M1 Finance is a popular online fintech platform that offers automated investment advisor services to consumers.
M1 Finance primarily makes money via fees, interest, or other revenue from Invest, its investment product. The company also makes money from fees, interests, or other revenue for its other financial services, Borrow, Spend, and M1 Plus.
Founded in 2015 by Brian Barnes, M1 Finance aimed to disrupt the fintech market by offering transformative and accessible money management services. Brian Barnes came up with the idea when he realized that the fintech industry had become stagnant. He then created his own app that was modern, sleek, and packed with features.
From the start, automated portfolio management was one of M1 Finance’s key features. Because the platform is so accessible, it reached $1 billion in assets under management (AUM) by 2020. Over time, the company launched new services like custodial accounts and smart transfers.
What is M1 Finance & How Does It Work?
M1 Finance is a hybrid fintech company that offers robo-advisory services and brokerage accounts for investors. It has over 80 uniquely tailored portfolios, each crafted by industry veterans and designed to cover a diverse range of investment strategies. The platform caters to both amateur and advanced investors by featuring a wide range of personalization options.
Investors who wish to take a more hands-on approach can pick and choose individual assets to invest in to create a customized portfolio which is then managed automatically by M1 Finance. On the other hand, investors who wish to spend a minimal amount of time within the app can let M1 Finance automatically manage their portfolios for them.
The company uses a pie-based model to represent investment strategies. Each asset occupies a slice on the pie. Users can create their own pie or download expert pies and merge them into their investment strategies. Slices on the pie can be stocks, Exchange Traded Funds (ETFs), Over the Counter (OTC) listings, and more.
Users assign target weights to each slice, which represent the holdings for that asset in proportion to the overall portfolio. A pie can contain other pies as slices. Each pie in M1 Finance holds up to 100 slices.
Friends on the app can share pies with each other. Every owner of an investment account on M1 Finance has their own pie. A single M1 Finance user can have up to five different investment accounts.
After a user has set the slice percentages, funds transferred to the portfolio are automatically allocated based on the percentage of the holdings for each slice. Users can easily see which assets are underperforming or overperforming their target weight. Slices that underperform shrink, while overperforming slices increase in size relative to the rest of the pie.
Slices can be edited or removed at any time. They can also be moved between different pies. M1 Finance will try to maintain slices at their original percentages by managing fund allocation.
M1 Finance claims to be a commission-free platform. It doesn’t charge users for basic operations like opening an investment account or making trades. However, users pay regulatory fees for trading stocks and ETFs.
These regulatory fees are charged by the Securities and Exchange Commission (SEC). A Trading Activity Fee (TAF) is also charged. Regulatory fees are usually measured in pennies and cents on most transactions.
M1 Finance also charges money on wire transfers, check requests, and transaction recalls like many traditional banks. It applies an inactivity fee of $20 to accounts that stay dormant for over 90 days.
In addition to its automated portfolio management and financial advisory services, M1 Finance also offers margin loans and credit cards. It also has a checking account called M1 Checking with a virtual Visa debit card. The checking account is insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).
Investors who use M1 Finance’s loans and rewards cards can sign up for a Plus membership. It costs $125 per year and provides users with a multitude of benefits that apply to various services throughout the M1 Finance app. With the Plus membership, M1 Finance investors get access to smart transfers and custodial accounts.
Plus members can also trade during both AM and PM windows. Interest rates are dropped to 5% for margin loans, as opposed to 6.5% for non-Plus members. In addition, M1 Finance members also enjoy superior rewards on their credit cards.
Business Model of M1 Finance
M1 Finance attracts customers by offering an all-in-one fintech platform to investors. It also acts as a digital bank system for those who aren’t interested in trading immediately. By storing their funds in a checking account and generating interest, M1 Finance provides prospective traders with a secure and convenient launch platform.
This also adds value to the website and app by providing investment education. This is especially useful for novice traders who are still learning the ropes. Some customers want an explanation of how things work rather than just relying on the robo-advisor to do their trading for them.
Through M1 Finance’s automated investment algorithm, users can easily allocate cash to various assets in their portfolio. This is done on the basis of preset weights that are represented by slices in a pie chart. By automating the investment process, M1 Finance improves user productivity and helps with reliable profit generation.
As a result, users prefer to use M1 Finance over more basic investment platforms that require more manual work and a larger time commitment. M1 Finance encourages users to spend more by portioning all their investments into neatly organized portfolios. These portfolios can be custom-made, or downloaded from a curated list that is crafted by industry veterans.
M1 Finance also has a feature that allows users to automatically invest their cash balance. This keeps users invested in the M1 Finance ecosystem and helps them iterate on their profits. In addition to helping users make smart investments in regular markets, M1 Finance also facilitates crypto trading.
By introducing crypto to its platform, M1 Finance captures a market segment with sparse competition. Currently, there are very few robo-advisor crypto trading platforms. M1 Finance is able to leverage its existing experience and technology base from traditional investing and apply the same to crypto.
In addition to automated investing, M1 Finance also offers a digital bank account and credit card. It also has margin loans that provide a line of credit using the portfolio value as collateral. With margin loans, investors can increase their buying power and capitalize on market trends at the right time.
Diversifying its offerings allows M1 Finance to attract a wide customer base. It also helps ensure more stable revenue generation, since the company offers a wide range of services within every stage of the investment cycle.
M1 Finance’s biggest rival is Fidelity as they offer similar services. While Fidelity has robo-advisor services and a wide variety of portfolio management options, it isn’t as streamlined or intuitive as M1 Finance. Fidelity users get a less polished mobile app, which means they are restricted to a computer if they want the best experience.
Fidelity also focuses on a more hands-on approach to investment, while M1 Finance allows users to build a passive portfolio with automated funding. Users who want a traditional advisory experience from a brokerage choose Fidelity. In comparison, M1 Finance is a far superior choice for casual traders who want to grow their portfolio with a minimal time investment.
M1 Finance is a private company and does not release its financials. While the company is estimated to have an annual revenue of around $63.1 million per year, it also has considerable expenses. These include things like staffing, hosting, platform, and development expenses. Due to the lack of data on M1 Finance’s financials, it is unclear how much the company spends on these expenses.
How Does M1 Finance Make Money?
M1 Finance makes money from four different revenue streams. These are fees and other revenue it earns from its Invest, Borrow, Spend, and M1 Plus services.
As M1 Finance is a private company, details about how much revenue it generates from these different revenue streams aren’t public.
This is the part of M1 Finance that deals with investing. Users create a brokerage account and add funds to start trading. M1 Finance provides them with automated portfolio management and investment recommendations.
Revenue is generated from interest on brokerage cash, lending securities, and payments for order flow. M1 Finance lends out cash from the accounts of investors to banks who pay interest on it. The company also gets paid by market makers for bringing business to their exchange.
By using their portfolio as collateral, investors can borrow money from M1 Finance. They receive a line of credit based on 40% of their portfolio value, with a minimum balance amount of $2,000. Margin loans provide greater leverage to traders by increasing their buying power.
In exchange for borrowing money, users pay interest to M1 Finance. The rates vary from 5% to 6.5% on margin loans.
Since M1 Finance is an all-in-one fintech solution, it also offers a digital bank. Users can open a checking account and receive a virtual debit card. Like regular banks, M1 Finance loans out the cash in a user’s account and receives interest in return.
It then splits this interest with the user. M1 Finance also gets money from interchange fees whenever a user makes a purchase with their debit card. This interchange fee is received by Visa who then splits a portion of it with the card issuer.
Members of the M1 Plus program get access to better interest rates, PM trading windows, bonus rewards, cashbacks, and many other perks. While the first three months are free for new members, a yearly subscription to M1 Plus costs $125.
M1 Finance Funding, Valuation & Revenue
M1 Finance is currently a private company, and its financials aren’t available to the public. Right now, it is unclear what the company is valued at.
However, M1 Finance has raised $323.2 million over seven venture capital funding rounds. Notable investors include Chaifetz Group, SoftBank Vision Fund, Clocktower Technology Ventures, Left Lane Capital, and Coatue.
In a July 2021 series-E funding round that raised $150 million, M1 Finance was valued at $1.45 billion. Since then, the company has not had any public valuations.
Annual revenue for M1 Finance is estimated to be around $63.1 million. But there is no official report to verify this. Given the recent upward trend in the fintech market, it is possible that M1 Finance could be making more than this figure.
Is M1 Finance Profitable?
M1 Finance is likely profitable. The company has very little overhead and likely employs a small workforce due to its mostly automated and online product. However, the company might have significant product development and advertising expenses that could affect its profit margins.
But given that the company has several reliable sources of revenue generation, it could be in a better place than some other startups. With global fintech revenue estimated to reach $188 billion in 2024, M1 Finance still has room to grow and expand into new markets.
We hope you enjoyed reading this detailed analysis of how M1 Finance makes money.
At the end of the day, M1 Finance is a company that wants to make it easy for you to get your financial house in order. The company has created a platform that anyone can use regardless of their experience with investing. They offer investment products that are designed to help you grow your money and reach your goals.
They have been able to differentiate themselves from other competitors by offering what many call “commission-free approach”: low-cost access to portfolios with no minimum balance requirements, no account opening fees, no annual maintenance fees, and no originating fees for clients who choose to use M1 Finance’s line of credit option.
We know it can be challenging to understand the business model of a company like M1 Finance, but we’re excited that you’ve taken the time to learn more about them and how they operate.
Thanks again for reading!
Originally posted 2022-10-17 21:53:05.