How to invest for your kids

One of the most common questions we get is how you can make investments on behalf of your children. Investing for your kids not only provides them a leg up financially, but also teaches financial responsibility and the life skill of investing. Most brokers, asset managers and investment platforms allow you to hold accounts as a custodian, or ‘in trustee of’.

Regardless of the name, the consequences of holding it in this manner means that the adult must wear any tax consequences until the minor turns 18.

There are three main options when choosing exposure to equity markets.

1. Micro-investing - managed funds or custodian model investments

Micro-investing means that you are able to invest with as little as $20. This could be for budding investors that are looking to start out, and you’re giving them a kickstart. There are a few micro-investing apps out there, and their purpose is to make investing more accessible for those with lower balances.

Micro-investing is a great starting off point and could be a gift that keeps giving – Christmas aside, you could have your gifts sorted for a while, with a contribution into the investment for each birthday, anniversary or Christmas. You could even have round-ups turned on throughout the year.

The great thing about this is that it will encourage long-term investing habits, if you’re investing at each of these intervals it means that you have a multi-year horizon for it to grow.

It’s important to consider that these investments do carry tax burdens, so any income that is earned does need to be declared at tax time and when it is sold, if it’s grown, there will be capital gains.

Another consideration is fees. If there is a monthly or yearly flat fee involved in the investment, make sure that the amount you are gifting makes sense for the flat fee involved. If an investment has a $2 admin fee every month and you invest $20, it’ll take just 10 months for the investment to come down to zero without capital appreciation.

Your initial investment will be gone before you can gift them again next Christmas.

This is also where it gets a bit tricky – these admin fees are normally deducted from a bank account instead of the investment account. This means that you don’t notice the impact it has on the investment, especially smaller balances.

Pros: Invest with smaller amounts without transaction costs, already diversified, user friendly

Cons: Fees, including flat fees, can be expensive especially on smaller balances

Here are some of the most popular Micro-investing platforms.

• Raiz Invest

A mix of ready-made and customisable portfolios. For the ready-made portfolios underlying assets are a mix of ETFs. For example, their readymade portfolio:

Costs: A maintenance fee of at least $4.50 (balances under $20,000, no maintenance fee for balances over $20,000), plus the underlying issuer fees, plus the investment management fee ($0, or 0.275% for balances over $20,000).

Feature to note: Round ups – you are able to connect a bank account. Any transaction that you make on that account – say, you purchase a coffee for $4.60 – it will ‘round up’ to $5, and you will have 40 cents invested in the account.

• Pearler

Pearler’s micro-investing function allows you to invest in a number of Vanguard, VanEck, eInvest and iShares ETFs.

Costs: Any investment under $100 does not incur a fee, any investment over $100 is $1.70 for one investment option and $2.30 for more than one. Pearler also has an offering of pre-mixed options. All investments will be charged underlying fees of the ETFs you are invested in. For example, their ‘Diversify and Chill’ option. The underlying fee is 0.26% p.a.

• Sharesies

Sharesies has a bit of a different offering. It offers fractional share and ETF investing. Instead of investing in a pre-mixed portfolio, it allows you to invest in Australian and US shares and Aussie ETFs.

There’s no investment or management fees, but you are charged based on trading. The fees are expensive – 1.9% transaction fee, plus 2% on linked bank transfers. You can remove these fees with their monthly plans. They range from $5-$20, and it removes the bank transfer costs, as well as trading fees up to a certain order amount (for example, for $5 a month, $500 worth of orders are covered).

Feature to note: Sharesies also has round-ups from your bank account.

2. ETFs

ETFs are an easy way to diversify, and they present the opportunity to create a multi-asset portfolio in one trade.

Low-cost ETFs will ensure better returns over the long term and cuts out the middleman that you experience with micro-investing apps.

Micro-investing apps for the most part offer fee-free additional investments, which may suit investors that are not just investing as a Christmas present – they’re investing on a regular basis with small amounts throughout the year.

ETFs come with trading costs (although, there are some brokers that offer fee-free ETF trades), so it may suit individuals who are investing less frequently, in larger amounts on someone else’s behalf. Trading costs can eat into total returns over the long term. If trading costs are $10 and you are gifting a $200 investment, that holding is already on the back foot by 5%.

Pros: Cut out the middleman (and the fees that the middle man charges)

Cons: Can incur brokerage on each trade, requiring larger balances to make brokerage make sense

3. Direct shares

My colleague Mark LaMonica was gifted shares when he was younger. He says, “the shares that I was gifted taught me some valuable lessons about investing – namely that an investment in a share is an investment in a company. Understanding that I was taking an ownership stake in a company and not a piece of paper always gave me some perspective during market volatility. Focusing on the long-term prospects of the company rather than the share price during market downturns made it easier to not make poor decisions during market dips.”

The easiest way to match interest to the gift – purchasing shares in a company that a person has interest in outside of the company. This of course, should not be the only factor in determining whether a stock might be right as a gift. Considering the future of the stock is important – so if this feels like the right gift and you’re not sure where to start, have our three part share podcast that might help with finding a company that appeals to your gift recipient, but also has a strong outlook.

Pros: Can invest in companies that can encourage interest in investing, no management fees

Cons: Brokerage costs, requires active management and monitoring

Our overview of share investing episodes on Investing Compass are a great way to get started.

How it works

For all intents and purposes, investments for children are treated exactly the same as investments that are made in an adult’s individual name.

When the child turns 18, holdings can be transferred to their name, so they will then by responsible for the investment, it’s potential profits and tax consequences.