M1 Finance Review: Keeping You Invested For Free

The single most popular trend in investing today is passive investing. Most people associate passive investing with low cost, broad based index funds like those you can purchase at Vanguard. But can you be a passive investor with a more complex strategy? M1 Finance thinks you can.

Their innovative investing platform brings together the best of “behavioral alpha” and low cost brokerages to help users invest with confidence.

If your investment strategy includes individual shares and low cost ETFs, you’ll be hard pressed to find a better investment tool than M1 Finance. 

In fact, we've had M1 Finance on our list of the best brokers to invest at this year, and they are consistently mentioned by our readers as one of the best places to invest. 

Here's our review.

Intersection of Behavioral Finance and Portfolio Theory

In his book Nudge, behavioral economist Richard Thaler, “people have a strong tendency to go along with the status quo or default option.”

Humans need a good default option, or we’ll make bad decisions. This is especially true in investing. It’s easy to have great investing intentions, but fail to follow through on them.

M1 Finance addresses this concern. Their low cost investing platform allows you to set up your ideal portfolio, and automate contributions to the portfolio. Once your default is set, you don’t have to think about it again.

But the platform does more than automate investing. It automates efficient rebalancing. Modern portfolio theory posits something called the “efficient frontier.” The efficient frontier is where you maximize your returns while minimizing portfolio volatility. If you have a higher tolerance for volatility, then you can see higher returns in the long run… as long as your portfolio is on the efficient frontier.

The key to keeping a portfolio on the efficient frontier is regular rebalancing. That means buying the asset class that is underweight and selling that class that is overweight. “Buy low, sell high” is a shorthand way of saying rebalance your portfolio. M1 Finance does that for you automatically. M1 Finance doesn’t hold any money in cash, so you don’t lose any time being invested in the market.

As an investor, you set your ideal portfolio structure. This can include individual stocks, ETFs, Bonds and more. If you can buy it on the New York Stock Exchange, you can put it in your portfolio. Then, every time you add money to your portfolio, M1 Finance automatically buys the most underweight asset. Every time you sell, they automatically sell the most overweight asset.

M1 Finance calls this “pie investing” because you set your portfolio preferences using a pie graph interface.

Low Price Includes Fractional Shares

It’s important to mention that most robo advisors work in the intersection of behavioral finance and portfolio theory. Most implement efficient rebalancing into their algorithms. Some (including Betterment and SoFi Wealth) are close to on par with M1 Finance.

But some users won’t find those lower cost robo-advisors as compelling as M1 Finance. This is because M1 Finances allows investors to include fractional shares in their portfolio.

What are fractional shares? Imagine that Amazon stock $AMZN is $800, but you only want to own $200 worth of stock. Traditionally, you could buy no less than 1 full share of stock. Fractional shares allow you to own just $200 worth of $AMZN or .25 shares. Low cost brokerages have allowed investors to employ fractional shares for years. But M1 Finance is among the first automated investment platforms that allows you to invest in fractional shares.

This means that investors can invest in particular stocks in part of their portfolio and in index funds in the other part. You can own hundreds of fractional shares if you want.

Smart Transfers

One of the latest perks for M1 Plus member is Smart Transfers. This feature allows you to make transfers from your Invest to Spend account, or from your Spend to Invest account, based on rules you setup.

While you can always make one-time transfers, Smart Transfers allow you to setup rules like, Transfer every dollar over $1,000 from my Spend to Invest account. This has great potential as it allows you to deploy your cash based on rules you set.

Vice versa, if you're trying to build or replenish an emergency fund, you can setup your Invest account to transfer all of your cash from things like dividends back into your Spend account.

M1 Borrow

M1 Finance announced this week an unique feature called M1 Borrow. Using M1, people can invest for free in exactly what they want. But doing so automatically opens up a portfolio line of credit at one of the lowest interest rates on the market. It is significantly easier to access, more flexible on terms, and lower cost than any other method of borrowing money that we've seen, whether it’s a mortgage, HELOC, auto loan, or personal loan.

This type of borrowing has historically only been available to the ultra-wealthy, who use it extensively due to the flexibility and low rates. M1 Borrow makes this even easier and less expensive, and opens it up to a much larger audience.

To qualify, users must have a taxable M1 brokerage account with an account balance of $5,000 or more. IRAs do not qualify. Your credit score doesn't matter and M1 Finance doesn't do a credit check since it uses your portfolio as collateral.

You can borrow up to 35% of your account's equity balance out as a loan. M1 Finance may impose additional restrictions based on risk of securities held or portfolio concentration.

The interesting thing is there is no set payment schedule. You can pay this back as you see fit, simply realizing interest every month on your outstanding balance.

There are three main risks with using M1 Borrow: interest rates rise, the portfolio value declines and forces a maintenance call, or losses are magnified due to leverage. Make sure you're aware of these risks if you take advantage of this feature.

Custodial Accounts

If you have M1 Plus, you get access to custodial accounts - where you can setup an account for your children to invest for the long term.

This account is a UGMA or UTMA account that you hold and make contributions to on behalf of a child. 

You (the custodian) can manage the account, but the child is the beneficiary of the account and the owner of the assets in the account. Each deposit is considered an irrevocable gift, and there is no maximum amount that can be contributed.

It's important to remember that this type of account can have implications for financial aid. If you're considering using this account to save for college, we recommend you use a 529 plan instead.

How Does M1 Finance Compare?

M1 Finance is one of our top picks for places to invest because it's commission-free, offers great tools and features. It's an honorable mention in our Best Places To Invest list.

Check out this quick comparison here: