Cash management account

What Is a Cash Management Account?

A cash management account (CMA) is a financial product typically offered by non-bank financial institutions, such as brokerage firms or robo-advisors, that combines features traditionally found in checking accounts and savings accounts. These accounts fall under the broader category of investment accounts, as they often serve as a hub for both spending and investing activities, providing a streamlined approach to managing personal finances. A cash management account is designed to offer convenience, competitive interest rates, and easy access to funds, acting as a central point for a user's liquid assets while potentially earning higher returns than a traditional bank account.²⁸

History and Origin

The concept of the cash management account revolutionized the financial industry by blending banking and brokerage services into a single offering. The seminal moment occurred in 1977 when Merrill Lynch, collaborating with SRI International, introduced its Cash Management Account (CMA). This innovative product combined an investment account with a transaction account, integrating features such as check-writing capabilities and a credit card issued by a partner bank.²⁷

Prior to the CMA's introduction, strict regulations, such as Regulation Q under the Banking Act of 1933, limited the interest banks could pay on deposits.²⁶ This regulatory environment, coupled with rising inflation in the late 1960s and 1970s, made traditional bank accounts less attractive for savers. The advent of money market funds in the early 1970s offered a way for investors to earn higher interest on their cash.²⁵ Merrill Lynch's CMA ingeniously addressed this by automatically sweeping uninvested cash balances from a brokerage account into a money market fund, allowing customers to maximize returns while still having access to their funds for daily needs.²³, ²⁴ This blend of services proved highly popular, with 300,000 CMA accounts established within four years of its release, and over 2.5 million by 2000, prompting numerous competitors to innovate similar products.²²

Key Takeaways

• A cash management account (CMA) integrates features of checking and savings accounts with investment capabilities, typically offered by non-bank financial institutions.
• CMAs often provide competitive Annual Percentage Yields (APYs) and lower fees compared to traditional bank accounts.²¹
• Funds in CMAs are generally protected by FDIC insurance through partner banks and/or SIPC insurance, depending on how the cash is held and the institution.²⁰
• They offer convenience through features like debit card access, bill pay, and direct deposit.¹⁹
• CMAs can help streamline financial management by consolidating spending, saving, and investing activities within one platform.

Interpreting the Cash Management Account

A cash management account is interpreted as a flexible and often higher-yielding alternative to traditional bank accounts for managing liquid assets. Its value lies in its hybrid nature, providing transactional convenience while aiming for better returns on uninvested cash. When evaluating a cash management account, consider the offered interest rates (APY), any associated fees, the accessibility of funds (e.g., ATM networks, debit cards), and the extent of deposit insurance coverage.¹⁸ Many CMAs offer tiered interest rates, where higher balances may earn a better yield, or variable rates tied to prevailing market conditions. Understanding these aspects helps assess whether a particular cash management account aligns with one's financial goals for liquidity and return on cash.

Hypothetical Example

Sarah, a freelance graphic designer, wants to better manage her income and savings. She decides to open a cash management account with a brokerage firm. Instead of having separate checking and savings accounts at a traditional bank, her CMA allows her to receive direct deposits from clients directly into the account.

She uses the associated debit card for daily expenses and pays her monthly bills through the CMA's bill pay feature. Any unspent cash automatically earns a competitive Annual Percentage Yield (APY), higher than what her old traditional savings account offered. When Sarah wants to invest, she can easily transfer funds directly from her cash management account to her linked brokerage account with the same firm, without needing to move money between different financial institutions. This setup simplifies her financial life, allowing her to earn interest on her working capital while maintaining easy access to her money.

Practical Applications

Cash management accounts have several practical applications across personal finance and investing:

• Emergency Funds: CMAs are suitable for housing an emergency fund due to their combination of competitive yields and high liquidity. Funds are readily accessible via debit cards or electronic transfers, while also earning more than typical checking accounts.
• Centralized Cash Hub: For individuals with active investment portfolios, a cash management account can serve as a centralized hub for all uninvested cash, allowing for easy transfers to and from investment accounts. This streamlines the process of funding new investments or receiving proceeds from asset sales.¹⁷
• High-Yield Savings Alternative: Many CMAs offer interest rates that rival or exceed those of high-yield savings accounts, making them an attractive option for parking short-term savings or funds earmarked for upcoming expenses.¹⁶
• Simplified Financial Management: By combining banking and investing features, a cash management account can reduce the need for multiple accounts at various financial institutions, simplifying financial oversight and potentially reducing fees.
• Enhanced Deposit Insurance: Some CMAs offer expanded Federal Deposit Insurance Corporation (FDIC) coverage by sweeping funds across multiple partner banks, potentially providing coverage beyond the standard $250,000 limit per depositor per bank. This structure is often highlighted by providers like Fidelity as a benefit for those with substantial cash balances.¹⁵

Limitations and Criticisms

Despite their advantages, cash management accounts have certain limitations and face some criticisms:

• Limited In-Person Services: Since most CMAs are offered by online brokerages or fintech companies, they typically lack the physical branch network of traditional banks. This can be a drawback for individuals who prefer in-person customer service or need to conduct complex transactions at a physical location.¹⁴
• Varying Features and Fees: The specific features, fees, and interest rates of cash management accounts can vary significantly between providers. Some may have minimum balance requirements, while others might charge fees for certain services, requiring careful comparison.¹³
• Perception of Safety: While funds in CMAs are typically protected by FDIC insurance (through partner banks) and/or Securities Investor Protection Corporation (SIPC) insurance, the multi-layered nature of this protection can sometimes lead to confusion. FDIC insurance covers deposits in the event of a bank failure, while SIPC protects against the failure of the brokerage firm itself, not against investment losses. Investors must understand the distinction to properly assess risk management for their funds.¹² For instance, the U.S. Securities and Exchange Commission (SEC) provides guidance on how broker-dealers manage customer funds and securities, underscoring the importance of segregation for investor protection.¹¹
• Potentially Lower Yields Than Investments: While CMAs often offer higher yields than traditional bank accounts, their returns are generally lower than those offered by more growth-oriented investment accounts, which carry higher risk. CMAs are primarily for liquidity and cash preservation, not aggressive wealth accumulation.

Cash Management Account vs. Money Market Fund

A cash management account (CMA) and a money market fund (MMF) are both options for holding liquid cash, but they serve different primary purposes and have distinct structures. A CMA is a type of account, often offered by brokerage firms, that bundles various banking-like features such as a debit card, bill pay, and direct deposit. It functions as a flexible operational account where uninvested cash typically earns interest by being swept into underlying FDIC-insured partner banks or, in some cases, a money market fund.¹⁰ The emphasis of a cash management account is on convenience and integration of spending and saving with investing.

Conversely, a money market fund is a specific type of mutual fund that invests in highly liquid, short-term debt securities, such as U.S. Treasury bills and commercial paper.⁹ MMFs aim to maintain a stable net asset value (typically $1.00 per share) and generate income through interest earned on their holdings. While MMFs are considered low-risk investments and are regulated by the SEC under the Investment Company Act of 1940, they are not bank deposits and are not FDIC-insured.⁸ Instead, they are covered by SIPC insurance if held in a brokerage account, protecting against the brokerage firm's failure, not against market losses.⁷ The core difference lies in their function: a CMA is an integrated account for managing cash flow and earning interest, while a money market fund is an investment vehicle for short-term capital preservation and income.

FAQs

Are cash management accounts FDIC insured?

Yes, cash management accounts can be FDIC insured. When you deposit money into a cash management account, the provider typically "sweeps" your funds into one or more partner banks that are FDIC-insured.⁶ This means your deposits are protected by the Federal Deposit Insurance Corporation (FDIC) up to the standard limit of $250,000 per depositor, per insured bank, per ownership category.⁵ Some CMAs use multiple partner banks to offer extended FDIC coverage beyond this standard limit.⁴

How do cash management accounts make money?

Cash management accounts typically earn money for the customer through the interest rates paid on the uninvested cash balances. The financial institution offering the CMA earns revenue in several ways, including the spread between the interest it earns on the swept funds at partner banks and the interest it pays to the customer, or through fees associated with the account or linked services.³

Can I use a cash management account like a regular bank account?

Many cash management accounts offer features similar to traditional bank accounts, such as a debit card for purchases and ATM withdrawals, direct deposit, and bill pay capabilities.² This allows them to function effectively for everyday financial needs. However, unlike traditional banks, most CMA providers do not have physical branches, meaning all customer service and transactions are handled online or over the phone.¹

What is the difference between a cash management account and a brokerage account?

While often offered by the same firm, a cash management account (CMA) and a brokerage account serve different primary functions. A CMA is designed for spending and saving uninvested cash, providing features similar to a checking or savings account with competitive interest. A brokerage account, conversely, is specifically for buying, selling, and holding securities like stocks, bonds, and mutual funds, with the goal of investment growth. Many firms allow seamless transfers between a CMA and a linked brokerage account to facilitate investing.