Betterment and Wealthfront were the first independent robo-advisors to launch in the United States. Nearly a decade later, these two firms still lead the pack, but newcomer M1 Finance offers innovation and unique features while being entirely free to use.
If you are looking for the best robo-advisor to manage your assets, each firm offers several unique advantages, and the best choice ultimately depends on your investment preferences and personal needs.
The remainder of this article will offer a detailed Wealthfront vs Betterment vs M1 Finance comparison so that you can decide which robo-advisor is the best solution for you.
Table of Contents
All three firms offer similar investment accounts, including the Traditional and Roth IRA, SEP-IRA, individual and joint brokerage accounts, and business or trust accounts.
None of these firms will directly manage your employer-sponsored retirement plan (401k, 403b, etc.), but all three will allow you to rollover an existing plan into a Rollover IRA if you are no longer employed by the plan provider. If you still work for your retirement plan provider, Blooom is your best available option.
Wealthfront is the one firm offering a unique type of account – their 529 college savings account.
A 529 college savings account is a tax-advantaged account similar to a Roth IRA, but the funds inside of the account can only be used to pay for qualified higher education expenses.
If you are considering a 529 plan for anyone in your family, Wealthfront’s account is very good. It carries low fees (0.43% annually) and includes all of the Wealthfront’s features and investments discussed later in this article. As an added bonus, detailed college planning advice is included at no additional cost.
Wealthfront and Betterment both charge one all-inclusive management fee, which is currently 0.25% your account balance annually. M1 Finance offers their entire platform free of charge!
The management fee covers all services. There are no trading commissions like those charged by brokers, no transfer fees, and no account maintenance fees.
There are no additional services available through M1 Finance. Betterment offers access to a team of certified financial planners for an additional fee. You can pay an additional 0.15% (0.40% total) to receive unlimited financial advice from their team of licensed advisors. Wealthfront offers free software-based financial planning that can give you answers to over 10,000 financial questions. You don’t need to open an investment account to access this.
|Plan Provider||Annual Fee |
(% of account balance)
|M1 Finance||0.00%||All M1 Finance services|
|Wealthfront||0.25%||All Wealthfront services + free financial planning advice|
|Betterment Digital||0.25%||All Betterment services|
|Betterment Premium||0.40%||Betterment Digital
+ unlimited financial planning advice
M1 Finance is free for all individual investors.
Wealthfront offers our readers two promotions to reduce the cost of service:
- Wealthfront offers the first $5,000 managed free of charge through this website.
- After establishing your Wealthfront account, you can refer an unlimited number of people and both parties receive an additional $5,000 managed free.
Betterment offers a slightly different set of promotions:
- Betterment offers up to one year of free service, depending on the size of your initial deposit.
- After establishing your Betterment account, you can refer an unlimited number of people. You will receive one month of free service per referral, and the person referred will receive three months of free service. If you successfully refer three friends, you will receive one free year of service as a bonus.
- Betterment waives all management fees on the portion of your account balance that exceeds $2,000,000. With Betterment Digital, the maximum you can pay is $5,000 per year.
The table below summarizes the annual cost by account balance:
|Account Balance||M1 Finance Annual Fee||Wealthfront Annual Fee|
($5,000 managed free)
|Betterment Annual Fee|
Obviously, M1 Finance is the least expensive option (free). Wealthfront is less expensive for smaller account balances (due to the $5,000 promotion), but Betterment offers a discount for large accounts by capping the annual fee at $5,000.
M1 Finance excels at investment customization (discussed in the investment section) but falls behind in the number of available features. Both Wealthfront and Betterment come loaded with a variety of useful features that improve usability and investment performance.
To help you evaluate each firm, I’ve divided the available features into two categories in the table below.
|Tax and Investing Features|
|Automated Tax-loss Harvesting||Yes, advanced||Yes||No|
|Differentiated Asset Location||Yes||Yes, advanced||Yes, manually|
|Smart Beta||Yes||Yes, additional fee||No|
|Risk Parity||Yes, additional fee||No||No|
|Financial Planning||Yes, free and software based||Yes||No|
|Portfolio Line of Credit||Yes||No||No|
Tax and Investment Features
Tax-loss Harvesting – At its most basic level, tax-loss harvesting (TLH) is the process of selling a security that has experienced a loss, and then buying a highly correlated alternative (i.e. one that offers similar investment characteristics) to replace it. By selling the original investments at a loss, you earn the right to deduct that loss from your taxable income – thus lowering your annual tax burden.
M1 Finance offers no automated TLH, but you can manually sell investments in your account. Wealthfront and Betterment offer automated TLH at the ETF level. For taxable accounts with $100,000 or more invested, Wealthfront offers Stock-Level Tax-Loss harvesting to look for movements in individual stocks within the US stock index to harvest more tax losses and lower your tax bill even more (see the Wealthfront Advanced Portfolio section). If you qualify for Wealthfront’s Stock-Level Tax-Loss Harvesting offering, it’s easily the best option.
Differentiated Asset Location – Asset location is the process of choosing an appropriate account for each type of investment. For example, municipal bond interest is exempt from federal taxation, which means that municipal bonds should only be held within a taxable account. On the other hand, corporate bond interest is taxed as ordinary income, making corporate bonds suitable for tax-sheltered accounts.
Both Wealthfront and Betterment provide this level of asset location when you first open an account, automatically choosing the best investments within each type of account. But if you hold both taxable and retirement accounts at Betterment, they will provide their Tax-Coordinated Portfolio service. This rearranges your asset classes between both accounts, placing stocks and other tax-preferred investments in your taxable account while placing corporate bonds and tax-inefficient investments in your retirement account. Wealthfront doesn’t offer this level of customization.
M1 Finance doesn’t include any automated asset location, but you have control over all investment decisions, which means that you can create a tax-efficient portfolio if you understand how individual financial assets are taxed.
Tax-efficient Withdrawals – When you sell any financial asset in a taxable account, you will realize a gain or loss. The tax consequences of your sale depend on the holding period. If you sell an investment after holding it for 365 days or less, you have a short-term capital gain (or loss). If you sell the investment after holding it for 366 days or longer, that is considered a long-term gain (or loss). Short-term capital gains are treated as ordinary income, while long-term capital gains are taxed at a preferential tax rate.
When you request a withdrawal from your taxable account, some of your investment must be liquidated (sold) so that you can receive cash. All three firms offer a similar withdrawal system that is designed to minimize taxation. First, they sell any positions that will result in no taxable gain. Second, they sell any positions that result in long-term capital gains. As a last resort, each firm will sell the positions that result in short-term capital gains.
Automated Rebalancing – All three firms automatically maintain your preferred asset allocation over time. When you create an account, you answer basic questions about your investment goals and each service will offer a recommended asset allocation, such as 50% stocks and 50% bonds. You can customize their recommendation, but you must ultimately decide on your preferred asset allocation.
Asset classes perform differently over time, which can shift your original asset allocation. If stocks outperform bonds this year, your asset allocation might be 60% stocks and 40% bonds. All three firms automatically use any cash dividends or contributions to rebalance the portfolio. For example, if you contribute another $5,000 to your investment account, that money would be used to purchase additional bond shares, bringing your allocation closer to the original 50/50 goal.
M1 Finance gets the slight edge by allowing you to manually rebalance your portfolio at any time.
Smart Beta – Smart Beta is an investment feature designed to increase your expected returns by weighting the securities in the US stock index of your portfolio more intelligently. It’s available to all Wealthfront clients with taxable account balances of $500,000 or more. Betterment also has a Smart Beta feature at an additional cost.
Risk Parity – Risk Parity is a methodology to allocate capital across multiple asset classes, much like Modern Portfolio Theory (MPT), also known as mean-variance optimization. Historically, Risk Parity has generated better returns for a given level of portfolio risk than MPT, which is the most common form of asset allocation. Risk Parity is available to all Wealthfront clients with taxable account balances of $100,000 or more.
Smart Deposit – All three companies allow you make inbound and outbound transfers at any time. Betterment’s advanced Smart Deposit feature allows you to automatically invest any excess savings that are sitting in your bank account. You tell Betterment how much you want to keep in your bank account and how much you want to invest, then Betterment uses those guidelines to automatically transfers funds from your bank account to Betterment on a regular basis. This allows you to continue building a bigger investment portfolio without holding too much cash.
College Planning – Wealthfront is the only firm offering detailed college planning advice (and a 529 college savings account). Wealthfront provides detailed financial information on every U.S. college and University. Their planning tool will calculate expected financial aid and help you decide how much to save each year towards college.
Financial Planning – M1 Finance offers no financial advice. Betterment and Wealthfront allow you to connect all of your financial accounts (even external accounts) within your account dashboard to create a comprehensive financial plan. Both services will analyze your external accounts for fees, tax efficiency, and diversification, and then recommend a solution for any potential problems.
Wealthfront takes account linking one step further by providing free financial planning, personalized to anyone and entirely software-based through their app or online. This is different from online retirement calculators or other services which charge a premium for financial planning where you would meet with an advisor or speak with someone on the phone. Wealthfront is able to do this without the use of human advisors thanks to their automated financial advice engine, Path, which was built by an in house team of PhDs.
First, you link all of your financial accounts to Wealthfront’s service — bank accounts, 401(k), mortgages, you name it they can connect to it. After that, Wealthfront can instantly show you your current net worth and your savings rate and will project the earliest you can retire based on your current situation. Wealthfront also connects to third-party data sources like Redfin and Zillow for home pricing projections as well as the Department of Education for college tuition costs. Since Wealthfront links directly to your finances, you never have to manually update anything. If you start saving more or get a raise, your data will be automatically updated into your overall plan.
Betterment offers a number of different financial planning features. First, you can create separate investment accounts for each financial goal that you have, with each account being organized in your account dashboard. The Betterment platform emphasizes goal-based investing and allows you to choose a separate asset allocation for each separate account.
Betterment also includes two forms of live financial advice. The first type of advice (free for all Betterment clients) is unlimited messaging through the Betterment mobile app. If you have any financial questions — big or small — you can securely message Betterment and receive answers from a licensed professional. For an additional fee, clients can upgrade to Betterment Premium which includes unlimited financial planning advice from a team of Certified Financial Planners.
Portfolio Line of Credit – Wealthfront is the only robo-advisor offering a line of credit. Wealthfront clients with $100,000 or more invested have immediate access to the line of credit. There is no paperwork, credit checks, or application process. Just request the cash (up to 30% of the current value of your Wealthfront account) and Wealthfront sends you the money as quickly as one business day. The interest rate is extremely competitive (less than 5% right now) and the repayment schedule can be customized by you.
This feature is better than even a home equity line of credit (HELOC) in many ways, and incredibly useful if you need a line of credit for any reason.
Investment Portfolio Recommendations
Betterment and Wealthfront are designed to be completely passive investing solutions. After creating your account and completing a basic risk tolerance questionnaire, both firms recommend a diversified portfolio of index ETFs. These index ETFs are comprised of thousands of domestic and foreign stocks and bonds, providing vast diversification in exchange for a small annual fee. Wealthfront also offers its Risk Parity fund as part of a diversified portfolio for clients with over $100,000 in a taxable investment account who opt-in.
All ETFs charge operational and management fees, which are often combined into a single figure called the “expense ratio.” Index ETFs (like those recommended by Betterment and Wealthfront), charge fewer fees than actively managed ETFs, but the average expense ratio is still between 0.04% and 0.25% annually.
Each firm recommends a slightly different set of ETF asset classes, but neither firm allows you to select your own ETFs (beyond changing your risk tolerance). Once your portfolio is established, both firms provide ongoing portfolio management services at no additional cost, leaving very little for you to do.
Make no mistake, the recommendations by both firms are very good. Both companies have hired Ph.D. investment committees to establish and oversee the investment methodology, and the recommendations are based on decades of relevant investment research. For example, Wealthfront’s Chief Investment Officer is Burt Malkiel, a Senior Economist at Princeton University who first brought the idea of passive investing to the forefront of the financial world.
M1 Finance offers something different entirely. You can select pre-made portfolios designed by the M1 Finance investment committee, which include the same index ETFs offered by Betterment and Wealthfront, or you can completely customize your portfolio using any combination of individual stocks and ETFs listed on the NYSE and NASDAQ stock exchanges. Once your portfolio is established, you can make an unlimited number of changes at no cost. You also decide when to rebalance your portfolio.
One other slight difference is that Betterment and M1 Finance utilize fractional shares, while Wealthfront does not. Fractional shares allow your money to remain 100% invested by limiting the amount of cash held in your investment account.
Every stock and ETF has a share price. If you don’t have the money to purchase an even number of shares, your cash remains uninvested until you accumulate enough to purchase one additional share. Fractional shares allow you remain invested regardless of share price. For example, if an ETF costs $100 per share and you have $50 available, you will purchase 0.5 shares and remain invested.
Here is a summary of the investment methodology used by each firm:
|Recommended Investments||Preselected ETFs||Preselected ETFs||Any stock or ETF|
|Average Expense Ratio||Roughly 0.12%||Roughly 0.12%||0% for stocks,
varies by ETF
Now that you understand the general investment methodology, let’s discuss the individual securities recommended by each company. Before we compare the investment selection, you should keep in mind that Wealthfront provides several important investment features if you have $100,000 or more invested in a taxable account. These features greatly improve their standard U.S. stock recommendations discussed below. You can read about these unique features in the next section.
U.S. Stocks – Both firms recommend Vanguard’s Total Stock Market Index (VTI), which includes every publicly traded U.S. stock. This ETF provides massive diversification and carries a 0.04% annual expense ratio.
Both firms also recommend large-cap value index funds, with Wealthfront offering Vanguard’s Dividend Appreciation Index (VIG) and Betterment offering Vanguard’s Large-Cap Value Index (VTV). They make these recommendations because value companies have historically outperformed growth companies. Betterment’s recommendation includes a 0.02% reduction in annual expenses and a slightly more diversified portfolio of companies.
Betterment recommends Vanguard’s US Mid-Cap Value Index (VOE) and Vanguard’s US Small-Cap Value Index (VBR). They recommend these funds because smaller firms have historically outperformed larger firms while providing additional diversification gains when combined with large-cap funds in the portfolio.
Betterment also provides three different optional portfolios that investors can select at no additional cost. These include a socially responsible portfolio, target income portfolio, and smart beta portfolio. You can read about these options in my Betterment Review.
Foreign Stocks – Both firms recommend the exact same ETFs, including Vanguard’s FTSE Developed Market Index (VEA) and Vanguard’s FTSE Emerging Index (VWO). These two ETFs are best in class, providing exposure to thousands of stocks in a variety of foreign markets.
U.S. Bonds – Both firms recommend iShares Corporate Bond Index (LQD) for retirement accounts. In my opinion, this is a poor recommendation. Vanguard’s intermediate corporate bond index (VCIT) is better in almost every way:
- Performance – the SEC Yield on both funds is almost identical.
- Trading Costs – Although LQD has slightly higher average trading volume, both ETFs closely track their underlying Net Asset Value (NAV) and provide liquidity. Historically, VCIT has offered better index tracking than LQD, providing a slight advantage.
- Expense Ratio – VCIT (0.07% annually) LQD (0.15% annually)
- Diversification – Historically, both funds have included 1700-1900 individual bonds.
- Average Duration – VCIT (6.5 years) LQD (8.3 years). Duration represents interest rate sensitivity. In the current rising interest rate environment, a shorter duration represents less interest rate risk, which means VCIT wins again.
Both firms recommend iShares Municipal Bond Index (MUB) in taxable accounts because municipal bonds are generally income-tax free. Again, both companies are making a poor recommendation. Here, MUB carries a 0.25% annual expense ratio while Vanguard’s Municipal Bond Index (VTEB) is just 0.09% annually. The LQD-VCIT comparison above applies to MUB-VTEB, and Vanguard still wins in most categories. Take note M1 Finance users, because you control these decisions.
Betterment gets the slight edge by offering Vanguard’s Short-term Inflation-Protected Treasury Bond Index (VTIP) in addition to the ETFs mentioned above.
Real Estate – Betterment does not include real estate as an asset class, but Wealthfront recommends Vanguard’s Real Estate Index (VNQ). Neither recommendation is better than the other because it’s a matter of personal preference. Homeowners who consider their residence to be a real estate investment might not be interested in owning VNQ. Furthermore, some investors would rather invest in local or private real estate than use a massive, publicly-traded REIT.
Natural Resources – Betterment doesn’t recommend natural resources as a separate asset class because it’s very difficult to capture with an ETF. Wealthfront recommends a small allocation to State Street Energy Select Index (XLE), which is an imperfect proxy for natural resources. XLE is technically an energy sector ETF holding most of the large oil producers like Exxon Mobil and Chevron.
Risk Parity – As mentioned above, Wealthfront has its own Risk Parity fund (WFRPX) that is available for all clients with taxable account balances of $100,000 or more who opt-in.
Here is a summary of the recommendations made by Wealthfront and Betterment:
|Asset Class||Wealthfront |
|U.S. Stocks||Vanguard U.S. Total Stock Market Index (VTI)|
Vanguard Dividend Yield Stock Index (VIG)
|Vanguard U.S. Total Stock Market Index (VTI)
Vanguard Large-Cap Value Index (VTV)
Vanguard Mid-Cap Value Index (VOE)
Vanguard Small-Cap Value Index (VBR)
|Foreign Developed Stocks||Vanguard Developed Foreign Stock Index (VEA)||Vanguard Developed Foreign Stock Index (VEA)|
|Foreign Emerging Stocks||Vanguard FTSE Emerging Index (VWO)||Vanguard FTSE Emerging Index (VWO)|
|U.S. Taxable Bonds||iShares Corporate Bond Index (LQD)||iShares Corporate Bond Index (LQD)
Vanguard US Total Bond Market Index (BND)
Vanguard Short-term Inflation-Protected Treasury Bond Index (VTIP)
|U.S. Municipal Bonds||iShares Municipal Bond Index (MUB)||iShares Municipal Bond Index (MUB)|
|Foreign Bonds||iShares Emerging Market Bond Index (EMB)||Vanguard Total International Bond Index (BNDX)
iShares Emerging Market Bond Index (EMB)
|Real Estate||Vanguard Real Estate Index (VNQ)||N/A|
|Natural Resources||State Street Energy Select Sector (XLE)||N/A|
|Risk Parity||Wealthfront Risk Parity Fund (WFRPX)||N/A|
M1 Finance is not shown in the table because the platform allows you to purchase any stock or ETF within your portfolio. Therefore, all of the recommendations made by Betterment and Wealthfront are available to M1 Finance users, excluding Wealthfront’s Risk Parity Fund.
Not only does this provide unlimited customization, but also potential cost savings. M1 Finance users can avoid ETF expenses by recreating each stock ETF index using individual securities.
For example, one of the stock ETFs recommended by Wealthfront is the Vanguard Dividend Appreciation ETF (VIG), which holds 187 stocks at the moment. You can review the complete list of companies held in the ETF through this link. M1 Finance users don’t need to pay the 0.08% annual fee. Simply take the list of 187 companies and purchase each stock individually to recreate the index. The downside is that manual index creation will require a time investment, which could be problematic if time is your scarcest resource.
Wealthfront’s Passive-Plus ® Investment Suite
The ETFs listed in the previous section are the standard Wealthfront recommendations. If you hold any type of IRA or retirement account at Wealthfront, you will use those ETFs. If you invest through a taxable brokerage account and maintain a balance smaller than $100,000, you will also use those ETFs. But if you have $100,000 or more invested in your taxable account, Wealthfront offers several important investment features at no additional cost.
Tax-Loss Harvesting is part of Wealthfront’s PassivePlus® suite available for all taxable investment account. However, free with $100,000 or more invested, Wealthfront’s Stock-Level Tax-Loss Harvesting feature takes it a step further and replaces part of the standard U.S. stock index (VTI) with individual stocks. This service is the automated equivalent of the M1 Finance index replication idea that I presented in the previous section.
But Wealthfront goes far beyond index replication by including individual tax-loss harvesting. If a single stock in your Wealthfront Stock-Level Tax-Loss Harvesting portfolio is down in value, it can be sold to harvest losses (even if the stock market is up overall). These losses can be used to offset any gains in your portfolio, reducing your annual tax burden. In Wealthfront’s standard index ETF portfolio, no tax-loss harvesting benefit would be available unless the U.S. stock market (VTI) declined in value.
Halfway through 2017, the Wealthfront investment committee decided to build upon Stock-Level Tax-Loss Harvesting by introducing Smart Beta. Smart Beta combines Stock-Level Tax-Loss Harvesting with a multifactor approach and is
Smart Beta still includes direct tax-loss harvesting using 500 or 1,000 individual stocks, but instead of replicating VTI, Smart Beta creates a new custom stock index using a multi-factor investment strategy.
Traditional index funds (like VTI) are market-cap weighted. The market capitalization (market cap) of each publicly traded company is the number of stock shares outstanding multiplied by the price per share. In a market-cap weighted index, the largest companies receive a larger weighting, which means they occupy a larger percentage of your overall portfolio.
Much of the investment research conducted over the last decade has investigated index creation that goes beyond simple market-cap weightings. Researchers have tried to determine if there are additional factors that should be considered when creating an index. I don’t have space to review a decade of investment research, but several studies have uncovered promising factors that appear to outperform the traditional market-cap index.
Smart Beta uses five of these factors (value, momentum, high dividend yield, low market beta, and low volatility) to identify the stocks which are likely to have the highest expected return, and overweights them relative to their allocation in the cap-weighted benchmark (VTI). As a result, Wealthfront’s Smart Beta portfolio is expected to outperform the market-cap index over time.
As shown in Wealthfront’s most recent research, the Stock-Level Tax-Loss Harvesting and Smart Beta combination
Risk Parity is the fourth investment feature offered in Wealthfront’s PassivePlus® suite. Available for taxable accounts over $100,000. Risk Parity is a methodology to allocate capital across multiple asset classes, much like Modern Portfolio Theory (MPT), also known as mean-variance optimization. Historically, Risk Parity has generated better returns for a given level of portfolio risk than MPT, which is the most common form of asset allocation.
I’m impressed by their investment methodology, but I’m even more impressed that their team has figured out how to fully automate these investment features. It’s an incredible marriage of technology and investment research that is unmatched by other robo-advisors. Even if I could figure out how to replicate their process, I would rather pay 0.25% annually than waste hundreds of hours trying to manually implement a custom five-factor index using individual stocks.
Wealthfront vs Betterment vs M1 Finance – Summary
Wealthfront, Betterment, and M1 Finance each offer a unique set of features. If you are trying to determine which firm will best serve your needs, here are my thoughts:
The mobile-friendly design, goal-based investment recommendations, and free ongoing financial advice are my favorite features offered by Betterment. I also believe that the ETF recommendations made by Betterment (including the optional Socially Responsible portfolio) are slightly more advanced than those made by Wealthfront. When you combine these features with Betterment’s Tax-Coordinated Portfolio, you can understand why Betterment is the largest robo-advisor in this comparison.
The current one year of free service promotion will reduce the management fee, and the $5,000 annual fee limit will appeal to investors with large account balances (in excess of $2,000,000).
M1 Finance has only been around since 2016, so the platform is still growing and features are being added on a regular basis. Despite being the newest robo-advisor on the block, the M1 Finance team has created something entirely unique. Instead of trying to replicate Betterment or Wealthfront, they have created a flexible and highly customizable platform.
M1 finance is the best robo-advisor for investors who are looking to actively manage their investment portfolio. Hands down, M1 Finance beats both Betterment and Wealthfront in portfolio customization and the number of available investments because M1 allows to you invest in diversified ETF portfolios (similar to Betterment and Wealthfront), as well as individual stocks and ETFs.
To summarize, M1 Finance is offering a premium investment platform and charging investors nothing for the service. Assuming they can remain profitable long-term, M1 Finance is an outstanding investment platform that is unmatched in value.
I’m not sure how they do it, but the Wealthfront team continues to roll out valuable features on a regular basis. Wealthfront’s Risk Parity, 529 college savings account, college planning advice, and portfolio line of credit are all features added in the past couple of years. And you can’t forget Wealthfront’s excellent free financial planning experience launched in December 2018.
The ETF investment recommendations are good, but the Smart Beta features are best in class. If you have $100,000 or more to invest in a taxable account, you are eligible for Wealthfront’s Stock-Level Tax-Loss Harvesting and Risk Parity. If you have $500,000 or more available, Smart Beta is unlike anything else on the market.
But it’s not only affluent investors who should consider Wealthfront. The $5,000 free management offer is designed to attract investors who are just getting started. Wealthfront obviously hopes that these investors will stay with the service and build substantial wealth over time