I'm thinking that they'll hide the brokerage fees by buying low-cost S&P index funds themselves in "large" chunks then breaking them off for users. The index funds still have brokerage fees tied into the cost of the fund, but the app itself won't charge users for entering or leaving the fund of funds.

If they're only buying additional index stock on a weekly/monthly basis they could potentially make that back in advertising revenue. Alternatively, by just paying out of pocket, if they get enough users they can now claim they've run a x $ amount mutual fund -- good resume padding.