How much are you willing to pay for a robo-advisor? How about nothing?
M1 Finance, a Chicago-based automated investing platform, has removed fees for all of its costumers regardless of their account balance.
Previously, the startup company had a free tier for the first $1,000 in an account and then a fee of 0.25% for balances between $1,000 and $100,000. Above that level, the fee dropped to 0.1%.
But rather than making money by charging the consumer a fee, the company says that it is better off doing it on the back end by lending securities to short sellers and money like a bank.
“Banks take in consumer deposits and then go lend it out,” Brian Barnes, M1’s chief executive officer and founder, said in an interview.
“We can similarly do that with the cash as well as the securities that people hold, and make interest on that,” he added.
Falling fees are a growing trend
Investing fees have been falling for the past few years. Part of that is due to the broad rise of passive investing through index mutual funds and exchange-traded funds. And part of it is from improved efficiency brought about by technology, including robo advisers.
Trend Accelerating
According to a report by a unit of McKinsey & Co., despite the bull market driving assets under management to a record in 2016, advisers in North America earned less from clients and saw a decline in average fees. Robos typically charge between 0.2% and 0.5% on accounts, compared with 1% or more for human advisers. And even big industry players like Morgan Stanley and Charles Schwab Corp. are now offering cheaper options to customers.
While M1’s still a small participant in the industry, a number of people see the trend toward lower fees continuing or even accelerating.
“Vanguard will soon offer the first S&P ETF that instead of charging typical asset-under-management fees, will pay customers a nominal amount to subscribe,” Tyler Sosin, principle at Menlo Ventures, said in an interview.
M1 agrees, which is why it’s getting out in front of the wave.
“I think investment accounts are going to take the same approach as a checking account in the future,” said, the Barnes chief executive and founder of MI.
“The first step for investing accounts is to go to zero, and all the big incumbents will go to zero in 5 to 10 years time.”
Bloomberg