M1 Finance vs Betterment

M1 Finance vs Betterment

Robo-advisors might be the future of investment portfolios. With their cheap management fees and low account minimums, robo-advisors are a perfect entry point for investors who want to benefit from a low-cost, well-diversified account.

M1 Finance is Better for:Betterment is Better for:
Active tradersPassive investors
Occasional account transfersFrequent transfers
Occasional withdrawalsMore withdrawals
Multiple account typesGetting human advice
Lower net worth balanceshigher net worth balances

Let’s look at some comparisons:

M1 Finance Betterment
Management Fees (AUM)

0.0%

0.25% (0.15% for balances > $2 million)

Premium Subscription

$125

0.40% AUM (0.30% for balances > 2 million)

Other Fees

Withdrawal, transfer, sale, inactivity, mail, etc.

No

Security Types

Stocks, ETFs, bonds

ETFs, bonds

Pay for Order Flow

Yes

No

Active or Passive

Active, Passive, or Expert-chosen “Pies”

Passive

Traditional Advisors?

No

Yes, with a Premium subscription or by paying $199/$299

Minimum Opening Balance

$100

$0 ($10 for high-yield cash)

Tax-Loss Harvesting

No

Yes

Supported Accounts

Traditional, Roth, Inherited SEP IRA

Individual and joint taxable accounts Trusts

Checking Credit

Minor Custodial

Traditional, Roth, SEP, Inherited IRA

Individual and joint taxable accounts

Joint taxable accounts with rights of survivorship

Trust accounts

Cash reserve

Best Use

Active Traders

Passive Investors

Current Promotion

Yes, Click Here!

Yes, Click Here!

Modest Money Overall Rating
5.0 rating based on 5 ratings
4.5 rating based on 5 ratings

M1 Finance vs Betterment: Determining Factors?

In Modest Money’s analysis, M1 Finance (5 stars) triumphs over Betterment (4.5 stars). This is because M1 Finance has a greater ability to customize your accounts and actively trade than Betterment.

This does not mean M1 Finance is the best choice for everyone, though. Despite M1 Finance’s advantages, Betterment could be the optimal choice for people who prefer automated portfolio rebalancing and achieving the savings of tax-loss harvesting.

Factor 1: M1 Finance vs Betterment, Management Fees

For management fees, most robo-advisors charge an annual percentage of assets under management (AUM). Since these management fees comprise most of the fees you directly pay to robo-advisors, comparing them is a good place to start to figure out which one is better for you in the M1 Finance vs Betterment competition.

M1 Finance Tops Betterment in Low Management Fees

  • M1 Finance does not charge management fees
  • Betterment’s management fee is 0.25%
  • M1 Finance earns revenue elsewhere

M1 Finance Management Fees

When M1 first started in 2015, they charged a management fee of 0.35% AUM. Since 2017, they’ve eliminated management fees from their revenue structure. Currently, customers can open investment accounts with M1 Finance without paying any management fees. 

Betterment Management Fees

Betterment charges an annual 0.25% AUM as a management fee for its basic account.

You can click here to get Betterment’s management fees waived for the first year.

If you have over $2 million in investments with Betterment, these fees fall to 0.15% and .30% respectively.

Factor 2: M1 Finance vs Betterment, Subscription Services 

Virtually every robo-advisor has multi tiers of service. M1 Finance and Betterment are no different. Subscription services offer an enhanced trading experience for an extra cost.

Betterment Tops M1 Finance in Subscription Services

  • Betterment’s subscription has access to human advisors
  • M1’s subscription AM/PM trading windows, better loan rates, and favorable checking account terms
  • While extended trading windows and better loan terms are nice, they would have to be used extensively to justify the cost

M1 Finance Enhanced Subscription Fees

While M1 Finance does not charge an asset management fee, it does offer a premium subscription, known as M1 Plus, which costs $125 annually. With this premium service, you get access to both AM and PM trading windows, better loan rates, and more favorable checking account terms.

If you click here to sign up for an M1 Plus account, the $125 subscription service fee will be waived for the first year.

Betterment Enhanced Subscription Fees 

If you have more than $100,000 managed by Betterment, you can get access to a Premium account that costs slightly more in management fees at 0.40% AUM. A Premium account gets you unlimited access to human financial advisors for any questions you have. 

Even if you don’t have a Premium account, you can still access Betterment’s human financial advisors by paying an extra fee.

These over-the-phone advice packages cost between $199 and $299 and will give you one-on-one access to Certified Financial Planners who can answer questions related to your investment or finance-related goals.

M1 Finance vs Betterment, Other Fees

So, since M1 Finance has no management fees it must be a better choice than Betterment, right?

Not necessarily. Even if they don’t have management fees, all brokerage companies make money somehow. Let’s look at some additional services offered by M1 Finance and Betterment for a more comprehensive understanding of the fees you will end up paying for each of them.

Betterment Tops M1 Finance in Other Fees

  • M1 Finance does not charge management fees
  • Betterment’s management fee is 0.25%
  • M1 Finance earns revenue primarily from pay for order flow

M1 Finance Other Fees

M1 Finance does not charge investment management fees or trade commissions, some other fees might catch you by surprise if you are not expecting them.

For instance, if you terminate your IRA, you’ll get hit with a $125 fee per event. You’ll also be charged $20 for mutual fund sales and $50 for selling foreign-exchange securities. There is also an account transfer fee of $100 and account inactivity fees can be $20. These aren’t all the fees either, so make sure you are aware of the extraneous fees M1 Finance will charge you for certain transactions.

Be careful about requesting paper copies of anything with M1 Finance, as these are all associated with fees. They can add up very quickly.

These fees are not necessarily terrible. They are there to help defray the cost of M1 Finance not charging a management fee. But if you are the type of investor who likes transferring money from your investment accounts on an ongoing basis, these fees will cut into your profits.

The best way to avoid paying fees is to leave your money in your M1 Finance account and only take money when necessary.

Betterment Other Fees

Betterment will not charge you miscellaneous fees. You will not be charged for closing accounts or transferring money. All transactions are covered in the existing management fee.

M1 Finance vs Betterment, Pay for Order Flow

“Pay for order flow” is a controversial practice where brokers get receive a fee from market makers for referring clients.

M1 Finance vs Betterment, Pay for Order Flow, Neutral

  • M1 Finance generates income from “pay for order” flow
  • Betterment does not generate income from pay for order flow
  • Proponents of pay for order flow claim it decreases expenses. Detractors say it poses a conflict of interest. Whether a plus or minus depends on your stance.

Pay for order flow is a primary way M1 Finance generates income. While M1 Finance doesn’t make money on commissions, they do make money every time they route an order to a market maker.

This fee might be only a few cents per transaction, but it could mean traders on M1’s platform might not get the best trading prices.

The jury is still out on whether pay for order flow is a good thing or a bad thing. Detractors say it can present a conflict of interest, while proponents counter that it helps keep commissions and management costs in check. Traders used to have to pay hefty commissions every time they bought or sold a stock, something that disproportionately cut into the profits of small investors.

Customers with brokers like M1 Finance or Robinhood might theoretically pay slightly more for a stock, but they also might be paying the same price as everyone else. One thing they aren’t paying, however, is commission fees.

Betterment does not receive pay for order flow. Its revenues are generated solely through management and subscription fees.

M1 Finance vs Betterment, Investment Services

M1 Finance Tops Betterment in Investment Services

  • M1 Finance allows for active, automated, and expert-selected pie accounts
  • Betterment only has automated portfolio options
  • Active traders will appreciate the ability to select portfolio securities with M1 Finance. For passive investors, Betterment might be a better choice due to tax-loss harvesting.

M1 Finance Services

M1 Finance’s investment platform allows you to build a fully automated account optimized for your risk tolerance. You can also choose to build your customized platform of stocks and funds. If you don’t like either of these options, you can choose to have your money invested in an expert-created “pie”.

M1 Finance requires a minimum balance of $100 upon account opening.

This is an extraordinary amount of flexibility for a robo-advisor, making it a cross between an automated portfolio account and a fee-free actively traded brokerage account, all combined in the same platform.

One cool feature of M1 Finance is you can trade fractional shares on the platform. So, if you don’t have $500,000 to buy one share of Berkshire Hathaway’s Class A stock, you can allocate your hundred bucks to get a piece of the action.

Betterment Finance Services

Betterment is solely a robo-advisor platform, so you as the investor do not have the option to choose individual stocks and ETFs. You can, however, choose beyond Betterment’s Core Portfolio, which it chooses for you based solely on your risk tolerance, and opt in to Smart Beta, Innovative Technologies, or even Socially Responsible portfolios.

Betterment’s stance on this is that they have already done the research to choose optimized portfolios, which is why they don’t let you choose your own.

Betterment offers additional features that can save you significant money, like tax-loss harvesting and dividend reinvestment. You can read a thorough explanation of these features here.

M1 Finance vs Betterment: Account Types

M1 Finance Tops Betterment in Account Types

  • M1 Finance has taxable accounts, retirement accounts, and custodial accounts.
  • Betterment has taxable accounts and retirement accounts.
  • M1 Finance has both more investment account types and securities. Betterment builds portfolios with ETFs and bonds.

M1 Finance Accounts

M1 Finance allows you to open individual and joint taxable accounts, retirement accounts, and custodial accounts. M1 Finance does not support 529 education plans.

With M1 Finance, you can trade stocks, bonds, and ETFs. All your trades will be commission-free, though there might be underlying fees associated with the ETFs. These are built into the cost of ETFs and are very low.  

Betterment Accounts

With Betterment, you can open taxable investment and retirement accounts. You can also open a high-yield cash account with Betterment. You cannot open minor accounts, like 529 plans and custodial accounts.

None of these accounts require minimum balances to open, except for the cash reserve high-yield account, which you will need to fund with at least $10.

As with M1 Finance, Betterment does not charge commissions, but the ETFs they purchase on your behalf might have underlying fees.

The account Betterment builds for you will be constructed mostly with ETFs with some room left over for bonds depending on the market and your risk tolerance. Bonds trade with less volatility than ETFs, so Betterment might use them to hedge your account against losses.

Over time, target allocations in a portfolio tend to “drift.” This is because different securities appreciate or depreciate and end up being over or under-weighted in your portfolio. Betterment will periodically rebalance your portfolio to make sure that your target allocation is restored according to your risk tolerance, which you set by answering their questions.

M1 Finance vs Betterment: The Bottom Line

When it comes to choosing between M1 Finance and Betterment, Modest Money recommends M1 Finance to most traders, due to its all-around superior flexibility. Solely passive traders should seriously consider Betterment.

M1 Finance is Better for:Betterment is Better for:
Active tradersPassive investors
Occasional account transfersFrequent transfers
Occasional withdrawalsMore withdrawals
Multiple account typesGetting human advice
Lower net worth balanceshigher net worth balances

M1 Finance Advantages

M1 Finance has a definite advantage when it comes to its 0% management fee structure. But for investors who aren’t careful, the money you could save in investment management fees can be clawed back through additional fees, especially if you make a lot of transfers from your accounts.

Over time, these fees will cost you, possibly even more than the management fees you’ll be paying elsewhere. Not making frequent withdrawals and other unnecessary transactions will minimize the fees you pay with M1 Finance.

M1 Finance is also advantageous to people who want to actively trade investments. For people who want to choose their securities, this feature is an absolute must and one that is not available through Betterment.

If you like to choose your own securities, click here to find out more about an M1 account and get the first year of M1 Plus free.

Betterment Advantages

Other investors of the more passive type might be big fans of the fully diversified investments offered by robo-advisors. This makes sense because the more diversified you are, the better chance you have at maximizing your returns according to your risk tolerance.

If you don’t want to manage your own portfolio choices, Betterment is probably a better choice for your circumstances.

You will pay a yearly management fee, but you won’t get hit with extra fees when you withdraw or transfer money. You also won’t end up paying more money for the securities in your account because of pay for order flow. And you will benefit from cost-saving measures like tax-loss harvesting,

To get the full benefits of an algorithm-enabled robo-advisor portfolio with the option to also speak to financial advisors when needed, click here to open a Betterment account.

Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. After working many years in the website marketing industry, he decided to take on blogging full time and also get his finances headed in the right direction. Also check out his contributions to Equities.com and Benzinga.