The findings of the study, released today, are a prelude to the 2004 World Wealth Report, the leading market research of High Net Worth Individuals' (HNWI) wealth and behavior, to be published in June. HNWIs are people with net financial assets of at least US$1million, excluding primary residential real estate.

"In volatile markets, high net worth investors rely on professional advisors and are extremely proactive in identifying emerging investment opportunities. Through their willingness to diversify and regularly rebalance their portfolios, they routinely outperform other investor segments," said James Gorman, President of Merrill Lynch's Global Private Client Group.

HNWIs have a dynamic approach to asset allocation and were among the first investors to move from equities to fixed income as reported in the 2002 World Wealth Report. More recently, they have shifted back to equities from fixed-income securities. HNWIs are also pursuing highly sophisticated investment strategies including relying more heavily on professional advice; diversifying across asset classes and geographies; and, consolidating financial information and assets. These strategies include:

• Managed products: By the end of 2003, assets in managed accounts had reached an all-time high of over $500 billion.
• Real estate: HNWIs have increased both their direct investment in real estate as well as indirect investment through Real Estate Investment Trusts.
• Investments of passion: Investment in art, wine, antiques and collectibles have continued to attract interest from HNWIs.
• Precious metals: Low fixed-income returns caused HNWIs to seek higher returns in commodities, with precious metals having a particularly favorable year in 2003.
• Alternative investments: To protect themselves from losses, HNWIs have increased the ratio of non-correlated instruments (i.e. instruments not directly correlated with stock market performance) such as derivatives, managed futures and similar products, with hedge funds being the strategy of choice.

"High Net Worth Individuals looking to improve portfolio diversity may consider investing in non-correlated assets, such as commodities," said Robert Doll, President and Chief Investment Officer of Merrill Lynch Investment Managers. "Such investments can further enhance diversification, especially in periods when volatility shifts from one asset class to another."

Access to Specialized Products and Timely Advice is Critical

As the investment options for HNWIs proliferate, these investors are asking their financial advisors for ever more sophisticated service and expertise.

"In response, financial advisors will be expected to adopt practices that establish specific financial goals at the outset of the relationship with attention to tax sensitivity, risk management, and outlook on transfer of wealth; continually track performance through frequent performance reviews utilizing collaborative tools; facilitate dynamic asset allocation; and, offer advisory services that optimize wealth management," Alvi Abuaf, vice president at Cap Gemini Ernst & Young, head of the Securities Industry Consulting Practice.

"With the product market highly commoditized, providers will have to differentiate themselves through quality of service and the advice they offer."

Account Consolidation is a Growing Trend

HNWIs tend to consolidate their accounts for two primary reasons, according to the study: To establish a single point of contact and to create a single view of their holdings. That means professional advisors now must be able to deliver clearly stated, objective advice and innovative solutions regardless of whether the products offered are proprietary or offered by a third party.

Petrina Dolby, vice president at Cap Gemini Ernst & Young in the Securities Industry Consulting Practice, said, "Wealth management firms need to strengthen their support to financial advisors by providing the ability to take a holistic, aggregated client view of both internal and external assets. This is not a new priority for financial institutions, but it still remains one of the industry's most critical challenges. This becomes even more critical in light of the increased institutional like behavior of HNWIs."

As 2004 unfolds, it is anticipated that financial institutions will begin to deliver some of the necessary functionality to allow advisors access to this type of information, much to the satisfaction of the advisors dealing with these increasing client demands.

The World Wealth Report provides a comprehensive picture of the number, aggregate wealth and investment preferences of high net worth individuals in the United States - and how they compare to their counterparts around the world.