning is important to you, check out Betterment or Ellevest, both of which offer robust services. They also offer access to advisors, though it costs more than the standard service.
No tax-loss harvesting
M1 Finance does not offer tax-loss harvesting on its accounts, which is too bad, since so much of the rest of the account feels automated. Tax-loss harvesting involves selling losing investments to help offset any gains and reduce your overall taxes. It’s a standard feature among the top robo-advisors, and both Wealthfront and Betterment offer versions of it.
What M1 Finance does offer, however, is what it calls tax minimization. This process involves reducing your tax burden by categorizing your investments by their tax effects and then, when you sell a specific stock or ETF, prioritizing those that minimize your tax burden. It’s not tax-loss harvesting, but it can reduce your taxes at the margin.
Cash management account
The cash management account here – what the company calls M1 Spend – is nothing special, particularly when put side-by-side with other cash accounts at rival robo-advisors.
The basic cash management account gives you a debit card, FDIC insurance up to $250,000 and one ATM fee reimbursement per month. You’ll also pay international fees at a very low rate, if you spend in foreign countries. And there’s no minimum balance fee.
As mentioned above, M1 Plus gets you a few extras, including some cash rewards for spending, interest on your cash balance, early direct deposit and more ATM reimbursements, among other things. These alone won’t justify the fee, especially as rivals charge little or nothing for similarly robust cash accounts.
For example, both Betterment and Wealthfront allow you a no-cost cash account, even if you’re not investing there. You’ll get a smidgen of interest, no monthly minimums, fee-free ATMs or reimbursed ATM fees. Wealthfront and Cash App both offer direct deposit up to two days early.
Bottom line
M1 Finance is going to feel like the metaphorical chocolate and peanut butter mash-up for some clients, offering a great combination that perfectly suits their tastes.
- The flexibility to design your own portfolio and the ability to use model portfolio pies will offer the best of both worlds.
- M1 Finance can automate much of your financial life, not only in your investing portfolio, but also in your cash management and spending, with its M1 Plus option.
- However, M1 Finance does not offer a lot of guidance and planning when it comes to investing, so investors need to be more of a do-it-yourselfer.
Investors who think they need more professional guidance on creating a portfolio should look at Wealthfront and Betterment, both of which can structure a portfolio while giving you some flexibility to invest in areas that you want. Those leaning toward a full-brokerage experience should investigate Interactive Brokers, Schwab or Fidelity for total investing freedom.
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