What Is a Cash Management Account and How Does It Work?

Many people today are worried about their finances and savings. Concerns about disruptive global events like the COVID-19 pandemic and the war in Ukraine further strengthen the desire to stay on top of our savings and budgets.

Fortunately, consumers have a lot of choices when it comes to how they save their money. An often under-discussed option is the cash management account. Cash management accounts can be a great alternative to other more traditional banking options including savings accounts.

This article will walk you through what cash management accounts offer and how they work. We’ll also discuss the pros and cons of cash management accounts and alternatives to utilizing a cash management account.

What Is a Cash Management Account and How Does It Work?

To start, let’s look at what a cash management account is. Chances are you already have a checking and savings account, but a cash management account can be an excellent alternative to keeping money in a low-interest account. Understanding financial formulas like cash flow and integrating that into cash management accounts can benefit your financial health.

What Is a Cash Management Account?

A cash management account, often called a CMA, operates like a combination checking and savings account. Preferred cash management accounts will have higher interest rates along with FDIC insurance beyond the normal limit of $250,000. One thing that makes cash management accounts unique is that they are typically held by financial institutions other than banks and credit unions.

Because cash management accounts work like a combination of multiple types of accounts, think of them as a way to do short-term investing and day-to-day banking at the same time. A good CMA will allow you to access your money whenever you want, make purchases, and manage your finances while earning interest. A cash management account is not necessary, but it can be a helpful way to grow your assets and net worth.

How Do Cash Management Accounts Work?

You’re probably already familiar with how checking and savings accounts work, but cash management accounts are slightly different since they blend aspects of a brokerage account with traditional savings and checking accounts.

Typically, a CMA will come with a debit card, paper checks, and digital banking access. Most cash management accounts offer competitive interest rates too. Since you receive a debit card like with checking accounts, you can spend your CMA money and access ATMs like you normally would.

One thing that makes cash management accounts unique is that they are often operated by investment firms, robo-advisors, and mobile trading apps. Cash management accounts then utilize AI-enabled trading algorithms to invest your deposits into partner banks. This process enables CMAs to offer greater levels of FDIC protection than traditional checking and savings accounts.

Since FDIC insurance is done individually per institution, sweeping your funds to partner banks allows your deposits to be secured at multiple locations. Remember, the FDIC only insures $250,000 per depositor for each account category at a given banking institution.

When large CMA balances are transferred to partner institutions, they give you a greater level of protection than you would otherwise receive. It’s not uncommon to find cash management accounts that can insure balances of $500,000 to $1 million and more through their partner banks.

Combined with higher interest rates and the traditional features of more common types of financial accounts — like a checking account and a savings account — cash management accounts can make a great option for saving your money.

The Pros and Cons of a Cash Management Account

Now that you know the basics of how a cash management account works, let’s look at some of the pros and cons of storing your money this way.

More Details about Cash Management Account Pros

We’ve gathered more information on what makes cash management accounts a good deal.

Banking is Easier

One of the main advantages of a CMA is that it can simplify your banking. It allows you to invest money, earn interest at a high rate, and utilize a debit card. For example, you can cover costs related to your car and invest from a single account. By having everything in one place, managing your money will be easier.

Maximizes Your Cash Management Automatically

Since many cash management accounts automate investing, it means you can maximize how your cash is used. Think of a cash management account as a convenient way to put your “cash” into investments.

Normally, when we utilize banking services, we use that day-to-day money for making purchases, paying bills, etc. Unfortunately, interest rates on deposit accounts are at all-time lows. A cash management account gives you all the advantages of traditional deposit accounts but allows investment firms to utilize those deposits and bring you greater returns.

Simple to Sign-up and Secure

Many cash management accounts are offered by digital firms that specialize in offering online investment services. Robinhood and Fidelity are some of the primary providers of CMAs. Signing up for an account is a breeze using their digital services. Also, because your deposits are FDIC insured, you don’t have to worry about losing your money.

Many Features Associated With Traditional Bank Accounts

Since a CMA combines features of traditional banks with investment accounts, one of the main draws is that it can act as a replacement for other accounts. CMAs usually feature debit cards, ATM withdrawals, online banking, and even paper check services. CMA debit cards are often issued by major card companies, so not only are they accepted practically everywhere, but you can link them to most popular payment methods such as Apple Pay too.

Connected to Investment Accounts

Many CMAs allow you to connect your account to investment accounts automatically. More accurately, since the account is held by an investment firm, you can purchase investments directly from your CMA. It helps simplify your finances because you’ll have one less place to keep track of your money.

Often Refunds Fees

Importantly, cash management accounts traditionally offer ATM fee reimbursement. This can be great if you enjoy having cash on hand. Many CMAs also are part of large ATM networks, so there may be no fees to worry about.

Other Cash Management Account Perks

CMA pros aren’t just limited to the above list; many accounts can have additional benefits. Some accounts are covered under the SIPC insurance, covering up to $500,000 in cash and securities per account. In that case, you’ll have an extra layer of protection when banking with a CMA.

Other potential perks include free credit monitoring and identity protection. With so many data breaches occurring today, identity protection is essential. Some CMAs offer cash bonuses and waive foreign transaction fees. Finally, you can be assured that you’ll never miss a transaction with zero fee cash advances.

More Details About Cash Management Account Cons

If CMAs are so great, then why doesn’t everyone use them? Unfortunately, they can have some drawbacks too. Here are the cons of cash management accounts.

Monthly Fees

The biggest issue many people face with CMAs is that they can have monthly fees. Some CMAs have these fees if your balance is too low, and others will waive the fee if you have enough qualifying services with your CMA. Today, many CMAs have no fees, so be cautious of any firm offering a CMA with high or exorbitant fees.

You Can Miss Out on More Profitable Investments

One of the reasons to use a CMA is if you’d like to maximize your investment potential while still being able to use that money without it being tied up in an investment account. On the other hand, you may end up utilizing your CMA instead of using a better high-yield investment account. And although CMAs offer competitive interest rates, they aren’t always the highest available. It’s possible that keeping your cash in a CMA may cost you money in the long run.

Potential Errors

Although uncommon, one thing to keep in mind is that the potential for errors is much higher because your balance is lent out to multiple institutions. If you’re worried about accounting mishaps, remember that your deposits are insured.

No Brick-and-Mortar Locations

CMAs rarely have brick-and-mortar locations, which could be a deal-breaker if you frequently go to the bank in person. Fortunately, online banking and electronic check deposits have all but eliminated the need to go to the bank.

May Have Large Asset Minimums

One gatekeeping aspect of CMAs is that they can have large asset minimums to open an account or maintain one. Sometimes, these minimums are in the tens of thousands of dollars – prohibitively high for many Americans. Not all CMAs have no asset minimums, though, depending on the provider.

Special Conditions May Apply

CMAs may also contain other special conditions, like minimum balances, transfer limits, and other terms. It’s important to remember that CMAs are not traditional checking and savings accounts, so don’t be surprised if your CMA comes with strings attached. Be sure to check with a representative about all the details of your CMA.

Alternatives to Cash Management Accounts

Now that you understand the main pros and cons of CMAs let’s look at some of their possible alternatives.

Online Checking

One of the best alternatives to utilizing a CMA is finding an online checking account provider. Ally Bank is one of the most common providers of online banking. A popular draw for online banks is that they usually offer reimbursement for ATM fees because they don’t have regular physical locations.

When picking the account, consider what features it offers compared to your CMA. Cashback rewards are common among credit card companies and checking services but less common for CMAs. Online checking can also offer lower interest rates than CMAs.

Today, many online checking accounts can be linked to your investment accounts, so you don’t necessarily need a CMA.

Investment Accounts

Having a dedicated investment account is another option instead of a cash management account. Dedicated investment accounts from TD Ameritrade or E*TRADE offer similar online services and allow you to connect outside accounts. However, moving funds and clearing them from investments can take longer on these services because the trades have to be resolved. E*TRADE has no yearly fees, which can be a huge plus if you’re looking to experiment with trading on your own.

Conclusion

Finally, remember that nothing is stopping you from having all of these options in addition to a CMA. Think of cash management accounts like other types of financial accounts as an asset in your toolbox for financial well-being. Understanding these tools and becoming educated about them is a great way to ensure your long-term financial health.

New York contributor Kiara Taylor specializes in financial literacy and financial technology subjects. She is a corporate financial analyst who also leads a group affiliated with University of Cincinnati that teaches financial literacy to Black students and helps them secure employment and internships.