How Does M1 Finance Make Any Money?

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How Does M1 Finance Make Money?

Times have changed, and investing in the stock market is not the same as it was 10 years ago. The rise of the robo advisor and algorithm-based trading have taken the brokerage industry by storm. One of the most established examples being M1 Finance.

M1 Finance has an offer that on the surface might seem too good to be true. First of all, they offer commission-free trading. Second of all, the minimum account balance is just $100. Is M1 Finance operating as a charity? Not quite. M1 Finance makes money in a variety of different ways. We will discuss exactly how they do in this article.

When M1 Finance first started, they charged a fee to investors. It has been over a year now since they have opted for a 100% free approach instead. M1 Finance decided it made more sense for them to make money in different, more creative ways instead of just charging investors a fee or placing commissions on trades.

It is essential to remember as well that M1 Finance operates a very lean business. They do not have any brick and mortar locations like you might see with Charles Schwab or some of the other brokerages out there. They also handle all communications electronically, which significantly cuts down on costs.

So, here is how they make money:

First, M1 Borrow.

M1 Finance makes money in a couple of different ways. The first way that M1 Finance makes money is by offering a feature known as M1 Borrow.

The first way M1 Finance makes money is by offering M1 Borrow.
M1 Finance investing app

M1 Borrow allows investors to take out a portfolio line of credit. Your investments in your M1 Finance account serve as the collateral. M1 Borrow allows you to borrow up to 35% of your M1 Finance account balance at an interest rate that varies. Primarily, M1 Finance extends a loan to you, and in return, if you do not pay it back, they can sell your investments to cover the loan. The risk of M1 Finance is relatively low, so this is easy money.

Second, lending shares to short sellers.

Short sellers are borrowing shares to bet against them. Short selling is a relatively complicated subject, and that is a topic for another article. However, M1 Finance can loan shares held by investors to short sellers and profit from doing this.

According to their site, M1 Finance lends out less than 5% of the total securities held within the platform to mitigate risk. When shares are loaned to short sellers, interest is paid to the lender who is, in this case, M1 Finance.

Third, uninvested cash in your account.

You know that cash sitting in your investment account? Depending on what brokerage you are using, you may or may not be earning interest on it. Free investing platforms like M1 Finance do not offer interest on the cash in your account. Instead of charging investors fees, they loan out the cash balance to banks and collect interest in the process.

Fourth, directing order flow

Brokerage accounts like M1 Finance can receive commission or compensation for directing orders to different parties for execution. The brokerage receives a small payment for directing the order to various parties.

Fifth, M1 Spend.

Recently, M1 Finance rolled out a new feature called M1 Spend. It is a checking account and debit card that integrates directly with your M1 Finance account. They offer a free version of this as well as a paid version called M1 Plus. There are three ways that M1 Finance can make money through M1 Spend:

  1. M1 Finance earns interest on the cash balance held within the M1 Spend checking account, similar to cash held within the brokerage account.
  2. For those interested in the added benefits, M1 Plus comes for $125 per year.
  3. M1 Finance receives interchange fees from merchants when you use your M1 Spend or M1 Plus debit card.

Between these methods, M1 Finance can make money and offer a brilliant investing platform completely free. Overall, we believe M1 Finance is a great platform, and the fact that they are free makes them even better. Instead of charging commissions and fees like other brokerages out there, M1 Finance found creative ways to make money.

 

Disclaimer
    Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion on this platform.

3 COMMENTS

  1. There is no mention on fill price. Is it possible that bid and ask prices are not as good as on regular brokerage platforms with level 2 screens?
    Has anyone tested execution prices on M1 vs other platforms?

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