Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.
Most people have heard of Vanguard, one of the largest fund companies in the world. If you have a 401k plan, there is a good chance that this is through Vanguard! This is one of the most prominent fund companies around. M1 Finance has recently taken a strong foothold in the brokerage industry, disrupting the traditional investing model. So, are you better off investing through Vanguard or though M1 Finance?
M1 Finance is a relatively new investing platform that launched in 2016. M1 Finance has goals that are in line with Vanguard. Both platforms have offerings that appeal to passive long term investors. Comparing M1 Finance to Vanguard is like comparing red grapes to green grapes. They are very similar, with only a few minor differences. Both companies have high value propositions being offered to their users, but each has unique features and characteristics.
M1 Finance offers a free online investing platform and mobile app for its users. It is easy to open an account and you can begin investing with as little as $100. You start by creating your portfolio which M1 Finance calls a pie. You can customize your pie with a variety of stocks and ETFs offered on M1’s platform, including Vanguard ETFs. One feature unique to M1 Finance is the ability to buy fractional shares. This means you can have broad diversification even if you have a small account balance. You can purchase as little as 1/10,000th of a share of a stock or ETF. M1 Finance offers a variety of other features such as tax minimization, automated deposits/rebalancing and dividend reinvestment all for free. Considered to be the next generation broker, M1 Finance has had a wave of users switching over to the platform since they launched. The emphasis on passive low cost investing has resonated with many other investors across the United States.
Vanguard is one of the largest fund companies in the world, with assets under management of approximately $5.1 trillion. They offer a variety of mutual funds and ETFs available on most investment platforms and brokerages. To directly invest in most of Vanguard’s mutual funds you must have a minimum account balance of $3,000.
Vanguard Retirement funds and STAR funds have a minimum of $1,000. Vanguard also offers a variety of exchange traded funds which have no minimum investment, and you can buy shares through brokerage accounts like M1 Finance. Vanguard is a mutual fund company, and it is owned by the funds that it offers. In essence, all of the Vanguard investors own shares of the funds and they own Vanguard itself.
Now, don’t let the word mutual fund scare you! What Vanguard offers is low fee index mutual funds. They offer some of the lowest fee investment products on the market.
Vanguard was started by a famous investor named John Bogle, known as the man who created the first index fund. Bogle created Vanguard to be a company devoted to its people and its underlying shareholders. Vanguard is based on the premise of Bogle’s own thesis of low fee index fund investing over the long term. That is why Vanguard has some of the lowest fees in the fund industry.
M1 Finance and Vanguard differ in many ways, though they both have the same goal of attracting long term passive investors. M1 Finance is an online trading platform geared towards a do it yourself investor who is relatively fee sensitive. Vanguard offers funds at record low fees within the industry, along with investing discipline from one of the greatest minds in the investing community. Vanguard is more of a traditional fund company with a focus on low cost passive investing. Barriers to invest into Vanguard mutual funds can be moderately high from $1,000 to $3,000. That being said, investors can find many Vanguard ETFs offered on a variety of platforms, including M1 Finance.
Vanguard and M1 Finance are very similar platforms. If you are on the fence trying to decide whether or not to invest in Vanguard ETFs through M1 Finance or investing in funds directly through Vanguard, consider the following…
With M1 Finance, you will be able to automate your deposits, allocation and rebalancing
You will be limited to Vanguard products through the Vanguard platform
M1 Finance allows you to invest in thousands of stocks and ETFs for free
The minimum balance to get started with M1 Finance is $100 while the minimum investment for most Vanguard funds is $3,000
ETFs have greater liquidity than funds
Using M1 Finance allows you to build your own portfolio of ETFs and/or stocks. You can choose from thousands of investments, and decide where you would like to invest your money. Since M1 Finance allows you to buy partial shares, you have the ability to build a well diversified portfolio with as little as $100. This lets you virtually create your own customized fund, containing the companies and ETFs you’d like to hold in your portfolio. You portfolio will also be frequently rebalanced in the most tax efficient manner, meaning you wont have to worry about constantly managing deposits and withdrawals.
Vanguard takes a different approach where you will be allowed to invest in strictly Vanguard products only. Vanguard’s model is very traditional and used by most fund companies. Most of their funds have extremely low expense ratios and holding fees. Both M1 Finance and Vanguard cater to long term passive investors, but if you’d like more flexibility with your investments, as well as tax efficient rebalancing then M1 Finance may be a better platform for you.
Investing Simple is affiliated with M1 Finance and Betterment. This relationship does not influence our opinion of these platforms.
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.
Traditional online brokerage platforms have costly trade commissions, on average ranging from $4.95 to $6.95 per trade. These same brokerages often require minimum account balances of $500 or more. These fees and minimum balances create high barriers to entry for someone who is just beginning to invest.
In recent years, the offerings for individual retail investors have gotten a lot better. Brokerages like Robinhood and M1 Finance learned that by handling everything electronically and not having brick and mortar locations they could offer their services for free! As a result, these free brokerage accounts have been extremely disruptive to the industry.
What Is M1 Finance?
M1 Finance was launched in 2016 and is an online robo advisor and brokerage hybrid for everyday people who want to invest in stocks or exchange traded funds (ETFs). M1 Finance combines features of a traditional brokerage account with a modern robo advisor. First, you select your investments and your allocations. Then, you automate the entire portfolio!
M1 Finance focuses on low cost passive investing with additional features such as automatic rebalancing of your portfolio and tax minimization strategies. The only fees you pay are the fees associated with any ETFs you invest in. M1 Finance is a completely free investing platform!
An exchange traded fund (ETF) is an investment vehicle that holds a collection of stocks, bonds, or commodities in a portfolio. The fund then splits into thousands or millions of shares and the shares are sold on a major exchange. Typically, this is the NYSE or NASDAQ exchange. There are a wide variety of investment options with ETFs such as index funds, bond funds, or international funds. ETFs trade just like stocks on public exchanges. By investing in ETFs, you are gaining diversified exposure to a particular market.
ETFs can give you diversified exposure to a certain sector or industry as well. For example, let’s say you want to invest in the semiconductor sector but you are not sure who the clear winner will be. Instead of buying individual semiconductor stocks, you could invest in an ETF that gives you exposure to the whole sector. One example of this is the PHLX Semiconductor Sector ETF.
Compared to a mutual fund, the fees associated with an ETF are often significantly lower. This is primarily due to the fact that mutual funds are actively managed while ETFs are passively managed. An ETF simply replicates the performance of an underlying benchmark, like the S&P 500 for example. With a mutual fund, a team of people are deciding what to buy and sell within the portfolio.
How Does M1 Finance Work?
M1 Finance operates by creating portfolios of stocks and ETFs called “Pies”. Each pie can be customized meaning you can choose specific stocks and ETFs that you want to add. For example, you could build a pie with 50% Tesla stock and 50% Google stock.
Within each pie, you can have up to 100 stocks or ETFs. Each can carry a different weight in the portfolio. There is no limit on the number of pies you can have in your M1 Finance account! For example, you could have one growth oriented pie and one income oriented pie in your M1 Finance account.
There are also prebuilt pies that M1 Finance has created based upon the amount of risk you would like to take, investment time horizon, and personal preferences. These are called custom pies.
It is important to understand that these portfolios or custom pies are not tailored to any one person. Each investor has a unique set of circumstances. If you want a personalized portfolio, you should consider a robo advisor like Betterment or a financial advisor. Betterment is another cutting edge platform that saves investors money by leveraging technology.
Most investing platforms charge an asset management fee in exchange for any kind of investment guidance. M1 Finance offers these prebuilt pies for free. They do not charge any fees outside of the ETF expense ratio. This is an expense you pay regardless of what platform you invest with.
M1 Finance also allows you to buy fractional shares of a corporation within your pie. For example, if your M1 Finance account had a total of $1,000 in it, but you would like to buy a share of Amazon for $1,885.60 then you would be offered a fractional share of Amazon to hold in your portfolio valued at $1,000 or less depending on its weight in your pie. With fractional shares, you can buy as little as 1/10,000th of a share!
A lot of people are skeptical about M1 Finance. They hear about everything this platform is offering and how they are doing it for free. Don’t worry, this isn’t too good to be true! M1 Finance is a member of Financial Industry Regulatory Authority (FINRA) and the Securities and Investor Protection Corporation (SIPC). Being a member of SIPC, you will be insured in the event that M1 Finance goes out of business or goes financially insolvent. Each account at M1 Finance is insured up to $500,000 in coverage ($250,000 for cash).
There are no trading commissions or mark up fees for using M1 Finance as long as you open a brokerage account and fund it with a minimum of $100 ($500 for retirement accounts). M1 Borrow has a fee of 3.75% APR and a required account maintenance balance of 35% of your initial loan. M1 Borrow allows you to borrow against the securities in your account.
Beyond that, these are the requirements to open an M1 Finance account:
M1 Finance has very basic requirements and a low minimum account balance, making this investing platform very accessible for new investors.
You may be asking yourself, so how do they make money? M1 Finance makes money in a way similar to Robinhood, by directing order flow and offering margin to investors.
What are the features of M1 Finance?
M1 Finance offers a variety of additional features, the two most prominent being tax minimization and smart rebalancing. Using a simplified method of tax loss harvesting, M1 Finance offers options to sell positions in the most tax favored way.
However, there are alternative robo advisors that offer more effective tax loss harvesting strategies. If you are interested in this feature, we recommend checking out Betterment, the most popular robo advisor.
Tax loss harvesting in Betterment involves the platform offsetting any gains by selling losing securities in your portfolio and replacing them with a similar security. For example, say you have $2,000 in realized capital gains in your portfolio. You also hold Lowes stock in your portfolio which has a potential loss of $2,000 if you sold it today. To offset your gain, Betterment will sell Lowes stock to realize the loss and buy back a similar security such as Home Depot!
Unfortunately, this feature is only available through a robo advisor like Betterment. It is important to remember that Betterment charges an annual fee of 0.25%, while M1 Finance is 100% free!
Another key feature of M1 Finance is smart rebalancing. Using smart rebalancing, all deposits will be automatically invested into your pie without your manual input. When withdrawals are taken out of your account it will automatically rebalance your pie so it has the correct weight of your holdings at all times.
Rebalancing is a crucial aspect of investing. Rebalancing ensures your portfolio has the correct ratio of holdings and makes sure you are not taking more or less risk than you originally planned.
For example, if you held a portfolio of 50% stocks and 50% bonds and the stock portion grew faster, your portfolio is now 60% stocks and 40% bonds. Your risk has increased by not rebalancing your account because you are more exposed to stocks. To tone back risk you would sell off some of the stocks and buy bonds to get back to your 50% stock and 50% bond portfolio. If you invest with a platform like Robinhood, you will have to manually rebalance your portfolio. M1 Finance does this automatically, for free!
What are the pros of M1 Finance?
M1 Finance is a 100% free investing platform with a wide array of features and benefits that go above and beyond other free investing platforms out there.
M1 Finance is a 100% passive investing platform. This automation is great for people who do not want to worry about remembering to contribute to or rebalance your portfolio.
M1 Finance offers complete flexibility with the custom pies. This flexibility is not available through most roboadvisors.
M1 Finance has a great platform for long term investors. The ideal user for M1 Finance is someone who is a somewhat passive investor, relatively fee sensitive, and does not want to spend a significant time managing their investments. M1 Finance offers a greater amount of flexibility because you can choose exactly what you invest in. With other robo advisors, you are limited to a handful of ETFs.
M1 Finance is also a great platform for dividend investors. Your dividends will automatically be reinvested back into your portfolio once the cash balance exceeds $10. Other free investing platforms like Robinhood do not offer any kind of automated dividend reinvestment. Brokerage accounts that offer dividend reinvestment and fractional shares charge a fee for this service.
Who Is M1 Finance Not For?
M1 Finance is not an ideal platform for short term traders or mutual fund investors. It is also not ideal for investors in over the counter stocks or executing other unique investment strategies such as hedging or short selling.
Trading is the goal of profiting off of short term price fluctuations in the market. Trades are usually executed over periods of weeks, days, or even minutes. Many traders use price analysis called technical analysis to exploit predicted movements in the market.
While using technical analysis, there is no consideration of underlying financial stability of a company. Instead, technical analysts use trading patterns, volume and price movements to predict future market prices. Trading is considered highly speculative and can be extremely risky if you don’t know what you are doing. M1 Finance is not the ideal platform for an active trading investment style.
Compared to the options available to retail investors even 5 years ago, M1 Finance is truly a fantastic platform. The tax minimization, fractional shares and smart rebalancing make this platform superior to other free platforms out there like Robinhood. M1 Finance is our favorite free investing platform and our top pick for beginners.
We believe that investing is for the long term. History has shown us that the most successful investors follow a long term investing strategy. This can be as long as a few years to decades if not longer. M1 Finance was designed for long term investors who want to build a well diversified investment portfolio.
Through the automated portfolio rebalancing, you are taking advantage of a powerful economic force known as dollar cost averaging. By regularly accumulating shares over a long period of time, you are paying the market average price for these shares. This helps to smooth out any hills and valleys over time.
The automated reinvestment of dividends will allow you to earn compound interest. Your dividends will be used to purchase more stocks, and as a result you will be earning more dividends from each of those shares.