How Does a Cash Management Account Compare to a Brokerage Account?

Cash management accounts (CMAs) and brokerage accounts are two types of accounts offered by brokerages, though they operate differently. Brokerages (think Robinhood, Betterment, and SoFi Money) have started to offer CMAs in addition to their investment account offerings to allow customers to hold money while earning a set interest rate. 

How Does a Cash Management Account Work?

A CMA operates in a similar way to a savings or checking account but that also has some features similar to an investment account. CMAs tend to be offered by financial service providers outside of banks and may offer above-average interest rates. Since CMAs are often offered by online brokerages with low overhead, they are usually available with low or no fees to customers. As with any type of financial account, there are both benefits and drawbacks to consider. 

Benefits: 

• It can be nice to enjoy the benefits of multiple types of accounts (checking, savings, investment) in one product/account. 
• Some offer higher interest rates than traditional banks
• They offer similar benefits to savings and checking accounts
• Many are protected by FDIC insurance via third-party bank partners

Drawbacks:

• While they offer higher interest rates than banks, you may still miss out on even higher interest opportunities via index funds or other investments
• Some online banks may offer savings accounts with higher rates
• Online brokerages do not offer face-to-face service

What is a Brokerage Account?

A brokerage account can be used to buy and sell securities, including mutual funds, bonds, and stocks. Most investors access the stock market through brokerage accounts and use them to manage investments. Like a bank account, money can be transferred into and out of brokerage accounts as the customer sees fit. 

Brokerage accounts are also called taxable accounts as any income earned from investing through a brokerage is considered a capital gain and taxed accordingly. This differs from some retirement accounts which abide by different tax rules that are favorable for retirement investing and saving.

How Do the Two Compare?

To compare CMAs with brokerage accounts, let’s look at what they both have in common. To start, both account types are offered through brokerages and may earn the customer returns on cash. In many cases, you can link both types of accounts to each other if they are under the same brokerage.  

There are quite a few differences between CMAs and brokerage accounts, including where earnings come from. With CMAs, you earn interest from the CMA provider, but brokerage account income is based on market performance. The potential risks and rewards are much greater with brokerage accounts depending on how your investments perform, while CMAs earn set interest rates. 

Customers can often use money in a CMA just like they would a checking or savings account (for example, to make purchases or pay bills via a payment card or check). Brokerage accounts can only be used to buy, sell, and trade securities. 

Deciding which account is right for you depends on your financial goals, needs, and expectations. Understanding how CMAs compare to brokerage accounts can help you make an informed decision about the best place to keep your money.