The average interest rate for traditional savings accounts today hovers around 0.09 percent — but consumers can earn 10 to 20 times more interest on their money by giving high-yield options a shot.
While banking customers have likely heard of high-yield online savings accounts, less familiar is a relatively new product that has come into its own only this year: the cash management account.
WHAT IS A CASH MANAGEMENT ACCOUNT?
A cash management account, sometimes called simply a cash account, is a hybrid product that combines features similar to those of checking and savings accounts. CMAs typically offer high interest rates — quite a bit higher than those at brick-and-mortar banks — and online-only customer service.
There’s an important distinction between cash management accounts and more traditional high-yield savings accounts: CMAs aren’t offered by banks, but by nonbank financial service providers, like brokerages or investment firms. These providers partner with banks behind the scenes to sweep customer funds into bank accounts, thereby providing FDIC insurance for customers’ cash.
Offering a CMA lets brokerage firms create more “stickiness” with their customers, said Ron Guay, a financial adviser in Sunnyvale, California.
“The longer-term play is to leverage the relationship and upsell the customer to move these funds into brokerage accounts, which these firms charge a management fee on,” Guay said via email.
But even without signing up for a brokerage account, customers can take advantage of a CMA. Here’s what to know.
BENEFITS OF CASH MANAGEMENT ACCOUNTS
STRONG INTEREST RATES FOR SHORT- TO MEDIUM-TERM SAVINGS. While retirement savings are better stored away in an investment account, money for an emergency fund or short-term savings goals is well-suited to cash management accounts, where funds can earn relatively high interest but can also usually be quickly cashed out.
ACCOUNTS ALL UNDER ONE ROOF. Cash management accounts can typically be linked to other accounts at the same brokerage, such as investment accounts. That’s convenient for customers who want to transfer money seamlessly between their invested funds and a CMA.
TECH-SAVVY SERVICES. CMA providers tend to be online-only, so their desktop and smartphone applications are usually well-designed and offer remote customer service options.
SOLID ATM REIMBURSEMENTS, DEPENDING ON THE PROVIDER. Since CMA providers aren’t banks, they don’t have their own ATMs. As a result, most make access easier by reimbursing ATM fees. Fidelity’s cash management account, for example, comes with a debit card and automatically reimburses all ATM fees.
USUALLY NO MONTHLY FEE. Most CMAs don’t charge a monthly fee for their services; many traditional checking accounts do.
NO FEDERAL RESTRICTIONS ON WITHDRAWING MONEY. Savings accounts at banks are federally restricted to allow only a maximum of six free transactions per month; CMAs don’t have that restriction.
FDIC-INSURED THROUGH PARTNER BANKS. Cash management account issuers partner with banks to sweep customer funds into FDIC-insured accounts, which allows these nonbank financial service providers to extend federal insurance to customers’ cash without needing a bank charter.
DRAWBACKS OF CASH MANAGEMENT ACCOUNTS
FLUCTUATING INTEREST RATES. Though it’s not unique to cash management accounts, it’s worth noting that CMA interest rates can change frequently and without warning. A CMA provider might advertise a flashy, high annual percentage yield only to slash it a few weeks later. Betterment, for example, launched its Betterment Everyday cash management account in July with an APY of 2.69 percent, and then dropped it significantly in the following months. As of this writing, its highest-tier APY is 1.78 percent.
NOT ALL CMAs MAKE IT EASY TO WITHDRAW AND DEPOSIT CASH. Some CMA providers — Wealthfront and Personal Capital, for example — allow only electronic transfers in and out of your account, which means it may take a day or longer to move your money into a linked bank account. That could be a problem if you’re in a pinch and need to withdraw cash quickly.
RETIREMENT ACCOUNTS AND SOME ONLINE BANKS AND CDs HAVE HIGHER APYs. Retirement accounts, meant for long-term savings, have much higher interest rates than CMAs, although they’re less liquid and you’ll likely pay fees or penalties if you try to access them early. And some high-yield online savings accounts and certificates of deposit match or exceed the interest rates of CMAs.
ONLINE-ONLY SERVICE MAY BE A CHALLENGE. Most cash accounts offer only remote assistance, via phone, email or social media direct message. That may not be a good fit if you prefer in-person customer service.
SHOULD YOU OPEN A CMA?
Cash management accounts sport some intriguing pros — but it’s also important to look at the cons. Do you prefer having access to in-person customer service? Do you want to stash money away for retirement and let it earn as much interest as possible? If so, a cash management account might not be for you.
But if you’re attracted by higher interest than most brick-and-mortar savings accounts offer, have or intend to open an investment account and are happy with remote customer service, then a CMA may be a good place to park your short- to medium-term savings.