- In this video we're gonna find out
how exactly M1 Finance makes money
so that people like you and I
are able to use their platform for free.
This is always a good thing to know
so you have an idea
of if you're getting taken advantage of or not.
Let's think about this logically.
The only way a business survives
is when it actually makes money.
But nowadays there are so many companies out there
giving us their services for free
and not charging us a dime.
It kind of makes you scratch your head a little bit
because they've gotta be making money somewhere.
But the real question is
where are they making that money?
For some it's not so obvious.
Take, for instance, Facebook,
who also owns Instagram,
they make about 85 percent of their money
through advertising to people like you and me.
Facebook isn't advertising itself to us, though.
Companies are paying Facebook to use their platform
to advertise their products and services to us.
What Facebook is doing
is giving these advertisers our data
so that these companies can target people they know
would be interested in whatever they're selling.
It's extremely profitable too
because in 2017, Facebook earned
almost 40 billion dollars with a B in advertising.
On the other hand,
we know how companies like Uber make money.
They have their drivers drop us off
at a place like Denny's for a late night snack
when we're hammered drunk
and we pay them for that service.
Unfortunately Uber is actually trying
to still earn a meaningful profit
but that's besides the point.
Hey, I'm Jarrad with an A,
and on this channel we talk about
all things personal finance, investing,
and we try to have some fun in the process.
I have zero issues with companies trying to make money.
If someone is giving me a service for free,
then they deserve to be compensated somehow, some way.
I honestly usually don't mind
as long as I know how they're actually getting paid
so I can decide whether or not
I'm willing to give them what they need
to make that happen.
Free investing platforms have been popping up
everywhere over the past handful of years.
Some are trash and others are amazing.
With the rapid rise of these investing apps,
it's always good to stop
to take a look into how they actually make their money.
Are they selling my data without me knowing
like Facebook has been for years?
Are they charging me a monthly fee,
or are they making it in other ways
that just aren't so obvious?
M1 Finance was founded back in 2015
and were actually charging to use the platform at first.
As of 2017 they switched from a paid model
to a free model.
They saw where the future of finance was going,
and the only way for them to stay competitive
was to change.
By now if an investing platform isn't free,
then most people like you and I
just aren't that interested.
Now this has become an industry standard by now
and probably will be forever.
It's one of those things
where once you open that box up,
you can't put the monster back inside.
Most of us don't realize this,
but brokerages like M1 Finance
make most of their money on the back end
than they do on the fees that they charge.
So lowering the barrier to entry
by removing the pay wall through a monthly fee
will increase their user base
which in turn will increase the amount of money
they're able to bring in every single month.
I'm good with this
as long as these companies continue to stay in business
so I can use 'em.
M1 Finance has actually been pretty transparent
on how they make their money.
They published a whole article on the topic
so let's dive into it.
The first way they make money
is through earned interest on cash
sitting in the brokerage accounts.
It's the exact same way that banks earn money
on cash sitting in your savings account
except they pay you interest on the money
and M1 Finance doesn't.
As we all know, national, regional, and local banks
like Chase, Bank of America, PNC, and so on
pay us extremely low interest
on their savings account
when we have money in those accounts.
By extremely low, I'm talking, like, .09 percent.
It is absolutely laughable.
On the other hand,
many online banks are willing to pay us
higher interest rates,
places like Ally, Capital One, CIT Bank
are all willing to pay us over 1.6 percent
for holding money in their savings accounts.
If you have a thousand dollars
sitting in your savings account,
then a bank would lend that money out to other people,
to businesses, and potentially other banks
at a rate that will cover the interest
they're paying out to you,
plus earning a profit in the process.
They give you 1.5 percent
and they lend your money out at a 3.5 percent rate
so they earn a two percent return
on the money that you have in their account.
This is what M1 Finance does
and this isn't unique to M1 Finance either though.
Because whether you know it or not,
every single investing platform that you use
is doing the same thing with lending out your money
that you have just sitting around in the account,
the account that is not invested.
With the free version of M1 Finance,
they do not give you a return
like a normal savings account would
because they're not claiming to be a savings account.
They are a brokerage firm for investing.
So if they lend your money out
at a three percent rate,
then they keep that full three percent as profit.
This is why you shouldn't use a brokerage account
or an investment account like a savings account
because you're not getting any interest
on having the money just sit there.
Since they need to have your cash ready for you
if you want to invest it or withdraw it,
they primarily lend the cash out to banks
on an overnight basis.
Don't worry because they will never
not have your money available for you.
Never not have, that was a double negative,
but you know what I'm saying.
We're about to get into the weeds a little bit
on the next one,
so stay with me because this is something
that you should be aware of.
M1 Finance's next revenue stream
is from interest on lending securities.
Now this is basically short selling securities like stocks.
Short selling is sort of complicated
but not really.
Now it's not something that you just
wake up one morning and say to yourself,
"Hm, I'm gonna short sell", we'll say, "Apple stock
"and make a butt load of money."
And then you do it and make a butt load of money.
It is very risky,
so don't even think about trying it.
By don't even think about trying it,
I mean if you really don't know what you're doing,
just don't go experimenting.
By the way,
butt load is a real unit of measure
for wine or whiskey.
It's equivalent to three hundred
and eight four gallons,
just so you know.
Short selling is when an investor
borrows a stock from a place like M1 Finance,
sells that stock,
then buys that stock back to return it to the lender
that they got it from originally,
like M1 Finance.
M1 Finance can make money from this in two ways:
The first way is through the interest rate
that they charge the borrower
for lending out that stock.
The second way would be
through the amount that they charge
to lend a security to reduce their risk.
So the borrower would pay 102 percent
of the stock they borrowed
so that M1 Finance kind of has some collateral
just in case things go bad.
When I say collateral
it's kind of like taking out a business loan
and putting your house up for collateral.
If you default on that business loan,
then the lender can potentially take your house from you.
Next, they offer a feature called M1 Borrow.
No, not Morrow like my last name,
I said borrow.
Borrow.
This is essentially just a line of credit
they're offering you on the money you have
in your portfolio.
It gives you a chance to stay invested
and still have access to cash.
That is known as portfolio margining.
They charge you an interest rate to borrow this money
which I believe right now is about 3.5 percent,
and that rate will also change
as short term interest rates do.
This is simple way for someone to have access to cash
without doing additional paperwork,
going through a credit check,
or things like that.
They also don't let you borrow on the full amount
in your portfolio, though,
so keep that in mind.
Only about a third is what they let you borrow.
So if you have $15,000 invested,
then they'd let you borrow about $5,000 of that.
If you're finding value in this video,
please Hulk smash that thumbs up button.
M1 Spend is another revenue stream.
Now this hasn't officially launched yet,
but it's a checking account
that comes with a debit card.
They'll make money in two ways with this:
The first is through the interest
from the cash in your account,
kinda like what we talked about earlier in the video,
but this is coming directly from your checking account
and not brokerage account.
The second way is through interchange fees.
Now these fees are earned when you use your debit card.
This is one way that actually
a lot of banks and credit card companies
have been making money forever.
The consumer like you and I
never actually see these fees,
but businesses where we spend our money
usually pay that fee every time we swipe our card
or purchase something through their online store.
Another behind the scenes way they make money
is payment for order flow.
This is a process that happens
every single time you buy or sell securities
on the stock market,
but most people have zero clue it's happening
because it happens really fast.
You tell M1 Finance that you wanna sell a stock.
They actually use a third party
to find a buyer for what you're selling
and complete the transaction.
There are many of those third party companies out there
for M1 Finance to use,
so that third party company pays M1 Finance
for a price per transaction
or a price per share or some rate
to actually work with them.
It's kind of simple,
but also complicated and a little bit more in detail
so I guess you could say that it's complicated.
Hopefully that picture helped.
M1 Finance offers something called M1 plus
that has a membership fee.
The cost is $125 per year
and gives you access to additional features
that you don't get when you use the free version,
things like two trading windows
as opposed to one;
a lower borrow rate;
a metal debit card;
a 1.5 interest rate on their checking account;
one percent cash back on that card;
and many other features.
Hopefully that helps shed some light
on how M1 Finance actually makes money
so you don't think that they're doing something
shady behind your back
because they're really not.
If you are interested in opening a free account
with M1 Finance,
then please use the link
in the description of this video to do so.
It is an affiliate link
so it helps support myself and my dog Molly
at no extra cost to you,
and honestly they are my investing platform of choice.
I'll have videos here to your left
that have to do with my personal M1 Finance portfolio
and other things you need to know
about the platform in general.
Check out the description for more resources and playlists
to help you out with all of your personal finance
and investing needs.
Make sure to Hulk smash that thumbs up button.
I'll see ya in the next one, friends.
Aydios.