M1 Finance vs. Betterment – The Dough Roller

The robo advisor universe has grown increasingly crowded in recent years. But two of the standout performers in the space are M1 Finance and Betterment. That’s because while Betterment remains the largest independent robo advisor in the industry–and perhaps the most innovative–M1 Finance has taken the robo advisor concept in a different direction by giving investors nearly unlimited control over their investment activities.

In most cases where we compare robo advisors, there are more similarities than differences. But in the case of M1 Finance vs. Betterment, each fills a very different niche. In the end, it may not be a choice between one or the other, but rather a serious decision to use both.

M1 Finance vs. Betterment – The Overview

M1 Finance and Betterment are both robo advisors. That means each will provide full management of your account, including periodic rebalancing to maintain target asset allocations, and reinvesting dividends. Your main responsibility with either platform will be to fund your account.

But that’s where the similarities between these two robo advisors end. Beyond the basic robo advisor structure of the two platforms, each operates in different ways.

For example, if it’s possible to say, Betterment is more of a traditional robo advisor. In exchange for a very small annual fee, they’ll not only provide complete investment management services, but they’ll also choose your portfolio allocation.

M1 Finance will also manage your portfolio, but they don’t choose your investment allocations. Instead, that’s a decision you get to make. And you don’t have to choose just one–M1 Finance will allow you to create dozens of individual portfolios within your account. You can choose not only the basic themes of each portfolio but also the specific investments that will fill each one.

To put it another way, Betterment is designed specifically for the investor who prefers hands-off investing. M1 Finance, on the other hand, is for those who want control over how they invest and what they invest in. But like Betterment, M1 Finance also spares you the need to manage your account on a day-to-day basis.

The table below shows the basic features of both investment platform side-by-side:

Features M1 Finance Betterment
Initial Investment None, but $100 to begin investing in a taxable account, $500 for a retirement account None, with regular monthly deposits on Digital Plan; $100,000 minimum for the Premium Plan
Advisory Fee None Digital Plan: 0.25% up to $2 million, then 0.15%; Premium Plan: 0.40% up to $2 million, then 0.30%
Available Accounts Individual and joint taxable accounts; trusts; traditional, Roth, SEP and rollover IRAs Individual and joint taxable accounts; traditional, Roth, SEP and rollover IRAs; trusts
Tax-Loss Harvesting Tax minimization only Yes
Rebalancing Yes Yes
Dividend Reinvestment Yes, once they reach $10 Yes
Customized portfolios Yes No
Asset Classes Included No set number 13
Investment in Individual Stocks Yes No
Socially Responsible Investing Yes Yes
Mobile App Android & iOS devices Android & iOS devices
Live Support Yes (limited only) Yes
Financial Advice No Yes, on Premium Plan
Website Visit M1 Finance Visit Betterment

M1 Finance and Betterment Investment Methodologies

Once again, both M1 Finance and Betterment provide automated investment management. With either platform, once you create a portfolio, all the investment details are handled by the robo advisor.

The main difference between the two is in portfolio selection. While Betterment handles that for you, based on your risk tolerance, time horizon, and investment goals, M1 Finance allows you to choose your own portfolios.

Betterment constructs your portfolio based on modern portfolio theory (MPT), which emphasizes asset allocation over individual securities selection. They’ll design your portfolio to include a mix of domestic and international stocks and bonds. Each asset allocation in your portfolio is represented by a single exchange-traded fund (ETF). ETFs are used specifically because they’re tied to market sector indexes and have very low fees.

M1 Finance also uses exchange-traded funds in the creation of their portfolios. But they also include individual stocks. In fact, it’s even possible to create a portfolio comprised entirely of individual stocks. And while M1 Finance has a large number of investment portfolio templates, you’re also free to create portfolios of your own design.

M1 Finance “Pie” Investing

So far I’ve been describing how M1 Finance allows you to create your own investment portfolios. That portfolio creation revolves around a concept the company refers to as “pies.”

You can design an unlimited number of pies, each based on a specific investment theme. For example, you can design a pie based on select tech companies or healthcare companies. You can also choose broad categories, such as socially responsible investing.

M1 Finance offers at least 80 different pie templates that you can use. Each will include specific stocks and/or ETFs that will make up the pie. Alternatively, you can create your own pies, and select your own investments. You can include a mix of up to 100 ETFs and individual stocks for each pie. Each individual investment in a pie is sometimes referred to as a “slice”, which is consistent with the pie theme.

Apart from the use of pies and your own ability to create them, there’s one more area where M1 Finance departs from other robo advisors, including Betterment. When you sign up for the service, you’re not required to complete a questionnaire. Typical robo advisors use a questionnaire, which is similar from one platform to another. It’s used to determine your risk tolerance. But since you will be designing your own portfolios, determining your risk tolerance is not necessary with M1 Finance.

Other M1 Finance Investment Features

Available investments. One factor to be aware of with M1 Finance is that you won’t have the ability to invest in any security you choose. For example, while ETFs are available in the construction of your pies, mutual funds are not permitted. Nor are stocks that trade only on foreign exchanges. You can only include individual stocks selected either from the New York Stock Exchange, the NASDAQ, or the BATS system. However, that still gives you access to more than 6,000 stocks and ETFs.

Also be aware that even though M1 Finance allows you to invest in individual stocks for your pie portfolios, you can’t use the platform to purchase and hold individual stocks. It also follows that the platform doesn’t permit day trading, which you may be tempted to do since the company charges no fees to use the service.

Fractional shares. Since a pie can be created with as little as $100 and can include up to 100 securities, M1 Finance allows you to purchase fractional shares. This means you may be able to allocate $5 for the purchase of 1/10 of a share of a $50 stock.

Tax minimization. In one other departure from typical robo advisors, M1 Finance doesn’t offer tax-loss harvesting. However, they do employ a tax loss strategy. It uses an algorithm to determine which securities are sold any time you withdraw funds from your account.

The strategy sets a priority on selling securities in the following order:

  1. Losses that offset future gains.
  2. Losses that result in long-term capital gains, to get the benefit of lower long-term capital gains tax rates.
  3. Losses resulting in short-term capital gains, which are taxed at ordinary tax rates.

Account fees. In yet another way M1 Finance sets itself apart from the rest of the robo advisor universe, there are no fees involved in your account. That includes no annual fee, no ongoing management fee, and no transaction fees, like commissions.

Customer service. You can contact the company by phone during regular business hours. However, customer service is limited to technical features regarding the use of the platform. M1 Finance does not provide any type of investment or financial advice.

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Betterment Investment Strategy – The Specifics

Betterment is generally recognized as the first robo advisor in the industry. Not only did they pioneer the concept, but they’ve also been the industry leader in perfecting it.

You can open an account with no money at all, since there is no minimum initial investment required. However, you will need to fund your account with regular monthly contributions. After all, while you may be able to open an account with no money, you’ll certainly need some to begin investing.

Typical of most robo advisors, you’ll be required to complete a questionnaire. Your answers will help Betterment build the most appropriate portfolio for you since your answers will determine your risk tolerance, investment goals, and time horizon.

Unlike M1 Finance, you’ll have no control over the investments that are included in your portfolio. Instead, your portfolio will be created using Betterment’s algorithm, which will allocate your portfolio into as many as 13 different asset classes. Each asset class will be represented by a single ETF.

The allocations are as follows:

Stock allocations:

  • US Total Stock Market
  • US Value Stocks – Large Cap
  • US Value Stocks – Mid Cap
  • US Value Stocks – Small Cap
  • International Developed Market Stocks
  • International Emerging Market Stocks

Bond allocations:

  • US Short-term Treasury Bonds
  • US Short-term Investment Grade Bonds
  • US Inflation-Protected Bonds
  • US Municipal Bonds (for taxable accounts only)
  • US High Quality Bonds
  • International Developed Market Bonds
  • International Emerging Market Bonds

Tax-loss harvesting. This is a strategy in which losing asset allocations are sold off to reduce taxable gains in other asset classes. Similar assets are then repurchased at least 30 days later, to maintain the target asset allocations. The strategy effectively defers capital gains in many instances, improving portfolio performance by reducing taxes. It’s available only on taxable accounts since retirement accounts are already tax-deferred.

For this reason, Betterment uses two or three ETFs for most asset classes. If the primary ETF class is sold, it can later be replaced with the second or third ETF in the same class. However, tax-loss harvesting is not used in all asset classes, so only one ETF will be included.

Betterment Investment Specializations

One of the investment strategies that makes Betterment unique is that they include value stocks among your stock asset allocations. Of the six stock asset classes used in your portfolio, three favor value stocks. Value stocks are stocks that trade at a lower price than what the company’s performance and fundamentals may otherwise indicate. Historically, they’ve outperformed the general stock market over the long-term.

As mentioned earlier, Betterment has two plan levels, its basic Digital plan, and the Betterment Premium Plan. The latter requires a minimum account balance of $100,000, but it comes with the External Account Analysis feature, as well as unlimited access to Certified Financial Planners. This is a fundamental departure from typical robo advisors, which specifically limit access to financial advice. In this way, Betterment’s Premium Plan is bridging the gap between pure robo advisors and traditional human investment advisors. And they do it at a much lower fee than what you will pay for traditional human investment advisors.

Betterment Specialized Portfolios

In addition to everything else Betterment offers, they also offer several highly specialized portfolios.

Flexible Portfolios. Designed for more experienced investors, it lets you deviate from portfolio allocations designed by Betterment. You can adjust individual asset class weights in your portfolio. For example, you can increase your allocation in large-cap stocks, and decrease your position in emerging markets. It provides you with at least some measure of control over the allocations in your portfolio.

Goldman Sachs Smart Beta. One of the strategies that most typifies robo advisors is passive investment management. That is, you set allocations and those remain constant. But with the Smart Beta option, you get active management provided by Goldman Sachs. Rather than just attempting to match the performance of the market, as most robo advisors do, the Smart Beta portfolio attempts to outperform it. As you might expect, this portfolio contains a higher risk than the normal Betterment portfolio.

Socially Responsible Investing. This portfolio reflects a 42% improvement to social responsibility scores for their US Large-cap holdings. Betterment replaces its US Stock–Large-cap and Emerging Market Stocks–with SRI investments. But instead of investing in individual stocks, they hold ETFs that specialize in SRI.

BlackRock Target Income. For investors who are primarily concerned with income, Betterment offers this option for those who are looking for a lower-risk portfolio with predictable returns. For that reason, it’s invested in a mix of long-term bonds and lower-quality, high-yield bonds (to increase overall returns). It does not invest in growth asset classes, like stocks.

Tax-Coordinated Portfolio. While Betterment offers-tax loss harvesting on all taxable accounts, they offer their Tax-Coordinated Portfolio for those looking for even greater investment income tax reduction. In addition to tax-loss harvesting, it also adds a tax allocation strategy, in which assets that generate capital gains are held in taxable accounts, while those that generate predictable income are held in tax-sheltered accounts. (Capital gains generating assets can get the benefit of lower long-term capital gains tax rates.)

Get up To 1 Year Free With Betterment

Other Features

M1 Finance

M1 Finance focuses primarily on investing, which is to say their menu of additional services is somewhat limited. But like Betterment, their list of related services is growing.

One feature worth mentioning is the ability to export your investing tax information directly into popular tax software programs, like H&R Block or TurboTax.

M1 Spend and M1 Plus. This a checking account offered by M1 Finance, which you can use to pay bills or access with a debit card. You can also use it to accept direct deposits. For an annual fee of $100 you’ll be an M1 Plus member, and earn interest on your cash balances, plus 1% cashback on all purchases using the M1 tungsten debit card. No minimum account balance is required with either program. Both accounts are fully insured by the FDIC for up to $250,000.

M1 Borrow. Like some other robo advisors, including Betterment, M1 Finance allows you to take a loan against your account value. Much like a 401(k) plan, you can borrow against the value of your plan without a credit check or needing to qualify based on your income. You’ll be eligible to borrow up to 35% of the value of your portfolio for any purpose. In addition, the loan can be repaid on your own terms.

You’ll need a minimum account value of $10,000 to take advantage of M1 Borrow.

Be aware that M1 Borrow is not intended to work like a margin loan. You won’t be able to use the proceeds to purchase additional securities. However, there is one way in which the loan facility doesn’t work similarly to a margin loan. If at any time your account equity falls below 30%, you’ll be subject to a maintenance call. In fact, the company reserves the right to limit how much you can borrow against your account if they believe your investments carry an excessive amount of risk.

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Betterment

As an older and better-established robo advisor, Betterment has been steadily expanding its menu of services. In addition to investment management, they are offering a growing list of related services.

Betterment Financial Experts. Live experts are available by phone to help you with any investment questions you have. They aren’t financial advisors, but they can provide limited investment advice, in addition to helping you manage your account.

Financial Advice Packages. In addition to having access to Betterment Financial Experts, you can also purchase live financial advice sessions for a flat fee. Each session will be between 45 minutes and 60 minutes and will be either one or two sessions depending on the package selected.

Financial advice packages currently offered include the following:

  • Getting Started Package – $199
  • Financial Checkup Package – $299
  • College Planning Package – $299
  • Marriage Planning Package – $299
  • Retirement Planning Package – $299

External Account Analysis. This feature is an example of how Betterment is one of the most innovative platforms in the robo advisor industry. Historically, robo advisors have been self-contained investment platforms. That is, they don’t take your other investments into consideration in how they will impact your Betterment portfolio.

If you subscribe to Betterment’s Premium Plan (see Fees and Pricing below), you’ll be eligible for External Account Analysis. Betterment will review your outside investments and provide investment management more consistent with your overall financial situation.

Betterment Everyday. This is Betterment’s savings and checking platform, allowing you to earn interest on your uninvested cash on the same platform where you invest. It comes with a checking feature and reimbursement of ATM fees worldwide. Balances are fully insured by FDIC. It even comes with a Visa debit card.

Fees and Pricing

Betterment has two fee structures. On the Digital plan, which is Betterment’s basic plan, the fee is 0.25% of your account balance, up to $2 million. For account balances over $2 million, the fee drops to 0.15%.

On Betterment’s Premium plan–which requires a minimum account balance of $100,000–the fee is 0.40% on account balances up to $2 million. For account balances in excess of $2 million, the annual management fee drops to 0.30%.

Get up To 1 Year Free With Betterment

M1 Finance vs. Betterment – Which is the Better Investment Platform?

M1 Finance and Betterment are both robo advisors, providing fully automated management of your investment portfolio. That includes periodic rebalancing and dividend reinvestment.

The main difference between the two is that while Betterment handles the creation of your portfolio, M1 Finance allows you to create your own. In fact, they give you the ability to create an unlimited number of portfolios or pies. You can choose the theme of each pie, then choose the stocks and ETFs to fill it.

If you prefer complete investment management, Betterment will certainly be the better choice between the two. But if you like the basic robo advisor concept, and prefer to create your own portfolios and select specific investments, M1 Finance will be the better choice.

You can’t go wrong with either of these robo advisors. Betterment is the leader in the fully managed robo advisor space. But M1 Finance has taken the basic robo advisor concept and added investor control to the process.

It’s not a stretch to say you might want to consider using both platforms. You can use Betterment to provide a fully managed investment portfolio option while using M1 Finance to engage in a bit of self-directed investing. It’s an excellent combination, especially since Betterment charges such a low annual management fee, and M1 Finance has no management fee at all.


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