Retail vs. Institutional Clients in Financial Firms

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The financial services industry addresses and serves a broad range of individuals and businesses, but all these clients fall into one of two categories. They're typically retail clients or institutional clients. You can substitute the term "investor" for "client" because financial advisors primarily offer assistance and advice in investing, profitably maintaining those investments, and knowing when to cash in and cut them loose.

 

The Definition of "Retail" 

"Retail" is something of a misleading term here. It brings to mind mom-and-pop stores, as well as mega-chain grocers -- it implies selling something. But in investment terms, the mom-and-pop operation and the mega-store are not both retail clients. The mom-and-pop operation would be because retail clients typically include individuals, families and small businesses, but the mega-chain grocer is most likely an institution.

The term "institution" pertains to larger clients. Think banks, funds that maintain investment portfolios for others such as pension funds, insurance companies and – yes – that grocery store if it's part of a national chain and provides its employees with investment opportunities and retirement plan provisions. 

A retail client can be an extremely wealthy individual or a small, successful business. The financial assets of retail clients can extend into the tens of millions, so small by no means translates to penny ante.

 

Institutional Clients

Most financial advisors in financial services firms have only retail clients. Institutional clients are usually serviced through a separate institutional sales force. Similarly, certain lines of business and job functions are typically organized in a retail division based on their orientation toward retail clients.

In addition to financial advisors, certain other job categories include financial planners.

But perhaps the most important distinction is the volume of trades each makes, as well as the types of investments they make. Consider the insurance company that sells whole life policies, the kind that build up cash value over time. How does that happen? A portion of your premiums is invested. You can then borrow against that growth, often tax-free. 

That insurance company has an ethical and professional responsibility to invest those premiums well but safely. If it regularly takes on high-risk investments and its policyholders consistently lose money, it might find itself out of business soon.

By the same token, minuscule returns on investments will produce some unhappy clients also. Institutional clients are often bound by their own service to their clients. Contrast this with Mom and Dad operating their very lucrative grocery store down the street. They have no one to please but themselves.

Retail clients tend to buy in round lots or 100 shares. They're not the guy next door who wants to dabble in the market with the extra $500 he has on hand this month, although retail clients do sometimes purchase less than 100 shares, even just one share in some rare cases.

Institutional clients tend to buy and sell thousands of shares at a time. Obviously, their needs as a financial advisor are much different.