Millennials and robo-advisors: A match made in heaven?

Financial advisors are facing two dueling forces: They desperately want to attract millennials to replace their aging stable of clients, but clients with low account balances—which many young investors happen to be—are unprofitable.

Not surprisingly, just 16 percent of millennials say they work with a financial advisor, about half the rate that baby boomers do, according to a study from Wells Fargo.

Millennials with technology
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"Young people have been largely overlooked by the [financial advice] industry because it wasn't economical to service them," said Adam Nash, founder of Wealthfront, a leading robo-advisor, or automated online wealth-management firm. "Technology changes the debate because it can be economical to help young people with their money."

Robo-advisors are able to serve younger investors with small balances because they rely on technology instead of pricey human advisors to guide clients. Their fees to work remotely with an advisor range from free, at WiseBanyan, to 95 basis points at Personal Capital.

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Low minimums—and sometimes no minimums, at players such as Betterment—are also a selling point for robo-advisors. Many throw tax-loss harvesting and rebalancing into the deal.

Human financial advisors, on the other hand, typically charge 1 percent of assets per year to provide a combination of investment management and broader financial advice.

"Because of those low barriers to entry … it's definitely encouraging for young people," said Sophie Louvel Schmitt, an analyst with consulting firm Aite Group.

In technology we trust

At the end of 2014, Aite reported, assets for start-up digital advisors stood at $5 billion. The firm estimates those assets will swell to $15 billion by the end of this year.

Those figures don't include digitally advised assets at legacy firms such as Charles Schwab and Vanguard. Vanguard's Personal Advisor Service, which officially launched at the beginning of May after a two-year pilot, now has $17 billion in assets and charges 30 basis points for asset allocation and remote access to a financial advisor.

Schwab's newly launched Schwab Intelligent Portfolios, an allocation service for retail investors, is free.

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But it's not simply low fees and low minimums that attract younger investors, observers believe. Millennials' relationship with technology makes digital asset management more appealing, according to Nash.

Younger consumers trust technology enough to delegate important tasks.

"They're saying, 'Don't tell me I could be saving money in a cheaper ETF; put me in a cheaper ETF,'" Nash said. "There is no shortage of websites with information, but there is a shortage of services that will do it for you and take the load off your mind."

Lluís Real | Age Fotostock | Getty Images / Jose Luis Pelaez | Iconica | Getty Images

To draw in younger investors, traditional advisors will need to adopt some of the technology that enable simple investing.

"When millennials get older and they want to interact with their advisor, they are going to want to have a highly technologically intermediated relationship," said Tom O'Shea, associate director of research with Cerulli Associates, a global research firm.

Uncomplicated situations … for now

Wealthfront, which had $1.7 billion in customer assets at the end of 2014, reports that 60 percent of its clients are under 35 and 90 percent are under 50. Among the robo-advisors, Wealthfront caters the most to millennials, given its early focus on young "techies" in Silicon Valley.

"The baby boom generation has more money, but they've also got complicated situations like retirement," Nash said.

In other words, they need more advice. But younger people may need only investment advice at this point in their lives, he noted.

"It's no wonder they find an automated investment service appealing," Nash said.

Automation is the key to getting young people to invest and adopt good savings habits early on, said Meir Statman, professor of behavioral finance at Santa Clara University and an advisor to Wealthfront.

It's similar to the experience many investors already have in their 401(k) plans with auto enrollment, auto escalation and defaults into age-based target-date funds.

"The robos, while very good at managing small accounts to scale, are challenged in dealing with those types of questions that have an emotional component to them." -Tom O'Shea, associate director of research at Cerulli Associates

Graduating to humans

The robo-advisor solution may work well when investors are just starting out, some observers said, but at some point, life gets complicated. Some people may need to go beyond robo-advisors as they mature.

"Take the example of having a baby," said certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth. "All of a sudden you have to figure out taxes, insurance, your flexible spending account and college savings. It's a little baby, but look at all the questions that come up," she explained.

Many investors use more than one advisor, said O'Shea of Cerulli, so it's feasible that millennials will maintain their robo accounts but turn to traditional advisors for more complex financial planning.

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"The robos, while very good at managing small accounts to scale, are challenged in dealing with those types of questions that have an emotional component to them," O'Shea said.

He likens their relationship to how consumers now approach fitness. "A lot of people are walking around with Fitbits in their pockets, but they're still going to their trainer and going over the data together," he said.

Not just for millennials

Although Wealthfront is a leading robo-advisor among millennials, other platforms count different generational groups among their core customer base.

"[Robo-advisors are] being accepted by younger folks, but they're not being rejected by older people," said George H. Walper Jr., president of consulting firm Spectrem Group. "In fact, the biggest users of the service are those that feel like they could use an advisor but feel like they can't find one."

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Spectrem's research of high-net-worth investors found that the average age of people in that demographic who use a robo-advisor is 55 years old.

Meanwhile, Schmitt of Aite said a growing number of digital advisors are shifting their focus older. Rebalance IRA, for example, has tools to help retirees manage withdrawal from their retirement savings. And SigFig recently launched a new portfolio focused on helping retirees meet their income needs for 50 basis points.

—By Ilana Polyak, special to CNBC.com