Retail investors have been driving the securities industry’s growth over the past couple of years, and their influence is only likely to increase, the Investment Dealers Association of Canada annual conference heard today.

In a presentation to the conference in Banff, Ian Russell, senior vice president of industry relations and representation, detailed the securities industry’s retail investor-led transformation over the past year. For one, retail investors didn’t run for the hills after the tech-led crash, he said. Instead, they turned to products such as income trusts, which sustained the Canadian market and now account for more than half of overall industry revenue. And that component has been growing.

The one thing the tech crash did seem to precipitate, Russell suggested, is the discrediting of do-it-yourself investing. He noted that the days are long gone when investors thought they could just open a discount brokerage account and do it all by themselves. Instead, retail advisors have been thrust to the front of the securities industry’s profit picture.

The tech crash also scared away smaller investors, largely represented as mutual fund buyers. These products were out of favour between 2001 and 2003, but with improved performance, their sales are resurgent, he noted. This habit of being later to the party is typical of less sophisticated investors, he noted, and these investors seem to have waited for the confirmation of a second year of higher markets before being persuaded to come back in force.

Still, Russell argued, there still appears to lots of money on the sidelines waiting to come back into the market. Credit liquidity at investment dealers is at an all-time high of $22 billion, and personal deposits, which ebbed away when investors really started turning to higher yielding mutual funds in the mid to late 1990s, are now back at record levels. All of this suggests that there is still a large untapped reserve of financial assets.

Retail advisors appear to be increasingly key to tapping into that asset base. Russell reported that client assets with dealers are up 20% over the past two years to an all-time high in that metric as well. This all comes despite corporate scandals, mutual fund trading scandals, disappointing fund performance, a growing regulatory burden and other disincentives. This, Russell suggested, highlights the importance of the broker-client relationship in maintaining investor participation in the face of turmoil and uncertainties.

With this shift in the balance of power toward advisors, Russell also noted, new, independent retail firms are luring away advisors, who are in turn able to bring along many of their clients, demonstrating that client loyalty largely lies with advisors, not firms. As a result, small firms are outperforming the traditional, large integrated dealers. Their revenues are up 70% over the 2002-2004 period, compared with 17% for bank-owned dealers. Assets under management have grown 40% for independents, vs. 21% for bank-owned dealers in that period. In the 2003-2004 period, independent profits are up 58%, compared with a 4% decline for bank-owned dealers.

Retail investors are looking for quality service, and largely finding it at small dealers he suggested, as the bank-owned firms focus exclusively on high net worth clients.