Loading the player...

What is a 'Financial Intermediary'

A financial intermediary is an entity that acts as the middleman between two parties in a financial transaction, such as a commercial bank, investment banks, mutual funds and pension funds. Financial intermediaries offer a number of benefits to the average consumer, including safety, liquidity, and economies of scale involved in commercial banking, investment banking and asset management. Although in certain areas, such as investing, advances in technology threaten to eliminate the financial intermediary, disintermediation is much less of a threat in other areas of finance, including banking and insurance.

BREAKING DOWN 'Financial Intermediary'

A non-bank financial intermediary does not accept deposits from the general public. The intermediary may provide factoring, leasing, insurance plans or other financial services. Many intermediaries take part in securities exchanges and utilize long-term plans for managing and growing their funds. The overall economic stability of a country may be shown through the activities of financial intermediaries and growth of the financial services industry.

Functions of Financial Intermediaries

Financial intermediaries move funds from parties with excess capital to parties needing funds. The process creates efficient markets and lowers the cost of conducting business. For example, a financial advisor connects with clients through purchasing insurance, stocks, bonds, real estate and other assets. Banks connect borrowers and lenders by providing capital from other financial institutions and from the Federal Reserve. Insurance companies collect premiums for policies and provide policy benefits. A pension fund collects funds on behalf of members and distributes payments to pensioners.

Mutual Funds as Financial Intermediaries

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.

Example of a Financial Intermediary

In July 2016, the European Commission took on two new financial instruments for European Structural and Investment (ESI) fund investments. The goal was creating easier access to funding for startups and urban development project promoters. Loans, equity, guarantees and other financial instruments attract greater public and private funding sources that may be reinvested over many cycles as compared to receiving grants.

One of the instruments, a co-investment facility, provides funding for startups to develop their business models and attract additional financial support through a collective investment plan managed by one main financial intermediary. The European Commission projected the total public and private resource investment at approximately $16.5 million per small- and medium-sized enterprise.

RELATED TERMS
  1. Disintermediation

    1. In finance, withdrawal of funds from intermediary financial ...
  2. Retail Fund

    A retail fund is an investment fund with capital invested by ...
  3. Brokered Market

    A marketplace where buyers and sellers are brought together by ...
  4. Secondary Liquidity

    A form of liquidity that is part of an initial public offering ...
  5. Trading Platform

    A trading platform is a software through which investors and ...
  6. Financial Institution - FI

    An establishment that focuses on dealing with financial transactions, ...
Related Articles
  1. Investing

    What Does a Financial Intermediary Do?

    A financial intermediary is an institution that acts as a go-between in a financial transaction.
  2. Trading

    Fund Costs and Expenses

    How much a fund charges for its services is the most important indicator of how well it will perform.
  3. Investing

    Scoring Fund Investment Quality

    Learn some background on mutual funds and what factors can be used to assess their investment quality.
  4. Investing

    Savings Accounts Not Always The Best Place For Cash Assets

    Money market funds may be all that stands between you and increasing your wealth.
  5. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  6. Investing

    Introduction To Institutional Investing

    Investopedia explains: Learn about institutional investing and all of the major players in this field.
  7. Investing

    How The Big Boys Buy

    Learn what those in-the-know look for when acquiring a company.
  8. Managing Wealth

    Should Balanced Funds Be Part Of Your Portfolio?

    Find out why you should include balanced funds in your portfolio, including the importance of customizability, diversification and professional management.
RELATED FAQS
  1. What percentage of asset management firms are privately held and not publicly traded?

    Explore asset management firms, a major part of the financial services sector, and learn about the respective markets served ... Read Answer >>
  2. What other sectors are most similar to banking?

    Learn valuable information about the many different subsectors in the financial services sector that most closely resemble ... Read Answer >>
  3. What economic indicators are important for investing in the financial services sector?

    Read about some of the most important macroeconomic indicators that investors in the financial services sector should watch ... Read Answer >>
Hot Definitions
  1. Trustee

    A person or firm that holds or administers property or assets for the benefit of a third party. A trustee may be appointed ...
  2. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  3. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  4. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
Trading Center