The earliest exchange-traded funds hit the market over 20 years ago and heralded a new age for index investing. Now, the investing world is going through another change, and ETFs are again playing a starring role, especially for investors age 25 to 45 with four-figure nest eggs and seven-figure dreams.

The new role of these funds is that of building block in the new online investing platforms sometimes called “robo-advisors.” ETFs are less expensive and it’s easy to use them to diversify your assets. They plug right in to standard allocation models. That has made them a great fit for the robo-revolution.

Robo-advisors, of course, have no shortage of critics, who view them as an impersonal financial planning shortcut that will likely remain on the margins of the industry. But to advocates among advisors, they are an important tool that will draw younger, less wealthy investors by bridging the gap between do-it-yourselfers and those who need full service.

“The advisors we work with often use our program to help service the lower end of the book cost-effectively,” says Juney Ham, president and co-founder at Upside, a firm that specializes in software for financial advisors (and a recent acquisition of Envestnet). “Many of these younger investors are among the so-called ‘emerging affluent,’ who don’t have the $1 million investment minimum but have the potential to build their accounts to that point.”

Account sizes for clients of financial advisors who use Upside span the board, but typically range from $5,000 to $100,000. Often, says Ham, the people reaching out to Upside are actually younger advisors working for older principals. Younger advisors find that the computer-centered approach to accounts and portfolio management, rather than being off-putting, appeals to their younger clients, who often prefer “digital first.”
These clients “want solutions that give them control over when, where and how they engage with advisors,” Ham says. “They place a premium on transparency and full access to information about their accounts, which these programs give them.”

Advisors who use these ETF-based programs typically communicate to clients through the Internet or e-mail, rather than one-on-one. The advisors can choose the level of personal interaction they want to have with clients, and charge accordingly. Those who want to minimize costs and prefer little or no face time with clients might charge just one fee—half a percent or less in annual investment management fees, for instance—while those that add a “human touch” to the system by adding on more comprehensive planning services and personal interaction can charge more.

Regardless of what they charge, advisors who want to be in business a decade from now need younger clients, even if those clients’ pockets are shallow right now. A survey by TD Ameritrade last year found that 68% of advisors pegged the average age of clients as 55 or older. Among the clients at RIA firms that custody with Schwab, 40% are already retired, and another 30% will retire within a decade, according to the brokerage. As the population ages, trillions of dollars in investable assets will shift from baby boomers to those under age 40, many of whom are already accumulating assets on their own.

Alex Teyf, senior manager of mutual funds and ETF products at TD Ameritrade, says ETFs are a good fit for accounts with lower balances because of their costs and their fit into “off-the-shelf” allocation models. He observes that financial advisors at his firm sometimes use the ETF-based programs to accommodate the children or grandchildren of full-service clients who don’t have the required investment minimum for their firms.

A Slow Build
Financial advisors who use ETF-based robo-software are still in the minority. But there are plenty of reasons others might want to test the waters. Other marketing approaches, lunches or on-site seminars, may appeal to the 50-plus crowd, but they don’t fly with younger investors. Attracting people in their 20s or 30s requires a lot of social media legwork and can be a very slow build (at least in those cases where the young client hasn’t been referred from an existing one).

One firm that now offers a robo component is Ritholtz Wealth Management, a New York City advisory. The firm, which was founded in 2013, has a $170 million business dedicated to full-service advisory clients with $1 million to $2 million. But last year, Ritholtz added a new service called Liftoff using robo-generated ETF portfolios for smaller accounts.

Liftoff, which is powered by Upside, has a minimum investment requirement of only $5,000 for an ETF-only asset allocation strategy. That includes the initial plan, regular rebalancing and free trades, and it costs only 0.40% of assets. (The management and advisory fees for the full-service offering range from 1% to 1.25%.)

According to CEO Josh Brown, the average account size in the Liftoff program is $37,000 (with the largest coming in at around $300,000) and most investors who use the service are in their 20s or early 30s. Most of Liftoff’s $2 million in assets comes from 401(k) rollovers and other transfers from IRAs, and almost all account owners set up regular transfers from bank accounts to reach their financial goals.

Brown says he has no problem with people using the term “robo-advisor” to describe the offering, if that’s what they want to do. “But this isn’t some kind of science fiction project. It’s us coming up with a way to deliver advice in a scalable fashion. And it’s head and shoulders above what smaller investors would get on their own.”

To help differentiate Liftoff from free or low-cost direct-to-consumer robo-advisors and build loyalty, Brown and Barry Ritholtz, the firm’s chairman and chief investment officer, turn to blogging and other forms of social media to build a brand and attract younger investors. Brown figures he and Ritholtz have churned out over 40,000 blog posts since 1998. Some accounts in the service also come from children or grandchildren of clients on the wealth management side with smaller accounts and less complicated financial planning needs.

Robo-based programs are popular tools for financial advisors in the early phase in their careers, people often willing to accept smaller accounts than their more established counterparts. Matt Haghighi, who targets clients between 20 and 35 years of age for his new advisory firm, Irvine, Calif.-based Amity Capital, charges 0.85% annually for a service that covers the plan setup, rebalancing, trading and transaction fees. The fee also pays for him to have regular meetings with clients to review their investments and discuss their goals. There is no minimum investment and accounts under $10,000 pay a $5 per month fee, which is waived with a deposit of $250 or more per month.

Haghighi views social media as a critical element of marketing to a generation raised on technology, and he says he spends about one or two hours a day creating and posting content. “It’s important to cast a wide net with social media, and not focus efforts on any one venue,” says Haghighi, who is 23. He cites the website Tumblr as a favored venue because “most users have themed blogs, which presents a unique opportunity to target specific interests.”

Cullen Breen, the president of Dutch Asset Corporation in Albany, N.Y., uses robo-advisor software from a firm called Betterment to accommodate smaller investors with accounts ranging from $10 to $30,000. Accounts of $100,000 or more are handled separately through an online broker. Both account types are charged 1.5% a year and include personal consultation, although the service that handles larger accounts can use mutual funds and individual securities in addition to ETFs.

The larger account side has about $3.9 million in assets under management and 26 clients; the smaller account side has $100,000 in assets and about the same number of clients. Breen says handling a lot of smaller accounts isn’t as cumbersome an administrative burden as it may appear because the program handles all regulatory documents, account openings and other tasks online.

“The compliance responsibility is less than 10% what it is for the larger accounts,” he says. “The program is really quite scalable.” Almost all of the clients who use it participate in an automatic investment program, and Breen screens them to help ensure they have the desire, discipline and income they need to build their accounts.

For advisors like Ritholtz’s Josh Brown, whose goal is to service smaller accounts cost-effectively, the challenge is limiting time commitments without becoming too impersonal. That becomes especially important during bear markets, when investors who don’t have the comfort of at least some hand-holding could flee the scene rather than stay the course.

Alex Teyf at TD Ameritrade believes that while there’s no substitute for a personal conversation with skittish clients, communicating through e-mail, newsletters and other forms of electronic delivery can also help mitigate asset attrition during tough times. “Millennials,” he says, “often prefer the digital touch.”

Upside’s Juney Ham cautioned that as financial advisors move forward with ETF computer programs, they shouldn’t ignore the communications and human side of the business. After all, he says, that is what will separate them from the free or low-cost robo-advisors that investors can use on their own.

“We believe in marrying algorithms with a personal touch,” he says. “That’s especially true during bear markets when clients want perspective from people who can put what is happening into context.”