Mentoring your teens when they invest in stocks

Younger people have become an attractive market for investment firms. The ease of buying stocks by the slice (fractional shares) and mobile apps are reasons for those new to investing to become involved, ready or not.

The issue of preparedness is important enough that FINRA (the Financial Industry Regulatory Authority, which regulates brokerage firms) launched a $30 million initiative this year to “explore innovative ways to reach and educate investors, especially new, self-directed retail investors who conduct transactions through online accounts or using mobile apps,” something I wrote about in July (“Beginning Today, You Can Help the Investors of Tomorrow”).

So, when Fidelity announced earlier this year that it had created the Fidelity Youth Account, “the industry’s first brokerage account designed exclusively for 13- to 17-year-old teens” (tinyurl.com/79cf4e8 ), I had some questions. But, I also saw some opportunities for parents to get involved.

As a proponent of financial literacy, I thought it was an interesting way to introduce the next generation of investors to the ins and outs of the stock market — provided there were guidelines, oversight and educational opportunities, things most parents would want as part of the endeavor.

Fidelity’s FAQs (tinyurl.com/3aa4pftm) address a number of those issues.

Who owns the account? The Youth Account “is a teen-owned brokerage account. It is owned by the minor, who makes all the investment decisions.” This makes it different from a custodial account, where the adult custodian, likely a parent or grandparent, makes investment decisions on the behalf of a minor.

With Fidelity’s programs, parents are involved, but not in charge. Parents approve the opening of the account and can close it at any time. They also have “inquiry access,” which means they can review trade confirmations and transactions, including withdrawals using the debit card that comes with the account.

Kids aren’t flying solo, however. Parents are “obligated to provide supervision/oversight and to be responsible for [their] teen’s actions.” And, parents are designated as “trusted contacts,” which Fidelity describes as “someone we can get in touch with in the event we’re concerned about your health, well-being or welfare (due to exploitation, endangerment or neglect)” (tinyurl.com/2999snrv). If you are thinking about going this route, be sure to read the “Fidelity Youth Account Parent Agreement” (tinyurl.com/yn49f2he).

Is there a minimum balance? No. You can start with $1. Are there upper limits? Fidelity recommends that deposits “be limited to no more than $30,000 per calendar year,” a total that is associated with the IRS gift tax policy, according to a Fidelity spokesperson. The annual gift-tax exclusion for a donor is $15,000 per recipient in 2021.

Are there limits on investments? Yes. The account is limited to most exchange-listed National Market System securities (including fractional shares) and shares of Fidelity mutual funds.

Not available are options and margin trading, international stocks, foreign currencies, the initial public offering (IPO) of a company and cryptocurrencies.

Are there limits on the debit card? The debit card has daily spending limits for transactions and cash withdrawals, with the limits listed on the Fidelity debit card page. Although a debit card is automatically created when the account is opened, a parent/guardian or teen can choose to deactivate it by contacting Fidelity.

What happens when the child reaches 18? When the teen reaches the age of legal adulthood, the account can transition to a standard brokerage account. New account paperwork will need to be signed, but no account transfers will need to be made.

What about financial education? Fidelity’s Youth Learning Center (tinyurl.com/3enmhhze) was created “to help teens learn good financial habits.” The topics include “Setting goals and planning,” “Saving and budgeting” and “Investing basics.”

This is an interesting opportunity for teens and parents to enter the world of investing together. Important lessons can be learned, and a foundation of good financial sense can be forged, especially if parents are involved in mentoring. I’d say it’s definitely worth a look.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2020 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.