Is M1 Finance Account Cash FDIC/SIPC Insured? For How Much?

Is M1 Finance FDIC protected? For how much brokerage, IRA investing accounts cash and funds have SIPC insurance coverage?

Is M1 Finance FDIC/SIPC Insured?

The quick answer is "yes and no," because investments serviced by M1 Finance are not insured by the FDIC. However, investor accounts are insured by the Securities Investor Protection Corporation (SIPC) up to $500,000 per account. This means that if M1 Finance were to go bankrupt or fail for some reason, SIPC guarantees each account up to that limit, with $250,000 of investors cash protected within that account. This is very similar to FDIC rules. What SIPC does not guarantee that any investment will generate a positive return, so investors are always at risk for a company they own stock in to fail and render their investment worthless.

M1 Spend and M1 Plus accounts are FDIC insured up to $250,000 and further insured through Lincoln Savings Bank.

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How Does M1 Finance Make Money Without Charging Commissions?

M1 Finance charges no commissions on any trades. So how in the world does it make money? Using several other methods, as it turns out.

- M1 Finance earns money by charging interest for various activities. These include margin loans and lending securities.

- M1 can also loan out idle cash in its customers’ accounts. Typically, M1 loans this cash to banks on an overnight basis because customers may want to withdraw the money or use it to make an investment the following day.

- M1 Invest customers can sign up for M1 Spend, which is the company’s cash management account. An M1 Spend account typically holds more cash than an M1 Invest account, and the broker can make money off this cash balance in the same way it does with a brokerage account.

- Moreover, the Spend account has a debit card attached to it. Every time a cardholder makes a purchase, M1 receives a small percentage of the transaction, called an interchange.

- M1 Borrow is the firm’s margin loan service. Currently, the broker charges either 3.5% or 2% for a margin loan, depending on the account. While this is a fairly low rate, it does provide a source of revenue for the broker.

- M1 Finance receives payment for order flow. In a nutshell, how this works is M1 sends orders to specific market makers. These middlemen between buyers and sellers make money off the bid-ask spread, and they send a portion of this spread to M1 as compensation for sending orders to them. The exact amount M1 receives is rather small, usually less than a penny per share.

- M1 Plus is a membership program that offers several perks that non-Plus members don’t get at M1. These include a cash back program, interest-bearing accounts, and more ATM fee rebates during the month. The cost of M1 Plus is $125 per year, which can really add up to a lot if enough clients sign up for it. Sometimes the broker offers the program at a discount.

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- Plus members earn 1% on uninvested cash in their M1 Spend accounts. But recall that the broker charges 3.5% (Plus members pay just 2%) for margin loans. The difference between what the firm charges in interest and what it receives is called net interest margin. Banks do the same thing when they loan out money at one rate (for auto loans or mortgages, for example), then pay a much lower rate on idle cash sitting in checking and savings accounts.

Although M1 Finance has several revenue streams, it doesn’t appear to make a lot of money from them. Because the brokerage house offers fractional-share trading, there won’t be much idle cash sitting in accounts. The M1 platform automatically invests cash balances above $25, so we can’t expect a great amount of revenue from idle cash. And the net interest margin the company is making is quite low by industry norms. Overall, M1 clients are getting a good value.

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