The investment platform that I recommend to most people is M1 Finance, and this article describes in detail why I think it’s so good.
In short, it’s commission-free and has a very powerful interface for managing position sizes, seamlessly blending ETFs and individual stocks, re-balancing for tactical asset allocation, and building custom portfolios.
In September 2018, I decided to start a real-money portfolio at M1 Finance as my fourth investment account. I use this account as the model portfolio for my newsletter, and I’m incredibly impressed with this platform.
And before I go further, you can see my full disclosure policy here regarding my affiliation with M1 Finance and some other products or services. I get pitched all the time by lousy companies that want me to promote their product or service, and I turn them all down. I recommend M1 Finance and use it myself because in my opinion it is one of the best investing platforms out there for many people.
Optimized for Long-Term Investors
There’s a great article by Barry Ritholtz called, “Cheap is Great, But Beware of Free” where he talked about the spectrum of investment fees.
The financial industry has thankfully been on a multi-decade trend from high fees to low fees, particularly thanks to the efforts of the late Jack Bogle and his company Vanguard over the years. Customers are benefiting greatly from this trend as investing becomes more accessible and cost-efficient.
In recent years, some investment platforms have popped up that go beyond low fees and are “free”. They don’t charge commissions or expenses.
The most famous one is Robinhood; an investment app that targets young investors. You can trade stocks, options, and cryptocurrencies on it without paying commissions.
But as Ritholtz points out, when something is “free”, you should be suspicious. There’s a good chance that you’re not the customer. You’re the product.
You see, many brokers make money by routing your trades to high-frequency traders. To execute your trade, they basically sell the right to a middle-man, who pays the brokerage for the opportunity to process your trade and skims some profit off the top. Robinhood makes a large percentage of its revenue from these middle-men.
So, rather than making fees transparent to you, they make money by skimming off the top here and there without much transparency. It’s a common practice but Robinhood’s whole namesake is based on the idea of taking from the rich and giving to the poor, but in reality they make their revenue by routing small investors’ money through big high-frequency trading firms.
For small accounts making small trades, this does save customers money because paying a small percentage of a small transaction (a few pennies per trade) is cheaper than paying a roughly $5 flat commission fee that other brokers used to charge per trade. These sorts of no-commission platforms have indeed played a role in bringing commission costs down industry-wide, and making them free in many cases.
For a large account making large transactions, however, paying a small percentage can end up being a lot more than the $5 flat commission.
Additionally, free-trading often results in trading more often. The more you trade, the more your brokerage financially benefits. And when trading is free, you’re likely to trade a lot. Robinhood’s platform is really addictive to a lot of people and the incentive structure for how Robinhood makes money isn’t great here.
There are a few professionals that do extremely well, but 95% of people out there, especially young ones, aren’t going to do well trading frequently.
That’s not to say that Robinhood is bad. For investors that use it to buy long-term positions, especially if their accounts are small, they generally save money overall, with a tiny bit lost to high-frequency trades but more saved by not paying commissions. It’s the people that use Robinhood for day trading that are probably paying a lot more than they realize.
M1 Finance is another free platform, so the first question people ask is, “how do they make money?”
Like most brokerages, they make money from selling your order execution to middle men, they make money from margin fees, and they do some securities lending. They also make some interest on cash balances, compared to companies like Schwab that pay you the interest. And they have a low-cost premium account with some extra perks too. On the surface, that’s not so different than Robinhood.
However, M1 Finance is built in a way that encourages good long-term investing, not frequent trading. You can’t day-trade on it; there are only one or two trading windows per day where the system executes pre-planned transactions. This keeps their costs extremely low, and keeps most of their incentives in line with yours.
In short:
- If you’re a trader with a small account, go with Robinhood.
- If you’re an investor, consider M1 Finance instead. It’s built for you.
M1 Finance’s Unique Advantage
M1 Finance currently offers what no other brokerage does; an advanced-but-simple interface for automatically diversifying into an unlimited number individual stocks or ETFs, even with very little money. You can invest with as little as $100, but there are also 8-figure accounts that use M1 Finance.
The unique platform that M1 Finance offers makes it easy to weight stocks equally, or with “fixed” weighting. For example, my high-yield stock article offers a sample portfolio of dividend stocks, using M1 Finance:
As I described in this article, equal/fixed weighting has a lot of advantages and historically improves returns over the long-term when used with the right types of stocks and ETFs.
For example, let’s say I invest in the portfolio above with $100,000. It will automatically put 6% of my contribution into BNS and 6% into BIP, so that’s $6,000 each, and will invest according to my percentages in all of the other stocks as well for the full sum.
Now, let’s say over the next month, BNS falls and BIP goes up, so BIP is now 6.3% of my portfolio and BNS is only 5.7%. All of the other positions will be up or down a bit as well. If I put another monthly contribution of, say, $2,000 into the portfolio, it will automatically redistribute the money to get the positions back towards my targets, so for example it will put more money into BNS than into BIP. It rebalances towards your target allocation without selling positions; just by where it allocates money from new contributions.
This ease of equal-weighting or fixed-weighting used to be restricted to multi-million dollar mutual funds, who hired a portfolio manager to do this sort of fine-tuning. Now, software does it essentially for free, and is extremely powerful if you know how to use it properly. My model newsletter portfolio has over 60 positions, but it’s very easy to manage because I have this built-in software to do it for me based on my direction.
If you are not making new contributions, or for whatever other reason, you can also easily rebalance with one button press via their “Rebalance” button. In that case, it will sell some positions that are above your target allocations and buy positions that are below your target allocations.
This strategy works with ETFs and other asset classes as well. If you want to, you can build a custom portfolio that consists entirely of simple ETFs. I have an article that describes three ETF-only portfolios, and here is one of them as an example:
M1 Finance’s powerful rebalancing mechanism works with both ETFs and stocks. Many robo-advisors do this, but M1 Finance is the one that can do it with both ETFs and individual stocks that are hand-picked by the investor.
I’m sure more places will replicate this, but M1 Finance did it first, they did it well, and they’re currently the one doing it in this precise way. I already have a lot of international readers email me and ask if there is a European equivalent or Asian equivalent or African equivalent for M1 Finance, for example, and I don’t know of any. In fact I hope someone goes out and makes them.
What M1 Finance Can’t Do:
That’s not to say that M1 Finance is perfect. It’s limited by design for doing certain things well, not doing everything. Here are some things it can’t do:
- The investment platform of M1 Finance is for stocks and ETFs. You can’t trade options on it, which is fine. I use another brokerage for selling options.
- Only liquid stocks and ETFs are available on the platform, although that includes thousands of them. For more niche ETFs or OTC stocks, you’ll need to use another brokerage.
- You can’t trade frequently with it, by design. There are only one or two trading windows per day, unlike most brokerages.
- M1 Finance doesn’t provide premium research like some of the full-service brokerages do. For example, Charles Schwab provides premium Morningstar analysis that is generally behind a paywall, along with other similar sources.
Final Opinion: 9/10
M1 Finance is nearly perfect as an investment platform for long-term investors. There are some advanced use-cases where it’s not a good fit, but other than those few scenarios, the investment platform is unique and powerful.
For smaller accounts, it’s great even if it’s your only investment platform. For someone looking to get started with investing, I would direct them to M1 Finance.
For investors with more wealth that want to invest in options or illiquid securities, or who want premium research, M1 Finance is best paired with an account at another brokerage. From M1 Finance, you have access to a unique software platforms that can weight your securities in fixed percentages, which is incredibly powerful. From other brokerages, you can get additional research and access to options trading or illiquid securities. For example, I have accounts at M1 Finance, Charles Schwab, and Fidelity.
