Opening separate Cash Management Accounts (CMAs) and Brokerage Accounts are common steps in financial planning. But what exactly are the differences, and when might you choose one over the other?
In this article, we will examine the distinctions between CMAs and Brokerage Accounts across all facets—from core purpose to account features. With an in-depth understanding of their complementary strengths and limitations, you can determine which account, or combination of accounts, best aligns with your financial situation and goals.
Now let’s dive deep into the world of Cash Management Account
What Is a Cash Management Account?
A cash management account (CMA) is a type of financial account offered by brokerage firms and banks to provide clients added flexibility in managing their cash. CMAs combine features of checking, savings, and investment accounts to offer convenience and liquidity.
The primary purpose of a CMA is to facilitate easy cash management through a single account. CMAs allow accountholders to seamlessly transfer between a high-yield savings account, a check writing account, and investment accounts at the same financial institution. This consolidated access makes managing daily spending and transfers simpler.
CMAs operate as hybrid accounts that seamlessly blend features of checking, savings, and sometimes basic investment accounts. Offered by leading brokerages like Fidelity, TD Ameritrade, and Charles Schwab, as well as banks like Bank of America, CMAs allow streamlined management of daily cash flows through a single account.
Specifically, they provide integrated access to linked checking accounts for payments by check or debit, high-yield savings accounts to earn interest, and money market mutual funds for low-risk investing. By consolidating these key features under one account, CMAs create a centralized hub for liquid cash management needs.
Advantages of Cash Management Account
The key benefit of a CMA is consolidated control over cash. CMAs grant flexibility to cost-effectively earn higher interest on idle cash, efficiently meet short-term spending needs and seamlessly transfer funds between integrated accounts.
For example, one major advantage is the ability to automatically sweep unused cash from checking into high-yield savings to earn significantly higher interest — up to 25 times higher than regular savings accounts. This automation allows any unused cash to begin passively compounding returns while still being accessible for upcoming expenses.
For those seeking maximum convenience, liquidity, and efficiency in everyday cash management, CMAs are an optimal single hub.
Benefits of Cash Management Account
Specifically, CMAs offer the following advantages:
- FDIC insurance protection – Cash deposits in CMAs are eligible for up to $250,000 in FDIC coverage per individual. This protects principal balances from losses even if the financial institution fails – unlike investing through brokerage accounts.
- Meeting spending needs – CMAs have unlimited check writing and instant debit card features to seamlessly access funds. This facilitates payments for everyday purchases, bills, and transfers without cash flow interruption.
- Managing fluctuating income – Through linked high-yield savings and checking accounts, CMAs allow fluid allocation between short-term savings and liquid cash as income and spending needs change month-to-month. This flexibility is key for fluctuating cash flows.
- Short-term savings – CMA savings accounts pay competitive interest rates up to 25x higher than national average savings account rates, with no lock-in on funds. This allows access to accrued interest anytime for unexpected expenses.
- Minimum balance waivers – Many CMA providers waive high minimum balance requirements on linked accounts, reducing cost burdens. This allows fee-free access even with lower balances.
Limitations and Risks of Cash Management Account
However, CMAs do have some constraints:
- Limited investment options – The investment capabilities in CMAs are restricted to basic money market and CD options. Unlike brokerage accounts with stocks, bonds, funds, and more.
- Account fees – While often waived with minimum balances, CMAs may charge account maintenance fees around $100-$300/year if balances drop below thresholds ranging from $2,500-$15,000.
- Lower interest rates – The savings rates, though higher than national averages, will be lower than alternatives like high-yield savings and CD rates at online banks.
- No investment growth – While safe, CMAs do not provide equity investing for long-term growth beyond modest interest accumulation.
Also Read: What Is a Bank Sign-Up Bonus?
What Is a Brokerage Account?
Brokerage accounts are investment accounts offered by brokerage firms that allow you to buy and sell various securities like stocks, bonds, mutual funds, ETFs, options, futures, and more. Top brokers include Charles Schwab, Fidelity, TD Ameritrade, E*Trade, and Interactive Brokers.
Primary Advantages of Brokerage Accounts:
The main objective of opening a dedicated brokerage account is to invest money across diverse asset classes like stocks, bonds, real estate, commodities, and cash equivalents. This asset diversification aims to earn potentially higher returns over long periods of time compared to savings accounts and CDs.
Specifically, equity investments like stocks historically return around 10% annualized when held for decades, compared to less than 1% in bank savings accounts. This growth potential over long time horizons is the main appeal of brokerage accounts.
Benefits of Brokerage Account:
Key strengths of brokerage accounts include:
- Wide range of investment options – Invest across domestic and international stocks, bonds, mutual funds, ETFs, options, futures, and more. This diversification can reduce portfolio risk over the long run.
- Potential for higher returns – Earn higher average returns through equity and bond investments over decades compared to cash and CD products. Even passive index funds significantly outpace savings interest rates.
- Customized portfolios – Select individual assets or use professionally managed portfolios tailored to your goals. This customization provides control over aligned investments.
- Robust research and tools – Take advantage of sophisticated investment research, analysis, education, and planning tools. This can lead to more informed investment decisions.
Key Risks of Brokerage Accounts
However, brokerage accounts have downsides:
- Market volatility risk – Equity investments like stocks carry higher risk and the potential for significant short-term losses given market volatility. Diversification only reduces so much risk.
- No FDIC insurance – Brokerage accounts do not carry FDIC protection. SIPC protects against brokerage insolvency up to $500,000 max but does not prevent investment losses.
- Liquidity limits – Accessing funds from illiquid assets like real estate without liquidating may be difficult. This impacts meeting short-term cash needs.
- Potentially higher fees – Brokerage accounts tend to have higher commissions, account fees, and managed portfolio expenses compared to CMAs.
Cash Management Account vs Brokerage Account
While CMAs and brokerage accounts share some commonalities, their differences across factors like liquidity, risk, investment options, and costs can influence which is more suitable:
A. Risk Appetite and Loss Tolerance
Brokerage accounts carry more investment risk and potential for losses given daily market volatility across stocks, bonds, funds, and other securities. CMAs provide stable principal protection through FDIC-insured cash holdings and money market funds.
For example, a 20% drop in the stock market could result in sizable losses in a brokerage account. Meanwhile, the cash in a high-yield savings account within a CMA remains fully protected and accessible.
So for those with very low risk tolerance, CMAs may be more suitable.
B. Investment Menu and Asset Class Options
Brokerage accounts provide an extremely vast array of investment options – domestic and foreign stocks, bonds, mutual funds, ETFs, options, futures, commodities, and more. This complete menu allows cheap diversified access to every asset class.
Conversely, CMAs offer only limited investment options like money market funds and CDs. The narrow selection lacks stocks and bonds.
Therefore, brokerage accounts are ideal for those seeking diversification across many asset classes for growth. CMAs are better suited to low-risk cash needs.
C. Liquidity and Account Accessibility
CMAs offer rapid access to cash holdings through unlimited check writing, debit cards, and instant account linking/transfers. Accessing invested funds from brokerage accounts often requires days for securities to sell before cash is available.
So CMAs provide quicker access to highly liquid cash to cover near-term spending needs, emergency expenses, or other cash flow needs. Brokerage accounts have more barriers to fast access.
D. Account Fees and Minimum Balance Requirements
Though account fees vary across providers, brokerage accounts tend to have higher commissions on trades, annual account fees, and portfolio management expenses compared to CMAs.
However, brokers usually waive fees conditional on minimum account balances – often $25,000 or more. CMA minimums range from $2,500-$15,000 to avoid monthly maintenance fees.
V. Choosing the Optimal Account
In choosing between CMAs and brokerage accounts, it is critical to assess your personal financial goals and circumstances, including:
- Your risk tolerance – can you withstand temporary losses?
- Expected liquidity needs – how quickly will you need access to cash?
- Desired account features – what asset classes do you want to invest in?
- Target average account balance – can you meet minimums to waive fees?
Where suitable, using both CMAs and brokerage accounts together can provide the ideal mix of cash management and investing for growth.
|Cash Management Account
|Managing daily cash flow needs in one account
|Investing for potential higher returns
|FDIC insurance on deposits Interest on savings Easy access to cash
|Wide investment options Higher growth potential Customized portfolios
|Low risk with guaranteed principal
|Higher risk depending on assets
|Highly liquid cash access
|Can be less liquid depending on assets
|Limited to cash equivalents
|Stocks, bonds, mutual funds, ETFs, etc.
|Low account fees if minimum balance maintained
|Commissions, management expenses, account fees
For example, keeping 3-6 months’ expenses in a high-yield CMA savings account, while investing the remainder in stocks and bonds through a brokerage account can balance stability and growth.
CMAs and brokerage accounts fulfill complementary roles in a holistic financial plan when used purposefully. CMAs optimize convenient daily cash management while brokerage accounts help build long-term wealth through varied investments.
With a comprehensive grasp of the accounts’ distinct advantages, limitations, risks, and costs, individuals can construct an integrated strategy using the best features of both CMAs and brokerage accounts tailored to their financial profile and needs. The optimal solutions combine efficient cash management with growth investing for both short and long-term financial success.