If you read my article earlier this year about so-called “game-day-trading” apps, you’ll already know that I’m no fan of brokerage firms that encourage people to treat investing like gambling.
However, I do believe that it’s beneficial for young people to get hands-on investment experience during their formative years. This knowledge will give them a head start on understanding the importance of managing their money responsibly.
Until recently, kids under 18 were only able to invest online using a custodial brokerage account opened by a parent or guardian. Theoretically, a child with access to the account could invest in anything an adult could, including foreign stocks, currencies, leveraged ETFs and junk bonds. If the custodial parent wasn’t paying attention, their child could get them both into trouble fast.
Giving teenagers unrestricted and unmonitored access to online trading is a recipe for disaster. That’s why I was intrigued by Fidelity Investments’ decision to launch a special discount brokerage platform for teenagers. Called the Fidelity Youth Account, this no-fee account allows children ages 13 to 17 to invest and bank online.
Now, I’m not legally allowed to endorse any particular trading platform. Even if I were, I would never give my thumbs-up to any app I didn’t try out on my own. It’s been many decades since I was teenager, so I won’t be able to kick Fidelity’s tires anytime soon. Therefore, after reading Fidelity’s description of the Youth Account, the most I can say is that I hope it lives up to its potential to teach teens how to invest, save and spend responsibly.
Some Impulse Controls Have Been Built In
On paper I will say that I am encouraged by the level of controls and parental oversight Fidelity claims will prevent teenagers from acting like amateur hedge fund traders or indulging in Wolf of Wall Street-style speculation.
First of all, teens can’t open an account on their own. Parents will have to open it for them, and they can only do it if they have their own Fidelity brokerage account. The Youth Account can be funded from a parent’s brokerage account or from transfers from the teen’s bank account (or a joint bank account). There are no minimum balance requirements or account maintenance or trading fees.
The account comes with a debit card, which Fidelity says will have daily spending limits. And kids can transfer money in and out using PayPal, Venmo and other apps. The app won’t give parents tools to control what their teenagers spend their money on or what they invest in, but they will receive notifications of these activities. I certainly hope they will scrutinize them very closely, because if Junior uses the account to conduct illegal or fraudulent activities, Mom and Dad will be liable. Fortunately, Mom and Dad can also shut down the account entirely if Junior betrays their trust.
To prevent kids from jumping on Reddit-style bandwagons, Fidelity says it won’t let kids buy and sell options, penny stocks, foreign stocks or individual bonds or cryptocurrencies. They can’t open margin accounts, short sell or invest in annuities, structured products or other complex securities.
But I Still Have Some Serious Reservations
This all sounds well and good. But there are some things about this app I have concerns about. I realize that Fidelity isn’t offering this platform out of the goodness of its heart. The company wants to start building loyalty to its discount brokerage platform as early as possible. That’s why, according to Fidelity, when the teen turns 18, the Youth Account automatically converts to a regular Fidelity brokerage account, and all parental controls come off. Does turning 18 suddenly make you a smarter, more responsible investor? My adult children might say yes, but I’d say that’s up for debate.
I don’t like that Fidelity only lets teens invest in its own mutual funds. This limits their ability to evaluate and invest in funds from other fund families that may have better track records or lower costs.
Another concern? Since these are taxable accounts, teenagers might not be aware of the ordinary income and capital gains taxes their transactions may generate. Given that teens generally don’t make a lot of money, their tax bill isn’t likely to rise all that much, but these profits may require them to file their own tax returns — something they might not have to do otherwise. In some cases, parents may be able to report their teen’s earnings on their own tax returns.
I’m also a bit worried that Fidelity doesn’t limit the amount that can be deposited into Youth Accounts, although they recommend capping it at $30,000 per year. I wish the limits were much lower, because there are no controls to keep kids from losing all of their savings trying to score the next GameStop-style payoff. Some commentators have said that the best way for teens to learn the consequences of making bad investment decisions is to get burned by them. But I don’t think this “school-of-hard-knocks” lesson plan is the best approach.
But I think what bothers me the most about these accounts is that teens can start trading without necessarily receiving the education they need to avoid making impulsive or ill-informed decisions. Fidelity offers a lot of educational content, but at first glance they seem to put the onus on parents to make sure their kids go through it first.
How about a Learner’s Permit to Make Youth Accounts Safer?
I don’t like this pass-the-buck approach. After all, we don’t let teens get behind the wheel of a car until they’ve passed a learner’s permit exam. And we don’t let them take the family SUV out on their own until they’ve passed their driver’s license test. Yet, Fidelity seems to be OK with the idea that a financially undereducated 13-year-old could lose all of their savings making bad trading decisions.
That’s why I’d like to see Fidelity, and other companies that plan to roll out similar youth brokerage accounts, implement a “financial learner’s permit.”
Ideally, any teen who wanted to open such an account would first have to take a series of industry-sanctioned online courses covering the basics of investing and personal finance. They would then be tested at the end of each module. Once they passed all of the tests, they would be able to fund their account and start trading. Of course, they might still lose their shirts, but at least they couldn’t use financial ignorance as an excuse.
I’m not holding my breath that this kind of qualification process will happen anytime soon, so the best that I can say about Fidelity’s app is that it may be a safer alternative to the game-day-trading apps I dislike.
In any case, if your teen expresses an interest in investing online, consider imposing your own investment qualification requirements before opening any kind of brokerage account on their behalf. Give them access to the educational content available through your online brokerage or 401(k) plan account, and test them to make sure they understand it. Or, consider having your child speak with your financial adviser, who can recommend additional sources of educational information and explain the investment rules of the road.
Chris Gullotti, CFP® is a financial adviser and Partner at Canby Financial Advisors in Framingham, MA. He has an MS in Financial Planning from Bentley College. He brings a big picture view to each client's situation and works cooperatively with his clients' other financial professionals, including family attorneys, tax professionals and insurance advisers.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
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