With interest rates at all-time lows, some brokers are passing savings on to their retail investor base in the form of lower margin rates. This is great, allowing you to more cheaply leverage your portfolio. I won’t bore you with an unnecessary primer on what margin is; if you landed here, you likely already know. Let’s get right into a comparison of the investing brokers with the lowest margin rates.
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Comparing Margin Rates of Major Brokerages
Below is a table comparing the margin rates of all the major brokers, assuming a margin loan of $100,000. Some brokers offer tiered rates that decrease slightly as your loan balance increases. I chose to compare $100,000 because that was the median tier in most of the rate tables of these brokers. Rates were taken directly from the broker’s website.
So basically we’re down to M1 Finance, Interactive Brokers, and Robinhood for the lowest margin rates. All offer commission-free investing. Let’s compare some of the nuances.
First, let’s talk about Interactive Brokers. Unfortunately, the Interactive Brokers interface is very bad and downright unintuitive and confusing, especially for a beginner investor. Interactive Brokers is definitely only suitable for sophisticated, seasoned investors and traders. Here’s their interface:
The interface for M1 Finance, on the other hand, is extremely simple and intuitive:
IB’s customer service is also notoriously pretty awful. In fairness, if you’re an experienced trader, you may never actually need to contact Support.
Now let’s briefly address Robinhood. In short, I think the platform may not even have a future after recent events.
Robinhood experienced outages on 3 days during one week in March 2020, which they stated was caused by “stress on our infrastructure—which struggled with unprecedented load.” One of these outages lasted an entire trading day. This was obviously very frustrating and concerning for users, especially considering these were high-volume, high-volatility days in the stock market.
Robinhood users have since filed a class-action lawsuit against the platform, alleging that “Robinhood had a duty to provide a system and platform ‘robust enough’ to handle that trading volume and have a backup system to handle outages.”
In December 2020, the SEC fined Robinhood $65 million for misleading users about its selling of order flow between 2015 and 2018, meaning users got worse trade execution prices than the platform claimed. Robinhood maintains that these were “historical practices that do not reflect Robinhood today.”
In the same week, the Massachusetts Securities Division filed a lawsuit against Robinhood, alleging that the broker uses “gaming strategies to manipulate customers” to execute more trades in order to boost fees, thereby taking advantage of inexperienced investors.
There are also many user complaints such as these of the site being “frozen,” orders not going through, inability to login, etc.
One could argue that these events may cause Robinhood to improve their infrastructure going forward to make sure this doesn’t happen again in the future. On the other hand, it is concerning considering other brokers did not experience these outages and issues during that same time period. I’ve already seen many users running from Robinhood in droves and finding alternatives in platforms like Webull, M1 Finance, etc. It will be interesting to see how things go going forward for Robinhood.
Perhaps most importantly, Robinhood users have been fleeing en masse after the broker’s recent stance on temporarily blocking users from buying stocks like GameStop ($GME) and AMC Entertainment ($AMC) during the massive short squeeze event. As of February 1, 2021, over 33 federal lawsuits have been filed against the platform across the country, citing securities trading and consumer protection violations, which add insult to injury after Robinhood hid the fact that it sold order flow and gave users worse trade execution prices.
The name of the platform now seems ironic, considering Robinhood seems to be placating hedge funds and Wall Street hotshots – at the expense of retail investors – at every turn.
I think M1 is probably the best of these.
Customer service from M1 started off slow when the platform first launched but M1 has famously recently hired a team of new staff members to man the phone lines. Interactive Brokers also doesn’t provide access to an integrable checking account like you can with M1 Finance via M1 Spend.
Perhaps the most important difference though is the fact that margin from Interactive Brokers can only be used to leverage your portfolio with them (i.e. buy more securities), whereas a margin loan from M1 Finance can be used for whatever you want – refinancing higher-interest debt, major purchases, unexpected expenses, etc. – it’s essentially just a low-interest collateralized loan.
M1 also offers fractional shares, zero transaction fees, zero account fees, and dynamic rebalancing.
They also have a transfer bonus promotion for up to $4,000 when transferring an existing account from another brokerage through May 31, 2021, as outlined below:
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.