Understanding Financial Intermediaries and the Role They Play: A Guide for Beginners

The market for financial intermediaries and related businesses is growing rapidly in response to the digital transformation of financial services. Traditional banking, insurance, and investment services are being offered through digital channels that reduce costs, increase transparency, and improve efficiency. Financial intermediaries such as broker-dealers, agencies, and transfer agents are playing a central role in the growth of intermediary services by providing brokerage, registration, disclosure, accounting, and other similar services to companies that offer securities directly to the public. This article covers what financial intermediaries are and how they function as essential links between investors and capital markets.

What is a financial intermediary?

A financial intermediary is a company or individual that provides services to both investors and capital markets. They can be categorized as either broker-dealers or non-broker-dealers. Financial intermediaries facilitate the flow of capital between investors and capital markets. This can include raising capital for the issuance of securities, facilitating the trading of securities, and providing pension and insurance services to an increasingly digital global financial system. Financial intermediaries facilitate transactions between investors and the capital markets. They can also be referred to as market makers since they are constantly seeking to match buyers and sellers. While financial intermediaries have traditionally been market makers for equities and debt, they are increasingly playing a role in other investment products and in the digital transformation of the financial services industry.

The role of financial intermediaries

Financial intermediaries play three main roles in the financial services industry: they help companies raise capital, they help investors find investment opportunities, and they help transfer assets between owners. By connecting people with capital and investment opportunities, intermediaries help to grow the global economy and create jobs. By helping companies sell shares, bonds, and other investment instruments, financial intermediaries enable companies to raise capital to grow and expand. By helping investors find investment opportunities, intermediaries help investors manage their savings by providing them with a variety of investment choices that fit their risk tolerance and financial goals. By helping owners of assets such as stocks, bonds, or real estate transfer their assets to new owners, financial intermediaries help with the orderly transfer of assets between individuals.

Broker-dealers

While broker-dealers perform all of the functions of financial intermediaries, they are most well known for their role in facilitating the trading of securities. There are more than 9,600 registered broker-dealers in the United States. These firms act as market-makers, matching buyers and sellers of securities and facilitating the transfer of assets. Broker-dealers provide a range of services, including portfolio management and investment advice to individual investors. They also provide liquidity to financial markets by buying and selling securities on behalf of investors. Broker-dealers handle trillions of dollars in securities transactions and play an important role in the financial services industry. They bring together buyers and sellers of securities, thereby providing liquidity to financial markets, facilitating capital formation by companies through the issuance of stock, and enabling investors to buy and sell a variety of securities such as stocks, bonds, ETFs, and mutual funds.

Mutual fund and hedge fund managers

Mutual fund and hedge fund managers manage investment funds that pool the money of many individual investors. They invest the pooled funds of investors in stocks, bonds, or other types of investments. Mutual funds are regulated investment companies that are managed by investment professionals. Mutual funds pool money from many investors, usually through a broker-dealer, and then invest that money in stocks, bonds, or other securities. While mutual funds are highly regulated enterprises that are required to follow detailed disclosure and valuation procedures, hedge funds are typically used by very wealthy investors who are seeking higher returns through speculative investments with lower transparency and less regulation. Mutual fund and hedge fund managers typically receive management fees for managing the funds.

Investment advisors

Investment advisors manage investment portfolios for individuals, companies, and trusts. They can provide investment advice to a single client or manage a large portfolio of investments. Investment advisors determine the types of investments to include in a portfolio based on the client’s risk tolerance and financial goals. Investment advisors often work with their clients over many years to help them adjust their portfolios as financial goals change. Investment advisors can work for investment firms, banks, or broker-dealers. Investment firms are typically large companies that manage large portfolios for clients such as retirement plans for large companies. Investment firms are required to comply with fiduciary standards, which means they have a legal duty to act in the best interests of their clients. Banks and broker-dealers also employ investment advisors who provide investment advice. While they are also required to act in their clients’ best interests, they are not subject to the same strict fiduciary standards as investment firms.

Transfer agents

Transfer agents help investors transfer securities between owners. They are responsible for keeping records of who owns what securities and making sure timely payments are made to investors. Transfer agents also help companies issue new securities by ensuring they are properly organized and authorized to issue shares or debt. Transfer agents help investors track their holdings, whether they are stocks, bonds, or other types of securities. Transfer agents play an important role in the financial system by keeping track of who owns what securities and helping facilitate the orderly transfer of securities from one owner to another. Transfer agents primarily work with investment companies, such as mutual funds, ETFs, and closed-end funds, that issue shares that are bought and sold on a secondary market. This means that transfer agents are not responsible for tracking the transfer of individual stocks. They track the value of mutual fund and ETF shares that are bought and sold each day in the financial markets.

Summary

Financial intermediaries play an important role in the digital transformation of the financial services industry by providing brokerage, registration, disclosure, accounting, and other similar services to companies that offer securities directly to the public. The market for financial intermediaries and related businesses is growing as a result of increased customer demand for increased transparency, reduced costs, and improved efficiency. Financial intermediaries facilitate transactions between investors and the capital markets. They also help companies raise capital, help investors find investment opportunities, and help transfer assets between owners. Two types of financial intermediaries are broker-dealers, which primarily facilitate securities trading, and transfer agents, which track ownership of mutual fund and ETF shares.