Cash Management Account: What Is It & How Does It Work?
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Summary:
The term cash management account acts as a catch-all term for deposit accounts that offer many of the features of a checking account, savings account, and various investment products combined. Cash management accounts are usually offered by online investment firms or robo-advisors who partner with banks or other FDIC-insured financial institutions to offer bank-like protection. Cash management accounts are ideal for people with a large amount of money who want easier money management and potentially higher interest rates than traditional checking or savings accounts.
“Mo money. Mo problems!” When the Notorious BIG coined this phrase in the ’90s, he was referring to trappings of wealth and all and the drama that ensues. But in a more realistic sense, accumulating wealth and cash can present problems related to how you manage your money. Do you have to keep moving money from your checking account to your savings every time you need to buy something substantial? How do you know you are getting the best interest rate on your savings account? And when you want to see your money grow, where do you invest? For those that want easy access to their money (all under one roof) without loads of paperwork, a cash management account might be an ideal solution.
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What is a cash management account?
Cash management accounts, or CMAs, are more than just cash accounts; they are catch-all multipurpose accounts offered by financial institutions outside of a traditional bank. Cash management accounts act as a combination of most of the accounts you would set up at a regular bank, such as checking and savings. In many cases, they will offer interest rates with sweep accounts better than a traditional bank, as well as investment products that are can have less expensive fees. Most importantly, they offer FDIC protection, meaning that they are protected by the full faith and solvency of the federal government, just like a bank.
How FDIC protection of cash management accounts works
The Federal Deposit Insurance Corporation, or FDIC, insures accounts up to $250,000 per financial institution. Cash management accounts often partner with banks and split the money. Here is an example of what that might look like.
| Cash management account value | $1,000,000 |
|---|---|
| Bank A | $200,000 |
| Bank B | $200,000 |
| Bank C | $200,000 |
| Bank D | $200,000 |
| Bank E | $200,000 |
You can see that the value of the cash management account is $1 million, split into five different banks at increments of $200,000. This is how cash management accounts can sometimes offer FDIC protection on your money that even exceeds the protection you would get with a deposit account with a traditional bank or credit union.
Pro Tip
Make sure that while you are browsing online for cash management accounts, you make absolutely sure they have FDIC protection. As CMAs are outside the traditional banking sphere, they are not obligated to have it, but many do.
Services cash management accounts can offer
These are some of the benefits that the best cash management accounts offer:
- Direct deposit
- Interest paid
- Online bill pay
- Investment products
- Ability to buy and sell shares
- Electronic transfers (international and domestic)
- Writing checks
- Waiving or minimal foreign transaction fees
- No monthly fees
Where to find cash management accounts
As cash management account providers work outside of the traditional scope of banking, you can’t just walk into your bank and inquire about one. Instead, you will probably need to inquire about cash management accounts at the following places.
Brokerage firms
Many brokerage firms, such as Fidelity, offer cash management accounts. If you already have a brokerage, you might want to inquire with them (or start looking for one if you have not).
If you are interested in cash management accounts, these brokerages may be able to help you find one.
Robo-advisors
Robo-advisors are online-based “advisors” that invest your money based on your personal preferences, using algorithms to fit an investor’s needs. Many robo-advisors also offer cash management accounts.
Advantages of cash management accounts
Why choose a cash management account over another type of account? Here are some of the advantages.
Simplified ownership and transparency
Having a cash management account gives the owner a consolidated view of the ins and outs of their financial transactions. It also saves a tremendous amount of time and paperwork. Rather than calculating different balances from your checking account, savings account, money market account, and brokerage account, you have them all in one place.
Higher yields
Many cash management accounts offer higher interest rates and yields compared to parking your money in a traditional savings account or bank. This is not always the case, however, so it’s best to check with your own bank or credit union to compare rates.
Smaller fees
Most cash management accounts offered by brokerages or other financial institutions will advertise that they have lower fees on both their accounts and investment products. In many cases, the brokerage will make deals with a bank to waive or minimize fees, as they are investing much more than an individual person would. Remember, with scale comes the power to negotiate, and cash management accounts are able to play that card.
Investment product diversity
If you buy investment products through a bank, chances are that they will come from that bank or one of its exclusive partners. Cash management accounts can offer a much more multifaceted investment product platform, such as different money market accounts. You might be able to obtain something that suits your needs and risk profile that you would not be able to find at your Main Street bank.
FAQ
Are cash management accounts worth it?
As long as the cash management account is FDIC insured and offers competitive or higher interest rates than traditional accounts, it can be worth it. You will not get the human interaction, however, that you would with a bank teller.
Is a cash management account a bank account?
No, a cash management account acts like a bank account but is not a bank account. Companies offering CMAs partner with banks to offer something like a savings account, checking account, and investment account combined.
Are cash management accounts risky?
As long as they are FDIC-insured, they are not particularly risky. However, if you do invest out of your CMA, then that always comes with risk, just as if you were to invest through your traditional bank.
Do you pay taxes on a CMA account?
Yes, just like a savings account, you must pay taxes on all interest and returns made over $10 on a cash management account.
Can you invest with a cash management account?
Yes, you can buy and sell shares, as well as invest in products like ETFs through a cash management account.
Key takeaways
- Cash management accounts work as a money management catch-all, offering the features of savings accounts, checking accounts, and investment accounts, among others.
- Companies offering cash management accounts often partner with banks and spread money around in order to maintain FDIC insurance and protection.
- Cash management accounts are typically offered by brokerages and robo-advisors, not traditional banks or credit unions.
- Cash management accounts can offer a consolidated view of your overall financial transactions, save on paperwork, and possibly give you a higher yield and more options for investment products.
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