Canada’s investment industry is under increasing financial pressure, but that doesn’t mean that all is lost – at least, not yet.

Headlines about the industry have been rather bleak as of late. Recent data from the Investment Industry Association of Canada show that operating profits dropped by almost 60% in the second quarter, hitting their lowest level in more than 10 years. In fact, the figures were weaker than at the height of the financial crisis, when it appeared that the financial world was really in danger of ending. And, within Canada’s industry, it’s only the large bank-owned dealers that are really making any money; the rest of the business is either losing or just breaking even.

What to do? Start cutting corners on compliance and doing whatever it takes to stoke revenue in the short term? Give up and sell out to a bank-owned dealer? Or chuck it all and start looking for a new line of work?

It may be that the industry does need to undergo some contraction. A study published earlier this year by the Bank for International Settlements found that the financial sector in Canada is disproportionately large. And it discovered that beyond a certain point, an overly large financial services industry inhibits economic growth because it drains human resources away from other, more productive uses.

Within Canada’s industry, some consolidation will probably have to take place. Certainly, larger firms do enjoy an advantage, having the scale needed to keep a lid on marginal operating costs. However, this doesn’t mean the banks will end up owning everyone. Smaller firms can join forces to gain scale, bolster their bottom lines and stay independent.

The one thing that the industry absolutely cannot do is use these tough times as an excuse to cut corners. One of the primary reasons for the overall weakness in revenue is a loss of investor confidence – mostly for reasons that go well beyond the control of the Canadian investment industry. However, the domestic business has done its share of harm. Rather than compounding that problem, the industry should look to win back investor trust by openly embracing a new era of transparency and fair dealing. Fail to do that, and it will be time to abandon all hope.

© 2012 Investment Executive. All rights reserved.