One of the most common advice for beginning investors is: “Don’t put all your eggs in one basket.” The phrase is used to explain a concept of diversification, which can help you lower the risk. Instead of owning only one stock you can reduce your risk by creating a portfolio of stocks. M1 Finance offers a platform, specifically designed to simplify this process.
Allocating your money: Custom and expert pies
M1 Finance uses Pies, which allow you to show your holdings as slices of a pie. All you need to do is assign a percentage to each slice, fund your Pie and you have a portfolio of stocks. You also have the option to take advantage of M1’s ‘Expert Pies’ feature. M1 Finance has an in-house asset management team for those who prefer to invest passively but maximize returns. This feature is great for investors who are transitioning from a robo-advisor.
Unlike most online brokerages, the platform allows you to purchase fractional shares in assurance all your capital is working for you. You also have the option to allow the computer to automatically rebalance your portfolio whenever. Most asset managers would rebalance on a quarterly basis.
The broker allows you to open individual, joint, and retirement account. You can also open other types of accounts like a Trust, LLC and a corporate investment account.
Pros of M1 Finance
No fees or commissions
One of the best parts of using M1 Finance – it’s without brokerage commissions and fees, so it is not a problem to frequently change your position by buying or selling few shares.
Brokers charge a fee per 100 shares and if you want to buy less than 100 shares, you will have to pay the same amount as you would pay for 100 shares. So, if your broker charges $1 for 100 shares when you buy 100 shares your cost per share is $0.01. But if you buy only one share, you are going to have to pay a dollar per share, which is significant.
How is this possible? Other online brokers usually make only 10 to 30 percent of total revenue from fees and commissions. They make the rest from various services, like lending securities they hold, interest on cash held in a brokerage account, borrowing money from customers, etc. Without fees and commissions, M1 Finance hopes to attract more customers and to maximize its other services. Although there are no brokerage fees and services, you still have to pay the SEC and FINRA Trading Activity Fee (TAF), but they represent minor fees.
Borrow against your portfolio
One of M1 Finance’s unique features includes the ability to borrow against your own portfolio. If you want to invest more money than you currently have, you can borrow up to 35 percent of your account balance from M1 at an annual interest rate of 3.75 percent. Although some may warn against buying securities on margin, M1 gives you the ability to capitalize on your position without the interference of loan officers or approval processes. The collateral for the loan is the balance in your account.
Easy to create a diversified portfolio
With M1 Finance you can practically create your own ETFs and manage your exposure the way you want to invest. For example, if you want to invest in the S&P 500 stocks, but you don’t want stocks that suffered a loss in a previous month, you could remove these stocks from your Pie and own only stocks that have had a positive performance in the previous month. It is then easy to compare the performance of this strategy with the S&P 500. You could also pick only the technology stocks or the banking stocks in the separate Pies and track their performance.
Good for every experience level
Experienced investors can use Pies to create different strategies, but if you are a beginner you don’t have to worry. M1 Finance offers Expert Pies, which are designed to help you meet your investment goals. You can combine them with custom Pies or use them as they are.
The platform allows you to set up recurring investments. You can add funds to your Pies and the system will rebalance your portfolio automatically to give you the desired exposure. It also allows tax-efficient investing, which uses allocation strategy when selling securities to help reduce the amount owed on taxes automatically. See the GIF below as an example.
Allows investing in fractional shares
It is difficult to diversify small accounts if you are trading with brokerage firms that allow only whole shares investing. M1 Finance offers fractional shares investing. When you receive a dividend or when you add a small amount of money to your account, you don’t have to wait until you have enough to buy a whole share. M1 allows you to put your money to work immediately.
By recommending M1 to your friends, you can earn $10 per referral. Your account has to be funded if you want to use this feature, though.
Cons of M1 Finance
M1 Finance is a member of SIPC (Securities Investor Protection Corporation), which protects the customers of failed brokerage firms when assets are missing from customer accounts. According to the SIPC website, the limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. M1 has also purchased a supplemental insurance policy through London Underwriters, which goes into effect if a customer exhausts the SIPC protection limits.
M1 Finance is a Chicago based startup, founded in 2016. Like all startups, it faces a risk of default. So if things don’t go well for M1, investors who commit more than SIPC protection limit have to be aware of that risk.
You can invest only in stocks and ETFs
If you want to invest in mutual funds, M1 Finance is not the broker for you. At the moment the brokerage allows only investments in stocks and ETFs traded on NASDAQ and NYSE.
M1 Finance offers a great new approach to portfolio creating. The CEO of the company, Brian Barnes, calls this approach “engaged investing”. He explained on his blog that investors don’t have to choose between active and passive investing. He thinks that they can have the best of both worlds by paying attention to costs and also on what they own.
M1 really introduces something more than passive investing and other brokers might adopt the same or similar concept. Its strategy is based on a vision of its founder, who believes that in the future customers are not going to compare brokers based on fees. Instead, they are going to compare platforms. If this vision becomes a reality, investing is going to become more approachable and a lot more fun for retail investors.