To better serve his smaller-account clients and the family members of some of his larger clients, Leonetti’s firm offers a mutual fund modeling service. After going through an initial screening process, clients are put into categories called “E-groups,” with the “E” standing for equities. There is also a number marking the percentage of equities a client wants to carry in his account. “‘E-100′ means that account could be up to 100% in equities,” Leonetti explains. “It will never hold any bonds, but it could go below 100% equities if we feel the markets are very weak. Then we will lower the equity amount and fill in the holes with cash.” Leonetti has seven or eight of these E-groups in place.
“Say we have 30 clients that are E-65. They will all get that E-65 model and their portfolios will almost all be the same,” he says. “Their returns may be a bit different depending on when they came in, but essentially they have the same investments.”
Leonetti argues that spending time carefully assessing a client’s risk tolerance up front and then placing each client in an E-group allows him to put clients into the appropriate investment niche while also streamlining his company’s client management and money management process.
To monitor the equity investments of these E-groups, Leonetti’s investment committee conducts its own research and establishes the appropriate allocation among large-cap and small-cap, growth and value, international and domestic, real estate, and alternative investment categories. Each of these holdings are reviewed when a category starts to run more than 5% outside of the target previously set by the investment committee, and all of the E-group portfolios are rebalanced annually.