The strong growth in the retail brokerage business is transforming the industry landscape, according to Ian Russell, senior vice president industry relations and representation for the Investment Dealers Association of Canada.

Speaking at the IDA’s annual conference in Banff today, Russell noted that, despite the retail-led growth the securities industry has enjoyed over the past couple of years, costs are rising for smaller firms.

Compensation payouts have grown faster than revenue over the past two years for retail firms, and operating expenses are rising faster than they have in the past. Increased resistance from brokers in migrating from large established dealers to start-ups and small independents is helping to drive recruitment costs higher.

In the face of this, small firms are moving to the introducer model in greater numbers, as they look to outsource the back office functions so they can run their businesses as efficiently as possible, focusing on their core strength — dealing with clients. He sees that trend continuing as the clearing and settlement process becomes more complex and firms grapple with the capital demands of self-clearing.

Russell also suggested that firms that live in the mutual-fund-dealer world are continually being pushed toward the IDA world by the growth in trusts and structured products that are sold from IDA platforms. This will improve the market by adding breadth and boosting proficiency standards, he said.

Independent retail firms are addressing their constraints by expanding their offerings through deals with independent institutional firms. These sorts of arrangements give small retail firms access to new issues, and boutique institutional players access to distribution that helps them win investment banking business.

This in turn has helped spur corporate-finance activity and boosted the development of the income trust sector and structured products, as well as more traditional equity offerings. Russell said he expects the institutional boutiques to continue to grow as they build these distribution channels through small retail firms, capitalize on strong junior markets, and improve their research and trading. Meanwhile, small retail firms are expected to build their advisor forces, add clients and broaden their product lines and service offerings.

“The only constancy in this business is change,” said Russell. “The industry has been adaptive and innovative and its success is linked to two things — the people in this business, and technology. We should be proud of the past, and we have a future to look forward to.”