Financial intermediaries can be essential to striking deals and getting signatures secured. They are crucial in the transfer of funds and can offer valuable insight into the market, which can be beneficial for both investor and borrower.
However, if you’re dealing with a financial intermediary, it can be hard to know exactly what they do and how they work. To help you out, we’ve compiled a list of the top things you need to know about financial intermediaries before you start working with one.
1. They are essential middle men
Financial intermediaries act as the middle men between the investor and the borrower, and in this sense they can be seen as the backbone of economies. They aim to meet the objectives of both parties, whilst ensuring everyone complies with laws and legislation.
They are businesses in themselves, and accept deposits from the investors with low interest, they then lend money to the borrowers at a higher interest rate to make a cut.
Although this seems like easy work for them, often the process can be lengthy and can involve a lot of negotiation in which their expertise is often essential. They help make the process seamless and aim to ensure both parties get what they want out of the deal.
2. There are many types of financial intermediaries
Financial intermediaries come in many shapes and forms including:
- Banks: probably the most well known intermediary and one that most people will use in their lifetime to apply for loans and mortgages.
- Stock exchanges: another popular financial intermediary that facilitates the trading of stocks and shares.
- Mutual funds: these funds invest mutual revenue streams from different investors.
- Insurance companies: insurance companies are financial intermediaries as they secure people against accidents. In this sense they accept a deposit in the form of a premium.
- Independent financial advisors: these specialists offer advice and guidance and handle the funds before they are placed in an investment portfolio.
- Investment banks: these are specialist banks that deal with initial public offerings, equity offerings and client broker services.
- Pension funds: pensions are funds taken from an employee salary and invested and then returned after retirement.
3. A common misconception is that they eliminate risk
Whilst it is true that financial intermediaries lower the risk of financial transfer, the risk can never be eliminated.
However, financial intermediaries lower the risk by detecting fraudulent activity and providing insight into risks and potential losses. They are considered more reliable and trustworthy than lending directly.
4. You need one if you’re looking for a quick and easy exchange
The likelihood is that if you’re dealing with big business, you’re going to need a financial intermediary to advise and assist. They are helpful for both the borrower and lender as they help them find each other and negotiate a deal. This can save a lot of time and their expertise can be very valuable to both parties.
For a quick and easy exchange, with reduced risk, a financial intermediary is advised.
5. They can be expensive
Whilst financial intermediaries can be amazing middle men in financial exchanges, it can cost for their services. The charges imposed will usually be for the financial advice and assistance they provide their clients with.
They also charge a higher interest on loans to the borrower in order to make a return.
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