Brendan Wood issued a stark warning to Canada’s investment bankers Tuesday, telling them that U.S. banks are skimming the cream from the Canadian investment banking business.

Speaking to the Investment Dealers Association’s annual conference in Mont Tremblant, Que., Wood, chairman and president of the firm that bears his name, Brendan Wood International Inc., warned that U.S. dealers are taking top investment banking deal mandates away from Canadian firms. “They’re eating your lunch,” Wood warned the crowd of brokerage executives, “but they’re not eating the whole lunch, just the truffles.”

Apart from the heavy U.S. competition for sweetest deals, the Canadian investment bankers are in trouble because there simply too many of them chasing too few deals in Canada. Wood said that the average Canadian banker generates US$3.2 million in revenues per year vs US$7.9 million for U.S. bankers. The problem for Canadian dealers is that average deal sizes are smaller in Canada, and there are relatively few deals to do.

The fact that the Canadian investment banking business is so over-banked means that there could be plenty of rationalization in this business if bank mergers are allowed to go ahead, Wood warned. “It may be good for the banks in their other lines of business but it would be very bad for the investment banking business.”

Instead of waiting for that axe to fall, Wood exhorted the Canadian dealers to increasingly try to compete in the U.S. He noted that Canadian bankers have the quality to compete with their U.S. counterparts on most characteristics, except for their global expertise. And, he said that the Canadian firms’ lack of this key attribute is enough to swing firms to deal with U.S. firms instead, particularly the global bulge bracket firms.

The Canadian firms’ weaknesses in the U.S. are because they commit the same sins that Canadian firms typically accuse U.S. Firms which try to play in Canada — not demonstrating enough commitment to the business, and not bringing enough expertise to bear on it.

Wood said that the firms that win will be those that invest in research and bring good investment ideas to the table. “To me, the quintessential firm of the future is the one that becomes a true investment house, rather than a schlock sales organization — there’s too much of that out there, and I think that’s what institutional clients are saying,” he said.