What Is a Cash Management Account?

Definition & Examples of Cash Management Accounts

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A cash management account is a cash account offered by a financial institution other than a bank or credit union, usually a brokerage firm. These accounts are designed for managing cash, making payments, and earning interest.

Cash management accounts can be used in place of or in addition to a checking account. Learn about the advantages of a cash management account over traditional banks, as well as the risks and tradeoffs.

What Is a Cash Management Account?

A cash management account is a cash account that combines features similar to checking, investment, and savings accounts. They are held through financial institutions other than banks and credit unions, such as brokerage firms, though funds may be stored in accounts with partnered banks.

Cash management accounts, or CMAs, combine both short-term investing and day-to-day banking. They allow you to access your money and pay bills, as well as manage your savings and earn interest.

These accounts are typically, but not always, separate from investment accounts at brokerage firms, though the accounts can be linked together.

Acronym: CMA

How Does a Cash Management Account Work?

When you put money in a cash management account, it earns money through low-risk investing that is done automatically, while you can also access it for your daily spending.

Most cash management accounts come with a debit card, a book of checks, and online bill pay services. This allows them to function similarly to a traditional checking account. They also pay interest that is higher than most savings accounts.

Many cash management accounts offer other features that may or may not be included in checking accounts, such as:

  • ATM rebates
  • Mobile deposit
  • Banking alerts
  • Cashback on purchases

Do I Need a Cash Management Account?

A cash management account is not a necessary part of managing your money, but it can be useful.

A CMA performs many of the same functions as other bank accounts. For example, you can store and access money in a checking or money market account and earn interest in a high-yield savings or CD account. If you don't already work with a brokerage firm, opening a cash management account may not be the best way to manage and grow your money.

However, if you already work with a brokerage firm or do not have a bank that you already use, opening a cash management account may be an easy way to keep your cash accessible and flexible, while also taking advantage of low-risk growth.

Before opening a cash management account, ask about monthly fees and minimum balance requirements. Some brokerage firms require tens of thousands of dollars as a minimum deposit to open a CMA, or charge high monthly fees for anyone under that minimum. Others will have no monthly fees and no minimums.

If you decide to open a cash management account, look for one that offers:

  • Linked accounts: You will probably need other accounts, such as an online bank account to earn a higher annual percentage yield or a local bank account your CDs and safety deposit box. Look for a CMA that allows you to link accounts in order to make it easy to access and move your money.
  • FDIC insurance: Cash management account providers automatically “sweep” your unused cash into investments that pay dividends or interest, which maximized the account's profitability. Make sure those sweep accounts are FDIC-insured, a government-guaranteed program that protects your money.

Cash Management Account vs. Checking Account

Cash management accounts are useful tools for money management, but they are not bank accounts. Understanding the differences between a CMA and a traditional checking account can help you understand which choice is best for you.

Cash Management Account Checking Account
Run by a brokerage firm Run by a bank or credit union
Funds split between brokerage accounts and accounts at different banks Funds all held by a single financial institution
Funds in brokerage accounts may or may not be federally insured All funds required to be federally insured
Debit card, checks, ATM use, mobile deposit Debit card, checks, ATM use, mobile deposit
May have large asset minimums and fees Usually have low, or no, asset minimums and fees
Connected to investment accounts Separate from investment accounts
No brick-and-mortar locations May have brick-and-mortar locations
Earns low-to-mid interest rates Earns low interest rates (except for high-yield checking)
Usually refunds ATM fees May charge ATM fees out-of-network (except for online banks)

Pros and Cons of a Cash Management Account

Cash management accounts offer many benefits, but they also come with disadvantages. Consider all the pros and cons when deciding what kind of accounts are best for your financial lifestyle.

Pros
  • Simplifies banking

  • Automatically maximizes cash management

  • Easy to set up and protect

  • Many features associated with traditional banks

Cons
  • Monthly fees

  • Miss out on more profitable investments

  • Potential errors

  • Higher interest elsewhere

  • Uninsured investments

Pros Explained

  • Simplifies banking: A cash management account allows you to use one financial institution for your saving and investing needs. That means only one sign-on to keep track of, fewer statements and tax forms each year, and fast transfers to and from your investment accounts.
  • Automatically maximizes cash management: Your money is put to work automatically to maximize profitability.
  • Easy to set up and protect: Opening a cash management account is generally a straightforward process that can be done online, especially if you already have an account with that financial firm. The money that is in savings is FDIC-insured.
  • Many features associated with traditional banks: You can get ATM rebates, mobile deposits, a free debit card, checks, and many other features you'd find at a regular bank.

Cons Explained

  • Monthly fees: Some CMAs have monthly fees or minimum balances that you must meet. There can also be fees for transferring money from your CMA to another bank account or closing your account.
  • Miss out on more profitable investments: Investments associated with cash management accounts are generally low-risk, but that also means they have lower yields. Keeping money in this account means not taking higher-yielding investments.
  • Potential errors: Because your money is moved around between financial institutions and accounts, it is exposed to potential processing errors.
  • Higher interest elsewhere: Though a CMA generally earns more interest than a standard checking or savings account, many high-yield checking accounts or those through online banks can earn more interest.
  • Uninsured investments: Though the investments that CMAs use are usually low-risk, that does not mean they are risk-free. Investments such as money market funds are not FDIC insured, which means you can lose money and be unable to recover it.

Key Takeaways

  • A cash management account is a cash account offered by a financial institution other than a bank or credit union, usually a brokerage firm.
  • It can be used in place of or in addition to a checking account.
  • Cash management accounts allow you to access your money and pay bills, as well as manage your savings and earn interest.
  • May have monthly fees or minimum balances that you must meet.
  • If you already work with a brokerage firm or don't have a bank, a CMA keeps your cash accessible and flexible while using low-risk investing strategies to help it grow.

Article Sources

  1. WealthFront. "Save More, Faster." Accessed June 24, 2020.

  2. SoFi. "SoFi Money." Accessed June 24, 2020.

  3. Fidelity. "Cash Management from Fidelity," Accessed June 24, 2020.

  4. Aspiration. "Save Money, Save the Planet." Accessed June 24, 2020.