Let me go through these calculations bit by bit so we don't lose track. We already agreed to say that both companies have roughly the same AUM, which is $3 billion. They both charge 25 bps to manage that money (note that I'm ignoring the money they manage for free up to $10k, which I suspect is a large amount of the younger customer base). That gives us yearly revenues of $7.5 million.

But what about costs? Wealthfront has 138 employees, and let's say the average employee salary is $85k. This salary part is worth expanding slightly. The average software developer salary is around $100k (often much more at hot startups), and I presume close to half, if not more, of the company is staffed by engineers. Research analysts, who pick which securities to invest in, are also highly compensated, mostly because of their experience (I doubt Wealthfront and Betterment are hiring many fresh college grads to do research). The marketing and administrative staff probably make closer to $50k, but there should be a lot less of them at a new startup. So $85k is probably a very conservative estimate of average salary, but it's the best we can do with the data with have.

With these assumptions, both Wealthfront and Betterment are operating at a loss, and this is without accounting for the office rent expenses, servers, marketing, legal, and a slew of other necessary overhead. So now you see what the problem is: neither company is following any of the cardinal asset management rules that we started this post with. Presumably, the plan is to grow AUM to gigantic amounts to offset these costs, but that's easier said than done.

Robo-advisors are becoming a commodity: from startups to large banks, providing an algorithm dressed up as a nice app is the absolute minimum you need to have to compete in this space. Wealthfront and Betterment know this well, so they traditionally competed on offering the lowest fees (0.25%) and having the best designed apps. Unfortunately, those two things are not competitive moats. Charles Schwab is already undercutting both companies with no fees (0.00%), and despite what Betterment will tell you, it's a great deal.

So what happens next? A few things:

The robo-advisors will consolidated into one or two large providers. As asset management cardinal rule #1 says, you can make money if you have high AUM and low fees (read: economies of scale). An alternative strategy to reach high AUM growth is to provide 401(k) plans for companies. Wealthfront and Betterment are already trying to do this, but it will be a hard battle to compete with companies like Fidelity, which don't give up very easily.

Big banks will acquire these robo-advisors for the engineering talent. Think about it. What do the banks have that the startups desire so much? Well, it's AUM and access to economics of scale. And what do the banks want from the startups? It's not the trivial AUM, and nor is it the stock picks. It's the engineering talent. These robo-advisors are still valued at hefty premiums, so I don't see banks swooping them up anytime soon. But as soon as things go downhill and valuations plummet, you'll see lots of acqui-hires start to happen.

A business can either boom or bust (or remain in an indefinite steady state of tranquility and no growth, but that's no fun). Most of the little guys in this space (and the fintech space in general) will dissolve out of existence. Starting a business is tough, making it work is tougher, and making it work in a competitive space is a brobdingnagian hardship.

And finally, more fees. For all the agitprop Wealthfront and Betterment palaver about traditional financial institutions, they might also have to raise rates or provide premium options. 25 basis points is not a business model, it's a temporary growth tactic. I wouldn't be surprised to see robo-advisors offer premium services that might some day involve person-to-person meetings. Companies like LearnVest and Personal Capital are already doing it, although their AUM grows resultantly slower.

It might seem like I'm being a codger on Wealthfront and Betterment, but the opposite is actually true. I think it's phenomenal that startups are trying to overtake a slow, bureaucratic and slightly sanctimonious industry. But for that to happen, they need to be realistic. The last thing I want is for them to go out of business or be acquired to become the status quo. Emerson is known to have said "Money often costs too much"; perhaps he was talking about managing it.