Two years ago, robo-advisor M1 Finance had less than $1 billion of investment assets, employed 40 people, and had raised $25 million in financial backing. Since then it’s taken a quantum leap and now boasts $6 billion of assets, 350 employees, and additional backing of $300 million.
Behind M1 is a 32-year-old Stanford grad who envisions the business evolving into a private bank. “It’s everything that Goldman would offer to someone who has $100 million, but we can digitize and provide it to the person who has $100,000,” says Brian Barnes, M1’s founder and CEO. “And we can do it in a seamless, intuitive, automated, personalized, enjoyable platform.”
Speaking with Barron’s Advisor, Barnes talks about products and services M1 offers that its rival robos don’t—and vice-versa. He shares the impact of the current market meltdown on the young business. And he explains why, a few months ago, he personally bought a bank.
I think it’s safe to call you a wunderkind. You founded M1 at age 25 and have built assets under management to $6 billion in just seven years. What’s your background? It feels like I’ve been in the industry for quite a while: Seven years at a start-up can seem like 15 or 20. But truthfully a lot of the pertinent stuff started when I was quite young. I was introduced to finance and investing early and given access to a brokerage account at 10 or 11 years old. I just immediately latched on to the notion of investing and money management, and I became a personal finance nerd.
I did undergrad at Stanford, where I majored in economics and math. After school I worked at a hedge fund doing equity research, and after that I went to a management consulting firm.
I got fascinated with the ability for technology to automate more and more complex things over time. M1 sprung from my interest in personal finance and ways to optimize it. I thought that if you created a financial firm 100% on a digital infrastructure, you would be able to do a lot more in terms of the people that you could serve and the products that you could offer than if you did it with the legacy branches and people.
Who introduced you to investing when you were young? My parents. I owe quite a bit to them. Both of my parents were successful businesspeople, my mom in the executive operator role, my dad in more of the finance role. So I got a dual education. I like to joke that childhood stories were like business case studies rather than Little Red Riding Hood.
Before M1 there was Wealthfront and Betterment—which have $25 billion and $34 billion of assets, respectively. And there’s a gaggle of other robos like SoFi and Acorns. How is M1 different? One way is the audience that we go after. I think a lot of the fintech players are targeting the people that were ignored by traditional finance, young people Schwab would ignore because they don’t have that much money.
We want to go headfirst against Schwab, Fidelity,
Bank of America, and serve the affluent user base—people with five, six, low-seven figures of investible assets. People who are served by the traditional finance sphere, but I would say not served well. The ultra-affluent still get significantly better financial options than the affluent do. And there’s no reason that needs to be the case.
The second is our products. For us, it’s about personalization, automation, and doing more sophisticated things with ease and simplicity. Whereas I feel a lot of the other firms do basic things simply, we do more complicated things simply. Some of our rivals put you in a portfolio of six to 10 ETFs; you have no customization, no selection, you can’t differ.
M1 extends that automation to any portfolio that any person would ever want to create, using any stocks or ETFs that trade on the major marketplaces. It’s much more akin to designing your own ETF or designing your own mutual fund and then allocating money against that. And so every single person gets a personalized portfolio.
We do a bunch of options that can mimic Wealthfront and Betterment if you aren’t sure or don’t know how to customize a portfolio. But for us, it’s really more of the separately managed account writ large.
We also offer borrowing at lower rates than you can get at any bank or any brokerage firm, if you borrow against your investment portfolio. We have a unique checking account and credit card and automated rules that let you maintain low cash balances. Your excess money gets swept over into an IRA, and when you tap your IRA, it goes over into a taxable account.
So it’s almost as if you have a personal finance team optimizing all of your finances. We just do it with software. And every single person can create a personalized plan, customize it to their heart’s content, automate it, and have money intelligently allocated according to that plan.
What does your median customer look like? Our average account balance after a year on the platform is around $25,000. After two years it’s $40,000. And it continues to grow.
The typical curve of someone coming on to M1 is, you sign up and have $0 on the platform. You then might try it with $1,000 or $2,000, maybe $10,000. You get comfortable with it. Four months later, you put $25,000 in, and then a year later, you say “OK, I’m going to consolidate my Fidelity IRA, my E*Trade trading account, and my JP Morgan checking account onto M1.” And that’s when $300,000 comes over.
We are continuing to see that exact same behavior. Even if we shut off new client acquisition today, we would still grow quite rapidly for many years from just the people who have signed up to the platform over the past year or two.
So if M1 is an adolescent, what do you want it to look like as an adult? I would agree we’re an adolescent. We have only scraped the surface in terms of what we can do. The adult version of M1 is a digital private bank. It’s everything that Goldman would offer to someone who has $100 million, but we can digitize and provide it to the person who has $100,000. And we can do it in a seamless, intuitive, automated, personalized, enjoyable platform.
Schwab was the next-generation platform in the 1970s; they had a better product, better pricing, and they looked at
and Merrill Lynch as the old industry incumbents. Today there’s a new tool kit and a new experience available. Younger people demand more. They don’t want to sit across from a person in a suit with mahogany walls and desks and stuff like that. And M1 is building what will be the next-generation financial institution.
What impact has this year’s market meltdown had on M1 as a business? We monetize mostly on assets under management, so when asset values fall, we take a short-term hit to revenue. That being said, if you’re building a financial institution, big things happen every seven to 10 years. And if you want to be around for 30 years, you’re going to go through five or six of these cycles.
We didn’t build our firm to be reliant on stock market mania or stock market depression. We are a financial institution. We’ll be fine in good times and bad, and it’s more about long-term systematic compounding than it is about how we do in any quarter or year. If you zoom out, this selloff has been a short-term shock, but I think long-term, it will be a blip on the overall growth curve of M1.
Have new asset inflows slowed down this year? New users and incoming assets are still quite high and accelerating. I don’t think we’re going to 6x in two years, just from the law of large numbers, but we are still growing quite rapidly. We did have the market take a little bit of that away from us. But as the market has dropped, we’ve stayed flat to up in AUM. We have more new assets coming in to fill the hole.
How about trading activity? Is it down? Not really, and I think a lot of it is because M1 isn’t oriented around trading. We think there’s a huge difference between trading and investing. They both start with buying a stock, but for completely different reasons. People who are trying to buy at 10 a.m. and sell at 2 p.m. want crazy price movements. If you’re an investor, you’re buying ownership stakes in asset classes, in companies, and you just have a much longer time horizon.
The way M1 is structured, we only buy or sell twice a day, in the morning and the afternoon. It’s much more about designing a portfolio and allocating against the portfolio. You can’t trade in and out of securities on a daily basis. So for us, trading volume has been pretty consistent.
As interest rates have risen, has margin borrowing slowed down? No. The amount that is borrowed is continuing to increase, and it’s grown with the overall platform.
M1 does lack a few offerings some of your competitors have. Are you looking to add account aggregation? Tax-loss harvesting? Crypto? Over a long enough time horizon, all of the above. We have three main pillars: invest, borrow, and spend. If we were to add breadth over time, it would be probably in the insurance realm. But for the time being, it’s about going deeper in each of our pillars rather than adding more breadth.
For example, on “invest,” we have plans for crypto at some point. We would like to add alternative investments like hedge funds, private equity, and venture capital. We want to be the digital private bank. Today if you have $100 million dollars, you can invest in VCs. If you have $100,000, you can’t. Being able to digitize that would open it up to more people.
On “borrow,” we only do a portfolio line of credit now. But we will be offering mortgages, HELOCs [home equity lines of credit], auto loans, unsecured loans, and really focusing on handling all borrowing needs.
You’re not set up to offer access to CFPs as part of a hybrid offering. Is that something we could see in the future? No, I think we would have CFPs on payroll to be treated more akin to doctors and lawyers, where you can pay for an hour phone call, as opposed to paying them whether you use them or not. It would be for a scenario that’s outside the norm—you want to buy a home or if you’re consolidating accounts.
You recently bought a small community bank in rural northern Minnesota, First National Bank of Buhl. Why did you personally buy it, and what are your plans for it? Over time, M1 wants to own a bank. We want to be a digital private bank, so we need to be able to support any banking feature or functionality, including checking accounts, payments, savings accounts, and different types of loans. But we’re not ready to become a bank holding company, which involves a timeline and a process that is probably more onerous than going public. And M1 was not ready to make that journey.
A unique opportunity presented itself, and I said I can take a half step to do all of this by purchasing the bank. The bank serves one town with a population of 900 and another with a population of 11,000. There’s nothing else for 25 miles in any direction.
The opportunity was, as opposed to starting a bank from scratch, to support a very small bank in its local community and then build a digital infrastructure such that it can support what M1 wants to do over long periods of time. I talked to them for the first time in January of 2021 (it was negative 30 degrees in northern Minnesota). I had acquired the bank by July of 2021. And I am currently investing very heavily in the technology to support a digital banking infrastructure.
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