The Canadian brokerage industry reported a 20% drop in its earnings in the first quarter of 2008, but Ian Russell, president and CEO of the Investment Industry Association of Canada, is not despairing.

It still reported an operating profit of more than $1 billion, he told the IIAC’s annual meeting in Banff yesterday: “Putting the quarter in perspective, if there are four quarters like the first quarter, industry earnings would still be at 2005 levels.”

In 2005, the industry had operating profits of more than $4 billion.

Despite the market meltdown that began in July 2007, last year was a record year for the Canadian brokerage industry, with operating profits in excess of $6 billion, up 9% from the previous year. All types of IIAC member firms showed growth in 2007: integrated firms grew 7% to $3.9 billion in operating profit; institutional firms were up 20% to $1.8 billion and retail firms had 9% growth to $606 million.

In fact, retail firms that are making good gains in share of the earnings pie. In 2000, they represented a 7% share; by 2007, that had grown to 10%. Institutional firms accounted for 28% of industry earnings in 2008, vs. 12% in 2000. The two are making gains at the cost of the integrated firms, whose share has slipped to 62% from 81% in 2000.

Retail/wealth management was also the brokerage industry’s dominant business line in 2007, representing 53% of industry revenue. Investment banking is the next largest source of revenue, at 28%.

Retail commission revenue was more than $4 billion in 2007, a slight increase year over year, and was slightly less than $1 billion in the first quarter of 2008. The gains in fee revenue, however, outstrip the gains in commission revenue. Year over year, fee revenue gained about 25% to more than $2.5 billion in 2007. First quarter fee revenue seems to be following the same trend.

“Small firms are building fee-based business as successfully as big firms,” says Russell.

Fee revenue is also gaining share of the wealth-management revenue pie. In 2007, fees accounted for 30% of the $8 billion in revenue, vs. 22% of $4.5 billion in revenue in 2000. In the same period, the share of commission revenue has declined — to 23% in 2007 from 31% in 2000.

Investment banking is feeling the pinch of the market uncertainties, Russell says, but corporate advisory business is growing its share of investment banking revenue, once again pointing to advice as a way to add value to corporate clients. In 2007, corporate advisory business accounted for 24% of $5.8 billion in revenue, up from 10% of a $4.1 billion pie in 2003.It made gains at the expense of principal trading, which declined to 21% from 35%. Underwriting remained steady at 55%.

The conference concludes today with the Terry Melling Golf Tournament.