Question

List three financial intermediaries that are not commercial banks, insurance companies nor investment banks

Answer 1

A financial intermediary is an entity that facilitates a financial transaction between two parties. Such an intermediary or a middleman could be a firm or an institution. One can also say that the primary objective of the financial intermediaries is to channel savings into investments. These intermediaries charge a fee for their services. Financial intermediaries have emerged as a useful tool for the efficient market system as they help channelize savings into investment. However, they can also be a cause of concern, as the sub-prime crisis shows. Often, there is a need to regulate the activities of these intermediaries.

The three financial intermediaries that are not commercial banks, insurance companies nor investment banks can be listed as follows:-

i) Mutual Funds: Mutual funds provide active management of capital pooled by shareholders. The fund manager connects with shareholders through purchasing stock in companies he anticipates may outperform the market. By doing so, the manager provides shareholders with assets, companies with capital and the market with liquidity.

ii) Financial advisors: Such intermediaries may or not offer a financial product, but advises investors to help them achieve their financial objectives. These advisors usually undergo special training.

iii) Pension funds: Pension funds have already become a significant financial intermediary in most of the developed economies. Even in emerging economies, they are destined to become significantly large intermediaries in not so distant future. Attributes such as assured contributions, long maturity periods, and relaxed regulation compared to other financial intermediaries such as banks or insurance companies; increasing economic prosperity; and ageing population coupled with increasing life expectancy place pension funds in a unique sweet spot.

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