As regular readers will know, my wife and I bought a farmhouse in Connecticut when we moved up here last year. It was originally built in the late 18th Century, then rebuilt about 10 years ago. Still, the floorplan is of an older vintage, which is to say formal – separated into smaller, traditional spaces. For the most part, that’s what we wanted. We also have two boys (2 and 4), and they are…well, they’re 2 and 4. We wanted another more informal space where a little bit of healthy destructiveness could be permitted during the 7 or so months of winter we apparently have up here.

Starting today, we’re working on a project to build out a currently unfinished space where the boys can be rowdy, where we can play games together and watch movies. Among other things, that has meant doing a bit of research on a television and speakers, neither of which I’ve had cause to purchase in the last 5-6 years. I’ve forgotten a lot since the days I spent in my early 20s as a 2-channel stereo audiophile. But I hadn’t forgotten the acronym that often pops up in online forums dedicated to audio equipment.


A decade or so ago, I’m confident this term meant ‘Wife Aggro Factor’, although Googling it now seems to indicate that the internet’s better judgment, if such a thing exists, has downgraded it to ‘Wife Acceptance Factor’. Either way, the idea is that there is some sound equipment that is so big, bulky and weird-looking that a partner who doesn’t care as much about audio fidelity is going to throw up all over having it in their living room. And y’all, there is some really weird-looking audio equipment out there. Drop this in your living room and see what happens:

Ultimately the buying decision requires some combination of accounting for what will sound the best, what’s in your budget and what isn’t going to earn you vicious side eye for the next 10 years. It’s…a complicated optimization. It’s also no different from the optimization every FA or IAR goes through in designing every client portfolio or financial plan. CAF – Client Aggro Factor – is a real thing, and it’s tricky as hell to juggle with the way we are usually trained to understand the role of a fiduciary.  

In my prior life, I ran the investment side of the house in a company with a $4.5 billion private wealth business. Mostly UHNW, a few family offices. We believed – as I still do today – that the best possible starting point for every investor was the one which expressed the least confidence in our ability to predict returns among asset classes, and the most confidence in diversification over any views we did have. The final destination of these two logical statements is risk parity. For a variety of reasons, we never ended there, but it was always where we started. It’s exactly what we did with institutional portfolios, too.

We were pretty forceful in making risk parity / risk balance the base recipe for our wealth business. Why? Because we believed it was the right thing to do. Because we believed that long-term, patient investing families deserved the same advice we gave to institutions. Because we believed that we could educate our clients to get on board with it. Because the speakers sounded better.

It was a mistake. It was my mistake.

The clients hated it. They hated it when it worked. They hated it even more when it didn’t work. They didn’t get it. It felt like a black box to most, even if we were fully transparent about the holdings, the trading and every calculation we made to build the portfolio from beginning to end. Our education program – which used a very light touch – came off as condescending and smarmy. Want to know why AQR changed the name of its risk parity mutual fund to “AQR Multi-Asset Fund” at the end of 2018, just like we did with our fund in 2016? Because even their massive distribution apparatus couldn’t sell a fund that FAs knew they couldn’t sell to their clients, even if they wanted to, and even if they thought it was the best portfolio for them.

If you work directly with clients, this conflict between doing what is in a client’s comfort zone and doing what you think would produce the best possible expected investment outcome for that client is the single hardest part of your job. If you are doing your job right, it’s the thing you will think about the most, that you will struggle with the most. There’s a sort of nobility you feel when you’ve convinced a client to trust you to implement a portfolio of things they don’t like or understand, but which you believe with all your heart are the best possible option. As much as we’ve written about these topics, we struggle with this, too. The intervening truth is that our evaluation of what is best for a client must always take into account the willingness of a client to stick with what we’ve designed for them. But unless we’re going to evaluate it on a case-by-case basis (please don’t), we need a framework for how we will answer the CAF problem.

I offer my humble submission, in three fairly easy rules:  

  • In matters of costs and independence, always do what you believe to be the best possible thing.
  • In matters of quantity of risk, always do what you believe to be the best possible thing.
  • In all other matters, seek the best possible thing wherever you can, but recognize that a client leaving the plan is likely to do him or her more harm than the good your best possible thing will achieve.

You may not come to the same conclusion. That’s fine. But if you’re managing money for clients and haven’t tried to explicitly define the places to take a stand and the places to show flexibility to prevent worse decisions, it’s time. Get it down on paper and make it part of your process.

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  1. Avatar for nick nick says:

    I love this note. I think this speaks directly to some tailwinds driving the popularity of cap-weighted index funds. These products are easy for clients to understand. Cheap. Tax-efficient. Perhaps most importantly (to borrow this framework), the speakers always sound the way the client expects them to sound. Tracking error is hugely problematic for many clients and the less “familiar” the strategy (ahem alts) the more problematic “unexpected” results become for the FA/client relationship and indeed the client’s commitment to the plan. As usual there is no Answer for this but this is a heckuva good suggestion for a Process.

  2. If you can’t help a client overcome his/her own particular behavioral vulnerabilities, it doesn’t matter how much alpha you can generate. In my experience, this is mostly achieved through the planning or pre-investment part of the process. Making sure the client doesn’t have too much of their net worth on the table when risk is expensive. Making sure that the client understands how much downside they can handle before it starts to impact their lifestyle & goals. Getting clear and rational about the real world objectives for the wealth we hope to create so that we can focus on outcomes rather than purely on relative returns. These are better starting places for addressing the CAF issue than portfolio construction.

  3. Hi Rusty,
    Just joined ET today. I was drawn in by the home entertainment dilemma you posed. I was getting ready to share what I think is a really good trade-off on cost, quality of sound, size and aesthetics. My mistake! Thanks for the advise to follow my own advise. Honestly, I have found that hard to do as the desire to optimize combined with fear of “what worked before (backtest) won’t work going forward”. The good news is that I am getting better at following my own advise as time goes by. Some people call that discipline, I think there is experience/wisdom in the mix.

    Happy wintering:)

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