Lesson 16 - Mr. Wilson: The Digital Classroom



AOF Financial ServicesLesson 8Services Provided by Investment CompaniesStudent ResourcesResourceDescriptionStudent Resource 8.1Reading: Services Provided by Investment Companies Student Resource 8.1Reading: Services Provided by Investment CompaniesThe activities of commercial banks such as Bank of America, Chase, and Wells Fargo used to be separated from the activities of investment banks such as Goldman Sachs and Morgan Stanley. If banks took in deposits from customers (as only commercial banks used to), they weren’t allowed to also underwrite securities such as stocks and bonds (as only investment houses used to). One reason was to avoid conflicts of interest. If banks created securities for one set of customers and then tried to sell them for a profit to another set of customers, then the banks may be inclined to be dishonest about the merits of the company whose stock they were trying to sell. However, the concern for a potential conflict of interest seems to have changed in recent years.When economic times are hard, people tend to put money into savings. This used to be good for commercial banks. When economic times are good, people tend to invest in stocks, bonds, and similar investments. This was good for investment banks. Finance industry representatives made a case to Congress that if they were allowed to participate in each others’ principal areas of business, both types of banks could do well in good or hard economic times. As a result, since the late 1980s the division of business activity between commercial and investment banks has blurred. Commercial banks have gotten into the investment business, and investment banks have gotten into the banking business. This has provided consumers with one-stop, all-inclusive banking and investment services.The following table separates the types of financial services that commercial banks and investment banks provided before the 1980s. Now, of course, commercial banks, investment banks, and investment companies can offer all services listed from both columns of the table.Formerly commercial bank activitiesFormerly investment bank activitiesBank checkingBrokerage (trade stocks, bonds, futures, options, exchange traded funds [ETFs], and other derivatives)Retirement accounts (IRA, Roth IRA)Mutual funds, stocks, bonds, ETFsCertificates of deposit (CDs)Margin accounts (buying stocks and bonds on credit)MortgagesResearch on stocks, bonds, and fundsHome equity lines of creditMoney markets (commercial paper, banker’s acceptances, Treasury bills)Credit cardsAnnuitiesWhy do investment companies offer so many different services today?First, there are trillions of dollars invested in the stock market alone. All finance companies strive to gain a larger share of those trillions of dollars. By offering many different services, they hope to get more of the market through more customers.Second, technology has opened up a lot of doors for both customers and investment companies. What used to be done in an office can be done now in the comfort of one’s own home, with the right technology. To make matters even easier, companies have increased their expertise so that customers don’t have to go to different companies or different websites to do their business. The thought is that once the investment company has a customer for one service, it’s best to meet all of that customer’s financial needs, which means making more money for each service performed.Third, the change in law allows investment companies to offer services that were once only handled by either commercial banks or investment banks. Without the new set of rules, finance companies would still be relegated to either taking deposits or underwriting securities.As you can see, there are some positive and negative outcomes for both consumers of finance and companies offering investment services. For example, one benefit is that consumers have the convenience of taking care of most of their financial needs at one location. And although there are laws protecting individual customers, it’s advisable to invest with the understanding of caveat emptor (buyer beware). Also, investment companies have the opportunity to attract more business by offering a wide variety of financial services. However, this increased opportunity has increased competition. ................
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