Should You Bank With Your Brokerage?
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If you’ve invested with a brokerage firm in recent years, you may have noticed that your brokerage offers a product called a cash management account. These accounts are very similar to a checking or savings account and typically provide competitive interest rates, debit cards and other money management features. However, those services aren’t always standard.
So what, then, would be the appeal of opening a CMA with a brokerage? Here are some things to consider when deciding whether to let your brokerage help you manage your cash.
How are cash management accounts different from bank accounts?
Perhaps the most crucial distinction between a CMA and a bank account is that CMAs are offered by nonbank financial institutions that do not possess a bank charter. Usually, this would mean that CMAs cannot provide their customers federal insurance on their balances, but many brokerages partner with chartered banks that sweep customers’ funds into bank accounts behind the scenes. That allows them to offer insurance from the Federal Deposit Insurance Corporation on customer balances.
What are the pros and cons of cash management accounts?
Pros
Interest rates tend to be higher than rates at traditional banks. Though some brokerages don’t offer much interest on their CMAs, others offer significantly higher interest rates than the national average of 0.06% for savings accounts. Robinhood Cash Management, for example, offers 0.30%, and SoFi Money offers 0.25% with a $500 minimum balance.
CMAs have benefits that are similar to checking and savings accounts. Some CMAs offer such account benefits as free ATM access, debit cards, mobile check deposit, early direct deposit and no monthly maintenance fees.
Transfers between CMAs and investing accounts can be faster. When you have a CMA at your brokerage, you may be able to avoid a waiting period between account transfers so that you can invest your money faster.
Joel Parker, a financial blogger and podcaster from Massachusetts, has a Fidelity Cash Management Account and appreciates the speed of transfers that would otherwise take between one and three days from a non-Fidelity account.
“I use Fidelity for my daughter’s 529 account, and it is nice that I can do a transfer to that account instantly,” Parker says. “If I had my primary brokerage account with Fidelity, it would be the same way.”
Cons
Interest rates have dropped. The financial industry is currently in a low-rate environment, meaning interest rates on deposit accounts are particularly low at the moment. Several CMAs that launched in recent years had notably high interest rates at first, but they dropped significantly in mid-2020 after the start of the COVID-19 pandemic.
Other things to consider
FDIC insurance is usually only available through third-party banks. Since brokerage firms aren’t banks, they typically have to partner with banks to offer FDIC insurance. Brokerages sweep customer funds into FDIC-insured accounts behind the scenes so that they’re covered.
CMA customer service is typically online-only. Most CMA providers offer only remote customer service because they don’t have branches. As a result, customers who open an account will need to be comfortable with service options that aren’t in person.
on Wealthfront's website
Wealthfront Cash Account
4.50%
$1
on Betterment's website
Betterment Cash Reserve – Paid non-client promotion
5.00%
$0
Can a cash management account make it easier to invest?
When it comes to investing, timing can be critical. For example, missing a day or two of having your cash in the market — say, the amount of time it takes to transfer cash from an outside account into your investing account — could mean losing out on market gains. By having all of your accounts in one place, you can take advantage of vital time in the market to potentially earn more money on your cash.
“First and foremost, you are likely setting up a one-stop-shop for yourself so you can bank, save and invest all in one,” said Leah Bourne, by email. Bourne, the managing editor of the investing education website The Money Manual, also added, “Many of the companies that offer these accounts have made the ability to transfer money between accounts really, really easy. If you are actively investing, this is a big pro.”
One of the other big practical perks when it comes to keeping a CMA with your brokerage? You have less to keep track of by keeping your cash accounts and your investment accounts at the same place.
“That means you’ll have one app on your phone instead of a few and will be seamlessly able to monitor your cash account and your brokerage account all in one spot,” Bourne says.
Such as with any financial product, consumers should do their research to determine whether a CMA makes sense for their lifestyle and if the perks work for their spending, saving and investing habits.
