If you've invested with a brokerage firm in recent years, you may have noticed that your brokerage or rival ones may be looking to offer a product called a cash management account – as a number of brokerages worldwide have been trying to provide one to their clients in the recent past.
These accounts are very similar to a savings account and promises to 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 cash management account with a brokerage? Here are some things to consider when deciding whether to let your brokerage help you manage your cash.
How cash management accounts are different from bank accounts
When compared to savings accounts, most brokerages globally don't currently offer higher interest rates on their cash management accounts. While some used to offer interest rates higher than the near-zero rates seen on average for savings accounts, they hardly offer as much since the pandemic hit worldwide.
Cash management accounts have benefits that are similar to savings accounts. Some offer such account benefits as free ATM access, debit cards, mobile check deposit, early direct deposit and no monthly maintenance fees.
Transfers between cash management accounts and investing accounts can be faster. When you have a cash management account 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 US-based financial blogger and podcaster, 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. So it’s a matter of convenience for the brokerage’s investors.
“It is nice that I can do a transfer to that account instantly,” said Parker. “If I had my primary brokerage account with Fidelity, it would be the same way.”
What are the downsides or risks of a cash management account?
Interest rates have dropped worldwide and the financial industry is currently in a low-rate environment, meaning interest rates on deposit accounts are particularly low at the moment.
Several cash management accounts 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.
For cash management accounts, customer service is typically online-only. Most 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.
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, the managing editor of the US-based investing education website The Money Manual.
“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 advantage.”
One of the other big practical perks when it comes to keeping a cash management account 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,” added Bourne.
Such as with any financial product, consumers should do their research to determine whether a cash management account makes sense for their lifestyle and if the perks work for their spending, saving and investing habits.