A recently launched fintech company, EarlyBird, is focused on empowering families to build a secure financial future for their children. The EarlyBird mobile application allows parents to quickly and easily establish a custodial account – also known as a UGMA (Uniform Gifts to Minors Act) account – in a matter of minutes. These accounts generally permit a parent, acting as the “custodian,” to invest in a variety of financial instruments, including stocks, bonds, mutual funds, and other securities, on behalf of their minor child. Upon the child reaching the age of legal adulthood, ownership of these investments transfers to them.

The application enables parents to create an account for their child and then extend invitations to family members and close friends to contribute financially.

This concept shares similarities with services like HoneyFund, where couples request monetary gifts from loved ones in lieu of traditional presents. Likewise, EarlyBird presents an alternative to conventional gifts such as toys and material possessions, encouraging family and friends to contribute funds. However, unlike a simple crowdfunding platform, EarlyBird facilitates actual investments rather than direct cash donations.

Specifically, EarlyBird strives to simplify and demystify the process of opening custodial accounts. While not the first fintech company to offer this service – Stash and Acorns are among others – it provides a valuable solution.

EarlyBird distinguishes itself by integrating the investment account with a platform that incorporates social features and a gifting experience. The intention is to make contributing to the account feel more like giving a meaningful gift, rather than simply handing over a check or cash.

The EarlyBird app allows donors to record a brief video “memory” alongside their contribution to the investment account. This fosters a more personal and engaging experience, allowing the child to revisit these videos in the future. Furthermore, these videos are visible to other family members and friends, potentially inspiring additional donations to the child’s investment account.

The idea behind EarlyBird originated with Jordan Wexler, formerly COO of AgilityIO and now EarlyBird CEO, and Caleb Frankel, an early employee of Yello.co and currently EarlyBird COO.

Wexler explains that his interest in investments as an alternative to physical gifts arose when a new baby joined his extended family.

“It all began with a challenge I faced when my niece was born. I found myself spending a significant amount of money on unnecessary items – essentially, just frivolous gifts,” he recounts.

He subsequently considered investing funds into an index fund for the child’s benefit.

“I wanted to make a more substantial impact on her life and provide her with something truly valuable as she grew up,” Wexler states.

In fact, his father had previously done the same for him. When he was 12, his father provided him with funds in a TD Ameritrade account, which he later used to help launch his first venture – SucceedOverseas in Qingdao, China – a strategic consulting firm specializing in employee relocation. (This firm was acquired in 2015 by Chiway Education Group.) 

Wexler and Caleb Frankel initially met in Qingdao and reconnected upon Wexler’s return to the U.S. Last year, they collaborated on EarlyBird, aiming to streamline the process for parents seeking to establish custodial investment accounts for their children.

Custodial accounts, however, may not be widely recognized as an investment option, particularly among those without prior experience – or even some parents. This is largely due to the greater popularity of 529 plans, which offer specific tax benefits.  

Both account types allow families to invest on behalf of minor children, but investments within 529 plans accumulate tax-free. Furthermore, withdrawals used for qualified educational expenses – such as tuition, room and board, and books – are also exempt from taxation. This is a significant advantage.

UGMA accounts, conversely, are subject to taxation at certain income levels. The first $1,100 of unearned annual income is tax-free, while the subsequent $1,100 is taxed at the child’s tax rate. Income exceeding $2,200 is then taxed at rates applicable to trusts and estates, which may be higher than the child’s individual tax rate.

Contributions to UGMA accounts do not qualify for income tax deductions, but they are not taxed themselves up to $15,000 for an individual or $30,000 for a married couple.

Given the focus on college savings and tax advantages, 529 plans have historically been more well-known. However, Wexler notes a shift in perspective.

“Many parents are uncertain about the future of education and college costs and desire a more adaptable solution,” he explains.

Moreover, UGMA accounts can be utilized for college expenses if needed. But should college become tuition-free in the future, the investments within the UGMA account can be applied to any purpose. This flexibility is increasingly appealing to parents – and attracting attention from other fintech companies, such as Acorns.

EarlyBird intends to incorporate 529 plans into its offerings within the next year, but chose to begin with UGMA accounts.

A key distinction between EarlyBird and custodial plans offered by Acorns or Stash lies in EarlyBird’s emphasis on financial literacy.

From birth to age five, the parent has complete control over the child’s account. However, between ages six and thirteen, parents can present the app to the child in a “view-only” mode, allowing them to learn about their investments and observe their growth. From ages thirteen to eighteen, the child can download the app and, in collaboration with their parents, begin to actively engage with it. At eighteen (or twenty-one in some states), the child assumes full control of the account.

EarlyBird also simplifies investing by providing a selection of portfolios ranging from conservative to aggressive. The conservative portfolio consists entirely of ETF bonds, while the aggressive portfolio is 100% invested in ETF equities. Similar to Acorns, it offers fixed portfolio models, as well as customized portfolios that align with individual values – such as investing in socially responsible companies. Users can also automate investments, both small and large, on a recurring schedule if they choose.

The portfolios were developed in collaboration with a team of financial advisors led by EarlyBird advisor Evan List, a twelve-year veteran VP at Bernstein Private Wealth Management. The company states that the portfolios are integrated with a rebalancing engine that maintains each equity position within a 10% deviation of the target allocation. Portfolios are also reviewed and rebalanced quarterly, mirroring the practices of other robo-investors.

The startup’s investment accounts are currently held with Apex Clearing Corporation, a third-party SEC registered broker-dealer and member of FINRA and the Securities Investor Protection Corporation (SIPC). This arrangement provides investment protection up to $500,000. EarlyBird intends to eventually become a broker-dealer itself.

Currently, EarlyBird generates revenue through a $3 monthly management fee (and $1 per month for each additional child).

In the future, the company plans to monetize its services in a manner similar to many fintech firms, leveraging transaction fees with Apex Clearing. As it transitions to a broker-dealer, it may also explore a fully paid lending program, comparable to those offered by other brokerages.

It’s important to note that these programs are not yet active, as the startup is still in its early stages.

EarlyBird has secured $2.4 million in funding, led by Network Ventures, in a round that closed in November 2020. Additional investors include Chingona Ventures, Bridge Investments, Kairos Angels, Takoma Ventures, Subconscious Ventures, and various angel investors.

The app is available for free download on iOS.