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The Disadvantages of Financial Intermediaries

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❶This may be in the form of loans or mortgages.

Lower Returns on Investment

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Other things being the same, lenders are interested in minimising all kinds of risk of capital and interest loss on leans or financial investments they make. These risks may arise in the form of risk of default or risk of capital loss on stock-market assets, such risks on secondary securities are far less than on primary securities for individual lenders.

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Video: Financial Intermediaries: Definition, Types, Role & Advantages In this lesson, you'll understand the process of financial intermediation. We'll also discuss the players in the process, the types of financial intermediaries as well as the advantages of financial intermediation.

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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. Definition of financial intermediaries A financial intermediary is a financial institution such as bank, building society, insurance company, investment bank or pension fund. A financial intermediary offers a service to help an individual/ firm to save or borrow money.

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Financial intermediaries are in business to make profit, so using their services can result in lower returns on investment or savings than what might be possible otherwise. Some of the advantages of having financial intermediaries include the following: (i) Lower search costs: You don’t have to find the right lenders; you leave that to a specialist. (ii) Spreading risk: Rather than lending to just one individual, you can deposit money with a financial intermediary who lends to a variety of borrowers — if one fails; you won’t lose all your funds.