Question

which of the following statements are FALSE regarding financial intermediaries?

1. banks and credit unions are financial intermediaries since they act as a middle man between households wanting to borrow and those wanting to lend

2. a financial advisor is a financial intermediary since he/she gives financial advice to households regarding saving for retirement

3. a stock broker acts as a financial intermediary by bringing together buyer and sellers of stock

4. insurance companies act as financial inter, by pooling risk amongst households thereby reducing the cost of insuring such risks

5. investment companies act as a financial inter. by pooling investors funds enabling those with small sums of money to obtain diversified portfolios

Answer 1

Statement 2 is false

A financial intermediary is a party which acts as a middleman between two entities in a financial transaction. They offer various benefits to both the parties and reduce the risk due to lack of information. Both banks and insurance companies are financial intermediaries since they facilitate a financial transaction between two parties. A stockbroker is also a financial intermediary since he connects the buyer of stocks with a seller. Investment companies act as financial intermediaries by facilitating investment by investors in various funds and companies.

A financial adviser cannot be called a financial intermediary because he does not facilitate a transaction. He only advises the parties as to the best financial options available which may fill their requirements.