National Savings month: Kicking off an investment journey for our youth
July is National Savings Month, a great opportunity for financial advisers to reach out to clients and have valuable discussions. One such conversation to consider having with clients is how and when they should start their kids on their own investment journey. Young people have the unique advantage of having time firmly on their side. By giving children a head start in an investment portfolio, they will be in a great position to harness the power of compound interest – truly one of the greatest gifts parents or guardians can give.
Thembeka Khumalo, senior client experience manager at Satrix says, “It’s beneficial for parents to involve their children in the investment process as soon as they’re old enough, as they can gain a sense of ownership over their portfolio from a young age. Show them where their money is invested and take time to explain how things like exchange-traded funds (ETFs) work. If they’re comfortable with the investment landscape at age 12, imagine how much market mastery they’ll possess as adults.”
Here are some key points advisers should discuss with their clients when it comes to investing for their children, according to Khumalo.
Time is on their side:
Emphasise the importance of starting early. The earlier parents begin investing for their children, the more time their investments have to grow. By harnessing the power of compounding growth, even small contributions can exponentially increase over the years. Stress that starting early also enables parents to take on more risk in their investment portfolio. With time on their side, the portfolio can weather short-term market fluctuations and move towards long-term growth.
Introduce them to accessible investing:
Introduce clients to digital investment platforms like SatrixNOW that can simplify the process and make investing more accessible. These platforms allow parents to invest any amount, making it feasible to start even with small contributions. Highlight the benefits of such platforms, including ease of use, diversified investment options, and low costs.
Encourage them to involve their children in the process:
Parents should involve their children in the investment journey as soon as they are old enough. This involvement can give children a sense of ownership over their portfolio from a young age and give them a solid understanding of investing.
Opening a minor's investment account:
The process of opening an investment account for a minor is simpler than they make expect. Parents or legal guardians need to have a FICA-verified account on the chosen investment platform. Once the parent's account is opened, they can add their child's account by following a few simple steps. Ensure they understand the process is quick and straightforward, and they will receive a verification email once the account is ready to fund.
Involvement of extended family and friends:
Only parents and legal guardians can open investment accounts for minors. However, extended family or friends can contribute to the child's account using a debit order authority form.
Transitioning when the minor turns 18:
When the minor turns 18 they gain full contractual ability. At this point, the investment account is transferred to them. An email will be sent to the parent or guardian's email address with instructions on how to complete the transfer process and at this point, financial advice can be critical to ensuring that the funds continue to work hard for the former minor.
Investment decision-making and withdrawals:
Minors cannot make legal investment decisions or withdrawals until they turn 18. During this period, the parent or legal guardian acts as an Authorised User on the minor's account. While the ‘power’ is in the parents’ hands they should spend as much time getting minors up to speed on investing and the power of compound interest. That way when they do get access to funds, they are more likely to make solid decisions.
Tax implications of opening an investment account for a minor
When opening an account for a minor, parents need to be made aware that if they make an investment on behalf of a minor, all income, dividends, and interest earned from their investment will be taxed. This applies to income received by minor children, stepchildren, and adopted children. If any shares are sold and there is a capital gain, this amount must be included in the parents’ capital gains calculation.
Recommend suitable products for a minor's investment account:
The Satrix Access Range is a great place to start, offering access to the market in a diversified manner and at a low cost. This range includes four flagship funds, catering to a range of investment horizons and risk appetites with both local and global exposure.
Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.
While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.