Have you noticed a recent rise in the number of “cash management accounts?”
If the term is new to you, you’re not alone. I only learned about these a few weeks ago and they’re fascinating. They are not technically bank accounts. The companies that have them are not banks. They’re usually some other type of financial company like a robo-advisor or brokerage or even a student loan refinancing company.
If they aren’t bank accounts, what exactly are these things?
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What is a Cash Management Account?
The terms for each account may be different but the basic idea is the same. You have a company that’s the “face” of the account and a bank, or series of banks, that provide the actual bank account.
What you’re getting is a Deposit Sweep account. It’s operated by the Insured Network Deposit (IND) Sweep Service and your cash is periodically swept into your bank accounts. IND is run by the Promontory Interfinancial Network, which is the same company that runs CDARS.
CDARS stands for Certificate of Deposit Account Registry Service. It’s very similar to a cash management account but for certificates of deposit (CD). The service helps you save in multi-million-dollar CDs while still earning typical CD rates. They spread the deposit across several banks’ CD offers.
For example, with Betterment Cash Reserve, the “face” is Betterment. There are seven partner banks (The Bancorp Bank+, Barclays Bank Delaware, Citibank, N.A., Cross River Bank, HSBC Bank USA, N.A. State Street Bank and Trust Company, and Wells Fargo Bank, N.A.) providing the banking services. The banks they partner with are the ones offering the FDIC insurance, which is why you get $1,000,000 of FDIC insurance. That’s $250,000 per bank across four.
The key thing to look for is the perks of the account. Most of them will have a high-interest rate, no account minimums, and no account fees.
Here are rates as of publishing:
- Betterment Cash Reserve – 5.50% APY (Annual percentage yield (variable) is as of 2/20/2024. Cash Reserve is only available to clients of Betterment LLC, which is not a bank, and cash transfers to program banks are conducted through the clients’ brokerage accounts at Betterment Securities.)
- Robinhood – 1.50% APY (5.00% APY for Robinhood Gold Members)
- Ally Bank – 4.00% APY (for reference, this is an online savings account)
- Vanguard Federal Money Market Fund (VMFXX) – 4.87% (7-day SEC yield as of 9/27/2024, w/ 0.11% expense ratio)
- Vanguard Cash Plus Account – 3.90% APY
- Empower Personal Cash – 4.70% APY
- Varo Money – 5.00% APY (up to $5,000, but has other requirements to get this higher rate)
- Federal Funds Rate (target) – 4.50% - 4.75% (set on November 2024)
As you can see, they are comparable or slightly higher than what you’d see at an online savings account. I have Ally Bank as a reference for online banks and the Vanguard Money Market Fund, which is their sweep fun, as a reference for a brokerage.
The Vanguard Money Market Fund is not FDIC insured, it’s covered by SIPC.
“Passthrough” FDIC Insurance Coverage
There is one quirk you need to know about cash management accounts. When the money is with the partner company, your money is NOT FDIC insured because the partner is not a bank. The money is swept into the bank account regularly (usually daily, but it varies) but when it’s in the partner company, it’s not FDIC insured yet.
If the partner is a brokerage, your funds are protected by SIPC insurance. SIPC insurance is similar to FDIC insurance except for brokerages.
If the partner isn’t a brokerage, there’s no federal program that the partner can pay into to protect you.
Key Benefits
The key benefits of a cash management account are what you’d expect from online savings and checking accounts PLUS whatever the partner offers. That’s the added value.
You want:
- A competitive interest rate
- No minimum balances, no account maintenance fees
- Very few other fees, if any
- A versatile mobile app
- A debit card, potentially with cash rewards
Key Drawbacks
While these offer higher interest rates, it’s not a great place to be saving money for the long term. It’s not a knock specifically against cash management accounts but against the idea that you should even ever need $250,000 of FDIC insurance, let alone a million dollars. That money should be invested in the stock market or put into a different type of safe investment vehicle.
You will never see physical branches, so you will be missing some of the features a physical location offers. That said, most will give you ATM reimbursements to make up for that.
You also never run into the 6 transfer limit for savings accounts. Regulations require a bank to limit the number of transactions on a savings account. If you go over six, you will often be warned and sometimes be penalized. If you do it too often, the bank may close your account. It’s only for savings accounts, you can transact as often as you want on a checking account. Cash management accounts are not limited either.
There are usually no other banking products. No money markets, no certificates of deposit, no loans, etc.
If you already have an account at a partner bank, it’s subject to the same FDIC limit. For example, if you’re using Robinhood and you already have a Citi account with $250,000 in it – you’ve hit the limit. (and congrats! you should move that money!) In some cases, you can designate the partner bank you’re using so you don’t exceed limits.
Closer Look at A Few Programs
Here is a look at four cash management accounts to give you a sense of what you are getting:
Robinhood Cash Management
Robinhood’s Cash Management account offers a 0.50% APY and it takes all un-invested cash in your Robinhood account. This is similar to a sweep account at any other brokerage. What’s interesting is that brokerages that offer free trades often don’t pay interest on cash balances because they keep that interest as income. This interest income helps offset revenue they aren’t booking from trades.
At Robinhood, they have 5 partner banks so you get $1.25 million in FDIC insurance. The banks are Wells Fargo, HSBC, Goldman Sachs, Citibank, U.S. Bank and Bank of Baroda. There are no account minimums, no maintenance fees, and no foreign transaction fees. They also offer a Mastercard debit card and a 75,000 ATM network.
Robinhood gives you a free share of stock when you open a brokerage account.
Betterment Cash Reserve & Checking
Betterment Cash Reserve is their high-yield savings cash management account and there is a separate checking component. Cash Reserve (savings) has up to $1,000,000 of FDIC insurance (4 partners) whereas the Checking has just $250,000 (1 partner, nbkc Bank). There are no fees, no minimums, and ATM fees are reimbursed worldwide.
Our review of Betterment Cash Reserve discusses this more.
Are These Safe?
Financially, your cash is safe because it’s FDIC insured. There is an “unsafe” time period when the funds are swept to a partner bank, but for the companies with SIPC insurance, you’re safe. The ones that don’t have coverage are a little riskier.
We haven’t gone through a financial period where these companies have been tested but I have trouble picturing a scenario in which you would lose money. That said, pick a partner with SIPC insurance or transfer smaller amounts to mitigate the risk.
Also, as we’ve learned with the Synapse fiasco, there are scenarios in which you can’t get access to your funds. Your funds are technically safe, but without access it’s just as bad as being lost (until you can recover them). So while they are technically safe, there is still a risk.
