By Brian Barnes
M1 Finance lets you automatically invest in what you want and on Dec. 13, we decided to offer this service for free. In response, competitors, journalists and others have rightfully asked: Can “free” work as a business model? Well, let’s see.
My phone is powered by Android, a free mobile operating system. I use Firefox, a free browser, to go to Google, a free search engine. When I’m searching something, I’m typically led to Wikipedia, the free encyclopedia. When I procrastinate, I check Facebook, a free social media platform, or Reddit, the free front page of the internet. In the exceedingly rare case I do pay for something, I either use my free credit card or Venmo (also free), which debits money from my free checking account.
The free business model has created some of the most beloved products and largest companies in the world. The question, therefore, is not whether free can work, but whether it can work for investment management? I’m here to say it can, it will and it is.
It’s easy to rationalize expensive fees if your business requires a massive number of employees, countless retail locations, and your name on a major sports stadium.
But M1 has none of those things. What costs some firms millions, costs us next to nothing. We also skip blanketing all New York taxi cabs with our logo, sponsoring every podcast and running TV commercials (how does that help returns?).
In the digital world of bits, your marginal cost can approach zero. In other words, once we’ve built the platform, it doesn’t cost us any more to serve additional users. A digital architecture dramatically changes the cost structure and is what has led to free emails, free texts, and now, free investing.
Every day, we sign up hundreds of new users, transfer millions of dollars, and process tens of thousands of trades (all in a matter of minutes) with minimal human interaction. Our staff of less than 20 has created an investing platform superior to that of multi-billion dollar, decades-old financial institutions that retain tens of thousands of employees.
We do incur costs, particularly in development, and need revenue to support our ongoing operations. To cover those costs, M1 monetizes other services, the same way other brokerages currently do, and in exactly the same way we did before we decided to eliminate management fees. We make money lending the user-owned securities and cash held in their accounts. In this way, we operate identically to a bank. We also are paid to transact on various exchanges that actually improve the pricing our customers get in a trade. In the coming months, we will introduce margin loans, adding an additional revenue stream for those who opt in.
These known and planned revenues streams are more than sufficient to support a vibrant business, especially when our costs are a fraction of others.
It’s only a matter of time before every investing platform goes free. The so-called “Google or Facebook of investing” will be ... well, just like Google and Facebook—engineering and product-led organizations that offer free digital products and monetize in other ways.
Those who object to free investing either fear for the survival of their own business or fail to see the world around them evolving as digital-first firms offer beloved products without charging.
But whether free works is ultimately and entirely up to the consumer. Firms can charge anything they want and attempt to justify their fees. At M1, we’ve taken a stance that the future of investing is free, and we want to lead the charge. We will continue to make money in a transparent and disclosed way that will never conflict with the best interest of our customers. Our spending on enhancing our product and user experience will outpace spending on advertising, which our competitors spend hundreds of millions of dollars.
Free has worked for banks with checking and savings accounts, credit card companies and trading platforms, like Robinhood. It can work for investing, too, and M1’s growth since our announcement to cut fees shows customers agree.
Brian Barnes is the founder and CEO of M1 Finance.