How to open a cash management account
The exact process for a beginner looking to open a brokerage account with cash management features varies from broker to broker. But the general process is the same as opening any brokerage account:
- Fill out an account application: This includes information about the type of account you want to open, and identifying information about yourself.
- Answer some questions: If you're opening a cash management account with a robo-advisor (automated investment platform), you'll also have to answer questions about your age, investment objectives (such as saving for college or retiring with $1 million), and how much risk you're comfortable with. This helps the robo-advisor determine how to best invest your money.
- Make a deposit: The easiest way to do this with most brokers is to link a bank account, but you may also be able to mail a check, wire money, or transfer assets from an existing investment account.
That's basically it. Once your brokerage account is open, you can decide how much you want to invest versus how much you want to leave in your cash management account.
How much can you deposit into a cash management account?
Most of the top cash management accounts don't have minimum balance requirements, and there are no minimums required to earn interest. And while cash management accounts typically don't have maximum balance restrictions, it's important to note that FDIC insurance will only cover a certain amount of money (typically $250,000).
A better question might be how much of your brokerage account should be left in cash. Many people stay fully invested in stocks, ETFs, mutual funds, and other investments, while others prefer to keep 10%-20% of their portfolio in cash, especially when interest rates are relatively high.
There's no perfect answer, but using a cash management account allows you to earn some interest while maintaining the financial flexibility to invest money when opportunities arise.
What investments can I buy in a cash management account?
The investments available depend on the nature of the broker offering the cash management account. Some of our top cash management brokers are robo-advisors, and are designed to create automated investment portfolios. On the other hand, some are full-featured brokers that offer stocks, bonds, mutual funds, and more.
As far as the cash management portion of the account goes, most simply deposit your money into FDIC-insured accounts offered by partner banks. However, some offer unique options like money market funds.
Can you get a cash management account from any broker?
Sort of. All brokers allow you to keep some of your money in cash (uninvested), but not all brokers offer the same features.
Specifically, some brokers don't offer competitive interest rates on cash, while others don't pay any interest at all on your uninvested funds. And only certain brokers offer cash management features such as check-writing privileges and debit card access to your cash.
Are cash management accounts safe?
Yes, because they are issued through partner banks, cash management accounts are FDIC insured, or are protected by the Federal Deposit Insurance Corporation. Technically speaking, deposits are swept into these partner banks, even though customers can still access their cash management accounts through the issuing brokerage or robo-advisor.
FDIC insurance is crucial to have with any type of cash balance account, as it protects you in the event of a bank failure. And this is different from the SIPC insurance that protects investment assets in your brokerage or robo-advisory account.
In fact, many of the best cash management accounts offer several times the standard $250,000 FDIC insurance limit because they partner with several banks. It's not uncommon to see cash management accounts that offer $500,000 to $1.5 million in maximum FDIC-insured balances.
What is a cash management account?
A cash management account, often abbreviated as a CMA, is a financial account offered by a non-bank financial firm, such as a brokerage, robo-advisor, or a financial app. While the features offered can vary, most CMAs offer some of the same features that are commonly provided by checking or savings accounts.
For example, some cash management accounts allow owners to write checks on the account, use a debit card to withdraw money at ATMs or pay at stores, and transfer money between accounts at other financial institutions. The best cash management accounts also typically pay interest, although the interest rates paid differ widely by institution.
In some (but not all) cases, you must be a customer of the brokerage or robo-advisor's investment account services in order to use its cash management account features. For example, you can't open a Betterment Cash Reserve account unless you're a Betterment investment services customer.
