Investors interested in non-retirement investment accounts have likely heard of or already have a brokerage account. However, in recent years, many brokerage firms have also begun offering cash management accounts to their clients. Although offered by the same financial institution, the two accounts function very differently. Learn more about the differences below.
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What Is a Brokerage Account?
A brokerage account is a taxable investment account that allows you to buy and sell assets, such as stocks, bonds, mutual funds, and exchange-traded funds. No matter your end goal, you can move money in and out of the account as needed, earning money (or losing it) through investment activities.
You can open a brokerage account with any brokerage firm that is licensed to buy and sell securities. Large, well-known firms include places like Fidelity Investments, Charles Schwab, E*Trade and TD Ameritrade, and different accounts you could consider are self-directed brokerage accounts, robo-advisory accounts and managed accounts.
What Is a Cash Management Account?
Cash management accounts (CMAs), on the other hand, may be offered by the same institution as your brokerage account, but they are not used for investing. Rather, cash management accounts function similarly to your regular checking account. A CMA is offered by a non-bank financial institution and is often used to complement your investment accounts.
CMAs can either be held at partner banks and linked to your brokerage accounts or they can be held directly by the brokerage firm.
If you have a Fidelity investment account, for example, you can open a Fidelity CMA that is held and insured by a partner bank, have a debit card in order to spend the funds and have access to FDIC-insured, brokered certificates of deposit (CDs) so your money can earn interest.
Other brokerage firms like E*Trade offer cash management services through a cash management program, where the firm holds your uninvested cash and offers you 0.1% interest on the balance, or a cash sweep program, where the firm “sweeps” brokerage cash balances into interest-bearing partner bank accounts. In both cases, the funds are insured and the account holder has access to bonds and CDs while being able to spend the money as if it were held in a separate checking account.
However, the benefit to having a CMA and not a separate checking account has to do with the availability of your money. If you hold cash at a bank in a checking account, you will have to transfer the funds to the brokerage account prior to buying any securities. Then you would need to sell your securities, wait for the sale to clear and then transfer the funds back to your checking account in order to spend them. With a CMA, the funds are accessible at any time for investing but offer investors the flexibility to spend the cash balance when desired.
What Are the Differences Between a Brokerage and Cash Management Account?
Brokerage accounts and cash management accounts may be offered by the same institution, but they have several key differences.
Brokerage accounts are not FDIC insured, since they are for buying and selling securities and not for deposits. Instead, they are SIPC insured. Basically, if a brokerage firm has to liquidate its assets due to financial troubles, SIPC works to restore to customers the securities and cash that are in their accounts and does not protect the value of those assets. Brokerage accounts earn value primarily through appreciation of investment assets, with a potential for high earnings and losses.
CMAs, on the other hand, are essentially regular bank accounts. They are FDIC insured, which protects the account’s value up to a certain amount in case the bank fails. CMAs earn value through interest or insurable investments like bonds or CDs, and many times the account comes with a debit card and checks so the holder can spend the funds as needed.
The Bottom Line
Brokerage accounts and cash management accounts are often offered by the same brokerage firm, but they function differently. Brokerage accounts are solely used for investing purposes, and while the account value is not insured, the custody of securities is usually protected up to a certain limit. Cash management accounts are similar to regular checking accounts, with similar features available to account holders. But by offering such an account at a brokerage firm, investors can access their funds easily and without delay.
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