Financial professionals who provide planning and investment advice to individual investors are financial intermediaries. Usually referred to as financial advisers, these intermediaries help channel savings from individuals into investments. This service is important because individuals want opportunities to grow their savings, and it stimulates economic growth and development. Financial intermediaries can help manage investment risk with their specialized knowledge and experience. The advantages of using intermediaries include risk management, fiduciary responsibility, increased liquidity for individual investors and professional advice.
Intermediaries help to manage investment risk by providing professional advice on investment opportunities. However, the advice they give may increase overall risk because of the nature of the investments, the potential rewards also increase. They also provide expertise and the technology to carry out investment transactions easily and quickly, and while intermediaries often steer their clients to certain investments that may be managed by their company, they are obligated to act in the client's best interest rather than their own or that of their employer.
The financial intermediary has a legal duty to act in the best interest of the individual investor client. They have a legal duty to disclose material information about their business that could affect the client and they must refrain from activities that cause conflicts of interest with clients. Any self-serving or self-dealing activities that involve clients are violations of fiduciary duties legally owed to clients. For example, an adviser may not unload unwanted securities on unsuspecting clients, or push a stock because of a higher commission even though it does not fit the client’s portfolio.
Financial intermediaries help their clients sell their investments when the client needs or wants to sell. They make a market for the client by finding willing buyers, and this usually happens immediately (buy the close of business on the day the sell order is submitted).
Financial intermediaries have a staff of professionals that provides research and analysis on various investment opportunities. Such information is usually made available at no additional cost to the individual investor. In fact, providing this type information free is a marketing strategy used by financial intermediaries to attract clients. The better the information, the more competitive the financial intermediary will be when attracting clients.
State security commissions, the Securities and Exchange Commission (SEC) and the various stock exchanges regulate financial intermediaries. Although the stock exchanges are not government agencies, they have established rules that must be followed. If a financial intermediary does not follow these rules, no trading on the particular exchange involved will be allowed. There are licensing requirements that must be complied with and violations of laws, rules and regulations can result in severe fines, sanctions and even criminal charges. Individual investors can register complaints with the stock exchanges, state security commissions and the SEC that will be investigated.