Financial Services and the Small Investor

A financial institution acts as an agent that provides financial services for its clients, large or small, and generally falls under financial regulation from a governmental authority. Common types of financial institutions include banks, building societies, credit unions, stock brokerages, and similar businesses. Financial institutions provide a service by moving funds from investors, those with excess funds, to companies, those in need of funds. This makes it simple for anyone to invest their money.

Financial institutions are also organizations such as commercial or investment banks, trust companies, brokerage houses, or insurance companies that participate in financial transactions involving cash or financial products, normally in the role of intermediary. This is, of course, another kind of investment; mainly the primary role of these institutions is to facilitate the financing of investments, from home mortgages to the raising of funds via the issue of debt or equity for financing mega-projects. They also provide insurance, take on fiduciary responsibilities, store cash and securities for safekeeping, etc.

Emerging market economies have achieved above average economic growth rates and have integrated themselves into the world economy through both trade and finance in ways that have transformed them as well as the global economy. These have huge implications for the small investor.

According to PricewaterhouseCoopers.com, "Many financial institutions will spend the rest of the decade positioning themselves to meet the demand for long-term savings products and for life-cycle wealth management services". An aging population is affecting financial service providers in a way that is making the consumer culture increasingly powerful.

Publicly funded pensions and healthcare systems are being strained forcing the working people to have to save more and retire later. Financial Institutions are trying to find ways to appeal to the working class by offering to service their retirement needs at rates beyond what one might expect from a job-related retirement. Due to the fact that the working class will not be able to retire until later, financial institutions are going to need to take the focus off of retirement and put it on trusts, life insurance and annuities, which makes it harder to acquire, retain, and satisfy customers.

A growing volume of regulations, bringing a higher need for compliance, on the financial services industry is going to cause changes over the next decade. Although there will be more costs to meet compliance, financial institutions may be able to profit from the regulations. Meeting compliance could build strong reputations for institutions meeting the ethical standards, which could bring more business. According to PricewaterhouseCoopers.com, "A tighter focus on capital management will encourage corporate restructuring and disposal of non-core activities" placing more attention on the customer and less attention on prior poor business practices.

An aging population causing later retirement, more regulations, and new technology are all going to greatly affect the financial services institutions for many years into the future and the ramifications are sure to follow. The global economy is seeing the effects of these changes now with the population-aging phenomenon predicting to boost rapid rates of growth in GDP, personal disposable income and stock and domestic savings. All industries are feeling the effect of new technology and are all being forced into the future. The end result for the financial services institutions is going to be for them to find more choices and lower prices for consumers. However, this may not make it easier for the small investor as the larger investors, with more money, will earn the lion's share of attention as the competition for business grows.

Small business, especially minority business, seems to be suffering under some of the changes that have come to the financial services industry. It is possible the quality of the service has increased; however, as smaller banks may not have the resources to offer certain kinds of services to small business that a large bank will be able to offer. In general, minority-owned business tends to be denied loans more frequently than white-owned firms, and this level seems to increase as the lending market becomes less competitive.

In general a smaller financial institution is likely to have a finer grasp on the local market than a larger, more global-oriented firm might have. Larger banks are also less likely to be flexible (think of the difference between George Bailey's practices in the old movie It's a Wonderful Life and his rival's banking practices) and the higher turnover of employees due to promotion and transfer may make forming a relationship more difficult.

The nature of the business, which relies upon stability and continuity, makes reacting to change somewhat more difficult than it might be an industry less insulated from the rapid rate of change now common in modern society. However, as some of the barriers to market entry in local and global markets has eased, financial services businesses have been forced to re-examine pricing as well as the services offered. This can be both good and bad for the small investor. Services, in some instances, have become more streamlined and uniform, but this can have a negative impact as one lender or stockbroker begins to look very much like every other one. Competition, in general, forces prices to decrease which is good for consumers, but not necessarily for the businesses and their investors.

In conclusion, financial services institutions clearly cannot afford to stand still as the complexity of the environment in which they operate will only increase. In an environment where being global creates as many compliance headaches as it does revenue opportunities, it is up to the institution to decide whether it is better to be international, national or even regional without losing the personal touch of small financial institutions. As a consumer, make certain you have analyzed all the lending practices and are familiar with your financial institution before investing.