June 2, 2021
What we’ll cover:
You may have seen a lot of sleek, splashy ads online lately about the wonders of cash management accounts (CMAs).
The financial institutions offering these accounts typically boast of their ability to deliver higher interest rates than a checking account while still giving you the flexibility to access your money whenever you want. And as a cherry on top, many of these CMA providers are able to provide a one-stop shop for your savings and checking needs with few or no fees.
In these ways, cash management accounts almost seem too good to be true, but are they worth all the buzz? To help you decide, let’s peel back that shiny wrapper and take a look at how these types of nonbank accounts generally work.
A cash management account is a nonbank cash account – typically managed online – where you can park your cash, earn competitive interest rates and withdraw money as you need it.
What do we mean by “nonbank?” CMA providers are typically investment advisory firms or broker-dealers (more on this later).
The specific features of a cash management account vary depending on the financial institution. For example, some cash management accounts offer check-writing privileges, ATM access, debit cards and online payment services. Due to these familiar features, some cash management accounts can be considered alternatives to a more traditional back account like checking or savings accounts.
Then there are also cash management accounts that include a brokerage component, where you’re able to transfer money from the cash account directly into your investment accounts (e.g., a retirement account).
While cash management accounts might share similar features with traditional bank accounts, generally, they are not a banking product.
For many of the CMA offers that you see in the market, the providers make it clear in the fine print that they are not banks. As we touched on earlier, CMA providers are often investment advisory firms or broker-dealers.
This nonbank distinction might seem irrelevant, but it’s an important detail. Why? Because while the financial institution that provides the cash management account can take your deposits, in many cases, it does not actually hold or manage the money for you.
Sound like we’re just splitting hairs? Let's get into why this matters.
Cash management account providers usually rely on a traditional bank or network of banks (sometimes called “program banks”) to hold your cash deposits.
When you fund your cash management account, your provider moves or “sweeps” that money into accounts at its program banks on a regular basis (e.g., at the end of each business day).
It is at these program banks where your money earns interest and receives FDIC insurance protection (if they’re FDIC-insured banks, of course).
This matters because it means that while your funds are sitting with the CMA provider (before the money is swept into the program banks), they are not FDIC-insured. Funds that are on their way to the program banks but not yet received by the banks are also generally not FDIC-insured. Whoa.
But don’t panic – if your CMA provider is a member of the Securities Investor Protection Corporation (SIPC), your funds may be insured by the SIPC while it’s with the CMA provider and/or in transit to the program banks.
Check our guide to learn the difference between FDIC and SIPC insurance.
FDIC and SIPC rules and limits. Cash management accounts have different FDIC and SIPC rules and protection limits depending on the financial institution you choose to open an account with. For example, some providers offer FDIC protections up to $1 million through their partnerships with their program banks, while others may offer even higher protection limits. And not every provider offers SIPC coverage.
So if you’re considering an account, it’s a good idea to ask your potential providers about their FDIC and SIPC coverage. Also, if you cannot find information on who their program banks are, you may want to ask your potential providers. This way you can double check that the banks they’re partnering with are FDIC-insured.
Fees and minimum balance requirement. Cash management accounts that come with debit cards often reimburse ATM fees. But you may also want to check to see if providers charge other types of fees such as monthly account fees, management fees, advisory fees, foreign transaction fees and overdraft fees. Some CMAs may also have minimum balance or initial deposit requirements.
We’ve thrown a lot of information your way, so let’s take a moment to get into some specific pros and cons to consider before opening a cash management account.
Pros can include a simplified banking experience. If you’re looking to combine features of an interest-earning savings account with a traditional checking account, a CMA might be an option to consider.
CMAs can also help maximize your cash by allowing you to earn interest on money that you may not have otherwise (or in the case that you have an interest-earning checking account, earn potentially more interest).
Cash management accounts can also be set up pretty easily and, once they’re transferred to a bank that’s FDIC-insured, your money can be parked more safely.
On the other hand, some cons of cash management accounts include that they might charge monthly maintenance fees or require that you maintain a minimum monthly balance. You also might have to pay fees if you want to transfer money out of your CMA to another account or even if you close your CMA.
Additionally, while CMAs do advertise competitive APYs, you still might want to shop around for different CMAs and online bank high-yield savings accounts to make sure you’re getting the highest interest rate you can.
By stitching together some of the attractive features of a high-yield savings account with the familiar conveniences of a traditional checking account, cash management accounts have a real potential to grow in popularity over time.
But before you toss aside your traditional checking or high-yield savings accounts in favor of CMAs, consider whether opening a cash management account is really necessary – or right for you and your financial goals.
While some people might want to consolidate and manage their savings, checking and investing from one account, there are others who prefer to maintain separate accounts as part of their savings strategy, where each account is dedicated towards a specific savings goal. The idea is that by keeping separate accounts, they can better track their spending and savings to help them reach their financial goals.
Another thing to keep in mind is that a number of the nonbank financial institutions offering CMAs are relatively newcomers in the financial services industry. One potential concern is whether some of these CMA providers would be able to weather the ups and downs of doing business in the financial services industry over the long term. While your money in a cash management account is generally protected by FDIC and/or SIPC insurance, if a CMA provider were to go belly-up, it could still cause a lot of unnecessary stress (e.g., figuring out how to recover your funds, filling out paperwork, etc.).
All this isn’t to scare you off, but they’re just some things to think about when deciding whether a cash management account is right for you.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.