M1 Finance Review 2021: Is it the Perfect Investment Platform?

M1 Finance review - Perfect investment platform

Investing is hard due to a myriad of factors ranging from behavioral to psychological. 

Getting started with investing and continuing with investing should ideally be automated so we do not second guess ourselves; trying to time the market or chase the next hot sector. Despite all the technological advances and myriad of brokerages competing for our investment dollars, there are not many perfect investment platforms.

I reviewed a number of investment platforms and scored them based on the advantages offered by each platform. I will update this post if better alternatives emerge in the future.

Review of M1 Finance compared to Vanguard, Schwab, Fidelity, Wealthfront and Betterment indicates that it is currently the perfect investment platform.

Characteristics Of My Perfect Investment Platform

My ideal dream platform would have zero fees, wide selection of low expense ratio funds and very low minimum investment. In addition to these basic characteristics, it should help one get started with a basic asset allocation. It should also automate investing and re-balance my portfolio automatically back to the desired asset allocation with zero tax implications. Would be great if it also did tax loss harvesting.

Let us examine each aspect of my perfect investment platform in detail.

Zero fees:

In this day and age when almost anything can be done online; it is criminal to charge fees for the act of investing. Fees could have been justified back in the day when you needed a human to answer the phone or manually place a trade. Wealthfront and Betterment charge 0.25% to 0.40% fee on all accounts.

Charging a fee based on your total assets is egregious. Initially when your balance is small you might not notice it. As your balance grows, this becomes a larger and larger recurring annual expense. Every dollar you don’t pay in fees is another dollar in your pocket, compounding for your future. For this reason, I have excluded Betterment and Wealthfront.

One might argue that the fee is justified based on their claim of Tax loss harvesting. I have not seen any published data wrt what is the quantum of benefit these firms have provided with tax loss harvesting to justify the fees. In fact, the SEC fined Betterment last year as wash sales occurred in at least 31 percent of accounts enrolled in Wealthfront’s tax loss harvesting strategy.

On the bright side, Vanguard, Fidelity, Schwab and M1 Finance do not currently charge fees. In the past the traditional brokerages charged fees. M1 Finance used to charge fees, but went to a totally free model as of Dec 2017.

Verdict: Betterment and Wealthfront out. Neutral for the remaining contenders since none charge fees.

Selection of Funds:

Vanguard, Schwab and Fidelity have an extensive selection of funds; albeit restricted to mostly their own fund families. However since most of their own index funds have a low expense ratio, this is not a major negative. M1 Finance supports most common stocks, ETFs and close ended funds listed on supported exchanges. So you get everything from Fidelity, Schwab, Vanguard, iShares, individual stocks, etc

Verdict: Slight edge to M1 Finance.

Minimum Investment:

Although I love Vanguard for popularizing index funds and being a pioneer wrt forcing lower expense ratios across the industry; the minimum investment is an area where it fails miserably. Most Vanguard index funds have a minimum of $3,000 and some like the technology index fund have a whooping $100,000 minimum. Schwab and M1 Finance have a minimum of  $100 while Fidelity has no minimum investment.

Firstly, it is easier to get folks investing weekly with smaller amounts instead of expecting them to save and wait till they have $3,000. Saving that amount and resisting the temptation to avoid spending it before it reaches that minimum threshold is hard.

Secondly, having to invest $3,000 in one swoop, will also lead most folks to second guess themselves. They will wonder if this is the right time to invest or should they wait for “lower” prices. The result of this analysis paralysis will result in them never getting started.

Thirdly, and most importantly, we are all humans and psychology is paramount. If someone diligently saves $3,000 and invests it; and the market drops suddenly, they will freak out and may shy away from any further investments. Psychology and behavior are important for investing which is why I rank this aspect quite high.

Verdict: Slight edge to Fidelity over Schwab and M1 Finance. Huge negative for Vanguard.

Auto Invest:

The best results from investing come from putting money to work in the market with regular frequency. It is hard to know what causes the markets to rise and fall on a daily basis. Also trying to time the market is a fool’s errand and will result in lower returns. Whether you own a business or work at a job, people get paid in a periodic fashion (monthly or every two weeks). Instead of deciding when to invest and how much to invest, the best course of action is to invest in a periodic fashion (as soon as you get paid) and automate that investing behavior.

Verdict: Neutral since all have auto investment feature.

Pre-defined asset allocation:

In order to get started with investing; it would be great if there was a way for investors to select a pre-defined asset allocation.  Fidelity, Schwab and Vanguard have Target date funds. M1 Finance has a much more extensive menu, if you are not a DIY investor in the form of pies. Some of their unique “pre-made” pies offer

  1. General Investing: Easily create a diversified portfolio and set it to your own personal risk tolerance.
  2. Plan for Retirement: Invest for your target retirement date in a portfolio that adjusts to your goals as you age.
  3. Responsible Investing: These are for the socially responsible investor to align their investments with the worldwide promotion of positive social and environmental values. Given that there is a lot of focus on climate change, gun control, etc you can invest in these pies which exclude companies not aligned with your values while simultaneously rewarding companies making positive social and environmental impacts.
  4. Income Earners: Choose a portfolio focused on dividends and income returns. You would notice that these have a higher dividend yield compared to other pies.
  5. Hedge Fund Followers: This is the most exciting category since I have not seen this on any other platform where you can replicate the investment strategies of some of the most successful investors and reputable hedge funds. You can click and drill down to see what specific stocks these Hedge Funds own based on the most recent 13F filings with SEC. These filings have a lag so I would not be basing my portfolio on these hedge funds. However I like this feature to watch how the various Hedge funds are performing. Many have a hot streak and then severely under perform.
M1 Finance makes it easy for investors to select a pre-defined asset allocation. Everything from Simple target date funds to Hedge fund pies and everything in-between.

Verdict: M1 Finance has a unique offering for all investors to get started. Several options from simple target date funds to Hedge fund pies and everything in-between.

Auto Rebalance:

After you have decided on your asset allocation; it is always a good practice to periodically rebalance your portfolio.  Rebalancing restores asset classes to their target allocations by selling assets that have appreciated and buying those that have declined. It is at its core a risk-minimizing strategy and also meant to increase returns due to the reversion to mean theory.

Vanguard, Schwab and Fidelity unfortunately DO NOT have auto rebalancing. You have to manually perform this action on a periodic basis. What is even worse; is that with Vanguard, Fidelity and Schwab since you are actually selling your winning stocks, funds, ETFs you would need to pay capital gains tax.

M1 Finance has a totally automated and tax efficient approach to rebalancing. After you select your pre-defined asset allocation; rebalancing is done every time your auto investment is triggered. The new contributions which are auto invested are used to buy stocks/ETFs which have dropped in value. No selling is done and this avoids capital gains tax. M1 Finance allocates money from every deposit to ensure your portfolio stays on track without any manual intervention on your part.

Verdict: Huge positive for M1 Finance since it does this in an automated and tax efficient manner.

Fractional shares:

Another advantage of M1 Finance is that you can also buy fractional stocks and ETFs. My former coworker keeps pondering when should he buy Amazon and at what price 🙂 So if you are enamored by Amazon and don’t want to invest a hefty chunk to buy one share; you can just add Amazon to your pie and based on your asset allocation, M1 Finance will auto buy it even in fractions. This is especially useful for High Beta stocks like Amazon, Apple, Netflix, etc which swing wildly over a period of time. This is not important to me; but I am sure some investors would like this additional feature.

Here is a quick summary comparing all the platforms as discussed

Review of M1 Finance compared to Vanguard, Schwab, Fidelity, Wealthfront and Betterment indicates that it is currently the perfect investment platform.
Review of M1 Finance compared to Vanguard, Schwab, Fidelity, Wealthfront and Betterment indicates that it is currently the perfect investment platform.
Review of M1 Finance compared to Vanguard, Schwab, Fidelity, Wealthfront and Betterment indicates that it is currently the perfect investment platform Click To Tweet
M1 Finance Review

Is M1 Finance Safe?

M1 Finance is covered under the SIPC. The SIPC covers up to $500,000, including $250,000 in cash, in the event of broker failure. Also it is a Broker/Dealer Regulated by FINRA

How does M1 Finance Optimize Taxes When Selling Securities?

M1 Finance uses a tax minimization method when you want to sell your stocks/ETFs. If you request a withdrawal from your account; the algorithm determines which securities to sell, based on target allocations. It then sells securities based on a tax efficient order
Losses that offset future gains
Lots that result in long-term gains
Lots that result in short-term gains

Does M1 Finance let you buy Index Funds?

Yes. M1 Finance does not have it’s own funds or ETFs. The advantage is you can buy Index funds (ETFs) from most of the major fund families including Vanguard, Schwab, Fidelity, etc.

How does M1 Finance make money?

This was the part I was most curious to figure out. M1 Finance makes money in several ways to ensure they are profitable while not charging management fees or commissions.

  1. Interest on cash: This is similar to how most retail banks make money. Lending out money at a higher interest rate. When M1 Customers hold cash on the platform they lend it out. This does not impact me because with the auto invest setup, all my money is directly invested into my stocks and ETFs. Also when any stock or ETF you own pays you a dividend, it will be deposited into your account. If a dividend payment causes your cash balance to exceed your defined threshold, your cash balance will be automatically invested in your portfolio based on your target allocation. My threshold is set at $10 so make sure you do the same. Also don’t leave excess cash trying to time the market. Many investors retail and professional are unable to predict. Biggest benefit of M1 Finance is having your investment on autopilot and not wondering should I sell my stocks now every time there is a small dip.
  2. Interest on lending securities: M1 Finance lends out securities to enable short selling. All brokerages do securities lending but only few pass on the benefits to customers. I am glad M1 Finance is using it to reduce my fees. Here is a recent article on Fidelity bringing this activity in-house.
  3. M1 Borrow: This is a program where you can get a line of credit against your portfolio. Depending on the circumstances and interest rates, you can borrow using your portfolio as collateral. Lets you tap into the liquidity of your money while staying invested. I have not used it but it is great to know that this is an additional source of revenue.
  4. M1 Spend: This is a checking account and visa debit card. The checking account is FDIC insured. I have not used this feature and instead prefer to park my money in various banks generating over 8% returns
  5. Order flow: Any buy sell orders typically have a small difference between the bid and ask price known as the spread. While most people don’t see the spread as an outright fee they’re charged, it is an implicit cost anytime you buy and then sell a security.
  6. M1 Plus membership fee: This membership fee gives you discount on rates when you use M1 Borrow and higher interest rate/cash back on M1 Spend. Since I neither use M1 Borrow nor M1 Spend, I did not opt for this annual membership fee.

To summarize, the ways M1 Finance makes money are common revenue streams for most financial services companies. I am glad it is used to subsidize my perfect investment platform.

Getting started

  1. Sign up using this link and create your account using your email id and password
  2. Answer a few questions about yourself
  3. Connect your bank account where you setup automatic funds to invest. You can select the frequency and amount you wish to fund.
  4. Build a sample portfolio either using your own individual stocks, ETFs or select one of the expert pre-made pies.
  5. And you are set!

You can drill down into the pre-made pies to even check what ETFs each of them contain. Here are the options in General Investing

M1 Finance review - Portfolios within general investing

If I click on the Aggressive I can see what is under the hood. Comforting to notice that these are standard low cost Vanguard ETFs.

M1 Finance Review - Details of Aggressive portfolio under General Investing

Cons of M1 Finance

  1. Not for traders: This platform is more suited to buy and hold investors who want to grow their wealth. Although you can sell your stocks/ETFs any time it is not suited for traders. The “set it and forget it” model helps remove any psychological barriers wrt investing.
  2. No Tax loss harvesting: Ideally I would like this to be an additional feature but not a deal breaker for now
  3. Pies do not take into account outside investments: It would be good if M1 Finance could take into account my external accounts such as an employer 401(k) and recommend pies based on what I already own.

Final Thoughts On M1 Finance

Review of M1 Finance compared to Vanguard, Schwab, Fidelity, Wealthfront and Betterment indicates that it is currently the perfect investment platform due to zero fees, very low minimums, automated investment with automatic rebalancing. Pre-built asset allocations and fractional shares compliment the pies like whipped cream.

I have been using the platform for over a year and am highly satisfied, Hoping other platforms emulate these features so we can all win.

Readers, have you tried M1 Finance so far. If so, what are the features you like or don’t like?

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