Financial intermediaries

economic-dictionary

Financial Intermediaries are those persons or companies that offer financial services to the investor without the latter having to contact the issuer of the financial instrument.

Its function is to mediate between the people who save and the people who need financing, that is, between suppliers and demanders. Therefore, they are in charge of placing the financial instrument or service issued by a financial institution to the investor or the end customer, charging a commission for the service provided.

Financial intermediaries fulfill a very important commercial function since they are in charge of putting in contact the bidders and demanders (savers) of financial products in order to activate the market by channeling savings to investment and thus make investors' capital profitable.

Advantages and disadvantages of financial intermediaries

The most important advantages that can be highlighted are the following:

  • They channel savings into investment.
  • More personalized service with the possibility of offering more alternatives to the investor.
  • In many cases the service of the financial intermediary is impartial.
  • More professional service with a greater follow-up to the client's situation as they make a living from this.

However, the disadvantages include:

  • By working on commission, they might not offer the best product to their customers, but simply look for products that benefit the broker in question the most.
  • Thus, the financial intermediary service may not be impartial.
  • Depending on in which cases, the service may not be personalized. It occurs especially with very large companies that have fully standardized services.

In summary it is important not to take any of the advantages or disadvantages for granted. That is to say, what in principle can be an advantage, could be a disadvantage. Therefore, everything will depend on the company or professional that facilitates the intermediation.

Authorization to be a financial intermediary

Financial intermediaries can be natural or legal persons who have legal authorization to be, they will have to meet a series of legal requirements such as having good financial solvency and extensive knowledge of the financial sector to carry out this task, prior registration in the National Securities Market Commission (CNMV).

Therefore, the following may become financial intermediaries:

  • Credit institutions (banks, savings banks, credit unions, financial credit institutions, etc.).
  • Portfolio Management Company (SGC).
  • Collective investment institution (IIC).
  • Insurance companies.
  • Pension funds.
  • Private companies or professionals who act as advisers.
  • Independent financial intermediaries.

There are financial intermediaries in multiple situations that occur in financial markets, such as:

  • In the issuance of debt.
  • In a public offering for sale (IPO).
  • In the placement of structured products.
  • In the sale of investment funds.

It is important to note that, in most of the cases, the cost for the service provided is higher since the profit has to be distributed between the financial intermediary and the issuing entity or the entity that has possession of the financial product. There are cases in which profit margins are very large and allow intermediaries to reduce the cost passed on to the customer, for example, in the branch of the insurance sector where competition is very great and prices have to be competitive or in the financial conditions of a mortgage.

Tags:  cryptocurrencies bag markets 

Interesting Articles

add