Investment management firm SCM Direct estimates that the average UK robo-advisers receives revenue of just £147.50 ($188.26, €170.26) per annum per account while the cost of acquisition is £180 per annum per account.
Robo-advisers also have to account for ongoing costs of £130 pa per account.
"Thus it costs them £180 to make just £17.50 net each year," it added.
Meanwhile, fees for automated advice on a £25,000 portfolio ranged from about 0.3% to 0.94% per annum, with an average cost of 0.59%.
As a result, said the firm, one well known UK robo-advisory firm has reported spending £9.42 for every £1 of revenue – with the average client having to invest for nearly 11 years for firm to break even despite research showing that the current average holding period is just three years.
“We believe it is actually safer to give advice to consumers rather than risk overstepping the guidance to advice line and being in hot water with the FCA".
After examining 10 UK-based robo-advisers, SCM said firms often used misleading performance calculations, questionable statements regarding fees and had an overreliance on risk questionnaires.
Many also has missing pages from key legal documents while other used questionable claims.
However, the company said the bigeest flaw with robo-advice is the misconception it offers the same range of advice as face-to-face advisers.
"This is not the case in most robo-advice models that are simply offering direct-to-consumer investment solutions," said SCM.
The damning indictment has been detailed in the SCM’s Fintech Folly report which found that far from being the “silver bullet” that solves the current ‘advice gap’, automated advice services could lead to the “next mis-selling scandal”.
He study also accused firms of straying into giving clients advice without meeting the relevant regulatory requirements.
Out of the 10 firms it examined, SCM found that although eight had websites that used risk questionnaires, two of these firms were not FCA-regulated to give advice to retail clients.
The firm also criticised robo-advisers for targeting millienials aged 18-35, arguing that the group accounts for just 5% of the total investible market.
Describing robo-advice as a potential “poisoned chalice”, SCM has called on the UK’s Financial Conduct Authority (FCA) to launch an urged review into the sector.
Bruce Moss, strategy director at fintech provider eValue, disputed the claims, arguing that “thoroughly tested” robo-advice should be “much more consistent and reliable” that human advisers.
“Far fewer regulatory problems should result from a carefully designed, tested and monitored process than traditional human-delivered advice,” he said.
However, he did acknowledge that there was a ‘grey area’ for robo-advisers between offering guidance and giving advice.
“We believe it is actually safer to give advice to consumers rather than risk overstepping the guidance to advice line and being in hot water with the FCA for inadvertently giving unsuitable advice which doesn’t take account of the consumer’s circumstances,” said Moss.
The FCA has been keen to push the robo-advice market in the UK in a bid to close the so-called ‘advice gap’ left in the wake of the Retail Distribution Review (RDR) introduced in 2012.
Earlier this year, in line with recommendations made in the Financial Advice Market Review (FAMR) the regulator launched its first specialist robo-advice unit to help bring new firms to the market - in the hope that cheaper forms of advice will increase the number of people saving and investing, particularly in light of the government’s pension freedom reforms.