NEW YORK (MainStreet) — Saddled with record levels of student loan debt and hampered by a still-recovering job market, many Gen Y-ers have slowed or altogether postponed their investments.

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But a new generation of online advisories - firms like Wealthfront, Future Advisor and Betterment that aim to offer low-cost, algorithm-based online alternatives to traditional brick-and-mortar financial advisories – may change that. Their low-fee models and willingness to manage smaller portfolios make them appealing to younger investors. And it’s a good thing for the robo-advisors, too, since their own futures depend in large part on the willingness of Gen Y to entrust their portfolios to their care. If they build enough loyalty with Millennial investors (whose Boomer parents are likely to leave their inheritances to), robo-advisors may stand to benefit from one of the greatest inter-generational wealth transfers.

Robo-Advisors’ Millennial Advantage

For Millennials, the appeal of robo-advisors over traditional firms is easy to see: they offer personalized, data-driven investment advice or management; use ETFs or other low-fee financial instruments which minimize expense; and will happily manage younger investors’ smaller portfolios. For a generation that grew up online, these are big advantages well worth the smaller loss of face-to-face advisor contact.

This helps explain why many robo-advisors have a client base comprised largely of 20- and 30-somethings. But there’s another factor at play: since many robo-advisors’ leaders are often in the same age group, it also makes them better attuned to Gen Y’s behaviors and preferences, providing insight into their investing needs.

At just 31 years old, FutureAdvisor’s CEO Bo Lu is a member of the Millennial generation himself. He started FutureAdvisor, in part, because of the frustration he felt when traditional financial advisors were reluctant to manage his cohort’s modest portfolios. FutureAdvisor’s typical client is a 30-something young professional – in other words, the sort of person traditional financial advisers might’ve overlooked in favor of older, wealthier clients with much larger portfolios. This is precisely the niche robo-advisors like FutureAdvisor are seeking to fill, he says: “We’re increasing the pie, not just talking someone else’s slice. We’re not trying to eat Morgan Stanley’s lunch – we don’t really want their multi-million clients.”

It’s hard to argue that robo-advisors are going hungry. One of the largest, Wealthfront, now has more than $1 billion in assets under management; others, like Betterment, exceed $500 million in assets managed. And a study of the industry by expects the total assets under management for robo-advisors to exceed $250 billion within five years. Lu says his own FutureAdvisor expects to hit the $1 billion AUM mark in about a year.

The majority of robo-advisors’ clients are under 50, and in many cases, under 35, pointing to continued sources of growth.

“80% of our clients have never had an advisor of any sort, so we feel there’s still a very large untapped market of younger investors we can serve," he said. "Our growth is coming from two places: both clients new to FutureAdvisor and existing ones who are upgrading their portfolios.”

Plus, the Great Recession taught Millennials to question their financial security and social safety nets and to assume greater responsibility for their financial futures, says Lu.

“Younger people are realizing more and more that they have to take control of their own financial futures," he says. "It wasn’t that long ago that people expected their employers to take care of them for life, but more people today understand they’re responsible for their own financial futures.”

How Millennials are Supporting the Robo-Advisor Model

If algorithmic, automated portfolio management and advice is so appealing to younger investors, what’s preventing larger players from entering the space? Demographics, for starters. An Ernst & Young study shows that only 5% of traditional financial advisors are under 30, underscoring the generational shift supporting robo-advisors’ rise – brick-and-mortar for mom and dad and online financial management for me.

As Millennials begin investing in greater numbers, this familiarity and comfort with robo-advisers and other online financial management tools means the AUM of these companies will continue to grow in tandem with Gen Y’s wealth accumulation. Is Lu concerned that larger, brick-and-mortar players will try to follow suit and enter the robo-adviser space?

“Given the fragmentation of our space, there’s room for a lot of players – last time there was a major shake-up in the industry, Vanguard and Fidelity came to be," he said. "The barriers to entry may appear low, but the actual work, processes, products and human teams required to communicate a simple, personalized message that is relevant and passes regulatory scrutiny and simultaneously offer a solid product is a lot harder than people think.”

But there’s an even bigger bullet in robo-advisers’ guns, says Lu, and it’s all about demography the massive generational wealth transfer coming from Boomers to Gen X and Y.

"It’ll be a big source of growth for us,” he says.

For now, Boomer moms and dads may still trust their money to traditional advisors and firms. But what happens when junior soon inherits the funds? If Millennials continue flocking to the robo-advisor model, their parents' money may follow suit.

--Written by Janet Al-Saad for MainStreet

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