Financial Services
Turning Financial Expertise into Business Value
Business Characteristics
- Fee-based revenue
- Financial expertise
- Client relationships
- Capital markets
- Regulated activities
- Multiple revenue streams
Financial services is a broad category rather than one uniform business model. An asset manager, investment bank, and financial adviser can have very different revenue sources, cost structures, and risks. Analyze each company's actual activities instead of assuming that all its revenue comes from the same model.
What Is It?
Understand how financial services companies help customers make decisions, manage assets, and access financial markets.
Financial services companies provide expertise, technology, and services that help people and organizations manage money and financial activities. Depending on the company, customers may need investment management, financial advice, securities trading, help raising capital, or support with complex financial transactions.
An investment bank may advise a company that wants to acquire another business or raise money by issuing shares or bonds. An asset manager invests money on behalf of clients according to an agreed strategy. A wealth manager may help individuals plan their finances, manage investments, and coordinate other financial needs. These businesses serve different customer problems even though they all operate in financial services.
Many financial services businesses earn fees for expertise or ongoing services. For example, an asset manager may charge a fee based on the assets it manages, while an investment bank may earn fees for completing a transaction. A brokerage business may earn commissions or other revenue from customer trading activity, depending on its pricing model.
The customer paying for a service is not always the person whose money is being managed. An investment fund may pay a management company to manage its portfolio, while individual investors own interests in the fund. Similarly, a company seeking advice on a transaction may pay an investment bank for its work.
Financial services companies may also earn revenue from activities that involve market exposure, financing, or other financial risks. Those activities should be distinguished from fee-based services because they can have different economic drivers and may produce more volatile results.
The central business question is whether a company can attract and retain customers, provide services they value, earn sufficient revenue to cover its costs, and manage the risks associated with its particular activities. A respected financial services business is not automatically a good investment at every share price.
Business Model in One Minute
Follow a simplified example of how a financial services company provides a service and earns revenue. The actual process depends on the type of service.
A Customer Has a Financial Need
An individual, business, or institution needs help managing assets, raising capital, trading securities, or completing a financial transaction.
The Provider Offers a Service
The financial services company agrees to provide a defined service, such as investment management, transaction advice, or brokerage access.
The Service Creates Customer Value
The provider applies its expertise, systems, relationships, and processes to help the customer address the agreed financial need. The outcome is not guaranteed.
The Company Earns Revenue
The provider receives fees, commissions, or other contractually agreed revenue. The amount and timing depend on the service and the terms of the agreement.
How It Works
Financial services companies connect customer needs with specialized expertise, financial products, and access to markets.
Imagine a business that wants to acquire a competitor. It may need advice on valuation, financing options, transaction structure, and negotiations. An investment bank may provide some of these services under an agreed engagement and earn a fee. This is one example of financial services; asset management and wealth management work through different customer relationships and revenue arrangements.
- 1Customer Need
Identify the Customer's Need
The provider determines what the customer needs and whether its services and expertise are appropriate for that task.
- 2Engagement
Agree on the Service
The parties establish the scope of work, responsibilities, pricing, and other contractual terms. Some services are ongoing, while others relate to a specific transaction.
- 3Service Delivery
Deliver Expertise or Access
The company uses its people, research, systems, relationships, and processes to deliver the agreed service.
- 4Revenue
Recognize Revenue
Revenue is recognized according to the applicable accounting rules and contract. Cash may be collected at a different time, and not every engagement results in a completed transaction.
- 5Economics
Manage Costs and Risk
The company pays the costs of serving customers and manages the operational, regulatory, reputational, and financial risks relevant to its activities.
A fee-based service does not necessarily eliminate financial risk. Revenue can fall when customer assets decline, transaction activity slows, or customers reduce spending. Some financial services businesses also undertake activities that expose them directly to market, credit, or funding risks.
Who Pays?
The paying customer depends on the service being provided and the contractual arrangement.
Individuals and Families
Individuals may pay for financial planning, investment advice, wealth management, brokerage, or related services. Pricing may be based on a fixed fee, an ongoing arrangement, assets managed, or transactions, depending on the provider.
Institutional Investors
Pension funds, investment funds, foundations, and other institutions may pay asset managers or specialist advisers to manage assets or provide financial expertise. The mandate determines the service and fee structure.
Businesses and Corporations
Companies may pay financial advisers and investment banks for services related to mergers and acquisitions, capital raising, restructuring, or other financial transactions. Fees and payment timing depend on the engagement.
Investment Funds
An investment fund may pay a management company to manage its portfolio. The management fee is governed by the fund's arrangements and may depend on assets managed or other agreed terms.
Trading and Brokerage Customers
Customers may pay commissions, account fees, or other charges for brokerage services. Some providers use different pricing arrangements, so the presence and size of commissions must be checked rather than assumed.
Financial Institutions and Other Organizations
Banks, insurers, asset owners, and other institutions may purchase research, advisory, administration, or specialist financial services. The exact customer and revenue source vary by provider.
How They Make Money
Financial services companies can earn revenue by managing assets, advising on transactions, facilitating trading, and providing specialized expertise.
Asset Management Fees
An asset manager may charge a fee for managing investments on behalf of clients. The fee may be calculated using assets under management, a contractual rate, or another agreed basis. Revenue can change when asset values, client flows, or fee rates change.
Wealth Management Fees
Wealth managers may earn fees for investment management, financial planning, advisory services, or other services offered to clients. The revenue mix depends on the provider's services and customer agreements.
Investment Banking Advisory Fees
Investment banks may advise on mergers, acquisitions, divestitures, and other corporate transactions. Fees may depend on the agreed engagement and may be linked to milestones or transaction completion. A proposed deal does not guarantee that a fee will be earned.
Capital Markets Fees
Companies raising money through equity or debt issuance may hire financial institutions to arrange or support the transaction. Providers may earn underwriting, placement, or related fees, subject to the transaction structure and contractual terms.
Brokerage Commissions and Trading Services
A brokerage business may earn commissions or other fees for facilitating securities transactions and related services. Pricing varies across providers and markets, and transaction-based revenue can be affected by customer activity and competitive pricing.
Performance-related Fees
Some investment managers receive additional compensation when an investment strategy meets specified contractual conditions. These arrangements vary and may include hurdles, high-water marks, or other terms. Performance-related revenue can be uneven and should not be assumed for every asset manager.
Where the Money Goes
The main costs depend on whether a company primarily sells expertise, manages assets, facilitates transactions, or takes financial risk.
Employee Compensation
Financial services firms often need skilled professionals, including advisers, portfolio managers, analysts, traders, engineers, compliance specialists, and support staff. Compensation may be a significant operating expense, and some roles may include variable pay.
Technology and Data
Companies may invest in trading systems, portfolio tools, financial data, cybersecurity, analytics, communications, and customer platforms. Technology costs vary with service complexity, scale, and the firm's operating model.
Research and Market Information
Some businesses spend on financial data, economic research, company analysis, market information, and specialist tools. These expenses may support decision-making or customer services, but the level of spending differs by business.
Compliance and Regulation
Financial services firms may need systems and personnel for licensing, reporting, client verification, recordkeeping, supervision, and other regulatory obligations. Requirements depend on the activities and jurisdictions involved.
Sales and Client Relationships
Firms may spend on client acquisition, relationship management, business development, and customer support. Maintaining trust and retaining customers can require ongoing investment in service quality.
Premises and Operations
Office space, administration, communications, professional services, and other operating expenses support daily activities. The cost structure varies between firms with extensive physical operations and those using more digital delivery.
Financing and Market-related Costs
Some businesses incur financing costs or expenses related to trading, hedging, and other financial activities. These costs are especially relevant when the company uses its balance sheet or undertakes market-facing activities, but they should not be assumed to apply equally to every adviser or asset manager.
What Can Drive Growth?
Where Can Opportunities Come From?
Potential Competitive Advantages
Financial services firms may build advantages through expertise, trust, distribution, and client relationships. These advantages must be assessed using evidence about the specific company.
Trust and Reputation
Clients may be more willing to entrust sensitive financial decisions to a provider with a strong record of reliability and professional conduct. Reputation can take years to build and may be damaged by poor performance, misconduct, or conflicts of interest.
Specialized Expertise
Deep knowledge of particular industries, markets, investment strategies, or transaction types can help a firm solve difficult customer problems. Expertise is valuable only when customers recognize it and the firm can consistently deliver quality work.
Long-term Client Relationships
Ongoing relationships can support repeat business and help providers understand customer needs. However, clients can still leave because of fees, service quality, performance, conflicts, or changes in their circumstances.
Distribution and Access
Established relationships with corporations, investors, institutions, or financial intermediaries may help a firm reach customers and compete for mandates. The strength of this advantage depends on the durability and breadth of those relationships.
Scale and Operating Efficiency
A larger firm may spread some technology, data, compliance, and administrative costs across a broader business. Scale does not guarantee better margins because larger firms may also face higher complexity, compensation, and control costs.
Integrated Services
A firm that can provide several relevant services may be convenient for customers with complex needs. Integration can support retention, but only when the combined offering creates real value and does not introduce unacceptable conflicts or complexity.
Data and Technology Capabilities
How Do Financial Services Firms Compete?
Why Can Competition Be Difficult?
What Could Go Wrong?
Financial services companies face different risks depending on whether they manage client assets, advise on transactions, facilitate trading, or take financial exposure themselves.
Market and Asset-value Risk
Changes in financial markets can reduce client asset values, affect assets under management, and weaken some forms of revenue. Firms with direct market exposure may also face losses on their own positions. These effects differ by business model.
Cyclical Transaction Activity
Mergers, acquisitions, securities issuance, and trading activity can slow when economic conditions or market confidence weaken. Firms that rely heavily on transaction-related fees may experience uneven revenue across periods.
Fee Pressure
Customers may negotiate lower fees or choose lower-cost alternatives. If prices fall faster than operating costs, profitability can weaken even when the firm continues to serve many clients.
Client Retention and Outflows
Clients may withdraw assets, transfer accounts, or end advisory relationships because of performance, fees, service issues, or changing needs. For asset managers, outflows can reduce the assets on which fees are calculated.
Regulatory and Legal Risk
Changes in regulation, licensing requirements, reporting obligations, or legal interpretations can increase costs or limit activities. Failures to meet applicable obligations may lead to penalties, litigation, or restrictions.
Conflicts of Interest
A firm may face conflicts between its own incentives and a customer's interests. Weak management of conflicts can harm customers, damage trust, create legal exposure, and undermine the firm's reputation.
Operational and Cybersecurity Risk
System outages, data breaches, fraud, inaccurate records, or process failures can disrupt services and cause financial or reputational damage. Strong controls are important, but they cannot eliminate every risk.
What to Look At
Choose metrics that match the company's actual business activities. Definitions, accounting treatment, and reporting scope can differ, so comparisons require care.
RevenueRevenue Recognized During the Period
Measures revenue recognized under the company's accounting policies. It helps assess business scale and growth, but revenue may combine advisory fees, asset management fees, commissions, trading-related income, and other activities. Review segment disclosures to understand the sources of growth.
Assets Under ManagementAssets Under Management (AUM)
Measures the value of assets a firm manages according to its reported definition. AUM can help indicate the scale of an asset management business and may influence fee revenue. It is not company revenue or company-owned assets. Market movements, client inflows, withdrawals, and reporting definitions can affect comparisons.
Net New AssetsNet New Assets
Measures the net assets clients add to or withdraw from a business over a period, based on the company's definition. It can help distinguish customer flows from changes caused by market performance. Companies may differ in which accounts, asset types, and movements they include.
Fee RevenueRevenue from Fees and Commissions
Measures revenue earned from fees and commissions under the company's reporting categories. It can help assess the contribution of service-based activities, but definitions vary. Some companies report fee revenue separately, while others combine it with other revenue sources.
Operating MarginOperating Income as a Percentage of Revenue
Usually calculated as operating income divided by revenue. It helps show how much recognized revenue remains after operating expenses. Comparisons can be misleading when firms have different business mixes, compensation structures, accounting classifications, or unusual expenses.
Return on EquityReturn on Equity (ROE)
Generally measures net income relative to average shareholders' equity. It helps assess the profit generated from the equity base, but results can be affected by leverage, capital structure, buybacks, and unusual items. ROE is not directly comparable across all financial services business models.
Companies Using This Model
Explore companies in Scope that have relevant financial services activities. Each example represents only part of a broader business, so review the company's reported segments rather than assuming it follows a single business model.
Diversified financial services example. JPMorgan Chase provides investment banking, asset management, and other financial services alongside its substantial banking activities. Its total company revenue should not be treated as revenue from fee-based financial services alone. Use its segment disclosures to distinguish advisory, asset management, banking, and other activities.
Diversified holding company with major insurance and investment activities. Berkshire Hathaway can illustrate selected financial activities, but it also owns businesses across other industries. Its consolidated revenue is not a measure of a pure financial services business, and its insurance operations should be distinguished from asset management and investment activities.
Related payments business rather than a core example of investment management or financial advisory services. Visa operates a payment network and earns revenue from payment-related services. It is included here only as a neighboring business model for comparison; its network activities should be studied primarily under Payments.
Related payments business with network and additional service activities. Mastercard can help readers compare payment infrastructure with other financial services, but its payment network economics should not be confused with asset management or investment banking. Payments is the more appropriate primary model for its network business.
Related Business Models
Explore neighboring models to understand how financial services connect with banking, payments, insurance, and investment activities.
Banking
Takes deposits, provides loans, and offers financial services to individuals and businesses.
Payments
Helps people and businesses send, receive, and process payments.
Insurance
Collects premiums and helps customers manage the financial risk of unexpected events.
Scope is built for understanding businesses and industries, not for investment advice.