Traditionally, banks and insurance companies have conveyed funds from low wealth households to businesses in need of capital. High wealth households and large companies have accessed financial markets directly. Today, with direct connections to millions of people through phone, fax and Internet, small companies are starting their lives as publicly-traded ventures thanks to easier sale of stock and consumers of banking, insurance and financial services can choose from dozens of providers worldwide with fewer geographic limitations than ever before.

Yet the value of long-term relationships between financial services customers and their institutions or intermediaries remains as strong as ever, counter Franklin Allen of the Wharton School at the University of Pennsylvania and Douglas Gale of New York University. They find that bankers, brokers, investment companies and insurance agents provide value to customers because of an implicit insurance of service in their paper "Innovations in Financial Services, Relationships and Risk Sharing." The relationships can provide value to both parties, particularly to consumers who might otherwise devote time and effort to investigating each company’s background every time they want to undertake a transaction.

Households and firms rely on intermediary companies understanding that they will share in any surprises in the market since both will benefit from the relationship in the future. Some companies prefer to ask for fees and commissions upfront to ensure consumer loyalty or sign contracts. And the assurances an intermediary provides are not contractual, so they cannot be enforced by the courts. Further, the variety of outcomes from a single transaction cannot be predicted — stocks, insurance premiums, interest rates and other units of measure can change slightly or dramatically. So each party to a transaction must interpret for himself whether the level of service and transaction were satisfactory.

Banks, particularly, have ignored the kinds of high-margin transactions that provide them more and stronger connections to their customers, and with the desirable, profitable transactions that customers are seeking from financial services companies.

In Germany and other European countries, universal banks with a broad array of services lead to relationships that are wider in scope and more important than in the U.S. It’s not unusual for a small business or individual customer to seek out the local branch manager and develop a personal relationship. There is less competition for such services in Europe compared with the U.S. and combined relationships are only successful when there are large future streams of profits at risk, which occurs in Europe but less so in the U.S.

For U.S. consumers, "one-stop shopping" has not proven valuable and mergers to create "financial supermarkets" have been unsuccessful. Complexity, liquidity and legal uncertainty were among the primary reasons for offering a limited set of securities in organized markets. The creation of such firms began in the 1980s, with Sears Roebuck & Co. buying Dean Witter and other financial service firms. Similar efforts by American Express to offer credit cards, mortgages, insurance, consumer loans, FDIC-insured deposits and other instruments were unsuccessful and the disparate units were returned to independent operation.

But the combinations of commercial banking and investment banking may be more positive because there are areas of profitability and the implicit assurances are possible. Bankers Trust and Alex Brown & Co., for instance, reflect the so-called Section 20 subsidiaries, named for the portion of the Glass-Steagall Act that were revised in 1989.

"I think they’re learning from their mistakes," Allen said. "In the future I think we’ll see large firms offering a wide range of services or small firms that are niche players. And there are likely to be middle players squeezed out."

Despite a significant fall in the cost of trading, the individual ownership of corporate equities fell from more than 75% to around 50% during the 1980s. Because intermediaries are using markets more extensively than ever before, the percentage of pension funds and mutual funds owning equities has risen dramatically.

Intermediaries are developing a new responsibility: instead of reducing transaction costs and providing information as in years past, they are now increasingly relied upon to reduce risk. Therefore, competition may lower the benefits from those relationships, as may the growing role of direct links from customer to financial institution.

"The markets are becoming more complicated and it’s difficult for an individual to go it alone," Allen said.

The increasing costs of participating in financial markets are the primary driver that leads investors to seek out intermediaries even where there is the potential of acting alone. New markets have developed in derivatives, new geographies and selections, they have increased the expertise needed for devising effective strategies. Although tangible costs in commissions and fees may have fallen, the information costs of these new strategies have increased. These are just a few of the reasons investors of various sizes have sought out intermediaries that can help them reduce their risks, increase their information and help them make prudent decisions.