Pete Pichaske, BridgeTower Media Newswires
If you're not familiar with cash management accounts, you probably will be soon.
The accounts are part of a wave of changes washing over the financial industry, fueled by the move toward virtual banking and a heightened interest in financially secure retirements.
A recent article on thebalance. com, a website that covers personal finance, defined a cash management account as "a brokerage account designed for managing cash, making payments and earning interest." Such an account, the article went on, "allows you to use one financial institution for your saving and investing needs," and typically come with a debit card, a checking account and online bill-paying services.
The accounts also come with an interest rate higher than the usual bank account.
Cash management accounts were first used in the 1980s, according to Rob Carpenter, CEO and president of Baltimore-Washington Financial Advisors, Inc., a Columbia-based financial advisory company that manages some $1 billion in assets. The accounts have become increasingly popular in the past 10 years or so, he added, as more people become disenchanted with traditional banks.
"Banks are not really giving you a good return on your money," he said, and their fees are more of a disincentive.
His firm, Carpenter said, offers cash management accounts linked to different money markets, which means they earn at least 2% interest. Clients also can set aside other sums of money in slightly riskier accounts that earn 3 or 4% interest, or more.
Typically, he said, his firm recommends that clients keep less than $50,000 in their checking account and invest the rest in accounts that provide at least 3% interest.
The thebalance.com article noted many benefits to cash management accounts, which include: your money is put to work maximizing investment balances and profitability; the account is FDIC-insured and easy to set up; ATM rebates, mobile deposits and other features are available; and, managing your cash is more efficient.
But the article notes possible disadvantages to the accounts. They include: possible monthly fees; keeping money in the account means not making use of higher-yield investments and higher interest rates available at online banks; and, potential processing errors.
The personal finances company NerdWallet, in a recent website posting, noted similar pros and cons to using cash management accounts.
The pros included: Fewer accounts to manage; higher interest rates than traditional banks; benefits similar to checking and savings accounts; and, FDIC insurance.
The cons included: The possibility of missing out on higher-interest investments, such as index funds; higher interest rates at some savings accounts at online banks; and, the lack of face-to-face customer service.
NerdWallet concluded: "If you're a fan of online banking, chances are that you'll like the similar features that cash management accounts have to offer. While face-to-face customer service might be swapped for virtual assistance, the savings in overhead allows some of these cash accounts to offer high-interest rates and streamlined account features. Make sure you evaluate what a CMA offers and what fees it charges before you pull the trigger on opening an account."
Alexandra Stewart, a financial adviser with the Baltimore-based Buttonwood Financial Advisors, noted that cash management accounts are designed to be simple.
"They're essentially a hybrid of a bank account and an investment account that are offered by brokerage firms, rather than banks," she said in an email response to questions. "They combine two traditionally separate services, saving and investing, so that you can use one financial institution for both. Consider it a one-stop shop."
While the same pros and cons apply to all investors, the experts agree that cash management accounts are better suited to some people than others.
"They're useful for people who like to keep everything in one place," said Stewart. "They're also useful for individuals or families holding onto a large cash reserve, perhaps for an upcoming purchase, and they want to earn a little more interest without sacrificing liquidity."
On the other hand, lower-income individuals or families living more day-to-day and not especially interested in saving for the future would benefit les from the accounts, according to Carpenter. Also, he said, people who make a lot of face-to-face transactions who put a lot of checks in their account, for example might want a physical bank to use.
Still, as more and more traditional banking functions, including depositing checks, can be done with a simple swipe on a smartphone more and more people look for higher returns on their savings and a simple way to manage their money, the popularity of cash management accounts is likely to grow.
"As high-yield online savings accounts grow in popularity, we expect for cash management accounts to grow in popularity as well," Stewart said. "They offer attractive features, and people generally value simplicity."
Published: Mon, Jan 20, 2020
