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Profits in the Canadian investment business were likely up for 2018 despite a rocky fourth quarter but the outlook for 2019 is notably darker, particularly for small dealers, according to the Investment Industry Association of Canada (IIAC).

Total operating profits were up by 28% year over year in the first three quarters of 2018, so even if profit drops off significantly in the fourth quarter, the industry will likely end with higher earnings for the full year.

The IIAC projects that a 20% fall in fourth-quarter profits would still leave the industry with $7.1 billion in total operating profit, up by 10% from 2017.

“The accelerating demand for wealth management services in recent years has been a key driver of earnings growth, a trend that is likely to continue for the foreseeable future,” says Ian Russell, IIAC president and CEO, in his most recent letter from the president.

However, Russell’s letter indicates that the outlook for the year ahead is notably gloomier, with “weaker market and economic conditions” expected to lead to lower retail and investment banking revenues. At the same time, industry costs continue to rise — further intensifying the pressure on industry profits, the letter notes.

“The sudden weaker domestic economic and market conditions that dragged down performance in the fourth quarter of 2018, and the sharp upward move in operating costs, will likely continue well into 2019, placing further pressure on operating margins and putting at further risk the viability of small and mid-sized dealers struggling to cope with transforming retail markets, rising operating costs and stiff competition,” it says.

Indeed, the IIAC predicts that the population of independent dealers will likely continue to contract in the year ahead.

“We anticipate even more firms to leave the business in 2019, given the ratcheting up in operating costs and prospect of an extended period of depressed market conditions and decelerating growth in retail and investment banking revenues,” the letter says.