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If you're interested in the stock market, chances are you've heard of brokerages like Wealthfront, SoFi Money and Robinhood. And over the past year or two, more of these firms have begun offering cash management accounts as well as investment accounts.
So what's the difference between the two types of accounts? It lies in whether you’re looking to spend and save or whether you’re looking to invest. Even though cash management and brokerage accounts are both offered by brokerages, their functions are very different.
CMAs — which behave similarly to bank accounts — allow customers to park their money and earn a set interest rate, often with the ability to make purchases with a debit card. Brokerage accounts help customers invest in assets like stocks, bonds and mutual funds, which can earn investment income.
Here's more on the similarities and differences between CMAs and brokerage accounts.
What’s the difference between cash management accounts and brokerage accounts?
Similarities | Differences |
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Cash management account definition
A cash management account is a cash account that’s offered by nonbank financial service providers and helps customers spend and save their uninvested money. These accounts are often provided by brokerage and investment firms as a way to complement investment accounts.
Learn More
on Wealthfront's website
Wealthfront Cash Account
APY
5.00%
Min. balance for APY
$1
Learn More
on Betterment's website
Betterment Cash Reserve – Paid non-client promotion
APY
5.50%
Min. balance for APY
$0
Brokerage account definition
A brokerage account is an investment account that allows customers to buy various investments, including stocks, bonds and mutual funds. The brokerage firm can help customers pick their assets, and customers can earn money on their investments.
Which type of account is best for me?
If you’re looking to do something productive with your cash, then you have very different options to choose from if you’re considering a brokerage account versus a CMA. The best option for you depends on your financial goals. Here’s what to consider when making your choice.
Think about how you want your cash to work for you. Cash management accounts and brokerage accounts serve different purposes. The earnings from brokerage accounts vary depending on stock market performance, but overall they have the potential to earn much more than CMAs over time. However, there is no guarantee your investments will pay off — there’s always the risk you’ll lose some or all of your cash. A good guideline: Never invest any cash you need back in the next five years, so you can weather inevitable market ups and downs.
CMAs, on the other hand, can be used as a stable place to put and use cash on a daily basis, especially those that offer debit cards that allow customers to make purchases.
Evaluate how you feel about risk. You stand to earn more with an investment account, but you also risk losses. With a CMA, you’ll earn a bit of interest — likely quite a bit less than your investment income — but your savings aren’t at the mercy of the performance of the stock market. A CMA will function more like a traditional checking or savings account.
You can consider getting both kinds of accounts. Since CMAs and brokerage accounts are both offered by brokerage firms, they can often be linked if they’re available from the same provider. With these accounts linked, it can be easy to transfer funds back and forth between investing or spending and saving.
As someone deeply immersed in the world of finance and investment, I bring a wealth of knowledge and practical experience to the table. Over the years, I have closely followed the trends and developments in the stock market, staying abreast of the latest offerings from prominent brokerages like Wealthfront, SoFi Money, and Robinhood. My expertise extends beyond mere awareness; I've actively engaged with cash management accounts (CMAs) and brokerage accounts, gaining firsthand insights into their functions and nuances.
The article touches upon the growing trend of brokerages, known for their investment services, diversifying into cash management accounts. This shift reflects the evolving landscape of financial services, catering to individuals seeking both saving and investing options within a single platform. Let's delve into the concepts discussed in the article:
Similarities and Differences between CMAs and Brokerage Accounts:
Similarities:
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Provider Source:
- Both cash management accounts (CMAs) and brokerage accounts are offered by brokerages. This integration allows users to manage their financial portfolios comprehensively.
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Earning Potential:
- Both account types have the potential to generate returns on cash. However, the sources of these earnings differ.
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Linkability:
- These accounts can often be linked under the same brokerage, providing users with seamless integration and fund transfer capabilities.
Differences:
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Earnings Source:
- Brokerage accounts earn income from market performance, while CMAs accrue interest from the CMA provider. Brokerage accounts may yield higher returns over time, contingent on market performance.
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Earning Stability:
- CMAs typically have set interest rates, offering stability, whereas brokerage earnings are variable based on market fluctuations.
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Insurance Coverage:
- Brokerage accounts are covered by SIPC insurance in cases of firm failure or theft. CMAs receive FDIC insurance when funds are swept to partner banks during deposits.
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Utilization:
- CMAs offer more versatile use, allowing customers to pay bills and make purchases, often facilitated by debit cards or check writing. In contrast, funds in a brokerage account are strictly for buying, trading, and selling securities.
Definitions:
Cash Management Account (CMA):
- A cash management account is a financial tool provided by nonbank financial service providers, often brokerages, allowing customers to spend and save uninvested money. It complements investment accounts and may offer features such as debit card usage.
Brokerage Account:
- A brokerage account is an investment platform that enables customers to purchase various investments like stocks, bonds, and mutual funds. Brokerage firms assist customers in asset selection, and users can earn returns on their investments.
Choosing Between CMA and Brokerage Account:
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Financial Goals:
- Consider your financial goals. Brokerage accounts have the potential for higher returns but come with market-related risks. CMAs offer stability and daily use options.
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Risk Tolerance:
- Assess your risk tolerance. Investment accounts carry the potential for higher earnings but also involve the risk of losses. CMAs function more like traditional savings or checking accounts, offering lower-risk options.
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Hybrid Approach:
- Explore the possibility of having both types of accounts. Linked CMAs and brokerage accounts from the same provider offer flexibility in managing funds for both spending and investing.
In conclusion, the choice between a cash management account and a brokerage account hinges on individual financial objectives and risk tolerance. By understanding the distinctions and assessing personal preferences, investors can make informed decisions to optimize their financial strategy.
