At 32, Bo Lu is a millennial cautionary tale for old-school banks and brokers. A first-generation American who emigrated from China with his parents at 7, Lu lives in a world of monitors and motherboards. He graduated with a computer-science degree from the University of Illinois and landed at Microsoft. He and his engineering friends in Seattle soon went looking for an adviser who could guide them about investing their nascent savings.
To their surprise, they found none: Despite their earning potential, no one was willing to take them on as clients. At the time, Lu recalls, “none of us really had any money, but we thought we had the opportunity to accumulate some.”
So Lu coded his own solution. In 2010 he co-founded FutureAdvisor, an online investment platform that uses algorithms to direct users’ savings to diversified exchange-traded funds. Depending on your risk appetite, the software automatically rebalances your account, navigating you through the world of equities. “This company was partially created to help people like my group of friends,” Lu says.
Within five years, FutureAdvisor had $700 million of assets under management, and about a quarter of those using the free service were under 35. At least one financial giant paid attention. In August, BlackRock—the world’s largest asset manager, with $4.5 trillion under management—bought Future-Advisor, seeking in one fell swoop to make itself more relevant to the smartphone generation. “We didn’t think we had enough retail and millennial DNA, [but] if we could find the right firm to bring into BlackRock, we could accelerate our plans,” says Robert Fairbairn, senior managing director at BlackRock.
Bo Lu, the 32-year-old founder of FutureAdvisor, built the site after a financial adviser declined to take him as a client.Photo: Thor Swift—The New York Times/Redux
The acquisition was a watershed in the battle for the dollars and loyalties of millennials, the Americans born between 1980 and 1997. It’s a generation that transitioned from college into adulthood facing slimmer job opportunities and heavy indebtedness, and its collective wealth is still tiny. For example, only 5% of the $15.9 trillion in U.S. households’ mutual fund assets are held by millennials, according to ICI, the fund industry’s trade group. Not coincidentally, they’re an afterthought for many financial pros. Just 30% of advisers say they’re actively seeking clients under age 40, according to research firm Corporate Insight. For an industry that has thrived by managing the net worth of peak earners and affluent retirees, grappling with the bank accounts of ladder-climbing young investors holds little appeal.
But industry leaders know that they can’t afford to shut doors on millennials. They’re already the most populous generation in the U.S., and their potential for wealth creation is huge as they approach their peak earning years; by 2020 millennials could have $7 trillion in liquid assets. “You’ve got this extra-ordinary demographic shift [away] from baby boomers,” says Fairbairn. “That’s going to lead to an aggressive market-share game.”
It’s a game being played mostly with technology, especially the apps and websites lumped together as -“robo-advisers.” Startups such as Wealthfront, Betterment, and Lu’s FutureAdvisor aim to speak the language of younger investors (beginning with their Silicon Valley brand names). They share key characteristics: low fees, no or low account minimums, and snapshots of your portfolio in the palm of your smartphone-holding hand.
Established wealth managers, however, are not passive spectators. “If we don’t stay at the top of our game, our industry is ripe for disruption,” says Nicole Sherrod, managing director of the trader group at TD Ameritrade (amtd) and leader of TD Ameritrade U, a platform that introduces college students to simulated investing. Legacy brokerages like hers are launching robo-tools of their own, while betting that millennials will eventually need—and pay for—-something more. Sherrod cites Aug. 24, 2015, when the Dow dropped 1,000 points in intraday trading as part of the biggest stock market correction since 2008. That day, index-fund giant Vanguard—which offers both an automated platform and live advisers—had a 9% increase in calls for consultation. “People still want to throw out a lifeline and talk to a professional,” Sherrod says.
Will high tech trump high touch? To find out, Fortune talked to older and newer brokerages and to young investors themselves for their takes on the ever-shifting fight for the millennial wallet.
The Millennial Customers
Jonathan Canalizo learned about money by playing online games. Titles like Diablo 2, Ragnarok, and World of Warcraft introduced him to the art of bartering and the effects of inflation. While he was a finance student at Stetson University, his interest in investing sharpened as he took part in a program that let students manage a real portfolio of bonds and stocks.
Managing his own money, however, proved disillusioning. Shortly after graduating, Canalizo opened an account with discount broker Scottrade. “I hated the fees and felt the service was mediocre,” says Canalizo. The site swamped him in much more data than he needed, and he gave up on the mobile app. (Scottrade senior vice president Joe Correnti says the company’s apps and research are part of “a very strong offering to clients.”) When a friend introduced him to Robinhood, a no-fee trading app, he happily switched. This year Canalizo, who’s now an accountant in Florida, used $5,000 in capital gains from his ETF-grounded Robinhood account to buy a condominium. “Once you know a couple of [investment] things, you can handle the rest on your own.”
Studies show that millennials, forged in the fire of the Great Recession, share key characteristics in their relationship with money. They’re risk-averse. They distrust institutions. They want transparency about fees. A Fidelity study showed that one in four millennials “trusts no one” on money matters. “When millennials see baby boomers doing their finances, they worry … In their eyes, boomers are the ones who created the problems to begin with,” says Stefanie O’Connell, the 29-year-old author of the book The Broke and Beautiful Life.
The hard task is persuading millennials to invest in the markets in the first place. In a Bankrate survey, millennials said that cash is their preferred long-term investment—even though returns on cash have almost always trailed those of stocks and bonds in the long term. Patrick O’Shaughnessy, a 30-year-old portfolio manager at O’Shaughnessy Asset Management (a company run by his boomer father), wrote Millennial Money, a book that implores his peers to tilt toward long-run equity investing. “Millennials seem much more conservative,” he says. With such long investment careers ahead of them, “they don’t need to be so cautious.”
The new breed of AI-driven managers—most of which are either online platforms like Wealthfront and Betterment or mobile apps like Robinhood and Acorns—offer millennials a way to trade stocks without having to deal with a potentially untrustworthy human intermediary (boomer or otherwise). Their “advice” takes the form of algorithms that suggest allocations based on the user’s responses to survey questions; they also offer on-the-go trading. The platforms are unemotional, subservient, and agenda-less—the polar opposite of many traditional advisers, especially those with commission-based models. The investing startups sell access to a diversified list of inexpensive investments, such as index funds and ETFs, and assure millennials that they can grow their wealth while mitigating risk.
The startups make the assumption that humans are not smarter than a beta-grade line of code. But they also charge next to nothing and require only a little skin in the game. Wealthfront, for example, charges no management fee for any account under $10,000, and 0.25% after that. Betterment allows you to open an account with no cash. That’s a big contrast to, say, Charles Schwab, where most accounts require a minimum deposit of $1,000 and every trade costs $8.95. If you want to work with a financial adviser, you’ll face annual fees of another 0.5% to 1.5% of assets under management.
The contrast explains why advocates of robo-advisers say they’re slowly removing the barrier of entry into stocks and bonds. “This is the democratization of investing. And we are just at the beginning stages,” says Lu.
The New Robo-Breed
Vlad Tenev bought his first stock at the age of 12, after his parents helped him set up an account on E*Trade. His interest in the markets continued through his years at Stanford, where he earned a degree in mathematics and physics, and as a Ph.D. student at UCLA. But the online-trading experience was increasingly “just not up to par with the stuff we use every day,” he says. “Look at Instagram, Uber—products that set the bar for user experiences.”
In 2013, Tenev and his former Stanford roommate, Baiju Bhatt, created Robinhood, designing it specifically for mobile devices. Customers can download the app and register a new account in about five minutes, and easy-to-read buttons and menus make trading relatively frictionless. Since then, in two years, customers have made trades worth more than $2 billion via their app. The average age of a Robinhood customer is 28, and a quarter of them come in as first-time traders, says Tenev (who is himself 28).
For millennials, accustomed to apps and websites that work easily and intuitively, an investing platform’s design can be a deal breaker. That’s creating opportunities for young, programming-savvy entrepreneurs who are as passionate about typefaces and algorithms as they are about managing assets. Jon Stein, the 36-year-old CEO of robo-advising brokerage Betterment, spent the first five years of his career as a consultant to bankers and brokers, coming away with a self-described “disdain” for a Wall Street model that, he felt, “was making money and acquiring customers but not paying attention to them.” Poorly designed trading platforms, he says, were part of that neglect.
Jon Stein started Betterment after deciding that Wall Street wasn’t paying attention to its younger customers.Photograph by Bryan Derballa for Fortune
Now Stein sees a field ripe for growth. Betterment manages $3 billion for 120,000 clients, two-thirds of whom are millennials. “We have lower costs, we give better advice, we have a better user experience,” says Stein. “Why would you go to Walmart to buy something if you can buy it cheaper and faster with Amazon’s instant delivery?”
Even for millennials who want a relationship with an adviser, technology has cracked open age-old customs. “The older financial planners are the ones sitting beside a mahogany desk and saying, ‘Come to my office downtown,’ ” says Sophia Bera, the 31-year-old founder of Gen Y Planning, a virtual advisory firm whose clients can build portfolios via email or Skype. (Bera is based in Minneapolis but has clients as far-flung as London and Nagoya, Japan.) “I have Google Hangouts meetings with my clients and have a great connection with all of them. It’s not weird at all.”
Startups see themselves as better able to tweak their products to the fast-changing whims of the younger set. They also think relationships forged with millennials today could evolve into something permanent. Adam Nash, CEO of Wealthfront, which has $3 billion under management, says his customer base is 60% millennials, and adds that Wealthfront is courting the next generation of investors in part for their long-term loyalty: “The kids don’t give up rock ’n’ roll.”
The Old Guard Adapts
Naureen Hassan, the executive vice president of investor services at Charles Schwab, is the firm’s tech advocate. In her previous role at Schwab’s adviser services unit, she was able to see firsthand the digital impact on a previously relationship-first industry. About half of Schwab’s roughly $2.5 trillion in client assets are connected to some form of ongoing adviser-client relationship—and advisers were consistently telling the company that changes in technology posed greater challenges to their practices than changes in client demographics.
So in March, Charles Schwab launched Schwab Intelligent Portfolios, an automated-advice offering that uses algorithms to rebalance investment portfolios, with a focus on diversified ETFs, and dispenses with advisory and account service fees. Is Schwab copying startup competitors or reinventing itself? “We don’t think it’s an either/or game,” says Hassan. “This crosses the age spectrum. To say boomers go to Schwab and millennials go to startups is too simplistic.”
Photo: Suzanne Kreiter—The Boston Globe via Getty Images
What established brokerages have in spades are resources—and with them, the ability to scale new products to the huge group of existing investors under their umbrella. Schwab Intelligent Portfolios amassed $4.1 billion in assets under management within six months of launching—making it, on paper, bigger than any new-school robo-adviser. Of the new-to-firm clients to the platform, Schwab says, 46% are under 40. Vanguard’s own hybrid automated tool, Vanguard Personal Advisor Services, came out of beta testing in May with around $17 billion under management, of which $7 billion were new-to-firm assets gained during its pilot phase.
As more brokerages launch robo-advisers, the battle to differentiate will get more heated. Some veterans think the real test will come the next time there’s a true bear market—when investors will want reassurance as much as they want a killer app. The last market crash ended in early 2009, and “a lot of these newer and smaller firms haven’t gone through the harder times,” Hassan says. Wealthfront and Betterment didn’t gain critical mass in clients and assets until relatively recently, but their founders say their clients can handle a little volatility. Betterment’s Stein points to its Twitter account and resource center as a channel to address concerns during a downturn. “Our advice is simple and straightforward,” he says. “Stay calm and stay the course.”
In an effort to set themselves apart, established brokerages are embarking on the kind of projects more suited to Google (googl) than Goldman Sachs. In November 2014, Fidelity showcased StockCity, a 3D virtual-reality interface that uses a VR headset to transform an investor’s portfolio into a city, each building representing a stock’s information. It was the brainchild of Fidelity Labs, a division set up in 1998 to explore emerging technologies. Among the Labs’ other inventions: Stocks Nearby—which lets users of the Fidelity app explore publicly traded companies near their present location—and an app for the Pebble smartwatch. There’s even been synergy between old and new: Betterment worked with Fidelity to launch an automated platform for advisers, and Fidelity is testing its own robo-adviser. Millennials “grew up with mobile. They grew up with the web,” says Sean Belka, director of Fidelity Labs. “How can we continue to meet them where they are?”
One thing seems clear: Millennials have no qualms about abandoning firms that don’t meet them on their terms. In a survey by LinkedIn and market research firm Ipsos, nearly seven out of 10 millennials said they were open to trying financial products and services from nonfinancial brands (think Apple or Google); only 47% of Gen Xers said the same. These experimenters could get used to a world where lines of code are as helpful as a mahogany-desk adviser.
It’s a future Wall Street wants to avoid. “The old model [made it] too hard for millennials to get invested,” says Hassan. “What we are changing is to leverage technology to make it easier and to keep up to date.” The bet is that when millennials look up from their phones and want a human touch, old-school brokerages will be there with reservoirs of experience—and, the old guard hopes, without the intergenerational baggage.
A version of this article appears in the December 15, 2015 issue of Fortune with the headline “The Battle for Millennials’ Money.”