Some RIAs just want to grow on their own terms. Bellevue, Wash.-based Coldstream Wealth Management has plans to double in size over the next five years—but it wants to do so without a cent of private equity or bank capital.
Coldstream now has $6.8 billion in assets under management and four offices, three in the Puget Sound region (in Bellevue; Seattle; and Mercer Island, Wash.) and one in Portland, Ore., with 115 employees across all of its offices. The firm takes its name from Britain’s legendary Coldstream Guards, considered “second to none” among regiments in the U.K. military.
The firm believes its independence is key to staying at the top of the RIA universe, according to Kevin Fitzwilson, managing shareholder, team lead and member of Coldstream’s board of directors. Being owned by an outside party, such as a bank or private equity firm, can create conflicts of interest for advisors, its principals reason.
“It’s a real problem, in our view,” says Fitzwilson. “Around peak times, like in 2008 and 2009, advisors were in a position where we wanted to spend all of our time with our clients, helping them through a challenging environment, but our investors wanted us to spend time building spreadsheets and preparing for board meetings. It was very enlightening for us.”
Independent Growing Pains
Coldstream was founded in Bellevue as Coldstream Capital Management in 1996 by four advisors leaving Bank of America, where they had run an RIA-like practice. As one of Coldstream’s first team leaders, joining the firm in 1997, Fitzwilson also helped build out the firm’s core back- and middle-office operations.
Today, he is responsible for setting the company’s strategic direction. He was on board in 2002 when some of Coldstream’s ownership sought liquidity to exit the company and sold their stake to Boston Private, one of the early outside investors in the RIA business.
In 2002, the bank owned 26% of Coldstream, but at its peak, almost half of the RIA was owned by Boston Private. Today, as when it was founded, Coldstream is 100% employee-owned, with 70 shareholders.
“Ideally we want everyone at the company to own equity,” Fitzwilson says. “We can’t force them, but we think employee ownership is the ideal model because it gets people thinking and acting like owners, which we believe will lead to obtaining, motivating and attracting the best clients and giving them exceptional client service. Looking at what’s going on in this industry—consolidation, with all of the private equity money—most of the transactions are being done by roll-ups that are private equity backed or private-company backed.”
Coldstream sees itself as an alternative that allows advisors to maintain a level of independence and autonomy while also giving them access to some of the scale, collaboration and resources that may be found in a larger firm. Fitzwilson and his partners never again wanted to be in a position where they had to put financial investors ahead of the end client, and Coldstream is betting that there are a large number of merger-minded RIAs out there who feel the same way.
But there were other drawbacks to being bank owned. “In more normal times, when you want to make an investment in the company that might impact your near-term profits, if you have investors who have short-term time horizons, like private equity funds, they might not want you to do that even though it might be in the best interest of your clients,” Fitzwilson says. “They might balk at investing in the business to create a better environment for your team members.”
Return To Independence
In 2009, after the financial crisis and in spite of a “great” relationship with Boston Private and many of the people there, Coldstream sought to buy back its independence. Fitzwilson first flew to Boston in the spring of 2009, but negotiations didn’t go anywhere until the bank was recapitalized and new management was brought in later in the year.
Ultimately, Boston Private was willing to sell its stake in Coldstream. All that stood in the way was the matter of price.
“It was an interesting process. They had a much higher price in mind than we were willing to pay,” Fitzwilson says. “We were able to figure out what price they had written down their investment in our company at, and that gave us information we found helpful in the negotiation process to end up at an attractive price. We were able to do it with some cash on our balance sheet, a conventional bank loan, and a few of us wrote checks. We got our company 100% employee owned at a good valuation at a good timing.”
But it wasn’t enough that Coldstream was employee owned—the firm believed that broad ownership was best for its business. Many employee-owned firms have very concentrated ownership among a handful of stakeholders, says Fitzwilson, but having 70 owners creates more incentives for employees to work hard and grow the firm, and can be a more attractive structure for potential new mergers and acquisitions.