With Private Equity Firms Continuing to Gobble Up RIAs at a Breakneck Pace, a Pacific Northwest Independent Wealth Manager Sees a Different Path for Growth
As private equity-driven consolidation intensifies across the wealth management industry, it’s only natural that vocal critics of that approach would begin to emerge. Still, it’s one thing to offer critiques and another to provide viable solutions.
Here’s where Coldstream Wealth Management comes in. The Seattle-based firm has long been one of the most influential RIAs in the Pacific Northwest. More recently, however, it has begun to grab headlines for anti-private equity stance.
Since May, it has announced two significant M&A transactions, both of which emphasized the value of employee-ownership and – very pointedly – shunned outside capital…especially private equity.
Now armed with $6.7 billion in client assets, Coldstream can hardly be accused of being all talk and no action.
We recently sat down with Kevin Fitzwilson, the firm’s Managing Shareholder to talk about its unique approach – And why the employee-owned RIA model offers a superior path forward for employees and clients, especially when compared against private equity ownership.
For financial advisors, what are the top three advantages to being part of an employee-owned RIA versus joining firms owned by private equity funds or large financial institutions?
We give every employee – advisors or otherwise – the opportunity to own equity in Coldstream. This ownership structure has enabled us to do three things.
The first is to get clarity on who we serve. Being employee-owned incentivizes each person in our organization to create the best experiences for clients and their fellow team members/owners. Compared with close ownership among a small group of executives or outside ownership by a third party, this deeply affects how we relate and work together. It’s like a family, one in which every employee is pulling for everyone else to be successful in their roles because when one person succeeds, we all succeed.
The second is that it provides us with an aligned vision of our mission and strategic direction. Private equity investors sometimes have different goals and typically shorter timelines to achieve them. At times, this can result in stakeholders having fundamental strategic differences that are difficult – if not impossible – to reconcile.
Lastly, being employee-owned gives us a degree of financial flexibility to create scale, improve our client service capabilities and explore mergers with like-minded partners, as we have this year with Paracle Advisors and Rosenbaum Financial. We are willing to take a short-term financial hit if the result is long-term, sustainable gains.
Do you enjoy better employee retention compared to similarly sized, private equity-owned firms or even ones owned by large financial institutions?
For competitive reasons, we don’t disclose numbers in this regard, but I can say qualitatively that being employee owned has driven superior employee retention, in our experience.
Our employees are loyal and dedicated. Not only do each one of us have a vested interest in seeing the company do well but we have bought into the collective Coldstream culture.
We’re unified in our collective mission to build and maintain a sustainable, independent and employee-owned firm, one that can chart its course for decades to come.
Do outside private investors own any meaningful percentage of Coldstream or are the owners all current employees?
Employees own 99.6% of the company. Three non-employee directors on our board – each of whom plays a crucial role in providing our firm’s leaders with strategic guidance in the firm’s direction – own the remaining portion. When an employee or board member leaves Coldstream, they must sell their stock back to the company.
How do employees earn the right to become shareholders? What kind of structure do you use (i.e., traditional K1 shareholders in a closely held firm, convertible units, phantom equity, etc.?)
The only eligibility requirement is to be a current employee, consistent with our belief that everyone should have the option to own equity in the company. Coldstream is a C corporation, and all shareholders own the same class of stock.
The Coldstream board sets the price at its quarterly meetings, with a nationally recognized investment banking firm focusing on wealth management firms providing input. Again, once an employee leaves Coldstream, they must sell back their stake in the firm.
How does the combination of your merger-drive-growth strategy and employee ownership model enable you to reinvest in the business? And what key areas are you targeting between now and the end of next year?
Our merger strategy and employee ownership structure re-enforce each other. When we merge with other firms, we add employees and give those individuals the opportunity to take equity stakes.
In addition to being a source of financing for us, this sort of ownership structure incentivizes employees to go the extra mile to serve clients, enabling greater growth, increased scale and enhanced efficiencies. This helps us run more profitably and build the financial resources to grow Coldstream at a sustainable pace.
As we plan our growth trajectory, we take a thoughtful, analytical approach to balancing liquidity needs for mergers, reinvesting in the business and buying back shares from departing team members. In certain instances, depending the structure and timing of a merger, Coldstream will lean on long-time relationship with a Pacific Northwest regional bank to access additional credit.
Between now and the end of the year, our primary focus is hiring additional personnel across several areas in the company – both in our overhead management and client-service teams.
Michael Madden, Contributing Editor & Research Analyst, can be reached at email@example.com