So suggest Merrill Lynch and Capgemini in their latest World Wealth Report. It seems that the events of 2008 put a fat dent in millionaires' faith and trust in markets, financial institutions the agencies that regulate them -- even in the time-honored principals of portfolio management. As a result, wealth-management firms run the risk of assuming that all will be well with client when just as soon asset values start to rise in a meaningful and sustained fashion, when in fact the only thing that keeps them in place is a possibly transitory sense that they're unlikely to get better treatment elsewhere.

"Wealth-management firms and advisors may not fully understand what drives clients to leave or stay," according to Bertrand Lavayssiere, head of Capgemini's financial-service practice and one of the authors of the 2009 edition of Merrill Lynch's and Capgemini's annual World Wealth Report.

As a result, "firms may be misjudging how satisfied advisors are with certain service and support areas," Lavayssiere adds.

Horribilis

Wherever we are on the road to recovery from a downturn that has been making itself felt in world markets since at least mid 2007, wealth-management firms that hope to make the most of a upturn "should re-evaluate current capabilities to ensure simplicity and transparency, demonstrate value (as defined by clients and prospects), and develop new products and services" suited to the marketplace and environment, says Lavayssiere.

The number of high-net-worth individuals -- defined as holders of financial assets worth at least $1 million -- declined 15% in 2008 from the year before and their total wealth fell by nearly 20%, according to

Ultra-high-net-worth individuals -- who were supposed to be better hedged against losses than those who make due with financial assets under the $30-million mark -- dropped 25% in absolute numbers and 24% of their collective assets.

But then 2008 was a lousy year. Most of the damage was done in the last four months of the year as markets struggled to digest a wave of financial-institution collapses and near-collapses and -- in the U.S. anyway -- an unprecedented intervention into free markets by the federal government and its agents. The Wilshire 5000, a broad gauge of U.S. stock performance, gave up 42% of its value in 2008. U.S. capital-market woes hit global consumption, production and savings, bending global equity-market capitalization by almost 50% by year end.

Telltale heart

Assets managed by hedge funds the world over fell 25% last year, and the prices of luxury real estate saw an equal rate of decline.

In comparative terms, the world's high-net-worth population and financial holdings slipped to levels unseen since 2005, when the world's population of millionaires embarked on a three-year growth spurt that averaged 7.2% and the segment's collective wealth began to grow at 10.4% a year.

By and large, millionaires reacted to the downturn by trimming their exposure to "risky" assets such as equities and hedge funds in favor of less volatile holdings such as fixed income and cash. By the end of 2008, equities made up 25% of all high-net-worth financial assets, down from 33% at the end of 2007. Fixed income, meanwhile, took up 29% of the average high-net-worth portfolio, up from 27% the year before. Cash holding among millionaires went from 14% of financial-asset holdings in 2007 to 21% in 2008. Real-estate holdings increased as a total portion of portfolio holdings from 14% at 2007's end to 18% at the end of 2008 -- though whether that was the result of a more rapid decline in the value of equities or sign of an early tactical allocation to battered housing markets is difficult to say. As "flight to safety" in the form of gold by millionaires pushed the proportion of commodities held in the average high-net-worth portfolio to 13% last year from 10% in 2007 -- despite a general decline in the price commodities. It's noteworthy that the move to gold was most pronounced in the U.S., where "goldbugs" are often derided as conspiracy theorists. -FWR

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