The Canadian securities industry is healthy, and the future is bright, according to Ian Russell, senior vice president industry relations and representation at the Investment Dealers Association of Canada.

In his annual state of the industry address to the IDA’s annual conference in Mont Tremblant, Que., Russell paints a positive picture for the industry overall, although there has been considerable structural change and innovation underlying the headline growth. Russell said industry profits have soared since the middle of 2003 and through the first half of 2004, driven largely by the rebounding equity markets.

The strong markets have, in turn, boosted sales volumes, which is compensating for some of the pressure that firms are feeling on their margins. Equity trading volumes are growing impressively, but it’s really retail revenues that are driving overall industry revenues higher (as firms continue to gather assets, and market gains boost fees).

Institutional commissions continue to face margin pressure, Russell noted, because “the buy side wants something for nothing.” He noted that buy side firms are not willing to pay for the research they receive from the sell side, nor are they paying enough for the brokerage capital they consume.

He predicts that dealers are going to push back against this trend, and that there will be some rationalization of these services, with cutbacks coming in both research and institutional block trading. Perhaps this trend will force more unbundling on the institutional side, and more buy side firms will start to pay for these things, he suggested.

The M&A business has remained weak (a fact that Russell blamed on the strong dollar hurting cross-border deals), but the corporate finance business is improving (thanks to the presence of both traditional deals and income trusts, and growth in the derivatives business).

That said, the growth engine remains retail. Russell said the traditional commission business continues to be important to retail revenues, but that product innovation is also playing a key part in the industry’s growth, thanks to both income trusts and the development of high-end retail wrap products.

Thanks largely to the strong development of these high-end retail products, fee-based revenues now account for 25% of total retail revenues, recently surpassing mutual fund commissions. Russell said fees in some cases are usurping mutual fund commissions. In fact, the mutual fund business was the one area of the industry that got a bit of a gloomy assessment from Russell.

Much of the rest of the retail industry has flourished in this environment however. Russell noted that the strong profit recovery has enabled restructuring of existing businesses and many new retail startups to emerge. Technology has been a big factor, enabling small firms to compensate for their lack of size and to build competitive, sophisticated products through outsourcing.

Indeed, there have been 57 new retail firms started in the past four years; 32 of them in the past two years. The large, integrated dealers still dominate the business, but the upstarts are taking market share. From 2000 to 2003 the retail market share for independent firms (both introducers and self-clearing) has risen from 30% to 35%.

This end of the business is also where the jobs are. Independent retail employment is up about 20% in the past couple of years, whereas employment at the large integrated firms has dropped by about 15% over the same period. Russell attributed the attrition at the large firms to their success in squeezing efficiencies from their businesses But there is also obviously a strong lure for people to join the independent side of the business.