What Is a Cash Management Account?

A cash management account (CMA) is a type of account offered by many financial institutions that combines features of checking, savings, and investment accounts. This kind of account is designed to streamline an individual’s financial operations by providing a “one-stop shop” for multiple banking activities.

The key features of a cash management account include the ability to deposit and withdraw money, write checks, make electronic transfers, and sometimes access automated teller machines (ATMs). Many CMAs also allow you to earn interest on the cash held in the account. In some cases, the interest rates may be higher than those provided by traditional savings accounts.

Cash management accounts often come with additional features like automatic cash sweep (where excess cash is automatically moved into an investment account or money market fund), debit cards, and overdraft protection.

What Is a Brokerage Account?

A brokerage account is an investment account that an individual opens with a brokerage firm. The primary purpose of this account is to invest money in various financial instruments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other securities. The money deposited into the brokerage account can be used to buy and sell these investments.

While a brokerage account doesn’t typically provide the same breadth of services as a cash management account, it can offer higher potential returns through investing. And, increasingly, many brokerage firms are incorporating features like check writing and debit cards.

Brokerage accounts are best-suited for those who have some knowledge of the financial markets and are looking to grow their wealth over the long term.

Cash Management Account vs. Brokerage Account: Key Similarities

Despite their different primary functions, cash management accounts and brokerage accounts share some similarities. Both accounts:

1. Offer an avenue for wealth growth: CMAs offer interest-bearing features, while brokerage accounts provide opportunities for investment gains.
2. Have potential for higher returns than traditional savings accounts: Brokerage accounts can provide substantial returns through investments, while some CMAs offer competitive interest rates.
3. Flexibility: CMAs’ various features and kinds of account activities make them useful for different banking activities.
4. Are offered by many financial institutions: Both types of accounts are available from a variety of financial institutions, including traditional banks, online banks, and brokerage firms.

Cash Management Account vs. Brokerage Account: Key Differences

While there are similarities between CMAs and brokerage accounts, there are also significant differences:

1. Primary purpose: The primary purpose of a CMA is to manage daily cash flow and offer convenience and liquidity for banking needs, while a brokerage account is designed specifically for investing in financial securities.
2. Access to funds: Funds in a CMA are typically easier to gain access to than those in a brokerage account. Withdrawals often can be made without penalties, unlike the fact that early withdrawal of certain investments in a brokerage account that may incur fees.
3. Risk level: Cash in a CMA generally carries less risk, as it isn’t subject to market fluctuations like investments in a brokerage account are. However, this also means potentially lower returns.
4. Account features: CMAs often come with features like debit cards, check writing, and ATM access, which are usually not offered with brokerage accounts.

Choosing an Account Type

Choosing between a cash management account and a brokerage account depends on your individual financial goals, risk tolerance, and banking needs.

If you’re looking for an account that combines the features of checking, savings, and potentially investment accounts, and you value the convenience of having everything in one place, then a cash management account may be right for you. It’s also a good choice if you prefer easy access to your money and lower risk. On the other hand, if your primary goal is to invest and grow your wealth over the long term, and you’re comfortable with the higher risks associated with investing in the stock market, then a brokerage account could be more suitable.

It’s also worth considering that these two account types are not mutually exclusive. Many individuals may find it beneficial to have a cash management account and a brokerage account. You could use the CMA for day-to-day financial management and saving for short-term goals and use the brokerage account for long-term investing and wealth building.

The Bottom Line

Cash management accounts (CMAs) and brokerage accounts each offer distinct features and benefits. CMAs provide a consolidated stop for banking needs with check writing, savings, and sometimes investing options. They are a great choice if you value convenience, easy access to your money, and lower risk. On the other hand, brokerage accounts are primarily designed for investing in the financial markets and can offer potentially higher returns, albeit at a higher risk.

Your choice between a CMA and a brokerage account, or potentially using both, should align with your financial goals, risk tolerance, and specific needs. Always conduct thorough research or consult with a financial advisor before making such decisions to ensure the best fit for your financial situation.