Robo-advisors manage your money for a fraction of what human advisers charge — 0.25% instead of 1%. That discount is real, but it raises the question every user should be able to answer: how does the platform make money on you at all? The answer explains both why these products are genuinely cheap and why so many of them die (see the Graveyard for the funerals).
The advisory fee: small, but the core
The headline model is simple: a percentage of assets under management, typically 0.25% a year. On a $10,000 account, that’s $25 — which is exactly the problem. Serving that account (custody, statements, support, compliance) costs a fairly fixed amount, so small accounts lose money and the platform survives only by growing average balances faster than costs.
Where the quieter revenue lives
Under the headline fee sit second engines. Cash sweep interest: uninvested cash gets parked at partner banks, and the platform keeps a slice of the interest spread — in high-rate years this can rival the advisory fee. Proprietary funds: some robos put you in their own ETFs, collecting the fund’s expense ratio on top of the advisory fee. Payment for order flow appears at the trading-app end of the spectrum. Subscription tiers and premium human advice round it out. None of these are scandals — but each is disclosed in the firm’s Form ADV, not its homepage, which is why we read ADVs in every Platform Report.
The brutal math of scale
At 0.25%, a robo needs roughly $4 billion under management to gross just $10M a year — before engineers, compliance, custody and marketing. That’s why the graveyard is full: the model works at Vanguard scale and venture-funded growth scale, and almost nowhere in between. When you evaluate a smaller platform, the question isn’t whether the product is nice — it’s whether the unit economics above can ever cover the burn.
What to check before you sign up
Three lines from this article, turned into checks: what’s the all-in fee (advisory + fund expenses)? Where does my idle cash sit and who earns on it? And is the firm’s AUM anywhere near sustainable scale? The first two are in the Form ADV and fund disclosures; the third is in the ADV’s AUM figure — and the registration behind all of it takes one Verifier scan to confirm.