Cash Management Accounts (CMAs) vs Brokerage Accounts: How They Compare

By Walecia Konrad · April 17, 2023 · 6 minute read

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Cash Management Accounts (CMAs) vs Brokerage Accounts: How They Compare

Investors need a brokerage account to buy and sell securities, but they can also take advantage of a cash management account (CMA), which is offered by a brokerage firm. It can be easy to confuse the two types of accounts, even though they are quite different.

To provide some clarity about the difference between a brokerage account vs. cash management, this article will examine some of the pros and cons of each. Let’s start with some definitions.

What Is a Cash Management Account?

Cash management accounts can offer similar features as the traditional checking or savings accounts that banks offer. CMAs allow you to deposit money and earn a set interest rate. Most provide access to your money via debit cards, in addition to checks.

What Is a Brokerage Account?

Brokerage accounts allow customers to deposit money which can then be used to buy and sell investments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other securities.

There are three main types of brokerage accounts.

•   A full-service brokerage firm usually provides a range of financial services including financial advice and automated investing.

•   A discount brokerage offers lower fees in exchange for fewer financial planning services.

•   Online brokerages allow you to trade via the internet and often charge the lowest fees.

Recommended: How Does a Brokerage Account Work?

Similarities Between a Cash Management Account and Brokerage Account

Although brokerage and CMA accounts work in different ways, there are some similarities.

Both Offered by Brokerages

Both types of accounts are offered by brokerage firms. When you open a brokerage account and link it to a CMA at the same firm, it can provide a convenient way for customers to transfer assets from one account to another when they buy and sell securities.

The Potential to Earn Returns

When considering a brokerage account vs a cash management, remember that they both offer customers the potential to earn money on deposits or investments.

In a self-directed brokerage account you have the potential to earn returns from your investments, although you also face the risk of loss that likewise comes with investing in stocks, bonds, and other securities.

A cash management account is generally a safer place to keep your money. The risk of losing money is lower than putting your money into securities, and you’ll earn interest on your deposits. But those rates are generally lower than the gains you might see from other investments.

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The Brokerage Account vs Cash Management: What Are the Differences?

Cash management accounts and brokerage accounts work in different ways. CMAs mirror traditional savings and checking accounts and brokerage accounts are strictly for investments. Here are the details:

Earnings Come From Different Places

In a brokerage account, potential earnings come from the gains you might see when investing in stocks, bonds, and other investments. Investing in securities also comes with the risk of losses.

Earnings in cash management accounts come from the interest rate paid on your balance. Usually, these rates are similar to the rates paid in traditional savings accounts.

CMAs also act like traditional checking accounts because you can use checks or a debit card for purchases. But traditional checking accounts don’t usually pay interest, or if they do the rate is often lower than a CMA.

Earnings on Brokerage Accounts Are Potentially Higher Over Time

Over time, the average return of the stock market has substantially outperformed what you can earn from interest in a savings account. With those potential earnings comes market risk, meaning you may experience losses too, especially in the short-term.

To manage a brokerage account or work with a broker, you need to take into account your tolerance for market risk and what combination of stocks and bonds is right for your financial goals.

Insurance Is Provided by Different Sources

When you open a new bank account, up to $250,000 of your cash deposits are covered by the Federal Deposit Insurance Corporation (FDIC). Some banks, however, participate in programs that extend the FDIC insurance1 to cover millions.

Most brokerage accounts, however, are insured by the Securities Investor Protection Corporation (SIPC) in the event of theft, fraud, or if the broker fails. The SIPC offers up to $500,000 of coverage total, per person, if such a loss were to occur. The SIPC does not cover investment losses.

Cash management accounts have so-called sweep accounts, which are insured by the FDIC. Here’s how it works: CMAs sweep funds into a variety of FDIC-insured banks. If you make a $200,000 deposit, for example, your money may be split into four $50,000 deposits in four different bank accounts. (The CMA provider manages this process — you only see your total CMA balance.)

Before your money is moved into the different accounts, your deposit is protected by SIPC insurance if the brokerage is an SIPC member.

What Money in These Accounts Can Be Used for

Because CMA accounts have checking and/or debit cards, you can use that money for purchases or bill paying or ATM withdrawals.

Money kept in a brokerage account is strictly used for trading securities. But by linking a CMA to your brokerage account, you can easily transfer cash from one to the other, for investing purposes.

The Takeaway

When considering a brokerage account vs. cash management, it helps to know what makes these accounts different, and how they can work together. While a brokerage account is for trading securities, and comes with the risks associated with investing in securities, a cash management account (CMA) is similar to a traditional checking or savings account. There’s almost no risk of losing money, and your deposits can earn interest. Because both are offered at brokerage firms, you can have both, and use your cash management account as a place to keep funds you don’t wish to invest.

To determine which account is right for you or if you should have both, it’s best to look closely at your financial goals and determine what type of returns and account features suit your aims.

SoFi Checking and Savings is an all-in-one account that blends the features of checking and savings accounts. With the special “vaults” feature, you can separate your savings from your spending, earn competitive interest on your total balance, and pay no account fees or monthly fees.

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Are brokerage accounts and cash management accounts the same?

No. Brokerage accounts are used to buy and sell securities. Cash management accounts act more like traditional bank savings and checking accounts, but are provided by brokerage and other non-bank financial institutions. Sometimes the accounts may be linked. But the accounts earn money from different sources.

Can you keep cash in a brokerage account?

No. You can use cash deposits in your brokerage account only to purchase securities. A cash management account, on the other hand, is similar to a traditional savings or checking account, so cash balances are welcome (and earn interest).

Do cash management accounts and brokerage accounts work together?

In most cases, yes. If you have a CMA and a brokerage account at the same brokerage firm and the accounts are linked, you can use your CMA to move cash into your brokerage account in order to execute trades. You can also transfer the money from sales of securities into your CMA for safekeeping. The combination gives you the ability to purchase stocks, bonds, mutual funds and other securities, but also offers the flexibility, liquidity and interest earnings of traditional bank accounts.

Photo credit: iStock/Aja Koska

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