Checklist
This checklist describes why financial intermediaries exist and why it can be useful to deal with one rather than directly with a financial institution. It provides advice on the best way to deal with a financial intermediary.
Definition
A financial intermediary is an individual or a company that acts as a go-between between two or more parties to a financial transaction. One party is usually the provider of a service or product, and the other party is usually the client or customer.
It is usual to think of a financial intermediary as an individual (such as a financial adviser, mortgage broker, or mortgage adviser), but a financial intermediary can also be an institution such as a bank that provides funds to a borrower (the client) but obtains those funds from another financial institution. Most people or entities who deal with any kind of finance do not enter the markets directly themselves but use brokers or intermediaries, with commercial banks being the most common form of financial intermediary.
Using a financial intermediary offers a number of advantages. First, an intermediary has the infrastructure to deal with transactions. They can also diversify to spread their own risk. An individual or small institution would struggle to achieve this. Financial intermediaries also know their particular markets, having built up a wealth of experience. They are also likely to be able to judge accurately which customers present the greatest risk to them and charge them accordingly.
Small-scale financial intermediaries—usually a small brokerage firm or an individual—act as a buffer between the customer and the financial institution, selling their expertise and taking commission on others’ financial products. The benefits of using a small-scale intermediary are their experience, knowledge of specific markets, and personal attention.
Bona fide financial intermediaries are usually regulated too, depending on which jurisdiction they are based in. Clients of regulated intermediaries generally have some form of consumer protection.
Advantages
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can spread their risk;
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have wide knowledge of financial markets;
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have access to many financial providers and institutions;
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are usually regulated;
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charge a fee, which can often be better value than the commission taken by a bank, which may reduce the amount you have to invest.
Disadvantages
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You have to put your trust in a third party.
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You will be charged for the services they provide.
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You will be at least one step removed from any transaction you enter into.
Action Checklist
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Search the internet and local directories for financial intermediaries. Asking your own contacts for recommendations can be a wise step.
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Talk to more than one intermediary to see what they are offering, what their specialisms are, and if they have the contacts and expertise to carry out the transaction you require.
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Work on building a good working relationship with the intermediary so that you can develop mutual trust.
Dos and Don’ts
Do
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Check out the experience and history of your financial intermediary.
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Check their charges, but be prepared to pay for a good service.
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Check that they are regulated.
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If dealing with an online intermediary (e.g. for trading shares), verify their credentials.
Don’t
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Don’t go with the first financial intermediary you talk to.
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Don’t use an unregulated intermediary.
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