There are fewer do-it-yourselfers, but greater scrutiny of advisors.

    For those in the financial advisory business, success is a result of being a step ahead of the game. That includes having an idea of the best investments, of course. But it also means knowing what affluent investors are thinking and doing, and what that connotes for the advisor/client relationship. And getting an accurate read on the wealthy can be as treacherous as trying to pick the next hot stock, if not more so.

At the end of 2004, we conducted a survey of millionaires. By comparing the data with that of a survey in late 2000, in which we asked the same questions, we can get an idea of how investors have changed their thinking over the past four, tumultuous years.
    The verdict? Going into 2005, the affluent were only slightly less optimistic about the future of the stock market. When it came to specific investments, mutual funds were old hat, in part displaced by alternative investments. The affluent were also far more thoughtful about the tax implications of their investments. Further, while they have not lost faith in financial advisors-indeed, they are less likely to dabble in stocks on their own-they are keeping a far closer eye on their advisors. And overall, despite the stock market's rebound in 2004, the percentage of affluent investors who think their advisors are doing a bang-up job has plummeted during the past four years from 70% all the way to 30%.

The Glory Days
    When we conducted our survey in the third quarter of 2000, the stock market had only recently declined from the all-time highs of earlier that year for the Dow, S&P 500 and, most notably, the Nasdaq, which had surged past the 5,000-point barrier. But while the crash had already happened, few would have guessed that the long and glorious bull run was over and that they were on the verge of what would be the market's first three-year losing streak since the Depression. They were not yet fully aware of the herd mentality and questionable bookkeeping that had helped fuel the tech frenzy. And they did not know, of course, about the impending terrorist attack on New York City, the subsequent wars in Afghanistan and Iraq, and how those events would not only impact the stock market, but the world.
    When we checked in at the end of 2004, the stock market had broken its losing streak and the Dow was within hailing distance of its record high. The S&P 500 and Nasdaq, though still far from their highs, were nonetheless comfortably up from their post-2000 lows. And while neither the war in Iraq nor the threat of terrorism was gone, the world seemed, for the moment, a less perilous and more predictable place.

The Money Trail
    So how had the passing of time affected the way that the affluent invested? As Table 1 shows, the biggest change came in their diminished interest in mutual funds. In 2000, more than half of the respondents invested in mutual funds, while in 2004 it was barely more than one in ten. In part, this reflects the fact that they were already in mutual funds. But just as important, it indicates the move from investments that might be identified as pedestrian-an investment that less-affluent investors could also get into-to higher-end, more exclusive investments such as private equity and hedge funds, reflected in the uptick in alternative investments from 2000 to 2004. The interest in managed and discretionary accounts had also dropped, again because many of the affluent had already made the move.
    It should also be noted that when we asked investors how concerned they were about the tax consequences of the investing, the percentage had soared by 21.1% in 2000 to 63.7% in 2004, an indication that lesser investment returns had made them more aware of the sting of taxes and of managing losses.

Looking Ahead
    In both surveys, we also asked investors what they expected of the stock market in the next three to five years and, given the three-year downturn that came in between, it's noteworthy that the percentages are surprisingly similar. Clearly, the rebound of 2003-2004, however modest by bull market standards, has in large part restored the faith of investors in the stock market.

Advisors Beware
While the shift in interest regarding specific investments might give advisors pause, the changes in the ways that affluent investors worked with and related to those advisors were far more sobering (Table 3).
    For example, investors were far less likely to move money to their primary advisor in 2004 than in 2000, in part reflecting the fact that they were less likely to chase returns but also an indication of greater caution. Further, as noted, the trend towards investing on their own, particularly online, has abated after the scorching that many investors suffered in the wake of the bust. One can infer that that means that more money is in the hands of their advisors.
    At the same time, there are a number of warning signs for advisors. In 2004, for instance, investors were more likely to take assets away from their primary advisor, to change their primary advisor, to fire an advisor, and to take legal action against an advisor (although that possibility remained remote). Tellingly, they were far less likely to refer a wealthy friend, with more than half of the respondents having done so in 2000 (when, admittedly, every investor was actively looking for hotshots) to just one in five in 2004. That more careful approach is also reflected in the average number of financial advisors for each investor, which rose from 2.4 in 2000 to 3.2 in 2004; investors in 2004 were more likely to spread their bets.
    The fact that affluent investors were more wary of their financial advisors showed up in their different responses to two other questions. First, as noted, the percentage of investors who rated the overall quality of their primary investment advisor as "very" or "extremely" good fell from 70.4% in 2000 to 30.3% in 2004. Second, the percentage of investors who were "very interested" in investment ideas from their primary investment advisor declined from 66.3% to 50.6%.

Higher Standards, Closer Scrutiny
    Based on these two surveys, we can conclude that the bursting of the Internet bubble in 2000 not only brought an end to the glory days of double-digit returns, but also to what might be seen as a free ride for financial advisors that went hand-in-hand with the outsized returns of the bull market. Who can quibble when a return of 25% is the baseline? In today's environment, when most financial experts and analysts expect returns in the high single digits to be (at best) the norm for some years to come, advisors still play a key role in the lives of affluent investors-arguably a greater role-but they can expect to be held to higher standards and subject to closer scrutiny. And in next month's column, we'll see some of the ways that financial advisors have worked over the past few years to restore their clients' faith and confidence in them.

Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.