How Does M1 Finance Make Money? Analyzing Its Business Model

Executive Summary:

M1 Finance is a personal finance company that offers a variety of wealth management products. These include M1 Borrow, Invest, and Spend.

M1 Finance makes money via order flow payments, subscription fees, lending out cash, interchange fees, and interest on cash as well as short sales.

Founded in 2015 and headquartered in Chicago, the firm has raised a total of $98.2 million to this date.

What Is M1 Finance?

M1 Finance is a FinTech company that offers various financial products for borrowing, investing, saving, and spending purposes. Its products can be accessed via the firm’s website as well as through mobile applications (available on Android and iOS devices).

When investing, users can create a highly customized plan that fits their own needs and financial situation. They can either develop their own portfolio mix or invest into more than 80 expert-created portfolios.

Users can invest in stocks (both fractional and complete ones) as well as exchange-traded funds (ETFs) through M1 Invest. Investments can be conducted via individual, joint, IRA, or trust accounts. If users want to minimize their time spend, they can do so by opting into auto investing features.

Via M1 Borrow users can get access to loans issued by the company. Users can borrow up to 35% of their invested portfolio. Any user who has $10,000 or more invested in their brokerage account is qualified for a loan.

M1 Spend allows users to apply for a checking account that comes with an associated debit card (issued by Lincoln Savings Bank). Apart from withdrawing cash or paying for items, the account and card can be used to earn APY (annual percentage yield) as well as cashback rewards. The account comes with an FDIC-insurance of up to $250,000.

The Borrow, Invest, and Spend products can be accessed free of charge. If users want to unlock more features as well as better rewards, they can do so by opting into M1 Plus, the firm’s premium subscription service.

Lastly, the firm provides a plethora of informational content that guides its users on how to optimize their financial situation. 

A Short History Of M1 Finance

M1 Finance, headquartered in Chicago, Illinois, was founded in 2015 by Brian Barnes, the firm’s acting CEO.

Getting into business has been deeply rooted in his family tree. His mother, Brenda C. Barnes (who unfortunately passed away in 2017), was the first female CEO at PepsiCo. She later served as chairman, president, and chief executive of consumer goods company Sara Lee.

Brian’s father, Randall Barnes, was more drawn to the quantitative side of business. He spent the majority of his career at PepsiCo, for instance as treasurer. His dad ultimately became the person who taught Brian how to sell and buy stocks – at the age of 10.

He nurtured that interest over the years and soon after began investing by himself. That interest even carried over into his adolescence when he became an Economics and Mathematics major at Stanford University.

After graduating from Stanford, Barnes moved to work as an equity researcher at a hedge fund as well as in management consulting. But he soon realized that he wasn’t cut for the corporate life and eventually decided to quit.

He spent the next few months trying to learn how to code while exploring any potential entrepreneurial ideas he might pursue. One problem particularly stuck with him. Inspired by his early investing days, he continued to face frustration with existing brokerage platforms.

In an interview with Crain’s Chicago Business he recalled that he was “very underwhelmed by the tools that were available,” concluding that these tools “were difficult to navigate to find the information you wanted. It was way more complex than it needed to be.”

On top of that, commissions in the ranges of $7 to $10 per trade were dragging down profits, especially for retail investors with not much to spare. At the time, Robinhood already picked up steam as a commission-free stock trading platform.

Barnes’ idea was to build something of the same nature. But instead of focusing on high-volume stock trading, he decided to build a holistic wealth management solution that is designed around managing a portfolio of assets rather than simply placing trades.

He began working on M1 Finance in 2015. The development of the app took more than a year. That’s because FinTech companies have to comply with a plethora of regulatory requirements as well as meeting the needs of their banking partners. Lastly, since you’re managing people’s wealth, it is important to ensure proper encryption and security on the platform.

M1 Finance came out of stealth in September 2016 at the FinovateFall FinTech conference. The firm secured another $9 million in seed funding to get them a proper head start.

At the time, M1 was charging a 0.35 percent management fee for investments made on its platform. This put them in direct competition with the likes of Betterment or Personal Capital. But in December 2017 M1 announced that it would abandon its management fees altogether.

That move caused M1 to receive a heap of criticism from finance professionals and competitors alike. Dan Egan, a director at Betterment, tweeted out that “if you aren’t paying, you aren’t the customer, you’re the product,” he wrote. “And the priority/design will reflect that.”

The move did not have the adverse effects its competitors predicted, though. In fact, M1 was able to exponentially grow its assets under management (AUM) in the next few years thereafter. Most of the firm’s growth originated from friends and family referring the service to each other. In fact, over 80 percent of M1’s new customers join the platform through word of mouth.

In 2020, when the world was forced to quarantine at home and masses of retail investors, fueled by government stimulus checks, flocked to the public markets, M1 was able to grow from $1 billion to $3 billion in AUM.

Unfortunately, not everything was always going according to plan. In January 2021, Wealthfront’s Senior Director of Product Daniel Slate called out M1, alleging that an M1 employee tried to sneak into a customer research session where future products were being discussed. M1 Finance denied any wrongdoing, stating that said employee clearly stated that she was employed at M1.

How Does M1 Finance Make Money?

M1 Finance makes money via order flow payments, subscription fees, lending out cash, interchange fees, and interest on cash as well as short sales.

Let’s dive into each of these revenue streams in more detail below.

Payment For Order Flow

Whenever a user places an order to buy or sell a security on M1’s app, that order is then forwarded to a so-called market maker which compensates the brokerages (M1, in this case) for facilitating deal flow.

These market makers, similar to stock exchanges like the Nasdaq, make money on the bid-ask spread. They try and match buyers who bid on securities with sellers who try and sell these securities (ask).

A profit is then generated on the delta between what the buyer is willing to pay and the seller is willing to charge for any given security.

When a user sells a security on M1, that transaction is then facilitated by the market maker who then tries to sell that security. The sales price a user receives is oftentimes a little lower (a few cents, at best) than what he/she would get on the ‘open’ market (i.e. when trading on a stock exchange).

The market maker essentially pockets a few cents for each transaction and shares a fraction of that profit with the platform facilitating it (here: M1 Finance). But because trades are executed algorithmically, thousands upon thousands of transactions can be conducted at any moment in time.

As such, the more deal flow a platform like M1 provides, the more lucrative this type of arrangement becomes for both parties.

Investors, on average, are better off when benchmarked against paying a commission on each trade. Nevertheless, the practice of paying for order flow has had its fair share of criticism in the past.

For instance, critics argue that retail investors don’t always get the best quoted price. Second, the process lacks any form of real-time transparency due to the automatic execution of trades. Lastly, due to the sheer number of trades executed, it is believed that the process can also contribute to market volatility.


M1 Finance offers a premium subscription called M1 Plus for $125 per year. The subscription unlocks better conditions within its 3 core products, namely Borrow, Invest, and Spend.

An overview of the benefits can be found here:

how does m1 finance make money

The subscription can be cancelled at any times but continues on until it reaches the 1-year threshold. The idea behind offering a premium subscription is to entice users to stay with the platform and utilize its different products to eventually recoup the fee.

This motivates them to keep using the service, which in turn increases the touchpoints with which M1 can monetize them. Competitors like Acorns or Stash Invest provide similar offerings.


Users can get access to a line of credit via M1’s Borrow product. The portfolio is hereby used as collateral to safeguard the company against any form of payment default.

Borrowing money directly from M1 allows users to avoid paying taxes when cashing out on their securities (i.e. capital gains tax). Furthermore, they can deduct the cost of paying interest when filing for their taxes.

Users need to have a minimum portfolio balance of $10,000. Interest rate is equal to 3.5 percent for users on the basic account and 2 percent for users subscribed to M1 Plus. Consequently, M1 makes money on the interest that it charges to borrowers.

Interest On Cash

M1 Finance, just like any normal bank, uses the cash residing on user accounts to lend it out to other institutions, such as said banks.

They then collect interest from these institutions (also called Net Interest Margin). For 2019, according to Statista, net interest margin for all U.S. banks was equal to 3.35 percent.

M1 Finance can lend out the cash that is held either in the investing accounts (via M1 Invest) or its cash accounts (M1 Spend).

The Invest accounts are SIPC insured for up to $500,000 while cash held in the M1 Spend accounts is insured by the FDIC for up to $250,000.

Interest On Short Sales

When short selling, the trader believes that the security will decrease in value by a set future date (the so-called expiration date).

First, the trader has to borrow that security from an institution (in this case a brokerage such as M1) and sell them at the current market price.

The goal is to re-purchase those securities at a lower price in the future (but not later than the expiration date) and then return the borrowed securities to the lender (M1, in this case).

Short sellers aim to profit off of the difference between the earnings generated from the short sale and the cost of buying back the securities. This is commonly referred to as short covering.

M1 Finance generates income by charging interest fees on the securities that it lends out. The interest rate is dependent on the value of the security, more specifically its demand and available supply.

Interchange Fees

M1 Finance offers a VISA debit card in cooperation with Lincoln Savings Bank. Whenever you pay with a debit or credit card, a so-called interchange fee is applied.

This fee represents a percentage of the purchasing price which is paid by the merchant who receives that payment. It normally lies within the 1 percent range.

M1 Finance receives a portion of those fees every time the debit card is used. The actual percentage share is not publicly disclosed.

M1 Finance Funding, Valuation & Revenue

According to Crunchbase, M1 Finance has raised a total of $98.2 million across 5 rounds of venture capital funding.

Notable investors into the company include Left Lane Capital, Chicago Ventures, Jump Capital, Clocktower Technology Ventures, and many more.

A valuation of the company has not been disclosed during its latest funding round (Series C). As previously stated, M1 currently has $3 billion in AUM. One of its major competitors, Stash Invest, poses a similar number and is currently being valued at $800 million.

TechCrunch reported that the company is able to extract around 1 percent of the assets in its ecosystem as yearly revenue. With $3 billion in AUM, the firm is on a $30 million revenue run-rate for 2021.

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.