Brokerage Account vs. Cash Management Account – What is the Difference?

Financial institutions offer various accounts to customers to meet their varying needs. This article focuses on brokerage and cash management accounts. Read on to learn their similarities and differences.

Cash Management Account Explained

Cash management accounts are those offered by financial institutions to serve banking services, such as savings, checking, and investing. Moreover, interest earned on these accounts is usually higher than those accrued on conventional savings accounts.

Some cash management accounts have additional functionalities, such as automatic cash sweep, which permits financial institutions to move customers’ excess money into money market funds.

Brokerage Account Explained

Brokerage accounts are investment accounts offered mostly by brokerage companies. Their primary purpose is to allow users to invest in financial instruments like mutual funds, bonds, stocks, and exchange-traded funds, among others.

While brokerage accounts do not serve multiple purposes like cash management accounts, they tend to offer higher returns. It is worth mentioning that some brokerage firms are now incorporating functionalities like check writing in their accounts.

Brokerage Account vs. Cash Management Account: Similarities

Here are some aspects that the two accounts share:

1. Facilitate wealth growth: With a brokerage account, you can invest in various financial markets to generate income. A cash management account, on the other hand, allows you to earn relatively high interest.

2. Offer higher returns than conventional savings accounts: As mentioned earlier, interest earned on a cash management account can be higher than on a savings account, thus offering users bigger returns. Similarly, brokerage accounts offer substantial returns via investments.

3. Both accounts are offered by various financial institutions: While most brokerage accounts are provided by brokerage firms, there are several financial institutions, including online and traditional banks, that offer them just like cash management accounts.

Brokerage Account vs. Cash Management Account: Differences

Here are the key differences between the two accounts:

1. Main purpose: Brokerage accounts facilitate investment in the financial markets, while cash management accounts are intended to allow users to manage their cash and provide liquidity in financial institutions.

2. Risk level: Money in cash management accounts is exposed to minimal risk compared to that in brokerage accounts. That’s because investment funds in brokerage accounts are subject to market fluctuations.

3. Access to funds: You can easily access your funds in a cash management account. Moreover, you can make withdrawals without being penalized. However, this is not the case with brokerage accounts, where you are panalized for making early withdrawals from specific investments.

4. Account functionalities: Brokerage accounts have fewer features than cash management accounts. For instance, while most brokerage accounts only support investments, cash management accounts, on the other hand, allow holders to write checks and withdraw money using debit cards.

Choosing the Right Account

Picking a brokerage or a cash management account depends on an individual’s risk tolerance, banking needs, and financial goals. If you want an account offering several services like savings and checking, then opting for a cash management account is recommended.

But if you are focused on investing and growing your wealth, a brokerage account should be your top choice. But keep in mind that you must be willing to tolerate high risks.

Do You Need a Significant Amount of Cash to Open a Brokerage or Cash Management Account?

No! Most financial institutions impose low minimum deposit requirements, thus lowering the barrier to entry. However, some brokerage firms offer premium accounts that require users to make significant deposits to invest in certain financial markets.

Can You Lose Money in Your Cash Management Account?

While a portion of your savings is insured by the FDIC (the Federal Deposit Insurance Corp), you may lose money if your cash management account provider is declared bankrupt and your savings exceed limits set by the FDIC.

Can You Use Your Brokerage Account Like Bank Account?

Although some brokerage accounts have features available on bank accounts, financial experts advise against using them as bank accounts since their balances are subject to market fluctuations.