In the recent past, stock market investments were exclusively the domain of those with not only several years of sector experience, but also significant wealth. Anyone interested in stock market trading needed to consider commissions and other fees that would make a real dent in potential investment returns.
Fortunately, in recent years, new platforms have emerged with commission-free trading that make it easy for new investors to get started without needing thousands of dollars. M1 Finance is one such platform. The company has been operating since 2015 and charges no trade commissions.
So, how does M1 Finance make money? In this article, we’ll explore the M1 Finance revenue streams to answer any questions you have about the way M1 Finance operates.
Related reading: How to Get Free Stocks
The M1 Finance Basics
When M1 Finance first began operating, there was a small fee for investors using the platform. However, the company moved over to a 100% free model after a short time. M1 Finance operates a lean business and requires just $100 as a minimum deposit unless you open a retirement account, which requires $500.
The company keeps its costs low, so it doesn’t have a panel of well-paid advisors or fancy locations that you may find with traditional brokerage firms. All communications are handled electronically, to streamline costs and pass along savings to its investors.
M1 Finance has decided that rather than charging investors a fee or imposing commissions on trades, there are other more creative ways to make money. It’s important that you’re aware of how M1 Finance generates revenue so that you can ensure that you feel comfortable before you join the platform.
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M1 Finance makes it easy to manage your investments. Choose from a wide variety of professionally-created "pies" (portfolio allocations) or create your own. Contribute to your account and M1 Finance automatically invests based on your selections.
- Free alternative to robo advisors
- Automated investing
- Easily view and manage your portfolio
- Ideal for long-term investors
- Commission-free trades
While M1 Finance doesn’t charge for a basic account or for trades, there are several ways that the company generates revenue, including M1 Plus subscriptions, lending, interest on cash balances, and payment for order flow.
M1 Plus Subscriptions
While the basic M1 Finance membership is free, the platform does have a premium subscription level called M1 Plus. This subscription has an annual fee (currently $125/year) and it unlocks improved conditions for the three core products; borrow, invest and spend. With an M1 Plus membership, you can access lower interest rates on borrowing, higher savings interest rates, extended trading windows, and other benefits.
You can cancel your M1 Plus subscription at any time, but it will continue to run until the end of the year. This feature is completely optional, as you can use the basic account without paying a subscription fee. However, M1 Plus does add to the feature set and M1 Finance makes money with this membership fee.
M1 Borrow Lending
Another way that M1 Finance makes money is via its lending feature, M1 Borrow. This allows investors to take out a line of credit for your portfolio, with the investments in your account serving as collateral for the loan. You can borrow up to 35% of your account balance, with the interest rate determined by your membership level.
What is unusual about M1 Borrow is that the funds can be used for a variety of reasons including buying stocks on margins, paying for a vacation or even funding for medical bills. Essentially, M1 Finance is extending a loan and if you fail to repay it, they are authorized to go into your account and sell your investments to recoup the outstanding debt. This presents a relatively low risk for M1 Finance, making it an easy source of income. Additionally, since the debt is secured on your investments, the interest rates are low, with a discounted rate if you’re an M1 Plus member.
There are some requirements to qualify for M1 Borrow, the primary requirement being that you have $5,000+ invested in a taxable brokerage account. There are no credit checks or complicated paperwork, and you don’t need to worry about loan denials damaging your credit.
You can transfer the loan funds to your M1 Invest account, M1 Spend account or an external bank account. All you need to do is click on the Borrow button under the borrow tab on the platform interface, you’ll input the amount you want to borrow and where you want the funds. Once you check the details and click confirm, it will initiate a transfer. You can view pending and previous transfers via the transfers tab.
M1 Spend is a relatively new feature on the M1 Finance platform. Essentially, it’s an integrated checking account and debit card that’s available to basic and M1 Plus members. There are two ways that offering M1 Spend provides revenue for M1 Finance.
Firstly, M1 Finance can earn interest on any cash balances. Just as with the typical high street bank, M1 Finance uses the cash in user accounts to lend out to other members or financial institutions. They collect interest on this lending. This can also apply to funds held in investment accounts, which can also be used.
However, you don’t need to worry about your money as Invest accounts have up to $500,000 in SIPC insurance and Spend accounts have up to $250,000 SIPC insurance.
M1 Finance can also make money from the debit card attached to M1 Spend accounts. The company receives some fees from merchants when you use your debit card to make purchases in stores and online.
These fees are referred to as interchange fees and they represent a percentage of the purchase price. This is normally less than one percent, but it is paid by the merchant and the customer is not affected by the fee. The M1 Finance Visa debit card is operated in cooperation with Lincoln Savings Bank and the two companies share the fees that are generated each time you swipe your debit card.
PFOF or Payment for Order Flow is the most common way that commission-free trading platforms generate income. Whenever you place a buy or sell order on the M1 Finance platform, the order is forwarded to a market maker. There are a number of market makers, so to secure business, they compensate brokerages for facilitating deal flow.
The market makers are similar to stock exchanges in that they make money on the bid ask spread, matching buyers who bid on the various securities with sellers who are looking to sell their securities. Market makers earn a few cents on every transaction and share a fraction of the profit with the broker facilitating it. This means that M1 Finance may earn a fraction of a cent on each trade, which can quickly add up over the thousands of trades made every day.
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- Research more than 8,500 stocks
- Details on 4,000 ETFs and 40,000 mutual funds
- Portfolio management (syncs with your brokerage)
- Detailed portfolio performance
- Powerful charting and screening
- Fully customizable
M1 Finance does provide a great blend of automated investing along with portfolio customization. You can also access spending and borrowing features, with preferential terms if you upgrade to M1 Plus.
You can choose from over 80 pre-built portfolios or build your own strategy, which makes it a good option for both newbies and more experienced investors. The customized option is geared towards the more experienced investor who is looking to automate strategies without compromising personal preferences, diversification goals, and desired risk.
Despite all of these excellent features, M1 Finance is still a low-cost platform. There are no fees for trading or investment management, so you can ensure that more of your investment fund is put to work for you.
However, as with most financial products and platforms, there are both potential advantages and downsides to consider.
The Pros of M1 Finance
- Free Trading: First and foremost, you can enjoy free trading with no commission, which makes it easier to maximize the profits of your investment strategies.
- Plenty of Customization Options: In addition to the 80+ pre-built portfolios or “pies”, there are extensive customization options that makes it easy to tailor your portfolio to your specific goals.
- Low Rate Margin Loans: You can access M1 Borrow providing your taxable investment portfolio is $5,000 or more. What’s more, you can use the funds for investing or transfer the funds to your external bank account to cover other expenses. The loans are secured on your investments, so they attract a low rate and you don’t need to worry about credit report searches.
- Spending Options: You can also use M1 Spend as a checking account with a debit card, so you can streamline your finances and keep your money all in one place, with the reassurance of SIPC insurance to protect your funds.
The Cons of M1 Finance
- Not Suitable for Active Traders: The nature of the platform and how it works means that it is not suitable for active traders. So, if you want to try your hand at being a day trader, this is not the right option for you (try Webull instead).
- Limited Securities: Unlike some other commission free platforms, M1 Finance only offers the ability to purchase stocks and ETFs. So, if you want to purchase crypto or other securities, you’ll find this platform limited (try Public or Webull).
- Limited Tools: Although the customization on M1 Finance is impressive, there’s a lack of financial tools, calculators and goal planning. There is also no access to financial planning options or advisors.
- Lack of Integration: When you create your portfolio allocations, M1 Finance will not recognize other investments, such as your employer sponsored retirement plan. This can make it very difficult to integrate all of your investments for easy management.
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- Commission-free trades of stocks and ETFs
- Buy and sell 27 different cryptocurrencies
- Fractional shares
- Access to alternative investors
- High-yield Treasury accounts
- Easy to use and beginner-friendly
- Connect with a supportive community of investors
- "Themes" help you to find investments that interest you
M1 Finance is an excellent trading platform and it’s quite transparent about the number of ways it makes money to support the company without needing its customers to pay commissions or management fees. Almost every financial company makes money in the ways we’ve looked at above, but M1 Finance has decided that these revenue streams are sufficient without needing to charge the customer for a basic account.
The overall aim of the company is to make money, but M1 Finance believes there’s a symbiotic relationship between a company and its customers. The company believes in financial services, but also thinks that for many years, the balance shifted, so that financial service companies were maintaining high profit margins at the cost of the customer. M1 Finance wants to redress this balance and offer a better product at a better price. For this reason, M1 Finance removed fees and built the business on other revenue streams, increasing efficiency and lowering operating costs to compensate for the loss in potential revenue.
So, if you’re looking to get a better service without paying a premium, M1 Finance is certainly worthy of consideration. You’re under no obligation to pay for M1 Plus and you can start trading with the basic account. Once you get comfortable using the platform, you may decide to upgrade and become a paying subscription customer. However, if you decide that you want to keep your investments low cost, you can continue using M1 without needing to worry about fees or commissions on your trades.