Should You Shift to a Cash Management Account?

High-yield cash management accounts are popping up at brokerages nationwide, promising customers much better returns and higher insurance limits than they can get from traditional banks.

The accounts are a twist on the sweep accounts brokerages have long offered their customers, where idle cash is swept into a money market account or affiliated bank account so it can earn interest while waiting to be reinvested.

By contrast, the new cash management accounts are designed as savings or checking account alternatives. Many pay interest rates of more than 1%, and some offer debit cards and check-writing privileges. The accounts don’t typically have the fees, account balance minimums and withdrawal restrictions banks impose.

The financial technology companies fueling the trend say people have had few options to get meaningful returns while still having ready access to their cash.

“The traditional banks have been failing customers when it comes to saving for the future,” says Jon Stein, CEO and founder of robo-advisor firm Betterment, which began offering its account last summer. “It's so important if you want to build a good long-term investment strategy to be making the most of your everyday cash flow.”

The accounts are attracting customers. Betterment rival Wealthfront, which launched its cash management account in February 2019 with a 2.24% interest rate, gained $1 billion in cash deposits in the first month, says Kate Wauck, Wealthfront’s vice president of communications. Many of the new customers went on to open new investment accounts, which has doubled the robo-advisor’s assets under management to $24 billion, she says.

“It kind of went from zero to 60,” Wauck says. “It really propelled our growth.”

Wealthfront currently advertises a 4.25% interest rate, and Betterment offers 4.25%. By contrast, banks typically offer interest rates of less than 0.1%. Online bank savings accounts also offer rates over 1%, but federal banking laws typically limit customers to six withdrawals per month, while cash management accounts usually offer unlimited transfers.

Some providers — including SoFi, Aspiration and Fidelity — offer debit cards, physical checks and fee-free ATM access. Wealthfront’s cash management accounts don’t yet offer those features, but they’re coming, Wauck says. Meanwhile, Betterment is beta-testing an actual checking account and plans to roll it out to its customers later this year.

Some of the fintech companies envision a future where bill paying and other cash management could be as automated as the investment management they provide.

“Where if we see you have bills coming due or need more cash, we'll sweep money into your checking account, if you approve that,” Betterment’s Stein says. “If it seems like you have excess cash in the checking account, we'll sweep it into the savings side.”

Cash management providers typically offer $1 million or more in Federal Deposit Insurance Corp. insurance coverage, far more than the typical $250,000 limit, by dividing large deposits among several banks. This aspect of the accounts has drawn some regulatory scrutiny. The Financial Industry Regulatory Authority Inc. or FINRA, which supervises brokerages, is monitoring how the accounts are advertised to customers to see if firms adequately disclose how this feature works and that deposits are FDIC-insured only when they’re held by the participating banks.

If you want your money to be FDIC-insured at all times, you might be better off with a high-yield savings account at an online bank, which can be linked to your checking account. If you have more money than is covered by the FDIC at one bank, you can open accounts at multiple banks.

But if the idea of one-stop cash management with higher rates appeals to you, you can take the following steps:

Check out the details. Not all cash management accounts offer high interest rates, and some have account minimums or charge fees. Those that reimburse ATM fees may limit the number of fees or not cover transactions outside the U.S.

Know where your money is. Ideally the brokerage will be transparent about which banks are holding your cash. If you have more than $250,000 in your account, you may need to monitor how much is at each bank.

Don’t let large amounts of cash sit idle. Even if a cash management account isn’t right for you, you should be earning more than 0.1% on your savings. Certificates of deposit, money market accounts and high-yield savings accounts may be good options.