Cash management accounts, or CMAs, are a popular account choice for DIY investors ranging from the inexperienced, to those running their own self-managed super funds (SMSF). So, why are they popular, and what do they have to offer?
This article covers:
What is a cash management account?
Cash management accounts are broadly the same as normal transaction or savings bank accounts, in that they allow you to manage your cash transactions while also earning interest. However, CMAs are often used primarily to receive cash from investments, such as dividends, and to purchase new investments, such as shares.
They are also commonly used to help manage an SMSF as they can act as a central source to move money in and out of multiple cash streams such as superannuation contributions, income and dividends.
Why may an investor choose to use a cash management account?
Cash management accounts are generally chosen by investors because of their ‘no-frills’ nature. CMA account holders generally do not require a debit card for use at an ATM nor the ability to physically deposit cash, preferring dedicated online services, meaning the account type is generally less suitable for day-to-day use when compared to transaction accounts.
In other ways CMAs are very similar to traditional bank accounts, allowing both incoming and outgoing payments, with one of the key reasons behind their use being the availability of data feeds to supported accounting and share trading platforms for investors. It is this visibility of transactions that has made them popular with financial advisers and stockbrokers.
CMAs may allow investors to better understand and manage their cash flow from a single point. This is because they allow investors to ‘quarantine’ investment transactions from daily expenses. They can also track the performance of their investments via dividend and other payments, without trawling through non-investment transactions.
How does a cash management account work?
A cash management account works like most other bank accounts, in that it allows customers to deposit and withdraw money from their accounts as needed, through electronic transfers (such as using BPAY), direct debits and in some cases through a linked debit card (using an ATM or EFTPOS facility) if provided by the institution.
You can also earn interest through a CMA, which may be offered at one standard rate or at tiered rates that increase as your balance increases. As interest rates can vary depending on the provider, it may be a good idea to compare your options.
Most CMAs were previously known as Cash Management Trusts (CMTs), and provided significantly higher interest rates than traditional savings accounts. However, their ‘trust’ structure was similar to a managed fund, and they were not originally covered by the Australian Government’s Financial Claims Scheme. Most have since converted into traditional bank accounts, which is why they are offered by both banks and non-banks.
Importantly, as long as a CMA is issued by an authorised deposit taking institution (ADI), which most are, they are also covered by the government guarantee that’s known as the Financial Claims Scheme (FCS) for balances up to $250,000. The government guarantee means if a participating CMA issuer goes bankrupt, you will still receive your balance back, up to $250,000.
These accounts are often opened and operated online or via phone applications for the majority of tasks. Because CMAs are primarily operated in this way, account holders may have to rely on telephone help desks or chat portals to have questions answered and issues resolved, which can be perceived as a drawback.
CMAs are usually free from account-keeping or other operational fees. However, some providers may offer additional services, such as immediate or overseas transfers, at a cost.
Who might a cash management account suit?
Anyone can use a CMA; however, the types of people who do are generally those with investment portfolios. Some examples of CMA user profiles, hypothetically, includes:
- An individual investor with a share portfolio. They may want to receive and use dividends and have expenses deducted from their CMA, but keep their daily transaction account separate.
- An individual or family with an investment property. They may wish to keep interest payments, rent and other expenses related to the property separate to simplify tax reporting.
- An individual with an investment loan who wishes to ensure the proceeds from a loan are kept separate from ‘non-deductible debt’, such as a personal car loan or an owner occupier mortgage.
- An SMSF investor with a financial adviser. In this case, their adviser may wish to provide proactive recommendations without the need to request a bank account balance.
- An SMSF investor without an adviser. They may use an SMSF tax reporting platform and wish to have their transactions automatically uploaded, which a CMA may allow, rather than providing physical statements.
How do you open a cash management account?
Most CMAs can now be opened online, subject to meeting appropriate identification requirements. In most cases you will need to be 18 years of age to open an account, or do so on trust for a minor. Identification requirements can often be met online, using the provider’s technology systems. Where you cannot be identified online, you may be required to send original, certified identification to open your account.
Some accounts come with a minimum opening balance requirement which can be a substantial figure (such as $10,000), depending on the provider. There may also be a minimum ongoing balance. However, many providers now have no opening or ongoing balance requirements.
What should I consider before opening a cash management account?
Before opening a cash management account, some important questions to ask may include:
- What is the purpose of the account?
- How much customer service do you require?
- Do you intend to make daily payments from the account, or use it solely for investment portfolio-related purposes?
- Is there another account type that might better suit your needs?
The lack of a branch network and debit card means that a CMA might not be suitable for everyone, but may offer specific benefits for self-directed investors.
Main image source: soul_studio/Shutterstock.com
The comparison table below shows some of the savings accounts on Canstar’s database for a regular saver in NSW. The results shown are based on an investment of $100,000 in a personal savings account and are sorted by Star Rating (highest to lowest), then provider name (alphabetically). For more information and to confirm whether a particular product will be suitable for you, check upfront with your provider and read the Product Disclosure Statement or other terms and conditions before making a decision.
About Drew Meredith
Drew Meredith is one of the original founders of financial advisory firm Wattle Partners, and works as Director at the company. He is an experienced financial and investment adviser with expertise in self-managed superannuation funds, superannuation strategies, investment analysis and portfolio construction.
Drew has a Bachelor of Commerce from the University of Melbourne and a postgraduate Diploma of Applied Finance, and is both a Certified Financial Planner and SMSF Specialist Adviser. Drew has also taken on the role as a Facilitator of the Kew Discussion Group of the Australian Investors Association. You can find him on LinkedIn.