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I used to mod my cars and have some experiencie on it (no BMWs). Your dad is right and wrong.
BMW "knows what is doing" but at the same time car manufacturers have a lot of limitations in terms of pollution, noise, maintenance and price. They develop a car with a budget, government regulations and 100 other variables. I don't think the M3 is limited by the fact there are higher end cars of the same brand in other segments. Even though the M3 is supposed to be a performance car, it must meet several requirements in order to be a production car, including emission requirements, maintenance, price,etc
The most simple example are the reflectors.... They had to adapt the front bumper with those ugly reflectors in order to comply with the US rules. They also need to sell a car capable of withstanding thousand of miles with no need of frequent maintenance, or been able to be driven through Temps of -10 or 110 degrees.....They will not fit the car with 10k-dollar brakes, or a full carbon fiber body, etc.
IMO, most simple engine mods won't make a big difference. In other cases, they will definitely improve performance but are very expensive and you will loose reliability (e.g. turbo). In summary, you usually either loose something and/or pay a lot of money.
Regarding air filters, I haven't done a lot of research for the M3, but the OEM filter has a charcoal liner that will decrease the backflow of contaminants. Aftermarket filters do not have this liner. In the M5, you can actually remove that filter. Changing the air filter won't "harm" the engine unless it's really a crappy one that is not "filtering" the air as it should. At the same time, you will not gain a lot (5HP in a 410HP car is almost nothing).
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