A breakdown of longstanding business models and the crisis in client confidence due to last year’s financial havoc mean a new reality for wealth-management firms.

More than a quarter of high-net-worth individuals withdrew assets from their wealth-management firm or left their firm altogether in 2008, according to the 13th annual World Wealth Report. The report was compiled by Bank of America Corp.’s Merrill Lynch Global Wealth Management and Capgemini Group.

The 15 largest firms surveyed saw the dollars they manage fall by almost a quarter in 2008, a sharp reversal from the 17% growth they saw in 2007, the report said.

The ability to increase assets under management is a key profit driver for wealth-management firms, and decreased profit margins led many of them to employ budget cuts, reduce their work force and freeze compensation.

“The good news is that it’s still a profitable business, just less profitable than before,” said Bertrand Lavayssiere, managing director of Global Financial Services for the Capgemini Group.

Wealthy clients allocated more holdings to low-margin asset classes, such as cash, cash equivalents and fixed-income products that typically generate fewer returns. Half of their assets were in these classes at the end of 2008, up from 44% a year earlier and 35% in 2006.

Local and regional banks are poised to benefit from the trend, as wealthy individuals report a roughly 30% increase in their use. These investors view them as safer than bigger firms that are more exposed to market turmoil, at least temporarily, the report said.

High-net-worth clients will use 8% fewer independent advisers in 2009 from a year earlier, compared to 14.7% growth over the last two years. This is largely due to recent fraud scandals and the failure of some independent advisers to provide adequate due diligence and risk-management services, the report said.