The Mechanics of Wealth
In terms of the game system – the mechanics – wealth basically exists for the purposes of magic items.
Mundane equipment does not cost very much, and outside of the very-lowest levels, it’s very difficult to spend any significant fraction of your expected wealth-by-level on mundane items. There are some niche exceptions (adamantine full plate for instance), but exceptions are all they are.
On the other hand, magic more-or-less dominates the game. The classes that have the easiest access to it are the most powerful, the classes that have limited or no access to it are the least powerful. Magic is frequently assumed for defeating a variety of monsters, and frequently other challenges as well.
So wealth represents the opportunity for the classes without native magic – those classes that are inherently weakest – to start to even things out by buying magic. It generally falls far short of actually creating an even playing field, but it helps.
It is also important to note that wealth can only serve this function if the items that one gets with it are those that are most useful to him or her. Magic items are specifically shoring up weaknesses – it’s important that they fill those weaknesses efficiently. Nominal wealth tied up in assets that aren’t helpful is little better than no wealth.
Without the ability to buy magic, those without magic will have no ability to even slightly narrow the natural gap between them and those who do have magic. Pathfinder, in general, widened this gap slightly relative to 3.5 as it is, and 3.5 already had a rather enormous gap in this regard. I recommend strongly that you allow players to receive their full wealth, spent how they’s like to see it spent.
The “Christmas Tree” Effect
A frequent problem that many have with 3.5 or Pathfinder (or, indeed, with many similar games) is the so-called “Christmas Tree effect,” wherein a character is imagined to be lit up like a Christmas Tree thanks to all the magic toys he or she is carrying. This isn’t a question of mechanics or even what those magic items can do, it’s purely a matter of the sheer number of magical items.
There are a number of potential solutions to this. Here are a few off the top of my head:
The effects of multiple magical items can be described as all coming from a single magical item.
Mechanically-magical items could be described as mundane items. This works especially well for pseudo-technological items in fantasy settings.
Mechanical items can be described not as items at all, but rather as tricks, abilities, mutations, what have you.
For the most part, the difference in description here shouldn’t change anything at all about the way those items function. There are some problems – particularly if a character swaps one item for another in the same slot, when neither item is described as an item – but clever explanations can work around these. At the end of the day, if you have to do a little “looking the other way” and hand-waving to explain a weird case, that’s not necessarily the end of the world, either.