M1 Finance is a robo-advisor, but it may be the next step forward in robo-investing. It works like a robo-advisor in that it provides automated account management, like automatic rebalancing and dividend reinvestment.
But it also allows you to select the investments you’ll hold in your account, giving you a mix of self-directed and automated investing.
It may disrupt the robo-advisor world in much the same way the robo-advisor concept has disrupted the investment universe.
About M1 Finance
Founded in 2015 and based in Dallas, Texas, M1 Finance is a unique robo-advisor, one which will work for a lot of investors who like the robo-advisor concept but want more direct control over their investments.
M1 Finance gives you both. You choose the investments in your portfolio – or actually several portfolios you can build – based on predetermined investment templates.
These are referred to as “pies”, each of which is basically a self-contained portfolio.
You can create several different pies to include in your account. Some pies are prebuilt, but others can be built from the ground up.
The robo-advisor side of M1 Finance is based on Modern Portfolio Theory (MPT), which is true of all robo-advisors, meaning once you select a pie, or create one, it’s then fully managed by M1 Finance. It will be rebalanced regularly to maintain the target allocation of the pie.
M1 Finance doesn’t actually hold your portfolio.
Instead, they’re held with Apex Clearing Corporation. Apex acts as both the clearing firm and custodial bank.
How M1 Finance Works
M1 Finance departs from traditional robo-advisors in several important respects:
- You don’t need to complete a questionnaire up front to establish your risk tolerance.
- As mentioned above, you select your own investments.
- You can select between both ETFs and stocks, so you are not limited to ETFs alone.
- You can change your investment choices at any time.
- Several portfolios can be included in your account, allowing you to create portfolios for multiple investment purposes.
The M1 Finance methodology works based on what they refer to as “pies,” with different types of pies available. “Expert Pies” are predetermined, and will be recommended for you, each designed to help you reach a specific goal.
M1 Finance offers more than 60 expert pies. You can also create custom pies, which can be built with ETFs and stocks of your choosing, but within the framework of investment templates.
Each pie can contain as many as 100 “slices,” with each slice being either an ETF or a stock. A slice can also be another pie – that’s how much flexibility the platform provides.
With custom investment selection, your choices aren’t unlimited.
There are a couple of limitations:
- First, you cannot invest in mutual funds.
- Second, stocks must be selected from either the New York Stock Exchange, NASDAQ, or the BATS system.
As you add funds to a pie, M1 Finance will go into robo-advisor mode and invest the funds within the scope of the desired target allocations for that portfolio.
Drilling Down Deeper on M1 Finance “Pies”
When you decide on a pie – expert or custom – you’ll be able to set percentage allocations for the pie. Those allocations will be maintained as you add or withdraw funds from your account.
The company gives an example of a portfolio invested in the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google).
If you choose this pie you can go with an even allocation between each of the five stocks, at 20% each. But you can also change the allocation within the pie.
For example, if you want 35% each in Google and Amazon, you’ll then have 10% each in Facebook, Netflix, and Apple.
You can also create pies based on market sectors. This can include socially responsible investing, healthcare, utilities, and even foreign countries. In fact, you can create an unlimited number of pies within your account.
When you first open your account, you can establish investment allocations.
For example, when you contribute $1,000 you can set how much will go into investments, and how much will be held in cash. This will enable you to minimize cash drag (uninvested funds that earn no investment income).
M1 Finance Tax Considerations
One other area where M1 Finance departs from many robo-advisors is that they don’t offer tax-loss harvesting.
But they do use a tax lots strategy when securities are sold. It works to reduce the capital gains taxes you’ll pay.
M1 Finance uses an algorithm to determine which securities are sold when you withdraw funds from your account.
The priority works as follows:
- Losses that offset future gains.
- Lots that result in long-term capital gains (to get lower tax rates on long-term capital gains).
- Lots that result in short-term capital gains (done as a last resort, since these gains are taxable at ordinary tax rates).
M1 Finance Features
M1 Finance offers users several notable features:
- Advisory fee: M1 Finance does not charge fees. The absence of fees can add up to tens of thousands of dollars over many years of investing activity.
- Accounts available: Individual and joint taxable accounts; traditional, Roth, rollover and SEP IRAs; trusts.
- Minimum initial investment: $0. However, they require at least $100 to begin investing, or $500 for IRA accounts.
- Automatic dividend reinvestment: Once dividends received in your account reach $10 they’re automatically reinvested.
- Mobile Access: M1 Finance is available for iOS and Andriod apps, and can be downloaded at Google Play or The App Store.
- Tax information exporting: M1 Finance can export investment results to TurboTax and H&R Block.
- Customer service: Available by either phone or email, Monday through Friday, 9:00 AM to 5:00 PM, Central time.
- M1 Finance retirement accounts: You can open traditional, Roth, SEP and rollover IRAs with M1 Finance. If you need to do a SEP account, M1 Finance can accommodate the account only for you as the business owner, but not any employees you may have. If you need to do a rollover from an employer-sponsored plan, M1 Finance offers a concierge service that will help you handle the transfer.
- 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, but it doesn’t cover losses resulting from declines in market value.
- M1 Finance Referral Program: You can get $10 to invest each time you refer a friend who signs up for M1 Finance, and so will your friend. You’ll be given a unique link on the M1 Mobile App that you can share with friends by email, text, or social post.
M1 Borrow Feature
With M1 Finance you can borrow up to 35% of the value of your portfolio for any purpose. What’s more, your credit will not be checked, and you will not be declined.
And once you borrow money, you can pay it back on your own schedule.
If you take advantage of M1 Borrow, be aware you will be subject to a “maintenance call” to put up more funds if your amount borrowed falls below 30%.
How to Sign Up For an M1 Finance Account
If you want to open an account with M1 Finance, you’ll need to meet the following qualifications:
- You must be either a US citizen or a permanent US resident (green card holder).
- You must be at least 18 years old.
- And you must have a current US mailing address.
You start the application process by entering your email address, then creating a unique password. You’ll then be asked to provide personal information, such as your name, address and phone number.
The next step is to choose the pies you want to invest in. Once you do, you’ll link the account to your bank account for funding purposes.
And once you’ve linked your accounts, you’ll be able to transfer funds back and forth between the two accounts electronically.
The M1 Finance platform easily links to a large number of banks, but if yours is not one of the choices, you can link your account by adding the name of the bank, the type of account (checking, money market, savings account, etc.), and of course, your bank routing and account numbers.
M1 Finance Advantages and Disadvantages
M1 Finance Pros:
- There are no fees to use M1 Finance. They don’t even charge trading fees.
- You can choose the portfolios (pies) you invest in.
- Pies can contain ETFs and individual stocks, which is unlike the way most robo-advisors work, investing in ETFs only.
- No initial deposit is required to open an account, though you do need at least $100 to begin investing or $500 for an IRA account.
- Because M1 Finance permits the use of fractional shares, you can build pies with small amounts of money. This makes it easier to diversify a small pie with different stocks.
- M1 Borrow enables you to borrow against your account at interest rates well below market rates.
M1 Finance Cons:
- Mutual funds are not available for constructing pies.
- No tax-loss harvesting is offered, which could potentially lower your capital gains tax liability. This is fast becoming a common feature with robo-advisors.
- Since you can create an unlimited number of pies, you run the risk of over-diversifying your account.
- Though you can include stocks in your pie investments, you can’t use M1 Finance to trade securities. It is, after all, a robo-advisor.
Why You Should Open an Account with M1 Finance
M1 Finance is almost unique among robo-advisors because you have a large amount of control over the investments in your account.
It’s a robo-advisor, and it manages your account just the way a robo-advisor does, but you have greater investment control than on most competitors.
It’s virtually a mix of robo-advisor and self-directed investing. It may be the next level up in the evolution of robo-advisors.
You don’t even need any funds to open the account (though you’ll obviously need money in the account to begin investing).
And as your account grows you can take advantage of M1 Borrow to access at least some of your account balance as a low-interest loan.
If you’d like more information, or you’d like to sign up for the service, visit the M1 Finance website.