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Investing for kids: Brighter future or massive scam?

Posted: 26 May 2022 4:17 pm
News
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Investing for children remains one of the most important ways to give them a head start, but beware of fees.

The rising cost of living is seeing parents looking to help their children, with a growing number of products tailored to under-18s investing now emerging.

These apps are gaining popularity, as record low rates mean parents and carers might not be able to use the old piggy bank.

As such, Superhero's CEO John Winters points to the rise of non-traditional financial tools parents are using to help their children.

"Where previously many parents and guardians invested regular savings into low interest bank accounts, there's been a big shift where parents are looking to build an investment portfolio for their children," Winters said.

What is the easiest way to invest for kids?

According to Winters, investing doesn't have to be difficult, with parents having the option of simply tracking a market.

He highlights how choosing a simple low-cost exchange-traded fund (ETF) that allows you to passively add to your portfolio.

"It's varied. We do see that when people start investing for their children they often start with ETFs," he said.

For those new to investing, the diversification and exposure offered by ETFs is often used as a starting point as they build up their knowledge about various companies and stocks."

The CEO points out that ease isn't necessarily everything, with parents needing to adjust their portfolio towards their own risk portfolio.

"They're more inclined to diversify to shares for themselves and potentially take on more risk, but are more risk-averse when investing for their children," Winters told Finder.

But beware the dreaded fees

Remember, choosing a high-fee account will greatly reduce your future returns, especially if you're only putting money into an account once a year.

"Most people would prefer to pay no or low fees. Small drops can make mighty oceans in terms of investing and the same can be said of fees," he said.

And according to the CEO, fees can quickly add up.

"For example, a monthly fee of $5 can turn into over $1,000 if you invest for a child from birth to 18 years of age. And I think most people would prefer this money is invested rather than paid in fees – especially if a parent is investing for more than one child."

Going further, if a parent or guardian were to choose to invest instead of giving a gift, this would likely see even a greater percentage of fees. Take for example $100 every birthday, in the above situation, 60% of that money would go to the provider instead of the child.

"And while there are a number of options out there, there are some which charge high fees or can lead to unintended tax implications for families. It's very important to be aware of and understand how investments can be taxed depending on the platform used," he said.

The bottom line

Unfortunately, there's no one way to help your children out, but record low rates have made it difficult for parents to save their way for a big-ticket item for their children.

As such, Winters believes it is important that parents have a strategy before beginning their investment journey.

"They should understand their goals, both long-term and short, how much they'd like to invest and at what cadence as well as identify their strategy when it comes to investing."

"Knowledge is key when it comes to investing and spending time researching and figuring out a plan before taking that very first step is essential," he said.

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