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Stocks in the diverse financial services industry will probably be volatile in the near-term but will provide good long-term buying opportunities for investors willing to take risks. Profits are generally rising in the industry, despite interest rate increases, but industry growth will probably slow down in 1995. Investors should be especially careful to evaluate individual companies rather than base their investment choice on general industry trends.

The financial services industry appears to have strong prospects over the near-term and long-term. Prospects over the near-term will be influenced by rising interest rates, competition and increasing specialization. Companies such as those in the credit card and mortgage banking sectors will experience margin erosion. Companies with earnings streams from fee-based sources will experience strong growth.

The variety of businesses within the financial services category make it difficult to predict the effect of rising interest rates on the industry as a whole. Consumer finance companies can raise their interest rates to balance their higher funding costs, but they may suffer from a weak demand for credit. Life insurance companies are less vulnerable to interest rate fluctuations because they pass the risk on to policyholders. Investment in the financial services industry is still a good long term investment, but most capital is likely to be put back into the business and not paid out in dividends.