Distribution Beats Automation in Robo Advice

This is what happens when robo advice stops being a startup product and becomes a distribution feature inside giant brokerages. Betterment had to buy each customer one by one and charge about 25 basis points to make the math work, while Vanguard and Schwab could place automated portfolios in front of millions of existing brokerage customers and undercut on price, which let them pull far more assets onto their platforms.

• The core edge was distribution, not better automation. Startup robo advisors faced CAC around $650 per new account, while Schwab could push its product through an app and brokerage relationship customers already used for custody, trading, and cash.
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• Fees mattered because the product is mostly ETF allocation, rebalancing, and tax features that are easy for incumbents to copy. Betterment and Wealthfront charged about 25 basis points of AUM, while Vanguard Digital Advisor lists 0.20% for index portfolios, and Schwab Intelligent Portfolios charges no advisory fee.
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• Scale in this category comes from assets, because revenue per customer is small. Robo advisors at 20 to 25 basis points need roughly $40B in assets to reach $100M in revenue. Internal comps put Betterment around $31B AUM versus Vanguard at $200B+ and Schwab at $65B+ in the period discussed.
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The next phase pushes robo advice further into a bundled brokerage relationship. The winners will keep using cash, retirement, and planning tools to pull in deposits first, then convert those balances into managed assets. That favors platforms with the biggest customer base, the lowest headline fee, and the widest menu of adjacent products.