Is a 61 percent decrease in profits from one year to the next a “reversion to the mean” or an ominous sign of cloudy skies ahead? It depends on whom you’re talking to.

In its Research Report for the second quarter of 2004, the Securities Industry Association announced that profits for brokerage firms ($2.98 billion) were 61.2 percent lower than in the second quarter of 2003. The profits number also represents a 60.7 percent drop-off from the first quarter of 2004, in which the firms notched $7.6 billion in profits.

Part of this is attributable to the fact that the rampant cost-cutting of 2003 has slowed. Revenues, after all, are only down 5 percent, from $56.8 billion in second-quarter 2003, to $53.93 billion.

“I think everyone slimmed down as much as they could a year ago,” says one analyst who requested anonymity. “It’s only natural that costs would go up a bit. Even the slightest downturn in revenue can lead to dramatic results.”

SIA chief economist Frank Fernandez takes this a step further, calling the lowering of profits to “mean reversion” after “a period of extraordinary growth.”

But there is still some sobering news lurking in the numbers, including a 12.7 percent drop in commission and fee income from the first quarter of 2004, to $11.48 billion. Trading gains also were down to $4.66 billion—37 percent off the average quarterly total of $7.38 billion.

The SIA’s report isn’t necessarily rosy about the future either. Even though it warns against reading too much into this “soft patch,” it doesn’t think the industry will regain traction in the third quarter, or even in the second half of the year.

Its specific prediction is that the second half of the year will likely match the first, which would be a considerable downturn from 2003—even though the industry’s cost structure remains low.

“Not that I’m the average broker, but my numbers are about steady from last year, relative to everything else,” says one Merrill Lynch advisor. “Seems like I have less support than I used to, though.”

The report did have one piece of unadulterated good news: Mutual fund sales are still up, increasing 15.7 percent from last year.