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Robinhood Cash Management Account Review 2021: Is it Insured?

Learn about the details of the Robinhood Cash Management program, such as the supposed fees and interest rates offered -- and the deposit insurance measures.

Robinhood has made a name for itself as a popular smartphone app for buying and selling stocks and options without fees. It’s a convenient way to invest and trade stocks from your phone, but it lacked any other banking features.

As part of a push to increase its userbase, Robinhood announced that it would be adding a checking and savings
combination account to its app.

What turned heads:

The advertised interest rate of the account was one of the highest rates available from any bank account on the market.

While Robinhood has backtracked slightly and changed how it has described the new account, many people are still looking forward to full details.

With all of the buzz surrounding the account, you may be wondering what exactly Robinhood is offering and whether you should be interested.

Early On

When Robinhood first announced its new service, it described the account as a combination checking and savings account that paid an incredibly high rate.

The issue:

The rate is high enough that many skeptics believed Robinhood will be taking a loss on the account, instead relying on people who open accounts to generate revenue for the company in other ways.

The other major account feature touted by Robinhood was the lack of fees.

There would be no fee to access a network of more than 75,000 ATMs in the U.S., no account maintenance fees, no overdraft fees, and no transaction fees. The account would act like a checking account that paid better interest than nearly any savings account on the market.

The accounts wouldn’t be held directly by Robinhood.

Instead, they would be backed by Sutton Bank, an Ohio-based bank that has been in operation since 1878.

In truth, the money wouldn’t be held directly in bank accounts.

Instead, Robinhood would use the money to invest in “government-grade assets like U.S. Treasuries.” It would use the proceeds from those investments to pay interest on the account.

Robinhood has pulled much of the information surrounding its new accounts from its website.

This is in response to potential inaccuracies in the initial announcement. In response, the company posted a letter from its founders explaining why the information has been removed and outlining the company’s dedication to clear and accurate communication.

If the details originally outlined by the company are accurate, the account will certainly make a major splash in the banking world.

It combines all of the best aspects of checking and savings accounts, even improving on them in many ways.

Deposit Insurance Controversy

One of the biggest concerns surrounding the initial announcement of Robinhood’s accounts is whether they would be insured.

Most banks in the United States are insured by the Federal Deposit Insurance Corporation. The FDIC was founded in the wake of the Great Depression and tasked with helping prevent a similar event from occurring in the future. It accomplished this task by insuring customer deposits and protected banks.

Today, the FDIC protects up to $250,000 per depositor, per account type at insured banks. That means that you can never lose money you deposit to a bank account.

Clearly, if Robinhood was offering a bank account, people would want the account to have similar protections.

However, because Robinhood is not a bank, but instead a licensed broker-dealer, which makes it ineligible for coverage from the FDIC.

The company claimed that the cash would instead be covered by the Securities Investor Protection Corporation. This company protects investors in the event that a brokerage covered by SIPC closes.

If you buy an investment through a brokerage and the brokerage later goes under, SIPC will reimburse you for up to $500,000 in losses.

SIPC protection extends limited protection to cash deposited to brokerage accounts, limiting cash protection to $250,000.

In a statement delivered to CNN Business, Stephen P. Harbeck, the president, and CEO of SIPC clarified, “SIPC protects cash that is deposited with a brokerage firm for one limited purpose ... the purpose of purchasing securities.

“Cash deposited for other reasons would not be protected. SIPC does not protect checking and savings accounts since the money has not been deposited for a protected purpose.”

Because Robinhood described its new accounts like a bank account and not an account intended to hold cash to be used for investing, it would be ineligible for SIPC protection.

This was a major blow to the value of the account, as one of the most important features of a bank account is that depositors cannot lose money.

Rebranded as a Cash Management Account

In response to the SIPC announcement that money deposited to Robinhood’s new accounts may not be covered by SIPC insurance, Robinhood backpedaled on much of its announcement.

The company has retooled its new account and its announcement and is now describing it as a cash management account. Cash management accounts are offered by many investment companies, including Fidelity and TD Ameritrade.

They’re a way for investors to use their brokerage accounts in a way that is similar to a checking account.

However, they work differently than typical bank accounts and have their own benefits and drawbacks.

Because Robinhood has pulled its announcement regarding its new account and has announced that it will be reworking the account into a cash management account, we don’t know exactly what it will look like.

What we can do is look at similar accounts offered by other companies to get an idea for what Robinhood’s version of a cash management account could look like.

Fidelity Cash Management Account

Fidelity advertises its cash management account as offering “all the features you need from a traditional checking account without the bank fees.”

This matches up closely with the product advertised by Robinhood.

Some of the notable features of the account are its free check writing and bill pay services, it’s lack of monthly fee and its $0 minimum balance. The account also offers full refunds for any ATM fee, nationwide, without limit.

One place where the Fidelity Cash Management account differs significantly from the product Robinhood advertised is its insurance.

Fidelity’s Cash Management Account offers up to $1.25 million in FDIC insurance for customer deposits. It can do this even though it is a brokerage and not a bank, by purchasing something called a brokered certificate of deposit. These large denomination CDs are issued to brokerages, by banks, for the benefit of the brokerage’s customers.

Because these brokered CDs are issued by banks, they qualify for FDIC insurance. Fidelity is able to offer protection in excess of the FDIC’s usual limit by splitting the cash you deposit to your cash management account among multiple CDs. This keeps your deposit below the $250,000 at any one bank.

This level of insurance makes the Fidelity Cash Management Account attractive to customers with a lot of money to deposit. For high-net-worth customers, that can give it a big leg up over Robinhood’s advertised account.

Where Fidelity’s Cash Management Account falls short of the account advertised by Robinhood is its interest rate. You need to deposit at least $100,000 to get the best rate available and even that rate is relatively low. Most online savings accounts beat it by a fair amount.

TD Ameritrade Cash Management Account

TD Ameritrade advertises similar features to Fidelity’s cash management account. It offers “flexible cash management... with a debit card and free ATM withdrawals.”

There’s no monthly maintenance fee, no fee to pay bills online, and no fee to write or re-order checks.

The TD Ameritrade Cash Management Account also offers insurance through the FDIC. It splits your deposits between two banks, which allows it to offer up to $500,000 in protection. This is more than the amount that Robinhood would have offered with the account it advertised.

TD Ameritrade’s Cash Management Account also offers a lower rate of interest than the one advertised by Robinhood.

How Robinhood stands out

With both the Fidelity and TD Ameritrade Cash Management accounts, the major benefit appears to be additional insurance and easy transfers to your brokerage for investing your excess cash.

While they can supplant a checking account in many ways, many people who have one of the accounts are likely to have a separate checking account.

Robinhood’s new account seems to be framed as a replacement for typical checking and savings accounts, setting it apart from its competitors’ cash management options.

Conclusion

In all likelihood, the account will retain most or all of the features that were originally advertised.

The biggest changes are likely to come in the form of its name and advertising.

The company is unlikely to refer to it as a bank account in the future. We can also expect clarification surrounding the deposit insurance issues that we saw.

Once those details settled, it is quite possible that Robinhood’s Cash Management Account will be one of the best on the market, offering great interest rates and easy access to your money.