In 2008, high-net-worth individuals (HNWIs) spread their assets among more wealth management firms, and said they would be less likely to do business with registered independent advisory firms in the near future, according to “World Wealth Report 2009,” a study released by Merrill Lynch Wealth Management Wednesday morning. The finding has generated interest—and debate—among wealth management professionals who say that independents are still holding their own when it comes to attracting and retaining clients.

Wealthy clients’ use of independent advisors will drop by 8% in 2009 and beyond, according to the study. The revelation of several fraud-related scandals, and the need for tighter internal controls at wealth management firms have pushed clients to diversify the types of companies that manage their money, said researchers. Twenty-seven percent of wealthy clients surveyed for the study said they withdrew assets from their primary advisory firm in 2008. “Clients are saying, ‘I need a firm that has risk management and due diligence to ensure that where I am investing my money is solid’,” said Ileana van der Linde, a principal in the wealth management practice for Capgemini Financial Services USA, the company that partnered with Merrill Lynch for the study.

Merrill’s assertion is “completely illogical and not supportable by any research we have done,” said Chip Roame, a managing principal at Tiburon Strategic Advisors, based in Tiburon, Calif. “In [dollars], the RIAs have raised more money than any other channel the past two years, far more than the banks.” Between 2007 and 2008, RIAs attracted $200 billion in assets; wirehouses took in $120 billion and banks pulled in $70 billion, Roame said.  

Local and regional Banks might seem to be more stable and trustworthy, especially as investors grapple with fears of encountering another Madoff fraud situation, said Paul Byron Hill, president and founder of Professional Financial Strategies, an independent wealth management firm in Pittsford, N.Y. But Hill stopped short of saying the RIA channel would lose business to banks.

“I haven’t had any clients leave me for this kind of reason, and I have not heard of colleagues having this kind of problem,” Hill said. “This is news to me.”

But Capgemini stands by its findings, gleaned from interviews with 50 wealth management firms in 71 countries. “People were shaken to the core,” said van der Linde. “They also started distributing assets [more widely] to firms they thought they could trust.”

As investors seek safer havens for their money, the World Wealth Report says that the use of local and regional banks by wealthy investors will rise by 31% in 2009 and beyond. HNWIs have begun to see local and regional banks as safer alternatives, at least temporarily, because those institutions were less exposed to the more esoteric products that caused the demise of larger counterparts,” van der Linde said.
Wednesday’s results mark a turnaround from trends reported in 2008. Back then, HNWIs were expected to increase use of independent advisors by 14.7%. “Prior to the crises, HNWIs may have deliberately chosen independent advisors, believing them to offer an alternative perspective to mainstream firms,” van der Linde said.

Now in its 13th year, the World Wealth Report measures the standings and investment habits of the world’s high-net-worth individuals, defined by Merrill Lynch as households with at least $1 million of investable assets, excluding the primary residence.  

There were fewer high net worth individuals in the world in 2008 than the year before and less wealth to be managed, according to the study. At the end of 2008, the world’s population of HNWIs was 8.6 million, a 14.9% decline from the year before. Similarly, their wealth had plunged 19.5%, to $32.8 trillion. The unprecedented declines for 2008 wiped out years of robust growth from 2006 and 2007, according to the report.   

One year earlier, at the end of 2007, there were 10.1 million HNWIs worldwide, an increase of 6% over the previous year. Their combined wealth measured at more than $40 trillion. The rate of growth among the world’s wealthiest investors had begun to slow back then, as investors began to feel the effects of awful market conditions, according to findings from 2007.