Disclosure:? I have an affiliate partnership with M1 Finance and may earn a commission on new signups over a certain threshold. If you signup for M1 Finance through the links on this page, you’ll get a $25 credit. I am an actual customer and wouldn’t recommend the service if I didn’t use it.
Signs are pointing to “YES”.
There are quite a few brokers in the “Robo-Advisor” market these days. Wealthfront and Betterment were among the first. Vanguard has an offering.? Fidelity and Schwab do as well.? ? I’ve even read recently that E*Trade has jumped on the bandwagon.? ?I have experience with Wealthfront and Betterment and I don’t really have any complaints.
mutual funds are forced to periodically realize capital gains which creates a taxable event in a non-retirement account
The reason for the growth of this style of investing is clear.? ?It automates something in a cost-efficient way.? ? ?Vanguard has become very popular in recent years for their low-cost expense ratio ETF’s and mutual funds.? ?And you can invest in a mutual fund that is managed and forget about it.? ?But one issue is that from time to time, mutual funds are forced to periodically realize capital gains which create a taxable event in a non-retirement account.? ? Your fund will typically distribute a capital gain only to then turn around and reinvest it.? ?And you pay taxes on that capital gain.
One way to avoid the forced capital gain is to use ETF’s.? ?This is a good solution but the only issue is that if you invest in ETF’s like the Boglehead’s highly recommended??“3 Fund Portfolio”, you need to manage it.
The standard setup might be 33% Bond, 33% Total Stock Index and 34% International.
For your initial setup, this isn’t terribly difficult, but EVERY TIME YOU PUT MORE MONEY IN?(or make a? withdrawal) you’ll need to re-allocate the shares and asset allocation properly.? ? If you’re doing a weekly deposit, this is going to require a bit of calculation every week to calculate it down to the share where each dollar should go.? And you can’t do fractional shares without a robot-advisor.
Bring in the ROBO ADVISORS.
This is where a bit of artificial intelligence and algorithms come in to save the day.? You simply make your deposit and the algorithm buys in accordance with your desired portfolio allocation.? ?If the bond market is down you’ll be buying and getting the cheaper shares.? If stocks are a bit high, you’ll be buying a bit less in order to bring your portfolio into balance.? This happens with every purchase and without you having to take out a calculator.? Thank you computers.
This is what Robo Advisors do and this is a fine application of technology and the algorithm.? ?But there’s just one little thing.? Most of these advisors have this nice service but they do it for a small fee.? Wait did I say small fee?? I mean a small percentage of TOTAL assets under management.? Do your research and you’ll see why over time, even a small percentage of less than 1% results in significantly less money in your account.
Bring in M1 Finance
Now, you could certainly make the debate that the fee other brokers charge is reasonable and worth it.? ?Intelligently maintaining the portfolio balance could give you an edge of .25% vs blind buying at a fixed allocation.? ?And you could also make the argument that the time saved is worth something.? ? But there’s an army of Vanguard soldiers that simply aren’t hearing it.? And with good reason.? ?Even a fraction of a percentage compounding over time adds up.
This is where M1 Finance excels.? ?It’s simply FREE.
Wealthfront is good too.? ?But if it’s Betterment vs. M1 Finance, I’ve got to say M1 Finance is taking it because they are providing the same quality of investment management and the use of their algorithm for FREE.? ?It’s kind of a cooler interface too but that shouldn’t matter too much.
If you remove the cost of the Robo Advisor, it’s kind of hard to make an argument AGAINST using one to manage your investments at least for taxable accounts.? ? Now to be fair, I think for a retirement account you’re probably fine with just using a typical retirement target fund.? (feel better Vanguard die-hards?)? They realize capital gains but it’s not a taxable event so it doesn’t matter in a retirement account.? ?But for taxable accounts with free management… why not?
|Advisor||Tax Loss Harvesting||Custom Portfolios||Fee|
My Impressions about M1 Finance
I signed up for an account to check out M1 Finance.? I’ve got to say I like what I see so far.? The interface is slick and fast. Beyond that, you’ve got a lot of options that give you the ability to do more than just buying a set portfolio.? You can even create baskets of individual stocks you can buy commission free. This is essentially like creating your own custom mutual fund that you can own with ZERO EXPENSE RATIO!
Overall I think this is a very good thing for the investment world and should force other brokers to lower or eliminate advisor/management cost for simply using a buying algorithm.? It’s my prediction that in the months or years to come you’ll see the Betterment’s and Wealthfront’s of the world start to remove their fees.? Maybe even Vanguard’s own advisor service might go zero cost. Dare to dream.
I’m thinking most Bogleheads would love M1 Finance since it allows you to set up the laziest version of the 3 fund portfolio available. You can set up one that’s self-managed and free.
- I created a 3 fund portfolio but then cheated a bit by adding a little bit of real estate to it.? What can I say, the yield on REIT investments is attractive these days. They’ve certainly done better than international since I opened my account. So it’s a modified 3 fund portfolio.
Interested in trying M1Finance? Click below to set up an account and you’ll get a free $25investing credit!
Disclosure:? I have an affiliate partnership with M1 Finance and may earn a commission on new signups over a certain threshold.
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