Cash management accounts are accounts offered by nonbank financial service providers that allow people to save and spend their cash. CMAs are usually found at brokerages, not chartered banks, which can raise a few questions. For example, the fact that these providers can’t directly cover your funds with federal insurance might make you wary. Or you may have concerns about account security in general.
But here’s why you shouldn’t worry about the safety of your money if you put it in a cash management account.
How does FDIC insurance work with cash management accounts?
Insurance from the Federal Deposit Insurance Corp. is provided by partner banks. When a customer puts money into a cash management account, the CMA provider sweeps the funds to a partner bank behind the scenes so that the money is insured. CMAs usually can’t provide FDIC insurance themselves because they aren’t offered by chartered banks. FDIC insurance protects your deposits so that in the event a bank goes under, the funds in your account are safe.
FDIC insurance is typically up to $250,000 per partner bank. CMA providers are usually not responsible for making sure a customer’s total assets at a bank stay within FDIC insurance limits — for example, if you have funds in a separate checking or savings account at a partner bank that, combined with your CMA, exceed $250,000. If there’s a risk that all your funds combined at a particular bank will go over the insured limit of $250,000, you may be able to opt out of using certain partner banks and have the CMA funds swept to a different one.
CMA providers often maximize insurance by using multiple partner banks. Some CMAs are able to insure a customer’s cash up to $1 million or more by spreading out their funds across multiple banks. If you have that much money in cash, however, you may want to look into investing instead.
Customers still have access to their money when they need it, although outbound transfers may take time. Cash that’s swept into accounts at partner banks is still directly accessible. Some CMAs offer debit cards for withdrawing cash and making purchases, but some only allow customers to make online transfers to a linked bank account to get their cash.
Is my money safe when it isn’t in a partner bank account?
Your money should be quite safe during the short period before it’s moved from the CMA provider into an account at an FDIC-insured partner bank. When a customer funds an account and the money is transferred to a partner bank — which usually only takes about a day — the funds should be covered in the interim by the Securities Investor Protection Corp. SIPC insurance is the brokerage equivalent of FDIC insurance. If you’re thinking of opening a cash management account, check with the provider to verify the protection offered before your funds move to a partner account.
Are cash management accounts technologically safe?
CMA providers use secure technology — such as encryption, authenticated logins and fraud detection — to protect their customers’ assets. Like most online-based financial service providers and banks, however, CMA providers deal with technical difficulties from time to time. In March 2020, for example, Robinhood experienced a major app outage that affected customers on the stock trading side of its business. And even major banks aren’t impervious to things like data breaches.
But when it comes to financial products, security weaknesses also come from customers themselves. Phishing scams, the use of sketchy Wi-Fi networks or simple inattention to who may be looking over one’s shoulder during login can create vulnerabilities that allow bad actors to gain access to accounts.
Always protect your account information and follow other best practices for online safety, such as using secure Wi-Fi networks and using complex passwords and two-step authentication for secure logins.