An investing platform founded by a 25-year-old went free - and now it's facing a backlash from its rivals
- Chicago-based M1 Finance made its investing platform free in December.
- Now its larger rivals are attacking the move as "desperate" and bad for wealth creation.
Chicago-based investing startup M1 Finance made a bet that it could become a financial services juggernaut by charging its users nothing to use its platform.
Now, some larger players in the automated investing space are criticizing the move.
M1, which was founded by CEO Brian Barnes when he was 25, originally charged users 25 to 40 basis points to use its platform, which allows users to buy fractional stocks and invest in pre-built portfolios. In December, it decided to go free, and make money strictly on the backend, by selling flow to trading firms and lending out non-invested funds sitting in users' accounts to banks. The company also plans to offer margin trading to its users.
Making the core-business free will draw people to the platform, according to Barnes. It's a strategy that worked for Robinhood, another investing startup that has lured millions of users to its free stock trading platform since launching in 2012. Since going free in December, M1 has seen daily inflows hit as high as $1 million, and a 10-fold increase in the number of new accounts each day.
Still, M1's robo rivals aren't convinced the strategy will work for the small company.
"It is a desperate move from a late entrant," Andy Rachleff, the chief executive of Wealthfront, a California-based roboadviser, told Business Insider through a spokesperson.
"Andy is not wrong," Dan Egan of Betterment, a New York-based roboadviser with more than $11 billion in assets, told Business Insider. Egan expressed his concern about M1's strategic shift in a tweet.
"If you aren't paying, you aren't the customer, you're the product," he wrote."And the priority/design will reflect that."
The criticisms are striking. For one, Betterment isn't charging customers who roll over $500,000 or more into a retirement account with the firm for a year.
And it wasn't so long ago that Betterment and Wealthfront were facing a backlash from larger financial services firms when they launched shortly after the financial crisis. Then, it wasn't clear roboadvisors would be able to scale by only charging 25 basis points for financial advice, according to Grant Easterbook, a financial technology expert and chief executive at DreamForward, a fintech company.
"People made the same argument about low-cost 'robo' advisers," Easterbrook said. "That they were making so little money subsidized by venture capital dollars that they would never succeed, that they would go bust during the first downturn they faced."
A different story
Charging customers nothing is a different story, according to Egan.
"If you're a broker you don't care if the client's money is growing," he said. "You are just connecting buyers and sellers."
In a broker model, a company typically makes more money when users make more trades. Egan said if M1 is making money on peripheral businesses, then those businesses will become the firm's focus.
"If you're a broker, then your incentive is to trade as much as possible, and to hold as much cash as possible," Egan said. "This isn't evil, but generally this hurts people's ability to grow their wealth."
"We do all the trading in one window," Barnes said. "M1 is very limiting from a trading perspective but it is a phenomenal tool for building a portfolio for the investments you want."
"We do make money when more people trade, but it's 99th on our list," Barnes added.
Barnes said if customers aren't growing wealth on the platform then they'll leave. As such, ensuring clients grow wealth will always be the top priority.