Robo-advisories have surged in popularity, thanks to their lower fees and ease of investing. From the standpoint of big banks and brokerages, why is getting into the robo-advisory business a smart move?

Michael Douglass and Fool contributor Matt Frankel discuss in the video. A full transcript follows.

This video was recorded on Nov. 13, 2017.

Michael Douglass: Let's also talk a little bit about why it makes sense for Wells Fargo (NYSE:WFC) specifically to be getting into this space.

Matt Frankel: It's just the direction that customers are going. People are becoming more and more aware of investment fees. 20 or 30 years ago, before the internet became popular, if you asked the average person how much they're paying in investment fees, they would have no idea. There's still a lot of that, to some extent, but now people are getting more aware of what they're paying, it's easy for anybody to trade a stock online, so, you see all these E*Trade and TD Ameritrade commercials advertising rock-bottom commissions, advertising robo-advisory services with really low, like you said, 0.5% or below fees for assets under management. So, it's kind of just where their customers are going. And they said in their press release, there are a lot of their customers, I think they said 20 million millennials and Generation X-ers alone, currently do not have an investment account with the bank. So, this is their way to attempt to take customers who would otherwise go to Betterment, TD Ameritrade, Vanguard, Charles Schwab, and bring them into the Wells Fargo family.

Douglass: Yeah. And that makes a lot of sense from a cross-selling perspective, as well. You could see these robo-advisors increasingly self-disrupting, particularly in the big institutions. It's not the case right now, but you could see a Wells Fargo one day offering its robo-advisor for free if you have a checking account or a credit card or something like that. So, it's basically this opportunity to cross-sell people, and then bring them further and further into your bank's ecosystem. In fact, although Wells Fargo is not offering its robo-advisor for free to anyone, or at least doesn't plan to right now, they are planning to offer a lower assets under management fee for people who have a certain amount of assets in your checking and savings accounts.

Frankel: Right. There are a few cases where it actually is free. I think Schwab is one of the big ones that offers a free robo-advisory service. They actually have two, they have one that's free and one that costs money in their hybrid platform. But, the reason they do that is, their customers' accounts are invested in Schwab mutual funds, or ETFs, I'm not sure which one, but it's invested in Schwab investment products, which, in turn, brings them into these. So, it's worth giving these advisory services away for free.

Douglass: Right. And essentially, they can use it as a loss leader, and put in the money a little bit further down the pipeline. Because, again, when you're thinking about fees that you're paying and investing, if you're working with a wealth manager or a robo-advisor, there's of course the advice, the management fee, which is that 0.5%, or for most human ones, in that 1%-2% range. Then, there's also the underlying fees for the funds. What that means is, Schwab can still make money even while they're offering something for free. So, it's a great way to just pull people in and get them further and further into the Schwab ecosystem.

Frankel: Eventually, it seems these are all going to trend down lower and lower to where people can invest for free, just pay the fund fees themselves.

Douglass: And that's one of the interesting things, for me, about institutions doing this. Institutions can both have the financial wherewithal to take some losses and also have the ability to, they've created their own funds, so they can take this initial loss anyways, go to the 0% fee and then make the rest on the funds and their expense ratios. For me, long-term, it begs the question, what will happen to the little guys?

Frankel: Right. There's no way of really knowing at this point, but it does seem like, especially the big institutions that offer their own line of funds, they definitely have a leg up on the smaller guys. And banks like Wells Fargo, too, that don't offer their own funds, but like you said, they have the cross-selling potential to offset the costs in other areas. Whereas a Betterment, if they can't charge a fee, how are they going to make money?

Douglass: Right. Long-term, perhaps this argues for greater vertical integration across all of finance. You could see, as banks continue to diversify, some of them really going fully into this idea of creating their own mutual funds, and doing all the different parts of someone's financial life so they can really do everything in one place. It'll be an interesting thing to see long term, whether that ends up panning out, and how our banks are structured five and 10 and 20 years from now, and also how the Vanguard of the world are structured as well as they try to compete on, at least so far, a really strictly fund and personal advice basis against some of these larger and more diversified institutions.

Frankel: Vanguard has the competitive advantage that their funds themselves are a lot cheaper.

Douglass: Oh, yeah.

Frankel: Which is their big draw. If you're paying a 0.5% of your assets with Wells Fargo, who has it invested in fees that charge you another 0.5%, but Vanguard charges, I think it's 0.3%, and the funds charge practically nothing, I think Vanguard's S&P 500 Index Fund is down to 0.4%.

Douglass: Something like that.

Frankel: Yeah. So, that's their big advantage, how they can stay competitive.

Douglass: And that's one of the reasons that, among robo-advisors, Vanguard personal advisor services has, as of this filming, the largest assets under management, around $65 billion as of May 15, 2017. Which, to give you a sense, No. 2 is Schwab Intelligent Portfolios at $16 billion as of March 31, 2017. So, a really big delta, and that's because Vanguard has, so far, at least, such an attractive platform. So, there's going to be a lot of different trends here to watch.

Matthew Frankel has no position in any of the stocks mentioned. Michael Douglass has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.