How does M1 Finance make money?

• Interested in how M1 generates revenues?
• See how their business model supports order flows and pricing.
• Check out who M1 competes with.

M1 Finance offers self-directed and advisory services to make your money work for you. Thanks to an innovative approach to personal finance management, they have experienced rapid growth in a fiercely competitive market.

Find out how M1 Finance's business model has allowed them to fund their business and grow as quickly as they have. Let's dive in!

What does M1 Finance do?

Founded in 2015 with headquarters in Chicago, this fintech firm has raised nearly $100 million to date. M1 Finance offers investors and traders a range of financial products for investing, borrowing, saving, and spending.

Users can access all M1 Finance products through their accounts on the official company website. M1 Finance also offers a mobile app for robo advisory services and other functions. When investing, platform users can create a custom portfolio of assets to suit their investment needs.

You have a choice of creating your portfolio or choosing to invest in one of the company's 80+ portfolios created and managed by expert traders and financial advisors. It took the company a year to develop its app, launching it to investors and advisors in 2016 during the FinovateFall FinTech conference.

After securing $9 billion in seed funding, M1 Finance started operations, with the firm charging clients a 0.35% fee for managing investments made through the platform. This strategy made M1 Finance a competitor to industry giants Betterment and Personal Capital.

However, in December 2017, M1 Finance announced they were abandoning management fees. After seeing the success of trading apps like Robinhood capturing millennial and Gen Z market share, the company decided to follow a no commission or fee strategy.

In the coming years, M1 Finance saw its assets under management swell, with more users coming to the platform after recommendations from friends and family using the service.

During the pandemic of 2020, M1 Finance benefitted from the millions of people left unemployed during the lockdowns. The company saw its AUM grow from $1 billion to $3 billion by the end of the year.

How does M1 Finance work?

M1 users can invest directly in stocks using fractional or whole shares, as well as several commission-free ETFs, with their own investment strategy using individual, joint, trust, or IRA accounts. The company also offers a range of auto-investment products through its robo-advisory service.

M1 Finance offers its users loans, where they can borrow up to 35% of their invested capital on the platform. To qualify for the lending facility, the user must have at least $5,000 in their M1 account.

The M1 Spend platform also allows users to apply for checking account facilities, featuring an associated debit card linked to the account. Users can withdraw cash from ATMs, pay for goods and services, and earn APY, along with cashback rewards.

All M1 Finance accounts come with FDIC insurance for amounts up to $250,000. Users can also access the Borrow, Invest, and Spend accounts at no charge. To unlock more platform features, users must opt into M1 Plus, a premium subscription service.

M1 Finance also positions itself as a market leader by offering its users a vast collection of financial resources for learning about financial markets and managing their finances.

How M1 Finance makes money

M1 Finance makes money using the payment for order flow model, subscriptions for their premium M1 Plus service, interchange fees, interest on cash loans, and fees for stock lending.

Payment for Order Flow

When a user places a trade using the M1 Finance platform, the company routes the order to a high-frequency trading firm (HFT) which then makes a market on the stock. The HFT arbitrages the difference on the bid and asks on the offer, netting a small commission for processing the transaction that it shares with M1 Finance. This process happens in nanoseconds.

The client benefits as spreads (the difference between the bid and ask) at the HFTs are generally lower than the major exchanges, while there's no impact on order execution for the client. The client also doesn't have the backend commission come out of their trading account. The market maker essentially uses the opportunity to trade on the user's trade, making money on the spread between the bid and the ask.

Some finance experts say that payment for order flow makes the client the product. However, it's the only way that brokers like M1 Finance can do away with charging commissions on trades.

Subscriptions

M1 Finance also provides users with a premium subscription service, "M1 Plus," for a subscription fee of $125 per year. Subscribers get the added advantage of unlocking the Borrow, Invest, and Spend functions of the M1 Finance offering.

Interchange fee

M1 Finance gives its users a checking account and Visa-backed debit card, allowing them to spend directly from their account on the platform. The company charges a processing fee on all transactions.

Interest on short sales

Short selling involves traders "borrowing" shares from M1 and then selling the shares on the market, making money when the asset price declines and they can buy back the shares. The trader must pay interest on borrowing these shares, which M1 banks as revenue.

Interest on cash

M1 Finance has over $3 billion in AUM. It loans out its cash balance to banks and other financial institutions for interest.

Lending

M1 users also have the option of taking loans against their portfolio value, provided they meet the platform's lending criteria. M1 charges interest on the outstanding amount in return for creating the loan, just like any other bank does with a personal loan.

Future growth engine

Since reaching the fabled $1 billion milestone of AUM, M1 Finance added more than 229,000 broker accounts in 2020, increasing AUM to $3 billion. That figure represents an 83% growth in user accounts year-on-year and a sign that many people opened accounts with the firm during the pandemic.

Today, M1 Finance has more than 500,000 users utilizing the company's financial management products.

The M1 Finance CEO states that the company never allocated itself a large marketing budget since more than 80% of its new business comes from word-of-mouth advertising by its clients. The company prefers to reinvest its earnings back into the platform, creating new investment and money management products for its users.

Competitors

M1 Finance operates in the money management sphere, and it competes with discount brokers and advisory services in the no-commission space. As a result, M1 Finance has significant competition from established players like Fidelity Investments, TD Ameritrade, The Vanguard Group Inc, Schwab, and E*TRADE, as well as online brokerage firms like Wealthfront, Robinhood, Webull, eToro, SoFi, Acorns, and Ally.