Editor’s Note: This post ran in the San Antonio Express News and Houston Chronicle in December 2018, but for some unknown reason I forgot to post it here, back then. Anyway, I needed to post this because I noticed the stocks my younger daughter picked for her account were ridiculously suited for the COVID-19 economy. Surely I could raise $100 million for her hedge fund launch, tentatively titled Hedgehog Capital.
One of the evergreen problems of personal finance is how to entice non-investors – especially the young’uns – to cross over the hump into capitalism, to own some stocks.
In the old days of stock investing – maybe two generations ago – this meant sitting down with Daddy’s highly paid stockbroker in a leather and wood-paneled room, selecting prudent choices from the “Nifty Fifty” list of blue chip companies, and paying him hundreds, or thousands, of dollars every time you traded.
One generation ago, a combination of low-cost trading and online access radically democratized that process, removing almost all the guardrails. My generation learned the joys and pains of picking our own stocks and ETFs, trading as often as we liked from the comfort of our own laptops for a few dollars per trade, or annual fees of less than $100.
Around 2010, robo-advising improved upon the old free-wheeling ways, matching an individual’s risk tolerance with low-cost, passive portfolios that required no thinking and reintroduced prudent guardrails without the need for expensive human advisors.
2018 means you can1 use a hybrid robo-investing app like M1 Finance to invest and trade for free, with a starting amount as little as $100, rebalancing your portfolio while zipping down the highway at 65 miles an hour. (Note: This is neither driving nor investing advice. If you do rebalance your portfolio while driving, wear your seatbelt in the backseat of a Lyft or Uber ride.)
In fact, the first time I used the M1 Finance app I was driving down the highway taking my 13 year-old to school, and I told her to build herself a stock portfolio. (She had her seatbelt on, I served as Uber daddy.) She’s my willing guinea pig for new finance apps.
She agreed to fund her portfolio with $100 of her own hard-earned money (Ok, mostly from losing teeth to the tooth fairy, if we’re being honest).
She picked 6 stocks, all household names you’d recognize, plus 3 mutual funds. After linking a bank account for funding the portfolio, the app prompted us to automate additional contributions. We did not, as teeth do not grow on trees and my daughter’s sources of funds are few and far between right now.
Over time, as her assets shift in value, the app can automatically rebalance her original allocation with new contributions, if she makes any.
Things I like about this app:
- Extremely low starting funding amounts, as little as $100
- A very intuitive user-interface on your phone with color-coded “pies” showing your asset allocation. Easy rebalancing to maintain the original allocations over time and with new investments.
- Fractional share amounts allowed. So if each Apple share cost around $200, you could own one-tenth of an Apple share for $20. This matters for investors just starting out. (FYI, she did not choose Apple.)
- No fees to invest or trade
- Hybrid robo-investing. You can take guidance on pre-set “robo-portfolios,” or you can build your own portfolio. Or you can do a hybrid combination. Choose your own adventure.
Two features of the app could be considered, by some, a mixed blessing. The first is that purchases or sales only happen once a day on the M1 Finance platform. With trading and management free, that rule keeps costs low for M1. From my perspective, once-a-day trading is a feature not a bug, since day trading will only make you poorer in the long run. I think you should sell or change asset allocations somewhere between every two decades and never, so I’m not concerned about this limitation. Day trading folks, obviously, will avoid this platform.
Another mixed blessing, ironically coming from me because I’m obsessed with fees, is that M1 Finance is free. Normally low cost is good, and free is the ultimate low cost.
Betterment and Wealthfront, two well-known robo-advisors which I have not used but about which I have a good impression, charge 0.25 percent of assets under management, which is already a rock-bottom price for investment services. Acorns, a robo-advising app I do use and love, also charges 0.25 percent.
But does no fee investing even make sense? I’m not sure. I’m cautious about free in this case, because of a basic business rule.
That rule is that if you aren’t paying for the product, then you are the product. That’s how Facebook works, obviously. That’s how network television works. The real product of television and Facebook is not our infotainment, but rather delivering our eyeballs to advertisers. Anyway. That’s my worry when I see M1 Finance is free – I assume they are delivering my eyeballs to somebody. And if not now, then possibly in the future.
How does M1 Finance claim they will be making money, if not charging fees?
From online reviews their CEO says M1 will make money from securities lending. That’s something that traditional brokerages do also, without necessarily emphasizing it as an important part of their business model. I’m skeptical this will earn them enough to survive.
Also, the CEO says they may develop other products with fees in the future. I guess that’s the part I’m cautious about, at least for the future. Without knowing exactly how my eyeballs – or my daughter’s eyeballs – will be delivered to advertisers, I don’t know what M1 Finance will ultimately look like.
For now, however, it’s a pretty cool on-ramp to the superhighway of low-cost, low dollar investing.
(By the way if you want to sign up for M1 Finance and get me a referral fee, go ahead and click the M1 Finance referral button here. Why not? It’s $10 for me. Or sign up for the even more totally awesome Acorns app and use my referral button. I think that’s $5 for me. I think you would get a similar matched $10 or $5 incentive. Whatever.)
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- I wrote this post in 2018 and I decided not to update this since its an artifact of when I originally wrote this post/column ↩