Cash Management Accounts: What Are They and How Do They Work? [Pros & Cons]

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Remember the days when interest rates and time deposits were attractive, that leaving money in your savings or time deposit account would yield significant returns? Unfortunately, those days are gone, and leaving your cash in traditional accounts will have its value overrun by inflation. Here’s where cash management accounts (CMAs) come in. This article presents an overview of CMAs and how they can (or cannot) work for you. 

What Are CMAs?

What is a cash management account (CMA)? A CMA is a savings, checking, and investment cash account, all rolled into one. They are products offered by non-bank financial institutions that attract clients who want higher returns and more perks from their deposits, making them great investment tools versus traditional banking services. Cash deposited into a CMA is held in partner banks. Like conventional banks, you can make withdrawals and deposits online or via ATM with debits cards. 

NOTE: The average interest rate for savings accounts is 0.06%.

How Do CMAs Work?

For many clients, getting higher returns may be the most significant selling point of a cash management account, which has an above-average interest rate compared to a conventional bank. Some institutions give a 0.30% annual percentage yield (APY), which is better than the 0.01% offered by banks. 

Other perks of CMAs also make them very attractive, including fewer accounts to manage cash. A CMA functions much like your savings, checking, and investments account, which would be three separate concerns in a conventional bank account—meaning you also have three different accounts to manage and keep track of. But if you enroll in a CMA investment, you have only one account with all these various functions and benefits. You don’t need to deal with institutions like banks or brokerage firms for all the different financial transactions you need. Your CMA account should already be a one-stop shop.

And as an alternative to a savings or checking account, a CMA account comes with Federal Deposit Insurance Corporation (FDIC), which can provide broader coverage than the typical account. Non-banks cannot directly offer this type of insurance, but CMA deposits have exceptional cases, making cash management safe and protected. 

Modern conveniences are also featured in a CMA, such as mobile check writing, deposit, bill payments, and money transfer. Plus, you don’t have to transfer funds in between accounts to perform different functions.

Much of the interaction you have with CMAs are done online, including account openings, with all verifications and background checks done without needing to go anywhere else. One way that CMAs can give higher returns is that they have less overhead than brick-and-mortar banks. Depending on your preference, this can be both a pro and a con. The pro, of course, is that you can do almost everything whenever and wherever. All you need is an internet connection, and you can manage your account and make transactions from your devices. Customer support for CMA investment products in most cases is done through self-help menus and chatbots.

While these can all be convenient, some customers may still prefer having the option to walk into a bank branch office and do transactions face-to-face. In addition, there are still particular concerns that are better dealt with by human support over automated AI responses. Plus, for some clients who are novices in the digital world, this may take some time to get comfortable with. 

Some CMAs have many fees—make sure these won’t defeat the cash management account interest rate. One of these fees includes transaction fees for transferring money from your CMA account to another banking account. Another would be fees for going below the minimum balance required, which, in some instances, these balances to maintain an account can be high. 

Cash Management Account: Advantages/Disadvantages 

Here’s a breakdown of the main pros and cons of a Cash Management Account.

Pros

  • Higher returns than conventional banks.
  • Consolidates all your accounts management into one.
  • Covered by the FDIC.

Cons

  • Possible high fees. 
  • May not be for those uncomfortable with an online system. 

Key Takeaways

Cash management accounts are great for clients who wish to consolidate their deposits into one all-purpose account.
Cash management accounts offer higher returns than conventional savings or time deposit accounts.
Most transactions and interactions with CMAs are online.
Deposits are held in partner banks and covered by FDIC.
May not be for those who prefer face-to-face transactions with personal representatives.

Cash Management Account: Eligibility Requirements

The  ‘what Is a cash management account’ question should also address the different approaches to getting started with one, including the typical steps below. 

Know How Much to Deposit

Some may say that the first step is to choose a financial institution, which is true. But you also need first to know how much you’re going to deposit because different institutions have various minimum balance requirements. Your minimum deposit will filter out the CMAs from your list to fit your financial profile. 

Choose Where to Open a Cash Management Account

Once you have the financial institutions that can accommodate your minimum balance, it’s time to pick one based on perks and features, one of which includes the APY. If this is your priority, the choice is as simple as picking the CMA with the highest returns and perhaps balancing it out against non-winning features on accounts control.  

Fill Out and Submit Application and Make a Deposit

Fill out the application form for your chosen financial institution. Requirements may vary, depending on the CMA. But for the most part, they should all be the same. After filling out forms and submitting your application, make a deposit. Of course, you need to deposit the minimum required, but bigger is always better for higher returns and maximum convenience for day-to-day transactions. 

Cash Management: Account vs Checking Account

Do you pull out all your funds from your conventional accounts and divert them all to a CMA? Before doing so, first, consider these points:

  • As part of the cash management definition, CMAs have the same nifty features as traditional accounts, such as pay bills, issuing checks, using debit cards, and other conveniences. But not all CMAs include these features—so make sure to check out the institution carefully. If these essential features don’t come in an all-in-one package with your chosen CMA, it still may be good to maintain a traditional checking or savings account.
  • A CMA might not allow you to open a joint, trust, or business account. For example, if you have a spouse that you wish to have co-access and shared accounts control to your funds, your CMA might forbid this. Likewise, creating accounts for trust purposes or business will most likely not be allowed by the non-bank financial institution offering you the CMA.
  • A CMA does not provide personal help. As previously mentioned, one of the reasons why CMAs yield higher returns is because they have no brick-and-mortar offices. So they have significantly less overhead than conventional banks. Should you need help, chatbots spitting out templates is your primary resource. 
NOTE: You can have your investment automated using robo advisors.

Conclusion

What is a CMA account? This is an account where products from non-bank institutions yield above-average returns compared to conventional bank accounts. Depending on the CMA, these accounts may also offer features standard with banks, such as online payments and checks.

FAQ

Brokerage account vs cash management account. Where should I put my money?

Brokerages will always give higher potential for growth since they are directly tied to equities. But they are also very risky and volatile. On the other hand, cash management accounts have lower returns but are more stable, and you have quicker access to your funds.

Are cash management accounts safe?

When you deposit into a cash management account, this money will be stored in the CMA provider’s partner bank. Deposits are correspondingly insured by the FDIC, keeping funds safe

Why should I get a cash management account?

As mentioned in this What Is a Cash Management Account article, one of the main reasons you want to get a CMA is for higher returns on your deposits. This—and other various perks—makes depositing in a CMA a good option.

ABOUT AUTHOR

I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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