7 Types of Financial Institutions – Explained

Financial institutions are engaged in dealing with financial transactions and the government highly regulates them.

Financial institutions help their clients with a wide variety of services like lending, deposit, investment services, and currency exchange.

The main financial institutions are commercial banks, investment banks, mutual funds, insurance companies, advisory firms, brokerage firms, investment institutions, trust companies, etc.

1) Commercial Bank

A commercial bank is a financial institution that accepts deposits from the general public and provides loans for investment with the target of earning profit.

Two distinctive features of commercial banks are accepting deposits and lending money. Commercial banks earn profit by providing loan facilities and earning interest from the loans.

They pay less interest on the money they borrow compared to the money they lend. The modern economic industry cannot exist without commercial banks because they play an important role in the economy by providing services like business loans, personal loans, customer deposits, savings accounts, money market accounts, etc.

They promote savings, provide a source of finance, enable entrepreneurs to innovate, help industries to expand their field of operation and ultimately make optimum utilization of resources.

2) Advisory Firms

Advisory firms consist of many experienced financial advisors who guide individuals or companies about various requirements and issues.

Advisory firms provide advisory services to individuals and organizations and help make the right financial decisions.

They always spend time understanding their client’s goals and assets. They assess their client’s performance objectives and risk tolerance to determine which asset classes are most suitable for making investments. They monitor the investment performance and guide portfolio rebalancing.

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They assist their clients with due diligence on investment, provide investment advice for saving money, provide valuation services and assist in understanding complex investment, insurance, and tax issues.

They use their expertise and knowledge to help their clients in achieving future goals and plans.

3) Mutual Funds

Mutual funds offer a type of investment where investments are managed by a professional and the decisions to buy and sell securities are made by a portfolio manager.

Mutual funds can be a cost-effective and smart method of making investments. Fund managers identify and evaluate which securities should be bought and sought. Mutual funds are also diversified which helps in mitigating risk.

4) Insurance Companies

Insurance companies offer risk management in the form of insurance contracts. Companies pay them premiums in the form of money, in return, they promise to pay for the losses that companies may incur due to unfortunate events.

Insurance companies calculate profitability and generate profits by charging more than the statistical cost of making claims. All insurance companies don’t offer the same services.

The most common type of insurance companies is health insurance companies, life insurance companies, and property-casualty insurance companies.

5) Brokerage Company

A brokerage company acts as a middleman that facilitates transactions between buyers and sellers.

Brokerage companies help their clients by selling stocks, bonds, options, and other financial products. Once the transactions are completed, brokerage companies receive a commission or fee.

In the financial market different types of brokers exist with different services. Investors choose brokerage companies according to their requirements.

Their fees will depend on the type of service they will provide to their client, their knowledge, and their expertise.

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6) Trust Companies

Trust companies are legal entities that act as agents on behalf of a person or business for administration, management, and transfer of assets to a party.

There are many trust companies with different sizes and fees. Large trust companies provide more services and charge fees depending upon the size of their trust.

Trust companies offer a variety of services such as wealth management which is wealth preservation so that a client’s future generation has the funds when needed, asset-management services, brokerage services, and building financial plans for clients.

The benefits of trust companies are that they can suggest making better investment decisions for their clients.

If anyone who doesn’t have experience or knowledge about the financial markets can be better benefitted from the investment management service of trust companies.

Trust companies also help their clients in estate planning matters. They deal with their client’s inheritances and estate planning and help them to solve future confusion by acting as a neutral third party.

7) Mortgage Company

Mortgage companies are financial institutions that are engaged in the origination and funding of mortgage loans. Mortgage companies offer services like origination, funding, and servicing of mortgages.

Some mortgage companies only specialize in providing loan options for commercial real estate.