Emma becomes a millionaire – how banks discover children

Parents must empower their children to manage life – including financial matters. For those who don't have much to leave behind but still want to give their offspring a little extra, it's never been easier. With a little discipline, you can lay the foundation early on to ensure your children have a comfortable retirement.

The little savings book your godparent gave you as a birth gift is a sweet gesture, but in a world without interest, it's no longer useful. Because the hundred francs in your savings account will almost certainly be worth less in a few years, not more, due to inflation.

Children's accounts have been around for a long time, but now savings plans are also available in Switzerland, allowing children to invest in funds and thus in securities. This makes it possible to systematically build wealth. It's best to start this approach when children are still babies. This is the most profitable and involves the least risk.

The longer the investment period, the stronger the compound interest effect – meaning there is an additional return on the return already earned, which allows assets to grow ever faster. If the parents, and later the child themselves, pay 120 francs per month into a fund savings plan, they can accumulate assets of one million francs after 65 years – i.e., at retirement age.

For it to work, you need an annual return of 7 percent. If it's less, you'll have to pay in more each month. Such returns are only available with acceptable risk on the stock market, for example, by investing in a Swiss equity fund or an index like the MSCI World.

The longer the time horizon, the greater the risk taken. A baby can safely be invested 100 percent in stocks, provided they continue saving at least until they reach adulthood. The likelihood of suffering losses after that time is low.

More and more banks have recognized this need and now offer fund savings plans for children. Cantonal banks and major banks like Raiffeisen or UBS offer this starting with an initial deposit of just a few hundred francs. But as always, caution is advised when banks try to sell financial products.

ZKB, for example, offers the Swisscanto Portfolio Fund Responsible Focus to young parents who desire a high equity allocation. The fund incorporates sustainability criteria but charges an annual fee of 1.68 percent—a considerable amount even for an actively managed fund.

Such fees are deducted directly from the return and make a significant difference over time. Parents are also well advised to be on the lookout for hidden fees such as issue and redemption commissions and taxes, which banks are reluctant to disclose.

More attractive are offerings from neobanks like Findependent or True Wealth, which offer access to ETFs via mobile apps. These are passive and therefore cheaper funds that track a stock index. Their performance is usually better than that of active funds. But even with ETF savings plans, the products differ. And whether the respective app will still be available when Emma retires is another question.