A cash management account is an alternative account to traditional accounts. You can open a cash management account in addition to or replacement of traditional accounts. It enhances the accessibility and safety of customers with a huge amount of money. So, this article explains the features, pros, cons, and benefits of cash management accounts.
What is Cash Management Account?
A cash management account is a cash account offered by a non-financial institution that combines the features of savings, checking, and investment accounts. It is offered by financial institutions such Robo advisors, online investment or brokerage firms, etc. other than traditional banks and credit unions. The brokerage firms always separate these accounts from the investment accounts, but both can be linked together. Therefore, it allows customers to combine their investing and banking in one account without any need to switch from one account to another. Also, it has features of both short-term investing and banking.
However, brokerage firms always partner with traditional banks to store funds. With cash management accounts or CMAs, you can access your money, make payments, make savings, and earn interest. It may involve the use of the debit card, checkbook, or both as well as online services depending on the brokerage companies. Maintaining CMAs always involves payment of little or no transaction or banking service fees. Depositing money into your cash management account will automatically give you a chance to earn money on low-risk investments as well as having access to the money to meet your daily expenses.
Features of Cash Management Accounts
Here are the features of cash management accounts to look out for when you are trying to open a CMA.
Higher interest rates
Cash management accounts offer interest rates equivalent to the prevailing market rates for the best saving accounts. The interest rates of some CMAs are fixed irrespective of how much you have in your account while interest rates for some are vary based on your account balance. Additionally, the interest rates offered by brokerages vary from one firm to another.
Cash management accounts have similar features to the checking account which ensure easy access to your money at any time. These features include the use of the debit card, online services for deposits and payments, checkbooks, banking alerts, and online bill payments. However, some CMAs have withdrawal limits which limit the amount of money you can withdraw from your account daily.
Low or no Service fees
CMAs have low or no transaction or banking service fees to operate. Some cash management accounts offer ATM rebates. So, they reimburse the ATM fees back to your account which means you are using the ATM free of charge. Some CMAs involve charging monthly maintenance fees and other fees. Also, some have a minimum balance to maintain.
Pros and Cons of Cash Management Account
- It gives customers the ability to maintain both banking and investment accounts in a single service.
- CMA enhances easy access to the funds.
- It yields higher interest to the customers than some traditional institutions.
- CMA involves little or no banking service or transaction fees.
- It provides convenient banking services through mobile and online services.
- It provides FDIC insurance on customers’ accounts through third-party bank partners.
- CMA may offer interest rates lower than some saving accounts at online banks.
- It provides only virtual customer services. I.e. no local customer services.
- Some CMAs require customers to maintain a high minimum balance.
- It may lead to missing out on higher interest investment opportunities such as index trust.
Difference Between Cash Management Accounts and Traditional Checking Accounts
CMAs offer similar services to traditional checking accounts such as access to a debit card, checkbook, online services, and others. These differences include:
|Cash Management Accounts||Traditional Checking Accounts|
|Run by non-financial institutions like brokerage firms||Run by financial institutions like banks|
|CMA provides higher interest rates to the customers.||The interest-bearing checking accounts where exist provides low-interest rates|
|CMA connects both banking and investment accounts. This enhances the easy and fast movement of funds because investment is the core business of brokerage firms.||Some banks also offer investment products but you can encounter a delay in the movement of funds because investment is not their core business.|
|Most cash management accounts involve low or no transaction fees.||It involves high transaction or services fees like maintenance fees.|
|It may require maintaining a high minimum balance.||It doesn’t involve high minimum balance requirements.|
Benefits of Cash Management Accounts
what are the benefits of cash management? The following are the benefits of CMAs:
One of the benefits of a cash management account is the convenience it gives to you to combine both banking and investing in one account.
Federal Deposit Insurance Corporation protection
CMAs provide FDIC protection to the customers through partnerships with third-party banks. It protects your money through FDIC with up to $2509,000 per depositor. However, in case you have a huge amount of money make sure you select the CMA that offers sufficient insurance to protect your whole balance. This is because some cash management accounts offer more FDIC protection than others.
Higher interest rates
Some CMAs offer interest rates higher than the rates offered by most traditional institutions like banks, credit unions, and others. For example, Fidelity Cash Management Account offers 0.01% APY to its customers. However, if you want a high return for your money, it is important to check NerdWallet for the list of online accounts with the best interest rates.
Low transaction fees
Another benefit of CMAs is that most non-financial institutions charge low or no fees on customers’ transactions compared to traditional institutions.
Who Needs Cash Management Accounts
CMAs are for those who prefer convenient and online banking. So, if you like online banking, CMA is for you. CMAs offer low or no transaction fees, higher interest rates, convenience, and others. But, it lacks face-to-face customer service. It is important to weigh both advantages and disadvantages of a cash management account before you open it.
Where to Open Cash Management Accounts?
You can open your CMA with brokerage firms if your brokerage offers such accounts. The best option is to open your account with your brokerage company. This is because your brokerage may offer you the best interest rate especially if you maintain a large balance.
Cash management accounts are good for those who prefer online banking over traditional banking. It offers convenience, low or no transaction fees, the connection of many accounts, and others. But, it lacks local customer services to the customers.
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Afeez is one of the founding partners of Marasas Consulting limited. He consults for both individuals and entities in the area of accounting, management, audit, tax, and investment. He has a wide range of experience both online and offline which allows him to provide relevant and timely professional advice and assistance to business owners with their accounting, tax, management, audit, and investment plans.
Afeez is a member of the Institute of Chartered Accountants of Nigeria (ICAN) and a member of the Nigerian Institute of Management (Chartered). He is a certified Google analyst and strategist. He earned his Bachelor degree in Management and Accounting from Obafemi Awolowo University, Ile-Ife, Nigeria, and earned an ordinary national diploma in Accountancy from The Polytechnic of Ibadan, Oyo State, Nigeria. He earned certification in “Excel Crash Course” and “Reading of Financial Statement” from Corporate Finance Institute, Canada.
Afeez is dedicated to helping clients achieve business success by helping them to establish solid and sound accounting, tax, and financial processes.