M1 Finance: What’s the Catch?

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BetaTracker
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M1 Finance: What’s the Catch?

Post by BetaTracker » Thu May 31, 2018 10:07 pm

I’ve been trying to find a low cost robo to manage our portfolio for my wife in case something happens to me. She has no interest in handling this task herself, so up to now I’ve been thinking it might be best to send her to Vanguard’s PAS robo.
But I’ve been reading lately how some Bogleheads like M1 Finanace. It’s a robo advisor that says it doesn’t charge fees or commissions and lets you create your own portfolio. It then rebalances everything automatically, again for free. So my question is: what’s the catch? No transaction fees, no advisory fees — if it seems too good to be true ... ??
The only red flags I can find on their website is that it apparently switched to this free model last year. So is this simply another big asset grab where those holding taxable money could suddenly face new charges and be faced with limited choices in the future in transferring your unique portfolio elsewhere?
I also can’t find specifics about any cap gains impact of their automatic rebalancing process in taxable accounts. M1 says it rebalances after each new deposit. Maybe I read it wrong, but couldn’t such an arbitrary automatic system trigger lots of possible taxable events?
I'd rather be content than happy -- Lao Tzu.

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whodidntante
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Re: M1 Finance: What’s the Catch?

Post by whodidntante » Thu May 31, 2018 10:41 pm

They certainly could add AUM fees again, but I don't think their intention is to dupe you. Market making, securities lending, rebates, interest on uninvested cash, miscellaneous fees, and maybe some other sources of revenue could be what they are doing to make money. I don't know if they are profitable with their model, but I wouldn't get excited about the sustainability of Vanguard PAS either.

Jags4186
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Re: M1 Finance: What’s the Catch?

Post by Jags4186 » Thu May 31, 2018 10:53 pm

M1 will deploy new money to lagging asset classes on every deposit. They will not sell assets to rebalance unless you click the rebalance button.

Regarding the catch, there’s always the possibility they go back to having fees, etiher AUM or buy sell commissions. Or they get bought by a competitor who charges fees.

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One Ping
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Re: M1 Finance: What’s the Catch?

Post by One Ping » Thu May 31, 2018 10:59 pm

"Re-verify our range to target ... one ping only."

Nate79
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Re: M1 Finance: What’s the Catch?

Post by Nate79 » Thu May 31, 2018 11:33 pm

I don't think there is really a catch. There is no reason that robo advisors need to charge an AUM. If I open an account at Schwab, transfer in VTI, and buy and hold I will pay Schwab exactly zero. What is the cost to the robo to do rebalancing? Probably almost zero.

Why does Vanguard need to charge a 0.3%(!) AUM is the real question....

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Tamarind
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Re: M1 Finance: What’s the Catch?

Post by Tamarind » Fri Jun 01, 2018 6:22 am

Nate79 wrote:
Thu May 31, 2018 11:33 pm
Why does Vanguard need to charge a 0.3%(!) AUM is the real question....
To pay someone to be by the phone when customers call for advice and guidance, probably. It's surely not for the mechanical aspects of managing the portfolio.

But I know plenty of people for whom having someone to say "no you don't need to sell and put everything in corporate bonds" for at least the first few years has a lot of value.

I would bet the PAS fee will drop as Vanguard responds to competition from robos. Right now they aren't really targeting the same demographic so not a lot of pressure on Vanguard.

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CyclingDuo
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Re: M1 Finance: What’s the Catch?

Post by CyclingDuo » Sat Jun 16, 2018 11:36 pm

BetaTracker wrote:
Thu May 31, 2018 10:07 pm
But I’ve been reading lately how some Bogleheads like M1 Finanace. It’s a robo advisor that says it doesn’t charge fees or commissions and lets you create your own portfolio. It then rebalances everything automatically, again for free.
It's really a great concept.

M1 stands out to me for something perfect for a portfolio like the Paul Merriman Ultimate Buy & Hold Portfolio or one of the other lazy portfolios that have 10-11 or more moving parts which make rebalancing require a calculator and spreadsheet. Not so with M1. Just click the button, or fund it with more money where it automatically fills the moving parts that are underweight first. It will be nice if this one survives as it does so much for low cost brokerage services compared to the competition.

Blooom will rebalance and optimize your 401k/403b/457b plans for a fee of course. It's $10 a month for their services. Luckily, we have one button rebalancing for free in two of our employer sponsored plans. It wouldn't surprise us to see that type of one button rebalance feature available more often in the future at many if not most plans. In the meantime, kudos to M1 for what they've got going!
"Everywhere is within walking distance if you have the time." ~ Steven Wright

sman09
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Re: M1 Finance: What’s the Catch?

Post by sman09 » Sun Jun 17, 2018 1:32 am

This interview with the M1Finance's CEO might answer some of your questions

http://www.wealthmanagement.com/technol ... nance-free


[...]
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. [...] 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.

[...]

livesoft
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Re: M1 Finance: What’s the Catch?

Post by livesoft » Sun Jun 17, 2018 7:15 am

The catch has also been described in this thread: viewtopic.php?f=1&t=236951&p=3964367
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Nate79
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Re: M1 Finance: What’s the Catch?

Post by Nate79 » Sun Jun 17, 2018 4:28 pm

livesoft wrote:
Sun Jun 17, 2018 7:15 am
The catch has also been described in this thread: viewtopic.php?f=1&t=236951&p=3964367
What are you specifically referring to?

investor997
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Re: M1 Finance: What’s the Catch?

Post by investor997 » Sun Jun 17, 2018 4:43 pm

I don't like services that buy stocks/ETFs in fractional amounts. It makes things really tricky when you decide to transfer them to a different brokerage. And you WILL try to transfer them out... someday. I learned my lesson with Betterment.

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