Why South Korea is seeing a surge in infant investment accounts

South Korean parents are ramping up efforts to give their children a head start in building long-term wealth by opening investment accounts even before they learn to crawl out of their cribs.

Brokerage accounts of kids under the age of one have nearly tripled from a year ago to about 15,000 in June at Mirae Asset Securities, the country’s largest brokerage by market cap.

New accounts openings for those under 9 have soared nearly 60% to around 185,000, the brokerage said, excluding duplicate accounts.

That enthusiasm, triggered by Korea’s AI-powered market rally, has sparked a trend toward generational wealth-planning, though the volatility in the domestic stock market has prompted investors to look for value beyond the border as well.

Lee Hye-won, who works as a nurse, told CNBC that she and her spouse believed investing long term was a better choice than keeping money in savings or deposit accounts. 

“We felt that, when it comes to managing our children’s accounts, the length of time invested matters more than the investment amount, so we opened an account for our first child at age 4, and for our second child right after birth,” she said. The family invests about 300,000 won ($210) to 400,000 won per month in U.S. exchange-traded funds, mainly those tracking the S&P 500. 

Other parents are doing similar things.

“I wanted to give my child the gift of time and the power of compounding during those years — that’s why I opened the account right after her birth,” said Lee Jun-hyeok, an office worker.

“I’m also making small, regular investments in the Korean semiconductor sector and U.S. physical AI–related stocks, both of which I see as having high growth potential,” he said.

Jae-joon Woo, professor of economics at DePaul University, told CNBC that parents will continue to open investment accounts for their children even if markets become more volatile. The phenomenon is here to stay “as long as equity investing—whether in Korea or overseas markets—is viewed as a reliable way to build long-term wealth,” Woo said.

“This could represent a gradual but meaningful shift from the traditional preference for real estate, which has long been the dominant form of household wealth in Korea,” he added.

Households held around three-quarters of their wealth in physical assets, primarily real estate, and the rest in financial assets, according to a survey by Ministry of Data and Statistics.

The relatively high capital gains tax on property, particularly for short holding periods or multiple-home ownership, is another factor attracting more Koreans to the stock market, said Jeong-woo Park, senior economist for South Korea at financial services firm Nomura.

Korea applies a progressive tax rate of 6% to 45% on capital gains from properties owned for two years or longer, according to the National Tax Service. The tax rate jumps to 40% to 70% for properties owned for less than two years.

By contrast, most retail investors are not subject to capital gains tax when selling Korea-listed shares, unless they are a major shareholder.

Gift tax is another reason parents are flocking to the stock market. Gifts of up to 20 million won from parents to a minor child are tax-exempt within once in a 10-year period, according to the Ministry of Government Legislation. So parents use that tax-exempt cash gift to invest in stocks.

“At first, our bigger concern wasn’t which stocks to buy via our children’s accounts, but rather how to handle gift tax. We looked into the relevant details ourselves and consulted with a tax accountant,” said “leecoach_mom.”

However, for most middle-income households, the main motivation to invest in stocks for their children would be to save up for education or financial security, rather than reduce taxes, Woo of DePaul University said.

Kakaopay Securities, an online brokerage linked to the Korean internet conglomerate Kakao Corp., said last month that it plans to hand out stocks worth 100,000 won per infant born next year in an effort to expand its customer base. 

The government is also doing its part to make the stock market more accessible.

In 2023, financial authorities revised guidelines to allow guardians to open accounts for their children remotely from their smartphones, without having to visit a branch. “Allowing parents to open accounts remotely has removed a significant practical barrier,” Nomura’s Park said.

“Further simplification would probably increase the number of minors’ accounts, especially among households making small and regular investments,” he said.

“However, it would mainly affect participation rather than the total amount invested, which will continue to depend more heavily on household wealth, market conditions and tax considerations.”