If the robo-advisor is free, how does it make money?
Automated investing arrived with a real price cut — and some programs charge no advisory fee at all. They still have to earn. Most of the time, the revenue is sitting inside your own account, labeled “cash.”
Consumer education, not investment advice. Paul Powell is not currently a licensed financial advisor.
Programs that advertise no advisory fee generally keep a slice of your portfolio in cash. That cash is swept to an affiliated bank, and the bank keeps the spread between what it pays you and what it earns lending the money out. You never get a bill. You’re just never fully invested. The cost shows up as a return you didn’t earn.
The fee is the cash
Digital advice gets paid one of two ways, and it’s worth knowing which one you’re in.
The first way is a stated fee. Many automated platforms charge somewhere around 0.25% a year — a quarter of a percent, billed the way an advisory fee is billed. You can see it. You can compare it. Nothing hidden about it.
The second way is no stated fee. And that’s where you have to go looking, because the revenue still has to come from somewhere. The most common answer is cash.
Here’s the mechanism. The program’s model portfolio holds a required slice in cash — not the small residual that lands in every account between trades, but a designed allocation, part of the portfolio itself. That cash gets swept into a deposit account at a bank affiliated with the same company. The bank lends it out at one rate and pays you a lower one. The difference is the firm’s revenue. It’s called net interest income, and on a large enough pile of client cash it is a serious business.
How large a slice? In a 2022 enforcement settlement, the SEC described one large brokerage’s automated portfolios as holding between 6% and 29.4% of client assets in cash, averaging about 12.5% across portfolios — with the most conservative allocations carrying the most cash. The SEC said the firm’s bank earned roughly $46 million from the spread over a period running from March 2015 to November 2018, and the company paid about $187 million to settle. The charge wasn’t that holding cash is wrong. It was that the disclosures described the cash as a portfolio-construction decision when, the SEC alleged, the allocations were set to hit revenue targets.
And this isn’t only a robo-advisor story. Nearly every brokerage and advisory account has a default cash sweep, and the spread works the same way whether a human or an algorithm picked the portfolio. In January 2025 the SEC settled charges against three advisory firms — two affiliated with one bank, one with another — over cash sweep programs; the orders described bank deposit sweeps offered as the only option for most advisory clients, at yields the SEC said were as much as four percentage points below reasonable alternatives. The firms paid $60 million in combined civil penalties without admitting or denying the findings.
Four percentage points. On the cash you thought was parked, not deployed.
Completely. That’s the point.
Earning a spread on customer cash is a normal, lawful part of how banks and brokerages make money. Sweep programs are disclosed — in the client agreement, in the fee schedule, in the Form ADV brochure. The enforcement actions above weren’t about the existence of the practice. They were about how it was described. That distinction matters, because it tells you what to expect: the mechanics will keep running, legally, and the only thing that changes is whether you understand them.
A cash allocation is a cost you pay in a currency nobody prints. A 1% fee shows up on a statement, and you can argue about it. A permanent 10% cash position doesn’t show up anywhere — it just quietly removes a tenth of your portfolio from whatever the market did that year, and hands the firm the interest on it. Ask yourself which of those two costs is easier to negotiate. Then ask why the “free” option is built out of the one you can’t see.
Find the cash. Then find the rate.
This one is unusually easy to check, because the number is printed on your own paperwork. Open your most recent statement and find the cash line — the allocation summary, the position list, or both. If you’re not sure where to look, the annotated statement teardown walks through where each cost hides. Write the percentage down. Then find what you’re being paid on it. Sweep rates are published, and the SEC’s own investor guidance on cash sweep programs tells you to compare that rate against what you could get on cash outside the firm.
Two numbers, and you know most of what you need. A small operating balance earning a competitive rate is housekeeping. A double-digit slice of your portfolio sitting in cash at a rate well below what a plain money market fund pays is a pricing decision someone made on your behalf — and it belongs in the same conversation as every other cost. If you’re running a full review, this question sits naturally alongside the twelve written due-diligence questions, and the whole sequence is laid out in the Method.
“What percentage of my portfolio is currently held in cash, where is that cash held, what annual rate am I paid on it, and does your firm or any affiliate earn revenue on my cash balances? If so, please describe how much and how it is calculated.”
An advisor — human or automated — who can answer that in two sentences has nothing to hide. What does it tell you if the answer takes three weeks?
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