[slg]

Option 1 doesn't do a good job of aligning incentives because you are taking a small percentage of a small percentage. The article says Wealthfront charges 0.25%. Let's use 5% as the difference between a good and bad investment (this is an arbitrary but I believe realistic number). This means the difference between Wealthfront doing a good job and a bad job for the customer is the equivalent of them increasing their fee 0.0125%. That is a $1.25 increase per $10,000 invested. So what is the better bath to increase profits, doing a fantastic job of investing, which likely comes with increased expenses, or increase your fee some tiny percentage that will almost surely go unnoticed by the customer?

Option 2 is moot for the authors example since they suggest these companies manage everything and therefore a customer can't give the advisor more to manage.