What Is a Cash Management Account? 

In 1977, Merrill Lynch decided to take a chance on a radical idea known as a cash management account. The concept was simple: blend traditional banking services with broker services into a single charge. The gamble paid off as the cash management account was a smashing success and forever changed the way Wall Street operated. 

Nearly 50 years later, cash management accounts are still a highly viable banking account option. These accounts can be especially beneficial for people who have a lot of cash to deposit. With a cash management account, account holders can keep it in one place and use it to start investing. Business owners often prefer using these accounts as they offer more convenience and better benefits than regular bank accounts. 

What is a cash management account and how does it work?

A cash management account is a cash account that combines several aspects of checking, savings, and investment accounts. The idea is to take the best features of each of these different accounts and roll them into a single charge. This combination of convenience and unique benefits is hard to pass up, especially for business managers, corporate treasurers, and chief financial officers. 

It’s extremely rare for a traditional bank or credit union to offer cash management accounts. Cash management accounts are usually only available to customers via a brokerage firm. Typically, the brokerage firm will partner with one or several multiple financial institutions as a means to store your funds. 

If you deposited $100,000 into your cash management account, the firm might deposit $20,000 into five separate bank accounts. Despite the funding being protected by several different banks, the account is still operated solely by the firm.

The exact details of each cash management account can vary depending on the provider. However, most accounts will typically include a checkbook, debit card, or combination. You’ll be able to use your cash management account like a traditional checking account. You can deposit/withdraw funds as needed, make electronic transfers and mobile check deposits, and use a check/debit card to make purchases. 

How are cash management accounts different from other accounts?

The idea behind cash management accounts is to provide users with easy access to all of their financial accounts. By combining these accounts, users can enjoy unique benefits that wouldn’t be possible with normal bank accounts. 

Here are a few ways that a cash management account differs from other accounts: 

• Checking. The main features of a checking account are also available with a cash management account. You’ll be able to check writing, use a debit card, and make cash balancewithdrawals/deposits at ATMs with no ATM fees. The key aspect that separates the two is that checking accounts come with little to no interest options. On the other hand, the annual percentage yield (APY) of cash management accounts can reach as high as five percent in some cases. 
• Savings. Unlike checking accounts, most savings accounts do come with interest rates. Some rates are higher than cash management accounts, and some are lower. The main downside to having a savings account is that most banks and credit unions will cap off monthly transactions at six. The rule was temporarily suspended during the pandemic, but it could be reinstated at any time. There are no such limits for cash management accounts. 
• Money market accounts. A money market account functions in a very similar way to a cash management account. The main difference is that an individual bank offers money market accounts. Keeping all your money in one bank can be risky if your funds exceed $250,000. The FDIC only insures bank accounts up to this amount, and any amount exceeding it will be uninsured. Since cash management accounts use several banks, you’ll be able to insure more than the cap of $250,000 properly.

What are the benefits of cash management accounts?

A long list of benefits is only available with a cash management account. You can enjoy the majority of these benefits separately, but only a cash management account will allow you to experience all of them:

• Easier investing. Cash management accounts are almost exclusively offered by brokerage firms specializing in investing. Since all your money will already be in their system, it will be much easier to use your funds to seize an investment opportunity or establish automated investments. There is often a delay when transferring money from a traditional bank account. The prolonged process can make a world of difference in the stock market.
• Little to no fees. There are two reasons why cash management account fees are so low. The first reason is that most brokerage firms that offer these accounts are online. The low overhead of being an online-only service can help them to limit costs and pass the savings onto their customers. The second reason is that the firms will use your money to make investments. You’ll still have access to your money, but the firm will make so much money off your money that they can still profit without tacking on fees. 
• FDIC protection. The FDIC insures every financial account in central banks and credit unions for up to $250,000. Since brokerage firms routinely use several banks to store your money, you can have more than $250,000 insured. If you had a standard bank account with $400,000, then only the first $250,000 is guaranteed. But a cash management account worth $400,000 could be split between five banks, and every dollar would be insured instead. Depending on the number of banking partners that the firm has, you could have more than $1 million with FDIC insurance protection. 
• Checking account features. Not every cash management account will offer the same features, but most function precisely like a checking account. You’ll be able to set up direct deposits, establish online bill pay, use thousands of ATMs for free, make mobile deposits, create banking alerts, and enjoy cashback on specified purchases. All of these features are available with the bonus that you’re earning interest. 
• Solid interest rate. Other options offer a higher interest rate, but the average rate for a cash management account is still pretty solid. The main benefit is that you’ll enjoy this interest rate without giving up access to your money. Other options will usually lock up your money for a specified time so if you withdraw these funds, you could incur a significant penalty. A cash management account, on the other hand, allows you to make money via interest while still using your funds when needed. 
• Simplified banking. Having multiple bank accounts can be challenging to juggle effectively. Most bank accounts include monthly maintenance fees that are only waived if specific requirements are met. The more versions you have, the more likely you will fail to meet these requirements and incur a fee. A cash management account bundles all of these separate accounts into one. You’ll have a single account capable of providing the same benefits as your multiple accounts.

Are there any downsides of cash management accounts?

These accounts aren’t perfect and come with a few downsides. You should be aware of the flaws before you open an account.

• The interest rates of a cash management account are typically lower than other high-yield saving account options. For example, index funds, certificates of deposit, and U.S. treasury bills will all come with a much higher APY than most cash management accounts.
• There are very few, if any, cash management accounts that allow you to create joint accounts or trust accounts. A cash management account is typically intended for business operations and can be lacking regarding marriages or other partnerships. 
• Some cash management accounts have limited features, such as online bill pay or cashback reward programs. These features are pretty standard, but it’s not guaranteed you’ll have them.
• Most cash management accounts come with very little or no monthly fees. However, some accounts feature relatively high minimum balance requirements. You could incur a penalty if your account balance dipped below this threshold. 
• There’s no local branch that you can visit when you have any questions or concerns. All customer service interactions with your cash management account will come online or via telephone. This can be particularly frustrating when you have an issue where time is of the essence. 

Is a cash management account right for me?

Opening a cash management account will come with several unique benefits and a few potential downsides. These accounts aren’t for everyone; only you will know if it’s best for you. If you own a business, want to start investing heavily, or already work with a brokerage firm, it might be a good idea to look into opening one. As a regular everyday person, the list of benefits might not be worth the hassle.

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