What Wealth is For
Player characters in Dungeons & Dragons are expected to have a given amount of “wealth” for reasons of theme (higher-level characters are more successful and one designator of that success is wealth) and balance (higher-level characters fight more powerful foes and so need more powerful tools). For the purposes of this answer, I am focusing primarily on the latter.
Wealth ought not be a character’s primary source of ability. The weakest classes in the game, not coincidentally, are those that rely most heavily on their wealth1 – their class features are weak, so they rely on items to shore them up. Furthermore, items are worth more, compared to their class features, than they are for more powerful classes. The Druid will only be moderately inconvenienced if he never gets his Periapt of Wisdom. The Paladin will be devastated if he cannot get his Belt of Giant Strength (and Cloak of Charisma, and Holy Avenger, and so on).
1 There’s a really important exception here in the Artificer; for the Artificer, his items are his (extremely powerful) class features.
The Importance of Choice
“Wealth” is defined as the value of your assets (less any liabilities, which are not relevant here). Assets are things you own, and value... is a bit more nebulous. There’s the market value, the resale value, the at-cost value (which happens to equal the resale value for non-art items), etc. But what’s really relevant to an adventurer is what each item is worth to him.
Every character is different, and responds differently to different items. A +1 raging battleaxe costs some 8.3k gp, and is easily worth that much to a Barbarian. To a Fighter, it’s worth 2.3k, because it might as well be a +1 battleaxe for all the good the raging enhancement does for him. Even in non-trivial examples, the nominal value of an item is rarely exactly how much its owner values it at. Either it’s worth more to him than its resale value (which is why he hasn’t sold it), or it’s worth less to him (and he’ll be selling it next chance he gets).
So it’s important that characters not merely have assets whose market value or resale value totals the WBL guideline for their level – because their items may be worth a lot less than that (or, in a few cases, a lot more than that; more on that later), if they aren’t the right items. So preventing players from getting the specific items they need can be a significant nerf to them, which may not be desirable.
Why That Doesn’t Mean You Should Just Eliminate Single-Item Caps
If you have really careful and conscientious players, you can. But that isn’t really the typical adventuring types ;)
Dungeons & Dragons assumes a lot of things about characters. It assumes they’ll have, for example, enhancement bonuses to their most-important ability scores and resistance bonuses to their saving throws. These bonuses are accounted for in characters’ and monsters’ stats – defenses will be set expecting that people have been getting enhancement bonuses to the abilities that power their offenses, and DCs will include bumps to account of those Cloaks of Resistance.
After a certain point, players are also expected to deal with flying enemies, incorporeal enemies, enemies who use illusions, compulsions, and [Death] effects. Access to abilities that counter these things are often most-efficiently found through items. A feat, and most class features, are set in stone: you cannot change them situationally. An item you can pull out when you need it, or even better, that’s just around but didn’t cost much to put there, is far more economical.
So the goal of single-item caps is to encourage players not to blow everything on the biggest weapon they can find. They may need a big one, but they don’t need one so big that they haven’t gotten their requisite enhancement and resistance bonuses, and later cures or immunities for devastating and common magic effects.
An Actual Suggestion
My goal has been to provide an education on the roles that wealth plays and what it is most important for. It’s not damage. Damage is, hopefully, coming as much from a character’s inherent power as possible. Weaker classes need more help in this area than others, but they still should strive to avoid sinking too much money in that direction. The really important thing is that they get the myriad defenses and static bonuses that the game simply expects that they’ll have.
As such, in my experience, the goal isn’t an arbitrary “fraction of wealth-by-level,” but ensuring that the player has hit all of the necessary points before blowing everything on the biggest sword around. I therefore recommend that you consider the adversaries they’ll be facing – either specifically, or in terms of what’s generally available to level-appropriate foes.
Make sure they’ve got the latest affordable +Ability and +Saving Throw items (if such things only just became affordable, being back a tier is OK; they aren’t outright assumed for a couple of levels).
If it’s mid-to-high levels, make sure they can fly and handle invisibility, or even better have alternate senses that work if vision is blocked.
If it’s high levels, they should have something like Freedom of Movement, a way to teleport or stop those who can, hopefully some way of cutting through magical defenses, and at the highest levels, immunity to a whole smorgasbord of things, including [Death] and [Mind-Affecting] effects.
If they have all of those things, then let them blow everything else on a huge weapon.
For the most part, items are overpriced; you rarely have to worry about throwing everything into a single item that will break the game. People who put everything into one item are usually going to get something that's kind of impressive at that level, but they're going to be horribly vulnerable. This is bad for the game, and you should try to avoid it. Single-item value caps are there to ensure that the player is balanced, not in the sense of avoiding him being overpowered, but in the sense of being well-rounded enough to handle a variety of situations and potential threats. It's hard to do that if all your wealth is sunk in one direction.
That said, be extremely careful about people getting magic effects higher than spellcasters of their level have. Note I say “effect” – having more or better versions of an effect spellcasters already have is usually fine. But being able to turn someone to stone before stone to flesh becomes available is bad. This is particularly bad when it’s all their money: that’s a really bad sign that someone’s going to attempt shenanigans. Ban the Candle of Invocation outright, do it now.