Financial Intermediary

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Definition of 'Financial Intermediary'

A financial intermediary is an entity that acts as a middleman between two parties in a financial transaction. The intermediary typically charges a fee for its services, which can be a flat fee or a percentage of the transaction value.

Financial intermediaries can be classified into two main types:

* **Depository institutions**, such as banks and credit unions, accept deposits from customers and use those funds to make loans to other customers.
* **Non-depository institutions**, such as investment banks and insurance companies, do not accept deposits from customers, but they provide other financial services, such as investment advice and insurance.

Financial intermediaries play an important role in the financial system by facilitating the flow of money between savers and borrowers. They also help to reduce risk by providing liquidity to the market and by diversifying investors' portfolios.

Here are some of the benefits of using a financial intermediary:

* **Convenience:** Financial intermediaries make it easy for individuals and businesses to save and invest money. They offer a variety of products and services, such as checking accounts, savings accounts, loans, and investment products.
* **Expertise:** Financial intermediaries have the expertise and experience to help clients make informed financial decisions. They can provide advice on saving for retirement, investing for college, and managing debt.
* **Risk reduction:** Financial intermediaries can help to reduce risk by diversifying investors' portfolios and by providing liquidity to the market.

Despite the benefits of using a financial intermediary, there are also some risks associated with doing so. These risks include:

* **Costs:** Financial intermediaries typically charge fees for their services. These fees can vary depending on the type of product or service being offered.
* **Conflicts of interest:** Financial intermediaries may have conflicts of interest that could impact the advice they provide to clients. For example, an investment advisor who is also a broker may recommend investments that generate commissions for the advisor, even if those investments are not the best option for the client.
* **Lack of transparency:** Financial intermediaries may not be transparent about their fees or the risks associated with their products and services. This can make it difficult for clients to make informed decisions.

It is important to weigh the benefits and risks of using a financial intermediary before making a decision. If you are considering using a financial intermediary, be sure to do your research and compare different providers before choosing one.

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