Understanding Cash Management Accounts: A Comprehensive Guide

When it comes to managing your finances, checking and savings accounts are not your only options. Cash management accounts (CMAs) offer a blend of the best features from both checking and savings accounts, providing a versatile and efficient way to handle your money. Unlike traditional bank accounts, CMAs are typically held at non-bank institutions such as investment or brokerage firms. In this blog, we will explore how CMAs work, their pros and cons, and how to choose the right one for your needs.

How Do Cash Management Accounts Work?

Cash management accounts operate by sweeping your money into one or more accounts at partnering banks. This setup allows your funds to earn interest while being insured by the Federal Deposit Insurance Corp. (FDIC). One of the significant advantages of CMAs is that they can offer FDIC insurance coverage beyond the standard $250,000 limit by distributing your funds across multiple banks.

CMAs combine the functionalities of both checking and savings accounts. Unlike most checking accounts, CMAs earn interest, and unlike most savings accounts, they can be used for payments. This makes CMAs an attractive option for those who prefer to keep all their money in one interest-earning account.

Since CMAs are not tied to a single bank or branch, most account management tasks are conducted online. Features can vary significantly between different accounts and financial institutions. Some CMAs come with debit cards, mobile apps, direct deposit capabilities, and digital wallet compatibility, while others may not. Therefore, it’s essential to shop around before opening a CMA.

Pros and Cons of Cash Management Accounts

Pros

• Higher FDIC Coverage Limits: By sweeping your money into multiple accounts at different banks, CMAs can offer FDIC insurance coverage beyond the standard $250,000 limit.
• Competitive Interest Rates: While high-interest savings accounts or certificates of deposit (CDs) may offer higher rates, CMAs generally provide better annual percentage yields (APYs) than regular savings accounts.
• Fewer Fees: Some CMAs do not charge account maintenance fees, ATM surcharge fees, or other transaction fees commonly found at banks. However, this is not universal, so it’s crucial to read the fine print.
• One Account for All Needs: CMAs eliminate the need for separate checking and savings accounts, allowing you to earn interest, pay bills, and invest from a single account.
• Interest on Checking Balances: Unlike many bank checking accounts, CMAs earn interest on your balance, making them a good option if you maintain a substantial checking account balance.

Cons

• Lack of Personalized Service: The online focus of most CMAs means you may miss out on face-to-face interactions.
• FDIC Insurance Gaps: While your money is typically swept into partner bank accounts within a day, it may not be covered by FDIC insurance while at the investment firm. In such cases, your funds might be covered by Securities Investor Protection Corp. (SIPC) insurance.
• Varying Features: The features of CMAs can differ significantly between brokerages, so it’s essential to shop for the features you need.
• No Separation for Savings: Keeping money in a separate savings account can help prevent accidental spending and make it easier to track your savings growth.
• Requirements and Fees: Some CMAs have minimum balance or initial deposit requirements and may charge maintenance, transfer, or account closure fees.
• Better Interest Rates Elsewhere: While CMAs generally offer better interest rates than regular savings accounts, they may not provide the highest available rates. It’s essential to compare rates before committing your funds.

Cash Management Accounts vs. Checking Accounts

Some CMAs function similarly to checking accounts, while others do not. There are also differences between banking at a traditional bank or credit union and using an investment or brokerage firm to manage your cash. Here are a few things to consider:

Checking Accounts

• Full range of deposit and payment options
• FDIC insured up to $250,000 per person and account ownership type
• Allows for separation between checking and savings

Cash Management Accounts

• Earns interest
• May exceed $250,000 in FDIC insurance protection by sweeping funds into multiple bank accounts
• Eliminates the need for separate checking and savings accounts

Banks vs. Brokerage Firms

Choosing between a bank and an investment firm for your checking and savings needs depends on your preferences and how you use your bank. Banks offer a range of services, including loans and credit cards, often with incentives for customers who have multiple accounts. If you value a relationship with your financial institution, you may miss this aspect when using a brokerage firm.

On the other hand, brokerage firms may be more suitable for investors and those who prefer digital tools for managing their money. A CMA at a brokerage firm can streamline your finances by combining your checking and savings funds into a single account, potentially held at the same firm that manages your investments. This can be particularly beneficial for active investors or retirees who receive regular distributions from a retirement investment account.

How to Choose a Cash Management Account

If you’re interested in exploring CMAs, here are some steps to help you find the right account for your needs:

Find a Financial Institution

Start by checking with your current brokerage or investment advisory firm if you already have an investment account. However, don’t stop there. Search online for alternatives to get a sense of what else is available.

Compare APYs

Look for competitive interest rates by comparing multiple options, including high-yield savings accounts, money market accounts, interest checking accounts, and CDs at traditional financial institutions.

Shop for Features

Consider how you want to use your CMA and proactively shop for the features you need, such as debit cards, mobile check deposit, online bill payments, and direct deposit capabilities.

Check FDIC Insurance Coverage

If your balance is likely to exceed $250,000, ensure that your entire account balance will be covered under FDIC insurance. Also, inquire whether any balances held in your CMA at the brokerage company will be insured by the SIPC.

Consider Convenience

Evaluate how easy it is to access information and get help, both online and by phone. Consider how quickly your money can transfer between accounts and the various ways you can access it, especially if you need cash quickly.

The Bottom Line

Cash management accounts offer a versatile alternative to traditional checking and savings accounts, providing competitive interest rates and higher FDIC insurance coverage limits. If you’re looking to streamline your finances, a CMA might be the right choice, especially if you’re an active investor or a retiree receiving regular distributions from a retirement account.

Finding a CMA online is easy, but it’s essential to investigate multiple options to find the one that best suits your needs. Ultimately, you may decide that conventional checking and savings accounts—and the banking relationship that comes with them—are a better fit for you.

At O1ne Mortgage, we are committed to helping you find the best financial solutions for your needs. If you have any questions or need assistance with mortgage services, please call us at 213-732-3074. Our team of experts is here to help you navigate your financial journey with confidence.