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The Financial Services Industry: What You Need to Know

Ever heard of the financial services industry? Even if you haven’t, you’ve probably interacted with this industry almost every day. You might think it just means working with a financial advisor. But in reality, whether you’re an investor, a homeowner, a credit cardholder or even just a simple savings account holder, you’ve worked with the financial services industry. But what is the financial services industry exactly? It involves so many aspects of our finances, so let’s take a look.

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What Is the Financial Services Industry?

You might think of banks, brokers and mortgage lenders as all entirely separate entities. While they do provide different services, they’re all part of the financial services industry. In fact, the industry includes more than those three sectors. It also involves insurance companies, securities traders, investors, financial advisors, Wall Street and more.

Plus, the financial services industry doesn’t just serve individuals like yourself. It also provides small businesses, large companies, nonprofits and even the government with the necessary financial services.

Breaking Down the Different Sectors of the Financial Services Industry

Banks and Credit Unions

Let’s start with the well-known sector of banking. Even if you currently don’t have a savings or checking account, you’ve probably worked with a bank at some point. This sector is where you get your bank accounts, credit cards, loans and increasingly much more.

Credit unions also offer many of the same accounts as banks, often with even more favorable interest rates. The main difference between credit unions and banks is the community and ownership that comes with being a credit union member versus being a bank customer.

Financial Advisors

Financial advisors, brokerages and investment banks are also a part of this financial sector. Advisors range from accountants to retirement planners to tax preparers and more. Investment banks are tailored for more wealthy consumers. Here, you can find wealth management, tax advice and company guidance.

Financial advisors, brokerages and investment banks are also part of the banking financial sector. Financial advisors can specialize in accounting, tax preparation, debt management and a range of other financial needs.

A financial planner is a type of financial advisor who specializes in creating long-term financial plans like saving for retirement. Investment banks are tailored for more wealthy consumers. Here, you can find wealth management, tax advice and company guidance.

Investment Managers

The next financial services industry sector involves asset management. This is where pensions, insurance assets, hedge funds, mutual funds and more are handled.

It’s important to note that nowadays, a certain financial product isn’t limited to just one financial sector. For example, both an asset management firm and an insurance company will have to manage insurance assets at some point, even though they are two different sectors.

Insurance Companies

The insurance sector provides, you guessed it, insurance policies. Of course this also encompasses a wide range of insurance needs from auto insurance to life insurance to health insurance. The insurance sector provides the underwriting and funding you need for all your insurance needs.

Private Equity and Venture Capital

Then there is the private equity sector, which you may not be quite as familiar with. Private equity and venture capital funds provide companies with capital. In exchange, the private equity investors gain ownership stakes or a cut of the company’s profits. This is largely an entrepreneurial investment sector.

Evolution of the Financial Services Industry

The financial services industry seems almost all-encompassing today. Banks not only offer checking and savings accounts, but many offer other products like mortgages and auto loans. However, it wasn’t always like that.

Before the 1970s, each sector of the financial services industry more or less stuck to its own specialty. Banks provided a place for customers to hold checking and savings accounts. Loan associations offered mortgages and personal loans. Brokerage companies offered consumers investment opportunities in stocks, bonds and mutual funds. And credit card companies, like Visa and Mastercard, solely provided credit cards.

But then during the 1970s, consumers began to move away from big banks, which were previously the center of the financial services industry. Federal regulations prevented banks from offering a variety of financial services which is what consumers wanted. So consumers increased their business with other sectors like brokers and mutual funds companies. As a response to save themselves, banks began to offer products like money market and mutual funds, mortgages and other loans.

By the 1990s, the lines that separated the different financial services sectors had become blurred. Not only were companies offering products outside of their original range, but companies were merging together to become bigger financial conglomerates. That would enable them to earn and offer even more.

Even still, the financial services industry continues to grow and change. This is largely due to rapid advances in technology. Certain financial products are becoming increasingly available to a wider variety of consumers thanks to the internet. There are even banks and financial advisors and banks that operate entirely online. Technology has opened new doors for both the financial services industry and its consumers.

Bottom Line

From the early history of the credit card to the increasing availability of robo-advisors, the financial services industry has gone through some pretty big transformations since its beginnings. It continues to offer what its consumers need, changing with the times as necessary. And even though we don’t always realize it, the financial services industry is constantly working, managing our assets and our money.

Tips for Finding a Local Financial Advisor

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Lauren Perez, CEPF® Lauren Perez writes on a variety of personal finance topics for SmartAsset, with a special expertise in savings, banking and credit cards. She is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. Lauren has a degree in English from the University of Rochester where she focused on Language, Media and Communications. She is originally from Los Angeles. While prone to the occasional shopping spree, Lauren has been aware of the importance of money management and savings since she was young. Lauren loves being able to make credit card and retirement account recommendations to friends and family based on the hours of research she completes at SmartAsset.
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