Financial Intermediaries: The Categories and Who Pays Them

An intermediary stands between a household and whoever manufactures a financial arrangement. The categories differ in what each may do, what each must do, and who pays each. The last of those three predicts the other two. The question to ask is not what somebody is called but who pays them and for what.

Nobody in this chain is hiding. Every arrangement in this chain is disclosed somewhere, in writing, to somebody: to a regulator, in a document, on a website, in a form the household signed. The difficulty is not concealment. The difficulty is that the disclosure lands in the places households do not read, at the moment when nobody is looking, in language built for a supervisor rather than for a person at a counter. The effect of a disclosure nobody reads is identical to the effect of concealment, even though nothing at all was concealed, and the gap between what was disclosed and what was understood is the whole difficulty.

What is a financial intermediary, and what does standing between actually mean?

The shape is completely ordinary. Start outside finance. A tailor in a market does not weave cloth. Somebody in a mill weaves it, a wholesaler moves it, and a counter in the market puts it in front of a customer who will never meet the mill. The counter is standing between two parties who need each other and cannot find each other. Ashok Bhosale, of the invented Bhosale household, runs his own tailoring counter, and he has stood in exactly that position for years without anybody calling it an arrangement.

An intermediarySomebody standing between a household and whoever manufactures an arrangement, so that the two do not deal with each other directly. in money is the same position with different goods. Somewhere there is a manufacturerWhoever actually creates the thing being placed: the insurer that issues a policy, the fund house that runs a scheme, the bank that holds a deposit.: an insurer that issues a policy, a fund house that runs a scheme, a bank that holds a deposit. Somewhere else there is a household. Between them stands a person, and that person is the intermediary.

An intermediary is anybody standing between a household and whoever manufactures a financial arrangement. The household deals with the person in front of it and never with the party whose name is on the document.

Standing between has one property that matters more than any other, and it is the property the cloth example does not have. Two things move through this position, and they move in opposite directions. The policy or the scheme travels from the manufacturer towards the household. Money travels from the household towards the manufacturer. And then a third movement happens that has no equivalent at a cloth counter: part of the money that reached the manufacturer travels back out to the intermediary, and the household never sees that leg at all.

The third movement is not a scandal and it is not a secret. Distribution has been paid for that way in almost every trade that has ever existed, including the cloth one. Only one thing makes the money version different: at a cloth counter the customer can see the price, compare it across two shops and work out roughly how much the middle takes. In the money version the amount is deducted before any value is shown to the household, so there is no price to compare and no moment at which the deduction appears as an event.

Why do intermediaries exist at all?

The question is worth asking properly. Anybody who learns that a payment happens out of sight will reasonably wonder whether the whole layer is a problem to be removed. The layer is not a problem, and pretending otherwise makes the country impossible to understand.

Two real needs meet at this position. A manufacturer needs to reach households it will never meet, in towns where it has no counter, and it cannot do that by waiting. And a household needs somewhere to ask. Meghna Bhosale went into a branch on 6 April to renew a recurring deposit. She did not arrive wanting a product. She arrived wanting a thing done and a person to do it, and the person who did it was employed by the bank and paid a salary by it.

Intermediaries exist because a manufacturer needs distribution it cannot build itself and a household needs somewhere to ask. Both of those needs are real, so the chain is an arrangement to be understood rather than a problem to be removed.

Removing the layer entirely gives a country in which only people who already know what to buy can buy anything. The Bhosale household has never taken advice from anybody and holds no scheme, no fund and no monthly investment plan. Such a country is no improvement for a household in that position. The reachability the layer provides is genuine, and so is the fact that it has to be paid for by somebody.

What are the categories, and what actually separates one from another?

Here is where most explanations of this subject go wrong, and the way they go wrong is by sorting people by what they are called. The month of April at the Bhosale household is useful precisely because the titles were no help at all. On 6 April a desk card at a branch read Relationship Manager. On 18 April a card handed over at the door read Financial Adviser. On 29 April a person by appointment described herself by what she charged for. Three cards, three descriptions, and none of the three told the household the thing it needed.

Sort them a different way and everything becomes legible. The categories that matter are not names. A category is a set of rules somebody operates under, and it decides three things at once: what that person is permitted to do, what that person is obliged to do, and who pays them. CategoryWhich set of rules somebody operates under. It is set by registration rather than by description, and it decides what a person may do and must do. membership is a fact with rules attached to it. A title is a description somebody chose.

The categories are defined by the rules a person operates under and not by the words on a card. Two people carrying identical titles can sit in different categories and owe a household completely different things.

Four arrangements appeared around this household inside one month, and they are worth setting side by side before anything is said about any of them.

The fourth row belongs on the table because an educator is an intermediary of a sort as well: somebody stands between a reader and a subject, somebody pays for it, and the who-pays question can be put there exactly as it would be put at any counter. The answer is nobody named in the rows above, and nothing at all is placed.

What is each category permitted to do?

Permission is the first of the three things a category decides, and it is narrower than most households expect. A person is not permitted to do whatever they are competent to do, or whatever they are willing to do. A person is permitted to do what the category they are registered in allows, and that permission has edges.

Set out abstractly, and the abstraction holds anywhere in the world, permissions run along one line. At one end is a person permitted to place a specific thing made by a specific manufacturer and to say what that thing does. In the middle is a person permitted to place a range of things made by many manufacturers and to describe them. At the far end is a person permitted to look at a household's whole position and say what it should do. Saying what one household should do is a materially different act: it produces a recommendation aimed at that household rather than a description of a product aimed at anybody.

The permission that separates the far end of that line from everything before it is the permission to make a recommendation to a particular household, and it is a different permission from the permission to place something.

Two consequences fall out of this immediately, and both surprise people. The first is that somebody may be extremely knowledgeable and still not be permitted to advise a household, and their knowledge does not change their category. The second is the mirror image: somebody permitted to advise may know less about a particular product than the person at the branch counter who places it every day. Permission is not a claim about competence. Permission is a statement about which rules apply.

What must each one do, and why is that a different list?

The second thing a category decides is obligation, and this is the list households almost never see. Permission says what a person may do. Obligation says what a person owes the household while doing it, and the two lists are not mirror images of each other.

The obligations that exist in this area, described in general terms rather than as any particular rule, cluster into four kinds. There are disclosure obligations: telling the household something before it decides, in a stated form. There are suitability obligations: forming a view about whether what is being placed fits the person at the counter. There are record obligations: keeping evidence of what was said and what was recommended. And there are conduct obligations: how somebody may be approached, what may be claimed, and what may not.

Different categories carry different combinations of those four obligations. Category, not how helpful or patient or well informed somebody seems in the room, decides what a household is owed.

The dignity question has to be faced squarely here. Naming an arrangement is not an accusation against the person inside it. A branch employee who places what an employer is paid to place is doing the job as it is defined, inside the permissions and obligations attached to that job, and doing it honestly. The Bhosale household was not defrauded on 6 April. The household met an arrangement whose shape it could not see. Not seeing a shape is a completely different thing from being defrauded, and no amount of care on the household's part would have made that shape visible from where it was standing.

What is an Insurance Agent, and what decides what one may do?

Insurance deserves its own treatment here for one reason: it is the arrangement most households in this country actually meet. Far more people have met somebody selling cover than have ever met anybody discussing a fund, and for a great many households the only financial professional who has ever sat in their front room came about a policy.

An insurance agentAn intermediary placing insurance, whose permissions and payment follow the category they are registered in rather than the description on their card. is an intermediary who places insurance. The definition is that thin on purpose. Everything that actually matters about such a person is decided by which category they are registered in. The category settles whether they may place the products of one insurer or of several, what they are obliged to tell a household before it signs, what they must record, and how they are paid. None of it is settled by the card.

The category an insurance agent is registered in, and not the description on their card, decides what that agent may do. The useful question is which category, not which title.

The household-level version of this is very simple. If somebody arrives with material from exactly one insurer and nothing else, that is a fact about the arrangement they operate under, and it is worth knowing before the conversation rather than after. If somebody arrives with material from several, that is a different fact about a different arrangement. Neither fact makes anybody good or bad at their job. Both facts change what can appear on the table, and what appears on the table is what the household ends up choosing between.

Who pays each of them, and out of what?

Now the third thing a category decides, and the one that matters most at a counter. There are only a few ways a person in this position can be paid, and every arrangement a household meets is one of them or a combination.

A person can be paid by the household, as a bill for work done. A person can be paid by the manufacturer, out of what is placed. A person can be paid a salary by an employer who is itself paid by manufacturers. The branch arrangement works that way, and it is the most common of the three in this country. And a person can be paid by nobody in the chain at all. An educator is paid that way. Having no stake in the outcome lets an educator be far more direct than anybody who has one, and also far less useful: an educator does not know the household.

Every payment arrangement in this area is one of four shapes, paid by the household, paid by the manufacturer, paid by an employer that the manufacturer pays, or paid by nobody in the chain, and the shape is what a household should be trying to establish.

Where the money comes out of matters as much as who hands it over. A bill is paid out of money the household already has, so it appears in the household's own record as a payment made. A manufacturer's payment is made out of the product, so it is deducted before any value is ever shown to the household. A deduction of that kind is an embedded costA cost deducted before a value is shown, so it produces no payment, no receipt and no event that a household could notice., and when it repeats for as long as something is held it is called a trailA payment made repeatedly, for as long as a holding stays in place, rather than once at the moment it is placed..

Mechanics alone let anybody believe whichever of the two they already believed, so the difference has to be put in rupees.

What do the two arrangements actually cost this household?

Take the two arrangements that came to this door and put rupees on both. One number is known because it was quoted. The other has to be built, and the building requires an assumption that is stated here in the open rather than buried.

The person who came by appointment on 29 April quoted Rs 12,000/- for the year to produce a written plan, billed to the household, taking nothing from any manufacturer and saying so in writing before starting. The Rs 12,000/- is not an estimate. The household was told that price.

The arrangements on 6 and 18 April charged the household nothing at all. Putting a rupee figure against them takes an invented trail of 1.2 per cent a year, and the word invented is doing real work: actual commission rates, trails and fee scales are set by regulation and by contract, they differ by product and by arrangement, and they change. The invented 1.2 per cent makes the arithmetic visible and stands for nothing more.

The illustration applies that invented rate to the Rs 3,67,887/- this household holds, and one more assumption has to be stated plainly with it: the household's holdings are two bank accounts at Rs 41,887/-, a recurring deposit at Rs 64,000/-, a public provident fund at Rs 84,000/-, gold at the household's own estimate of Rs 1,40,000/- and a two-wheeler at Rs 38,000/-. Nobody placed any of that. The illustration treats the whole Rs 3,67,887/- as though it sat in something an intermediary had placed, purely so the two arrangements can be compared at this household's actual size.

At this household's size the unbilled arrangement costs Rs 4,415/- a year and the billed arrangement costs Rs 12,000/- a year, so the invisible one is Rs 7,585/- a year cheaper, even though most writing on this subject implies the opposite.

Rs 7,585/- is not a rounding difference for this household. Against the Rs 42,770/- that leaves in an ordinary month it is more than five days of everything this household spends, food, fares, school and all, arriving once a year. The tidier conclusion, that the visible fee must be the better arrangement because it is visible, is false at this size however responsible it sounds.

The arithmetic above is only half of what is true, and the other half must never be separated from it.

The Rs 4,415/- cannot be seen. The Rs 4,415/- is not billed, no receipt exists for it, and it appears in no month as a payment. Its size also moves with what is sold: a payment made out of what is placed depends on what gets placed. The Rs 12,000/- can be seen. A bill arrives, it can be queried, it can be refused, it can be compared with somebody else's price, and its size does not move with what is recommended. The price was fixed before any recommendation existed.

Both of those facts are completely true at the same time, they point in opposite directions, and neither ranks above the other.

Ranking them would be advice. A ranking would require knowing how much a particular household values being able to see a cost against paying a smaller one, how much it holds now and how much it expects to hold in ten years, and what it would do with the information a plan produced. Every one of those is a fact about one household, and no general account holds them. A ranking made without them substitutes an author's preferences for a reader's circumstances and calls the result education.

Why does who pays somebody predict what they can offer?

The structural point is why the who-pays question is worth more than any other question that can be asked at a counter. The point is not a claim about anybody's character. The point is a claim about the shape of an arrangement, and it would hold if every person in it were a saint.

Think about a food stall outside one office building. The person running it is not dishonest, but the menu is going to reflect what the office wants for lunch. The office is what pays. Put the same person outside a college and the menu changes. Nothing about the cook changed. Only the source of the money changed.

Apply that to this position. Somebody paid only when something is placed can offer the things that can be placed. Such a person can be diligent, careful and completely straight with a household, and the set of things that can appear on the table is still the set of things that can be placed. Doing nothing is not a thing that can be placed, so no arrangement pays such a person for concluding that a household should do nothing this year.

Somebody paid when something is placed can offer what can be placed, and somebody paid by the household for the work can offer whatever the work concludes, including that nothing should be done, and neither sentence is a statement about anybody's honesty.

The mirror side has to be said with the same flatness. Somebody paid by the household has their own shape. Such a person is paid for producing something, so a plan gets produced. Such a person may know far less about a particular product than the person who places it daily. And a household that has Rs 41,887/- in two accounts and a buffer covering 0.73 months of its outgoings may find that the arrangement it is being sold is a document, when the thing it needed was one specific answer.

Where do the two costs cross, and what does the crossing show?

The arithmetic above was done at one size. Change the size and the answer changes, and how it changes turns an argument about arrangements into a question about amounts.

A bill does not move when the amount held moves. Rs 12,000/- for a year's work is Rs 12,000/- whether the household holds Rs 3,67,887/- or ten times that. A percentage does exactly the opposite: it is small when the amount is small and large when the amount is large, and it never stops moving. One is a flat line and the other is a rising one, and two such lines cross exactly once.

Rs 12,000/- divided by 0.012 is Rs 10,00,000/-, so the invented 1.2 per cent gives a crossing pointThe amount at which two ways of paying cost the same. Below it one is cheaper in rupees and above it the other is. of Rs 10,00,000/-, the amount at which the flat bill and the rising percentage cost the same. Below that amount the arrangement paid by the manufacturer costs the household fewer rupees. Above it, the billed arrangement does. The Bhosale household holds Rs 3,67,887/-, a little over a third of the crossing point.

Which of the two costs less is a fact about how much a household holds rather than a fact about which arrangement is better, and at this household's size that fact points at the arrangement most writing on this subject disparages.

How does a household find out which category somebody is in?

Everything above is useless unless an ordinary conversation at a counter can establish which arrangement a household is standing in. Two moves do it, not one.

The first move is to ask. A title is all that asking the name produces. Ask instead the four questions that produce facts: who pays this person, out of what, whose products they may place, and what they are obliged to state before anything is signed. All four are ordinary questions and they are not rude. Somebody operating inside a category can answer all four without difficulty. The answers are simply what their arrangement is.

Asking produces an answer and checking produces a fact, so the sequence is ask first and then verify on a public register rather than choose between the two.

The second move is to check the answer somewhere that is not the person who gave it. Public registers exist for this and they are maintained by the authorities named further down. Checking a name on a public register is a job of its own, with its own sequence, and it is set out under checking an intermediary on a register.

What do people actually do with this in practice?

Three uses, and they are worth seeing because the who-pays question looks academic until somebody watches it being used in a room.

A household uses it to work out what can appear on the table. Before agreeing to a conversation, knowing who pays the person tells a household what the set of possible outcomes contains, and it is more useful than any assessment of the person. A household that knows the answer is not suspicious of anybody; it is simply not surprised later.

Somebody assessing a complaint uses it to work out what was owed. When a household says it was sold the wrong thing, the first question anybody handling that complaint has to settle is what obligations attached to the person who sold it, and that is answered by the category rather than by what was said in the room. A household that never established the category has made its own later complaint harder to state.

Somebody looking at a whole market uses it to work out where the money goes. No bills exist, so an analyst who wants to know what a distribution arrangement costs households in aggregate cannot read it off bills. The figure has to be built from the product side, exactly the arithmetic done above at one household's size. The cost of a distribution layer is invisible on the household side and completely visible on the manufacturing side, so the household that pays it is the party least able to see it.

None of those three uses requires anybody to decide that one category is better. All three require only knowing which one is in the room.

What cannot be settled without knowing the household?

Two things cannot be settled at all.

The first is which arrangement any household should use. The rupee cost of each at one size, the smaller of the two there, the crossing point, and how each looks from the household's side of the counter are all settled above. The ranking is not settled. Ranking requires facts about a household that a general account cannot have: what it holds, what it expects to hold, what it would do with a plan, and how much it values being able to see a cost. A ranking made without those facts has replaced them with somebody's preferences.

The second is whether the Bhosale household should have accepted any of the three approaches it met in April. The Bhosale household accepted none of them. The same household has never taken advice from anybody, holds no scheme and no fund, and carries a buffer covering 0.73 months and Rs 71,594/- owed. Each of those is a fact. No general account can know what those facts call for.

The part worth carrying is short. An intermediary stands between a household and a manufacturer, and three movements pass through that position while the household can see only two. Categories are sets of rules, not names. A category decides permission, obligation and payment together. Who pays somebody predicts what they can offer. And at Rs 3,67,887/- held, an invented trail of 1.2 per cent costs Rs 4,415/- against a quoted Rs 12,000/-. The smaller cost is Rs 7,585/- less in rupees and completely invisible, and both facts hold at once.

The Bhosale household, Meghna Bhosale, Ashok Bhosale and Ira Bhosale are invented.
Educational material. Not advice on any investment, tax, budget or market position.