Annual ReportTWO THOUSAND SIXTEENWADDELL & REEDwaddell.com ANN-CORP-2016/34341 (02/17)7263_Cover.indd 12/17/17 11:12 PM INFORMATIONHIGHLIGHTS2016 ANNUAL REPORT152WADDELL & REED FINANCIAL, INC.Corporate InformationANNUAL MEETING OF STOCKHOLDERSApril 27, 2017, 10:00 a.m. Corporate HeadquartersCORPORATE HEADQUARTERSWaddell & Reed Financial, Inc. 6300 Lamar Avenue Overland Park, KS 66202STOCK EXCHANGE LISTINGSClass A Common Stock New York Stock Exchange Symbol: WDRTRANSFER AGENT AND REGISTRARComputershare Trust Company, N.A. P.O. Box 30170 College Station, TX 77842-3170 Toll Free Number: 877.498.8861 Hearing Impaired: 800.952.9245 www.computershare.comINDEPENDENT AUDITORSKPMG LLP 1000 Walnut, Suite 1100 Kansas City, MO 64106STOCKHOLDER INQUIRIESFor general information regarding your Waddell & Reed Financial, Inc. stock, call 800.532.2757 or visit our web site at www.ir.waddell.com. For stock transfers, call 877.498.8861.MUTUAL FUND INFORMATIONFor information regarding our mutual funds, please call 888.WADDELL or visit www.waddell.com or www.ivyinvestments.com.INSTITUTIONAL MARKETING INFORMATIONFor information regarding institutional marketing, please call 877.887.0867 or visit www.institutional.ivyinvestments.comQUESTIONS ABOUT CORPORATE INFORMATION CAN BE DIRECTED TO THE ATTENTION OF:Nicole Russell Vice President — Investor Relations 913.236.1880 nrussell@waddell.comDIVIDEND REINVESTMENTWaddell & Reed Financial, Inc. maintains a dividend reinvestment plan for all holders of its common stock. Under the plan, stockholders may reinvest all or part of their dividends in additional shares of common stock. Participation is entirely voluntary. More information on the plan can be obtained from our Transfer Agent.STOCKHOLDER AND ANALYST RESOURCESWe believe that in today’s digital world, the Internet allows us to disseminate our corporate information much more quickly and efficiently. In addition to the standard information typically found on corporate web sites, such as general, corporate and stock information, access to archived press releases and SEC filings, and answers to frequently asked questions, we supply our stockholders and analysts with timely supplemental data including quarterly corporate presentations, access to live and archived web casts, data tables and more. If you elect to request information alerts, we will send you an e-mail when new information is posted to our corporate web site.FINANCIAL HIGHLIGHTS($ IN THOUSAND, EXCEPT PER SHARE DATA)20162015Operating revenues$1,239,023 $1,516,631 Net income146,907 245,536 Diluted earnings per share$1.78 $2.94 Cash & cash equivalents (unrestricted)$555,102 $558,495 Investment securities328,750 291,743 Long-term debt189,605 189,432 Shareholder's equity844,002 846,455 CAPITAL RETURNED TO STOCKHOLDERSShare Repurchases$49,753 $80,335 Dividends paid152,830 143,959 Dividend rate$1.84 $1.72 Business profile & financial highlightsOUR DISTINCT BUSINESS MODEL is built upon proven, professional investment management and financial planning services that we provide to individuals, businesses and institutional investors. As we enter our 80th year in business, our culture remains firmly established, centered on preparedness, collaboration, accountability and an understanding that every day we serve our clients, stockholders, employees and financial advisors. We consistently work to bring individual skills and innovative ideas together as we continue to fortify our business model in a changing environment. Ultimately, we believe the strength of our company stems from the confluence of three key elements: a collaborative, risk management-focused culture in our Investment Management Division; a balanced distribution model; and our experienced executive management team.7263_Cover.indd 22/22/17 8:40 PM Our distribution channels
RETAIL
UNAFFILIATED
DISTRIBUTION
Through our national wholesaling efforts, we distribute our products —
the Ivy Funds, Ivy Variable Insurance Portfolios, InvestEd Portfolios and
Ivy NextShares® — to retail clients through financial advisors at broker/dealers,
retirement platforms and independent registered investment advisors.
Our national network of independent Waddell & Reed financial advisors
RETAIL
BROKER-DEALER
provides comprehensive, personal financial planning services to clients across
the United States. As more individuals and families realize the importance of
planning for their financial futures, the demand for professional financial
advice like ours has grown markedly.
INSTITUTIONAL
We serve as sub-adviser for domestic and foreign distributors of investment
products and manage investments for pension funds, Taft-Hartley plans
and endowments.
ASSETS UNDER MANAGEMENT
($ IN MILLIONS)
2016
2015
■ Retail Unaffiliated
$30,295
$45,641
■ Retail Broker-Dealer
42,322
43,344
■ Institutional
7,904
15,414
Total
$80,521
$104,399
GROSS SALES
($ IN MILLIONS)
$120,000
100,000
80,000
60,000
40,000
20,000
0
$25,000
2016
2015
20,000
■ Retail Unaffiliated
$6,362
$12,218
■ Retail Broker-Dealer
4,287
5,073
■ Institutional
1,065
2,743
Total
$11,714
$20,034
15,000
10,000
5,000
0
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To our stockholders
THE YEAR 2016 WAS ONE OF THE MOST UNUSUAL IN RECENT MEMORY, bringing market volatility,
political surprises and, by year-end, an upswing in the equity markets. Across the year, investors
experienced concerns about global economic growth, interest rates, fluctuation in oil prices
and the outcome of the U.S. presidential election.
Waddell & Reed Financial, Inc. saw its own share of change and challenge over the year, as did
the industry as a whole. The industry faced disruption as passive and active investment strategies
battled for market share and firms coped with the demands of preparing for compliance with the
Department of Labor’s new fiduciary
standard. In addition to these
industry forces, our company faced
disappointing performance in some
products, contributing to weak
overall sales, and declining assets
under management and earnings
power. Redemptions, which were at
historical highs at mid-year, abated
in the second half of 2016.
Our 80-year heritage allows us to
view the industry and our company
through the lens of experience,
understanding that rapid change
is a part of progress.
As we assess the past year and look ahead, we first must express gratitude to Henry “Hank”
Herrmann, who retired in 2016 after 45 years with the company, the last 11 as our Chief
Executive Officer. Hank remains non-executive Chairman of the Board. His influence,
guidance, leadership and friendship have been instrumental to our growth over the years.
In 2017, we mark 80 years in business. This heritage allows us to view the industry and our
company through the lens of experience, with an understanding that rapid change is a part of
progress. Our management team stands together and is ever-ready to meet the requirements
of an evolving environment. Most importantly, we remain steadfast in our commitment to
improve our business and our financial results, bringing continued value to our stockholders.
Challenges across the year led to a 23 percent decline in assets under management and pressured
our financial results, crystallizing our resolve to take decisive action as we move forward. Net
income declined 40 percent compared to 2015, largely due to lower assets under management.
Annual results were also pressured by $48 million in pretax charges related to severance, pension
settlement and the impairment of intangible assets, partly offset by a curtailment gain on our
post-retirement medical benefit plan. We also incurred costs for the implementation of Project E
and costs for the implementation of the Department of Labor's fiduciary standard. We initiated a
significant cost-cutting program during the year designed to reduce the run-rate of fixed costs by
approximately 10 percent. This right-sizing and ongoing cost discipline should benefit us in 2017.
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We have identified concrete action steps toward a stronger future. You’ll read more on the
following pages about our focus on four key imperatives in 2017:
• Strengthen investment performance;
• Reinvigorate sales;
• Prepare for and adapt to a new fiduciary standard; and
• Execute on key technology initiatives.
Underlying the first two, performance and sales, is an unusually difficult environment for active
investment management. For several years now, investors have lived in a world with low growth,
low inflation and very low interest rates, which has led to a higher correlation among asset classes
and individual securities. That environment, in addition to making it more difficult for investors
to capture income and growth, has made it difficult for historically successful active managers to
outperform. That said, it is also clear we have not been at our best in navigating this environment
and need to do a better job. Broad underperformance by active managers has contributed to an
increase in demand for lower-fee passive products.
By the end of 2016 and early in 2017, we saw the environment begin to improve. The equity
market turned upward following the U.S. presidential election, inflation in the U.S. has started
to rise, and the Federal Reserve has indicated it intends to raise interest rates at a measured
pace in 2017 if the data continues to support a tightening in monetary policy. The change in
political leadership in the U.S. has bolstered a belief that we may be entering a more pro-growth
environment, driven by potential tax reform, a less-stringent regulatory environment and the
possibility of fiscal stimulus. Thus, we believe the investment environment also may be
changing, with the possibility for increased dispersion among asset categories, bringing more
We continue to expand our
investment product offerings,
introducing new options and
partnering with sub-advisers that
bring distinct ideas and experience.
opportunity for active managers
who strategically utilize research
and differentiated ideas.
We continue to believe strongly in
the importance of fundamental
research and the value of actively
managed funds in helping to drive
alpha in investors’ portfolios.
Nonetheless, we can’t ignore the
popularity and demand for passive products among investors. It will require us to apply our best
thinking toward innovation and adapting our product line, a process we’ve already begun. We
continue to expand our investment product offerings for a range of investors, introducing new
options, while also partnering with key sub-advisers that bring distinct ideas and experience.
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We’re acutely aware that the regulatory environment also is changing, with renewed focus on
requirements that ensure that financial institutions and advisors act in clients’ best interests as
fiduciary stewards. We have long believed that financial institutions and advisors have a deep
understanding of clients' investment needs. It’s a concept that is inherent to our culture, and we
look forward to strengthening our position through compliance with the Department of Labor’s
new fiduciary standard as it continues to evolve.
Within our asset management business, we are evaluating our product line to ensure its relevance
and cost competitiveness, and continue to make adjustments as appropriate, including an ongoing
focus on fund expenses. We’ve also realigned our sales structure to enable consistency of focus and
efficiency of effort, with a stronger utilization of technology and data that allows us to best respond
to the environment, our clients and our opportunities.
With respect to our own broker-dealer, we began a series of initiatives, collectively known as Project E,
which combine compliance with expected fiduciary standards with other steps to improve and
enhance the business. Across four key areas — Platform, Product, Brand, and Programs and
Services — we are investing in improvements intended to provide financial advisors affiliated with
Waddell & Reed access to industry-leading technology, compelling products, a distinctive and
enduring brand, and valued
programs and services.
As both an asset manager and a
distributor, it is vital that we
actively address all parts of
fiduciary requirements. While
As both an asset manager and a
distributor, it is vital that we address
all aspects of fiduciary requirements.
political debate of the Department of Labor’s fiduciary standard continues, our preparation
moves forward uninterrupted. Particularly in the broker-dealer, where a high proportion of the
assets are in affiliated products, we are taking steps to expand our investment options through our
advisory programs, including the introduction of selected proprietary index funds that fit within
our overall strategy through a new partnership with a major sub-adviser. Please see the following
Q&A for more detail on product expansion for both affiliated and unaffiliated distribution.
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The four imperatives listed above all are directed toward improving our financial performance
over time. We believe the distinction of our business model retains significant strength, while the
experience and depth of our management team allows us to execute on our strategies effectively.
Our focus is on balancing
growth and investing in the
infrastructure of our business
while managing expenses.
We retain a very strong balance sheet
and cash position, with a lower level of
debt. We remain focused on balancing
growth opportunities and investing in
the infrastructure of our business while
managing expenses.
Since the summer of 2016, we have
undertaken a holistic review of our
business practices. In our asset
management business and unaffiliated distribution, we are reviewing and expanding the
products we offer. In our broker-dealer, we are reviewing the way financial advisors interface
with their clients and how advisors will be compensated.
While in the short to intermediate-term these changes will pressure our margin, they are
necessary to retain our competitive position.
We believe that these actions will set the stage for our return to a strong competitive position in
the future. Thank you to our employees, clients and stockholders for your ongoing partnership
as we look ahead toward growth, innovation and opportunity in an evolving financial landscape.
Sincerely,
Philip J. Sanders, CFA
Chief Executive Officer
Chief Investment Officer
Waddell & Reed Financial, Inc.
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Questions & Answers
Chief Executive Officer Philip J. Sanders, CFA, answers questions about all
aspects of the business, where it is today and the strategic plans for the future.
Q: What have you identified as your top priorities since assuming the role
of Chief Executive Officer in August of 2016?
A: The past couple of years, without question, have been challenging and we have not executed
as well as we can. We have a strong leadership team in place and a business model that is
differentiated, offers great value and has demonstrated that value over time. Our strategic plan
allows us to emphasize fundamental strengths, monitor our cost structure and position the
company for future success. We have identified four core priorities to guide our near-term efforts
in order to regain our momentum.
• Strengthen investment performance: We’re reinforcing the framework of our investment team,
including research and risk management.
• Reinvigorate sales: We’re evaluating sales opportunities across all channels; we must position our
products consistently across our channels and utilize technology to be more focused and targeted.
• Prepare for a new regulatory environment, including the Department of Labor’s fiduciary
standard: We began a process last year, known as Project E, that combines compliance with
expected fiduciary standards and
other steps to improve and enhance
our broker-dealer. More broadly, we
are evaluating fee structures, and
expanding investment options
across our channels.
• Execute on our technology
initiatives, which includes
Our strategic plan allows us to
emphasize fundamental strengths,
monitor costs and position the
company for future success.
Project E: We’re unveiling innovative account management systems, real-time client access,
and financial planning tools within our broker-dealer and deploying business intelligence-
driven selling in our retail unaffiliated business.
Q: Why has Waddell & Reed/Ivy’s investment performance lagged, and
what can you do to improve over time?
A: Our underperformance recently has been a combination of a slow-growth market environment
and difficult years for some of our largest fund products. During the last few years, we’ve seen an
unusually difficult environment for active investment managers, coupled with unfavorable stock
selection in certain of our funds. Investors have lived in a world with low growth, low inflation and
very low interest rates, which has led to a high correlation among asset classes and individual
securities. Of course, that environment, in addition to making it more difficult for investors to capture
income and growth, has made it difficult for historically successful active managers to outperform.
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As 2016 came to an end, the environment began to change, and we believe, combined with steps
we’re taking internally, will bring improvement to our performance. By year end, we saw evidence
of stronger performance in several strategies, including International Core Equity, High Income,
Global Bond, Small Cap Growth, Small Cap Core, Emerging Markets Equity and Energy.
As markets change — and all
indications are that the next few
years will bring more change —
investors need managers that
research the global environment
and understand the market.
We have a long history of strong
investment performance and we
believe in the quality of our
investment process. That belief
doesn’t mean we won’t continue to
evaluate our process and improve
or enhance it along the way.
In 2016, we added a Chief Risk
Officer who is responsible for
enhancing and executing
procedures related to investment risk management capabilities across the firm and providing
comprehensive portfolio oversight. As our research capabilities and depth of coverage have
expanded, we appointed a fully-dedicated individual as Director of Equity and Fixed Income
Research who oversees our team of analysts and implements our firm-wide research process.
Together, their work on behalf of our entire investment team should allow us to better monitor
and execute our investment strategies on behalf of clients.
Q: Passively managed investment products are gaining in popularity.
How do you see active management competing in the future?
A: We believe there is room for both active and passive products in a client’s portfolio. This belief
is corroborated by financial advisors' investment selections on behalf of their clients.
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In our experience, most investors set long-term goals that represent key milestones in their lives.
When it comes to investing for those long-term goals, deeply researched information and distinct
ideas can make a meaningful difference in targeting more than average results. With decades of
experience in actively managing money for investors, we’ve learned that differentiated ideas,
skilled interpretation of data and experienced professionals are important to successful investing
over time. As markets change — and all indications are that the next few years will bring more
change — investors need managers that research the global environment and understand the
market. It seems clear that investing is about more than simply its cost, so we believe that proven
active managers will continue to have a place in client portfolios. At the same time, we will
continue to be responsive to investor preference, including offering certain passive products,
through a partnership with ProShares, a well-known sub-adviser, that we believe to be of value to
investors’ portfolios and complementary to our active strategies.
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Q: How would you assess your product offerings? Where have you
focused your efforts recently?
A: We’ve taken steps to evaluate and broaden our product line in each of the last several
years based on what we see as investor need or market opportunity. We are always assessing the
competitive landscape and looking for opportunities in asset classes where good portfolio
managers can make a difference. We’ve broadened the products we manage internally and, where
it has made sense, we have partnered with skilled sub-advisers who can create distinct products
not widely available elsewhere, bringing specialized knowledge that we may not have in-house.
For example, investors are increasingly seeking multi-asset class products, an area we’ve expanded
recently with our Ivy Apollo Multi-Asset and Ivy Apollo Strategic Income funds introduced in 2015.
In 2016, we expanded the way investors can access active investment management that is
packaged with the tax and cost efficiencies found in exchange trading as Ivy became among the
first to offer NextShares exchange-traded managed funds (ETMFs).
Ivy Energy NextShares®, Ivy Focused Growth NextShares® and Ivy Focused Value NextShares®
launched in October 2016, and we’re looking into further expanding the Ivy NextShares lineup
in 2017. Relevant to discussions
about fee pressures in the industry
today, NextShares offer the potential
for competitive investment returns
by applying the strength of Ivy’s
experienced portfolio managers
and proprietary investment
research in a cost-effective and
tax-effective structure.
We are always assessing the
competitive landscape looking
for opportunities in asset classes
where good portfolio managers
can make a difference.
In early 2017, we introduced Ivy IG International Small Cap Fund, which offers investors the
potential to gain exposure to smaller international companies. It seeks smaller-capitalization
(less than $10 billion) companies outside North America that exhibit perceived growth at a
reasonable price. It is subadvised by IG International Management Ltd., a firm with a global
focus that introduced its first international small cap fund in 2002.
Also in the second quarter of 2017, we plan to introduce five Ivy ProShares index funds, both
through our affiliated broker-dealer and through unaffiliated distribution. These index-tracking
strategies will allow advisors to build portfolios that include passive strategies for those clients
that desire them, further broadening our ability to meet an array of needs.
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Q: What is behind the decline in sales, particularly in retail unaffiliated
distribution, and what are you doing to reinvigorate it?
A: There are a few factors that contributed to the sales decline, most notably a combination of
underperformance in certain of our key funds and weak demand for actively managed products,
as discussed previously. In the retail unaffiliated channel, relative underperformance led to some
of our strategies being removed from certain distributor platforms and generally reduced demand.
In the affiliated broker-dealer channel, sales and retention of assets has remained more stable.
Our commitment is to identify and
pursue our best opportunities,
utilizing industry-leading technology,
data analysis and a detailed client
relationship management system.
Competition for shelf space for
asset managers is getting more
intense. Product rationalization
at leading distributors has led to
a reduced number of products
offered, a step that is likely to be
accelerated by implications of
the new Department of Labor
fiduciary standard.
To reinvigorate sales in our retail unaffiliated distribution channel, our commitment is to identify
and pursue our best opportunities, firm-by-firm, product-by-product, utilizing industry-leading
technology, data analysis and a detailed client relationship management (CRM) system. We
have a broad and experienced team dedicated to cultivating relationships with our distributors
and with the advisors who attach to them.
Q: How are you preparing for the new Department of Labor fiduciary standard?
A: Many of the concepts underlying the standard are solid and good for clients. In many ways,
the industry was already moving in that direction. We are well underway pursuing specific
steps toward compliance with the new standard.
As an asset manager, we need to be able to withstand the rigor of distributors’ screening processes.
As platform rationalization continues at major distributors, we want to ensure our most viable
products are available and opportunities are maximized at our partner firms. We plan to restructure
our share class offerings across most products to align with new industry standards.
Compliance as a broker-dealer involves a different set of challenges. We are in the final stages
of a complete review of our sales approach, pay practices and fund inventory. We have identified
conflicts and are working to either mitigate or eliminate them. Where a conflict cannot be
eliminated, we intend to rely on the Best Interest Contract exemption in selected cases. Our
ongoing Project E initiative with its steady transformation of our broker-dealer business is in
many ways devoted to compliance with the expected fiduciary standard.
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Q: Waddell & Reed has made significant investments in technology.
Can you discuss some of those investments and how they will benefit
the business moving forward?
A: As mentioned earlier, technology and data analysis are helping us create a more consistent
and efficient sales process in retail unaffiliated distribution. We’re utilizing sales documentation
and tracking software from SalesPage, along with a new CRM system, to help us compile data on
each of our client partners, sales penetration, asset levels and even tracking specific meetings.
This helps us better identify and react to real product opportunities, as well as to move past
less-productive relationships.
Within our broker-dealer, the platform element of Project E includes a substantial investment in
technology. Our partnership with industry leaders Envestnet and Docupace Technologies blends
higher efficiency account analysis with an innovative account management system and straight-
through processing, customized for our broker-dealer. Among other benefits, it allows financial
advisors to work in an ultimately paperless environment with digital access to accounts, featuring
smart forms, eSignature, electronic document storage and model portfolio creation.
We’ve also adopted leading-edge financial planning tools from eMoney that allow clients and
advisors to work in real time, tracking progress toward financial goals, working with financial
planning tools, store documents online and retrieve them any time. It’s a dynamic environment
that allows clients and advisors to work together more effectively and plan more strategically
over time. Together, these systems will boost the effectiveness and the appeal of Waddell & Reed
financial advisors.
Q: What are your priorities for returning capital to shareholders?
A: We have a solid balance sheet with a sizable
cash position and a low level of debt. We are
addressing our challenges head-on. Having
available cash allows us flexibility as we
evaluate a range of strategic options.
Our intent is to deploy cash
strategically to best position
our company for the future.
Our dividend payout is high but manageable if we can reverse the negative revenue trend.
Our intent is to deploy cash strategically to best position our company for the future.
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Q: Waddell & Reed marks its 80th anniversary in 2017. What does that mean to
the company, its employees and clients?
A: It’s a significant accomplishment and is a tribute to all those who in the past have worked to
mold this firm and build its genuine culture. It’s also indicative of a responsibility that we don’t
take lightly. There aren’t many firms today that carry the same name they started with decades
ago. Our founders began with a vision that we carry forward: through a deep study of the global
Since our founding in 1937, the
world has seen a lot of change,
and we continue to adapt.
markets, we strive to identify
opportunities that help advisors and
investors plan for and achieve long-
term financial goals.
Since our founding in 1937, the world
has seen a lot of change, and we
continue to adapt. Certainly, 2016
illustrated that we can’t rest on heritage or past accomplishments. Our management team stands
ready to continue our firm's legacy, to cultivate the talent and the attitude of innovation necessary
to succeed, and to identify and act on the steps that are needed to keep us moving aggressively in
the right direction.
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Directors
HENRY J. HERRMANN
Chairman of the Board and
SHARILYN S. GASAWAY
Former EVP and
MICHAEL F. MORRISSEY
Former Partner,
Former CEO of the Company
CFO Alltel Corporation
Director (since 1998)4
Director (since 2010)1,3,6
Ernst and Young, LLP
Director (since 2010)1,2,3
ALAN W. KOSLOFF
Lead Independent Director
THOMAS C. GODLASKY
Former CEO
JAMES M. RAINES
President,
Chairman, Kosloff & Partners, LLC
Aviva North America
Director (since 2003)2,3,4,5
Director (since 2010)3,5,6
James M. Raines and Co.
Director (since 1998)2,3,6
PHILIP J. SANDERS
Chief Executive Officer and
DENNIS E. LOGUE
Chairman,
JERRY W. WALTON
Former CFO, J.B. Hunt
Chief Investment Officer
Ledyard Financial Group
Transportation Services, Inc.
of the Company
Director (since 2016)4
Director (since2002)1,3,5
Director (since 2000)1,2,3,4
1 Audit Committee 2 Compensation Committee 3 Nominating and Corporate Governance Committee
4 Executive Committee 5 Marketing Committee 6 Investment Committee
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Officers
PHILIP J. SANDERS
Chief Executive Officer, Chief
JOHN E. SUNDEEN, JR.
Senior Vice President and Chief
Investment Officer and Director
Administrative Officer — Investments
• 29 Years of Industry Experience
• 33 Years of Industry Experience
• 19 Years with Waddell & Reed
• 33 Years with Waddell & Reed
THOMAS W. BUTCH
Executive Vice President and
JEFFREY P. BENNETT
Vice President, Associate General
Chief Marketing Officer
Counsel and Assistant Secretary
• 35 Years of Industry Experience
• 3 Years of Industry Experience
• 17 Years with Waddell & Reed
• 3 Years with Waddell & Reed
BRENT K. BLOSS
Senior Vice President, Chief
BENJAMIN R. CLOUSE
Vice President and
Financial Officer and Treasurer
Chief Accounting Officer
• 17 Years of Industry Experience
• 1 Year of Industry Experience
• 15 Years with Waddell & Reed
• 1 Year with Waddell & Reed
WENDY J. HILLS
Senior Vice President, General
Counsel, Chief Legal Officer
and Secretary
• 19 Years of Industry Experience
• 19 Years with Waddell & Reed
NICOLE RUSSELL
Vice President — Investor Relations
• 19 Years of Industry Experience
• 19 Years with Waddell & Reed
14
WA D D E L L & R E E D F I N A N C I A L , I N C .
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(cid:59) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FORM 10-K
For the fiscal year ended December 31, 2016
OR
(cid:133) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
51-0261715
(I.R.S. Employer
Identification No.)
6300 Lamar Avenue
Overland Park, Kansas 66202
913-236-2000
(Address, including zip code, and telephone number of Registrant’s principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class
Class A Common Stock, $.01 par value
Name of each exchange on which registered
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:59) NO (cid:133)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES (cid:134) NO (cid:59).
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes (cid:59) No (cid:133).
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes (cid:59) No (cid:133).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated Filer
Non-accelerated Filer
(Do not check if a smaller reporting company)
(cid:59)(cid:3)
(cid:133)
Accelerated Filer
Smaller Reporting Company
(cid:133)
(cid:133)
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:59).
The aggregate market value of the voting and non-voting common stock equity held by non-affiliates based on the closing sale price on
June 30, 2016 was $1.38 billion.
Shares outstanding of each of the registrant’s classes of common stock as of February 10, 2017 Class A common stock, $.01 par value:
84,276,768
In Parts II and III of this Form 10-K, portions of the definitive proxy statement for the 2017 Annual Meeting of Stockholders to be held
DOCUMENTS INCORPORATED BY REFERENCE
April 27, 2017.
Index of Exhibits (Pages 89 through 93)
Total Number of Pages Included Are 93
WADDELL & REED FINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2016
Page
Part I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . . .
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
10
26
26
26
26
27
30
31
49
51
51
51
53
53
53
53
54
54
54
55
56
89
2
Forward-Looking Statements
PART I
This Annual Report on Form 10-K and the letter to stockholders contains “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding
our business and the industry in general. These forward-looking statements include all statements, other than statements
of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations,
including statements with respect to revenues and earnings, the amount and composition of assets under management,
distribution sources, expense levels, redemption rates and the financial markets and other conditions. These statements
are generally identified by the use of words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,”
“forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of
a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by or on behalf
of the Company is not a guarantee of future performance. Certain important factors that could cause actual results to
differ materially from our expectations are disclosed in the Item 1 “Business” and Item 1A “Risk Factors” sections of this
Annual Report on Form 10-K, which include, without limitation, the adverse effect from a decline in securities markets or
in the relative investment performance of our products, our inability to pay future dividends, the loss of existing distribution
channels or the inability to access new ones, a reduction of the assets we manage on short notice, and adverse results of
litigation and/or arbitration. The forgoing factors should not be construed as exhaustive and should be read together with
other cautionary statements included in this and other reports and filings we make with the SEC. All forward-looking
statements speak only as of the date on which they are made and we undertake no duty to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 1. Business
General
Waddell & Reed Financial, Inc. (hereinafter referred to as the “Company,” “we,” “our” or “us”) is a holding
company, incorporated in the state of Delaware in 1981, that conducts business through its subsidiaries. Founded in 1937,
we are one of the oldest mutual fund complexes in the United States, having introduced the Waddell & Reed Advisors
group of mutual funds (the “Advisors Funds”) in 1940. Over time we added additional mutual funds: Ivy Funds (the “Ivy
Funds”); Ivy Variable Insurance Portfolios, our variable product offering (“Ivy VIP”); InvestEd Portfolios, our 529 college
savings plan (“InvestEd”); Ivy High Income Opportunities Fund, a closed-end mutual fund (“IVH”); and the Ivy Global
Investors Fund Société d’Investissement à Capital Variable (the “SICAV”) and its Ivy Global Investors sub-funds (the
“IGI Funds”), an undertaking for the collective investment in transferable securities (“UCITS”). In 2016, we introduced
the Ivy NextShares® exchange-traded managed funds (“Ivy NextShares”) (collectively, the Advisors Funds, Ivy Funds,
Ivy VIP, InvestEd, IVH and Ivy NextShares are referred to as the “Funds”). As of December 31, 2016, we had $80.5 billion
in assets under management.
We derive our revenues from providing investment management, investment advisory, investment product
underwriting and distribution, and shareholder services administration to the Funds, the IGI Funds, and institutional and
separately managed accounts. Investment management fees are based on the amount of average assets under management
and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting
and distribution revenues consist of fees earned on fee-based asset allocation products and related advisory services,
asset-based service and distribution fees promulgated under the 1940 Act (“Rule 12b-1”), commissions derived from sales
of investment and insurance products, and distribution fees on certain variable products. The products sold have various
commission structures and the revenues received from those sales vary based on the type and dollar amount sold.
Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio
accounting and administration fees, and is earned based on assets under management or number of client accounts.
We operate our business through a balanced distribution network. Our retail products are distributed through third
parties such as other broker-dealers, registered investment advisers and various retirement platforms (collectively, the
“retail unaffiliated distribution channel”) or through associated independent contractor financial advisors (the “retail
broker-dealer channel”). We also market our investment advisory services to institutional investors, either directly or
through consultants (the “institutional channel”).
3
Our retail unaffiliated distribution channel efforts include retail fund distribution through broker-dealers (the
primary method of distributing mutual funds for the industry), registered investment advisers (fee-based financial advisors
who generally sell mutual funds through financial supermarkets) and retirement and insurance platforms. Assets under
management in this channel were $30.3 billion at the end of 2016.
In the retail broker-dealer channel, associated independent financial advisors focus their efforts primarily on
financial planning, serving mostly middle class and mass affluent clients. We compete with smaller broker-dealers and
independent financial advisors, as well as a span of other financial service providers. Assets under management in this
channel were $42.3 billion at December 31, 2016.
Through our institutional channel, we serve as subadviser for domestic and foreign distributors of investment
products for pension funds, Taft-Hartley plans and endowments. Additionally, we serve as investment adviser and
distributor of the IGI Funds. Assets under management in the institutional channel were $7.9 billion at December 31, 2016.
Organization
We operate our investment advisory business through our subsidiary companies, primarily Waddell & Reed
Investment Management Company (“WRIMCO”), a registered investment adviser for the Advisors Funds and Ivy
Investment Management Company (“IICO”), the registered investment adviser for the Ivy Funds, Ivy VIP, InvestEd, the
IGI Funds, and Ivy NextShares and global distributor of the IGI Funds.
Our underwriting and distribution business operates through two broker-dealers: Waddell & Reed, Inc. (“W&R”)
and Ivy Distributors, Inc. (“IDI”). W&R is a registered broker-dealer and investment adviser that acts primarily as the
national distributor and underwriter for shares of the Advisors Funds, InvestEd and other mutual funds, and as a distributor
of variable annuities and other insurance products issued by our business partners. In addition, W&R is the largest
distributor of the Ivy Funds. IDI is the distributor and underwriter for the Ivy Funds, Ivy VIP and Ivy Nextshares.
Waddell & Reed Services Company (“WRSCO”) provides transfer agency and accounting services to the Funds.
Waddell & Reed Financial, Inc., W&R, WRIMCO, WRSCO, IICO and IDI are hereafter collectively referred to as the
“Company,” “we,” “us” or “our” unless the context requires otherwise.
Investment Management Operations
Our investment advisory business provides one of our largest sources of revenues. We earn investment
management fee revenues by providing investment advisory and management services pursuant to investment
management agreements with the Funds. While the specific terms of the agreements vary, the basic terms are similar. The
agreements provide that we render overall investment management services to each of the Funds, subject to the oversight
of each Fund’s board of trustees and in accordance with each Fund’s investment objectives and policies. The agreements
permit us to enter into separate agreements for shareholder services or accounting services with each respective Fund.
Each Fund’s board of trustees, including a majority of the trustees who are not “interested persons” of the Fund
or the Company within the meaning of the Investment Company Act of 1940, as amended (the “ICA”) (“disinterested
members”) and the Fund’s shareholders must approve the investment management agreement between the respective Fund
and the Company. These agreements may continue in effect from year to year if specifically approved at least annually by
(i) the Fund’s board, including a majority of the disinterested members, or (ii) the vote of a majority of both the
shareholders of the Fund and the disinterested members of each Fund’s board, each vote being cast in person at a meeting
called for such purpose. Each agreement automatically terminates in the event of its assignment, as defined by the ICA or
the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and may be terminated without penalty by any
Fund by giving us 60 days’ written notice if the termination has been approved by a majority of the Fund’s trustees or the
Fund’s shareholders. We may terminate an investment management agreement without penalty on 120 days’ written
notice.
In addition to performing investment management services for the Funds, we act as an investment adviser for the
IGI Funds, institutional and other private investors and we provide subadvisory services to other investment companies.
Such services are provided pursuant to various written agreements and our fees are generally based on a percentage of
assets under management.
4
Our investment management team begins each business day in a collaborative discussion that fosters idea sharing,
yet reinforces individual accountability. Through all market cycles, we remain dedicated to the following investment
principles:
• Rigorous fundamental research—an enduring investment culture that dedicates itself to analyzing companies
on our own rather than relying exclusively on widely available research produced by others.
• Collaboration and accountability—a balance of collaboration and individual accountability, which ensures
the sharing and analysis of investment ideas among investment professionals while empowering portfolio
managers to shape their portfolios individually.
• Focus on growing and protecting investors’ assets—a sound approach that seeks to capture asset appreciation
when market conditions are favorable and strives to manage risk during difficult market periods.
These three principles shape our investment philosophy and money management approach. For nearly 80 years,
our investment organization has delivered consistently competitive investment performance. Through bull and bear
markets, our investment professionals have not strayed from what works—fundamental research and a time-tested
investment process. We believe investors turn to us because they appreciate that our investment approach continues to
identify and create opportunities for wealth creation.
Our investment management team is comprised of 78 professionals, including 34 portfolio managers who average
23 years of industry experience and 15 years of tenure with our firm. We have significant experience in virtually all major
asset classes, several specialized asset classes and a range of investment styles. At December 31, 2016, 76% of the
Company’s $80.5 billion in assets under management were invested in equities, of which 79% was domestic and 21% was
international. In recent years, we have supported growth of international investments by adding investment professionals
native to countries that we consider emerging markets. They, along with other members of the investment team, focus on
understanding foreign markets and capturing investment opportunities. Our investment management team also includes
subadvisors who bring similar investment philosophies and additional expertise in specific asset classes.
Investment Management Products
Our mutual fund families offer a wide variety of investment options. We are the exclusive underwriter and
distributor of 90 registered open-end mutual fund portfolios in the Funds, which includes 14 investment styles.
Additionally, we have one closed-end offering, three Ivy NextShares exchange-traded managed funds and offer the IGI
Funds through our institutional channel. The Advisors Funds, variable products offering Ivy VIP, and InvestEd are offered
primarily through W&R financial advisors in the retail broker-dealer channel; in some circumstances, certain of those
funds are also offered through the retail unaffiliated distribution channel. The Ivy Funds are offered through both our retail
unaffiliated distribution channel and retail broker-dealer channel. The Funds’ assets under management are included in
either our retail unaffiliated distribution channel or our retail broker-dealer channel depending on which channel marketed
the client account or is the broker of record.
During 2016, we launched the Ivy Targeted Return Bond fund, subadvised by Pictet Asset Management, and the
Ivy California Municipal High Income fund. The Ivy Targeted Return Bond fund seeks to provide a positive total return
over the long-term across all market environments by investing in any form of debt security issued in the U.S or
internationally. The Ivy California Municipal High Income fund seeks a high level of income that is exempt from federal
and California income taxes. In January of 2017, we launched the Ivy IG International Small Cap fund, subadvised by IG
International Management Ltd. This fund seeks smaller-capitalization companies outside North America that exhibit
perceived growth at a reasonable price.
Additionally in 2016, we introduced three Ivy NextShares as part of a planned lineup of NextShares exchange-
traded managed funds. Ivy Energy NextShares invests primarily in securities of companies within all aspects of the energy
sector. Ivy Focused Growth NextShares invests primarily in a portfolio of common stock issued by large capitalization,
growth-oriented companies that the portfolio manager believes have the ability to sustain growth over the long-term. Ivy
Focused Value NextShares invests primarily in the common stocks of companies that the portfolio manager believes are
undervalued, trading at a significant discount relative to the intrinsic value of the Company as estimated by IICO and/or
are out of favor in financial markets but have a favorable outlook for capital appreciation.
5
Other Products
We offer our retail broker-dealer channel clients a variety of fee-based asset allocation products, including
Managed Allocation Portfolio (“MAP”), MAP Plus, MAP Choice, MAP Flex, MAP Select, MAP Latitude and Strategic
Portfolio Allocation (“SPA”). These products utilize a variety of investment options including mutual funds, as well as
individual stock, bond and exchange traded fund investment options. As of December 31, 2016, clients had $18.4 billion
invested in our fee-based asset allocation products, of which $15.6 billion is invested in our mutual funds and included in
our mutual fund assets under management.
In our retail broker-dealer channel, we distribute various business partners’ variable annuity products, which offer
Ivy VIP as an investment vehicle. We also offer our retail broker-dealer channel customers retirement and life insurance
products underwritten by our business partners. Through our insurance agency subsidiary, W&R financial advisors also
sell life insurance and disability products underwritten by various carriers.
Distribution Channels
We distribute our investment products through the retail unaffiliated distribution, retail broker-dealer and
institutional channels.
Retail Unaffiliated Distribution Channel
Our team of 42 external wholesalers lead our wholesaling efforts, which focus principally on distributing the Ivy
Funds through three segments: broker-dealers (the largest method of distributing mutual funds for the industry and for us),
retirement platforms (401(k) platforms using multiple managers) and registered investment advisers (fee-based financial
advisors who generally sell mutual funds through financial supermarkets). Additionally, our National Accounts team,
comprised of 10 employees, work with our distribution partners managing current and new relationships.
Retail Broker-Dealer Channel
Throughout our history, independent W&R advisors have sold investment products primarily to middle income
and mass affluent individuals, families and businesses across the country in geographic markets of all sizes. We assist
clients on a wide range of financial issues with a significant focus on helping them plan, generally, for long-term
investments such as retirement and education, and offer one-on-one consultations that emphasize long-term relationships
through continued service. As a result of this approach, this channel has developed a loyal customer base with clients
maintaining their accounts significantly longer than the industry average. Over the past several years, we have expanded
our brokerage platform technology and offerings, and continue to do so which enable us to competitively recruit
experienced advisors.
As of December 31, 2016, there were 1,780 independent W&R financial advisors who operate out of offices
located throughout the United States. We believe, based on industry data, that W&R financial advisors are currently one
of the largest groups in the United States selling primarily mutual funds, and that W&R, our broker-dealer subsidiary,
ranks among the largest independent broker-dealers. Retail broker-dealer channel underwriting and distribution fee
revenues per the average number of advisors were $243 thousand, $265 thousand and $254 thousand for the years ended
December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, our retail broker-dealer channel had
approximately 426,000 mutual fund customers.
Institutional Channel
Through this channel, we manage assets in a variety of investment styles for a variety of institutions. The largest
client type is other asset managers that hire us to act as subadviser; they are typically domestic and foreign distributors of
investment products who lack scale or the track record to manage internally, or choose to market multi-manager styles.
Over time, the institutional channel has been successful in developing subadvisory relationships, and as of December 31,
2016, subadvisory business comprised more than 60% of the institutional channel’s assets. Our diverse client list also
includes the IGI Funds, pension funds, Taft-Hartley plans and endowments.
6
Service Agreements
We earn service fee revenues by providing various services to the Funds and their shareholders. Pursuant to
shareholder servicing agreements, we perform shareholder servicing functions for which the Funds pay us a monthly fee,
including: maintaining shareholder accounts; issuing, transferring and redeeming shares; distributing dividends and paying
redemptions; furnishing information related to the Funds; and handling shareholder inquiries. Pursuant to accounting
service agreements, we provide the Funds with bookkeeping and accounting services and assistance for which the Funds
pay us a monthly fee, including: maintaining the Funds’ records; pricing Fund shares; and preparing prospectuses for
existing shareholders, proxy statements and certain other shareholder reports.
Agreements with the Funds may be adopted or amended with the approval of the disinterested members of each
Fund’s board of trustees and have annually renewable terms of one year.
Competition
The financial services industry is a highly competitive global industry. According to the Investment Company
Institute (the “ICI”), at the end of 2016 there were more than 9,500 open-end investment companies, more than 500
closed-end investment companies and more than 1,700 exchange traded funds of varying sizes, investment policies and
objectives whose shares are being offered to the public in the United States alone. Factors affecting our business include
brand recognition, business reputation, investment performance, quality of service and the continuity of both client
relationships and assets under management. A majority of mutual fund sales go to funds that are highly rated by a small
number of well-known ranking services that focus on investment performance. Competition is based on distribution
methods, the type and quality of shareholder services, the success of marketing efforts, the ability to develop investment
products for certain market segments to meet the changing needs of investors, and the achievement of competitive
investment management performance.
We compete with hundreds of other mutual fund management, distribution and service companies that distribute
their fund shares through a variety of methods, including affiliated and unaffiliated sales forces, broker-dealers and direct
sales to the public of shares offered at a low or no sales charge. Many larger mutual fund complexes have significant
advertising budgets and established relationships with brokerage houses with large distribution networks, which enable
these fund complexes to reach broad client bases. Many investment management firms offer services and products similar
to ours, as well as other independent financial advisors. We also compete with brokerage and investment banking firms,
insurance companies, commercial banks and other financial institutions and businesses offering other financial products
in all aspects of their businesses. Although no single company or group of companies consistently dominates the mutual
fund management and services industry, many are larger than us, have greater resources and offer a wider array of financial
services and products.
The distribution of mutual funds and other investment products has undergone significant developments in recent
years, which has intensified the competitive environment in which we operate. These developments include the
introduction of new products, increasingly complex distribution systems with multiple classes of shares, the development
of internet websites providing investors with the ability to invest on-line, the introduction of sophisticated technological
platforms used by financial advisors to sell and service mutual funds for their clients, the introduction of separately
managed accounts—previously available only to institutional investors—to individuals, and growth in the number of
mutual funds offered. In recent years, we have faced significant competition from passive oriented investment strategies,
which have taken market share from active managers like ourselves. While we cannot predict how much market share
these competitors will gain, we believe there will always be demand for active management.
We believe we effectively compete across multiple dimensions of the asset management and broker-dealer
businesses. First, we market our products, primarily the Ivy Funds family, to unaffiliated broker-dealers and advisors and
compete against other asset managers offering mutual fund products. This distribution method allows us to move beyond
proprietary distribution and increases our potential pool of clients. Competition is based on sales techniques, personal
relationships and skills, and the quality of financial planning products and services offered. We compete against asset
managers that are both larger and smaller than our firm, but we believe that the breadth and depth of our products position
us to compete in this environment. In this marketplace, we compete with a broad range of asset managers. Second, W&R
financial advisors, who operate through our affiliated broker-dealer, have access to our proprietary financial products. We
believe our business model targets customers seeking personal assistance from financial advisors or planners where the
primary competition is companies distributing products through financial advisors. The market for financial advice is
7
extremely broad and fragmented. W&R financial advisors compete primarily with large and small broker-dealers,
independent financial advisors, registered investment advisers, financial institutions and insurance representatives. Finally,
we compete in the institutional marketplace, working with consultants who select asset managers for various opportunities,
as well as working directly with plan sponsors, foundations, endowments, sovereign funds and other asset managers who
hire subadvisors.
We also face competition in attracting and retaining qualified financial advisors and employees. To maximize
our ability to compete effectively in our business, we offer competitive compensation.
For additional discussion regarding the impact of competition, please see the Market and Competition risk factors
included in Item 1A—“Risk Factors” in this annual report.
Regulation
The securities industry is subject to extensive regulation and virtually all aspects of our business are subject to
various federal and state laws and regulations. These laws and regulations are primarily intended to protect investment
advisory clients and shareholders of registered investment companies. Under such laws and regulations, agencies and
organizations that regulate investment advisers, broker-dealers, and transfer agents like us have broad administrative
powers, including the power to limit, restrict or prohibit an investment adviser, broker-dealer or transfer agent from
carrying on its business in the event that it fails to comply with applicable laws and regulations. In such event, the possible
sanctions that may be imposed include, but are not limited to, the suspension of individual employees or agents, limitations
on engaging in certain lines of business for specified periods of time, censures, fines and the revocation of investment
adviser and other registrations.
The United States Securities and Exchange Commission (the “SEC”) is the federal agency responsible for the
administration of federal securities laws. Certain of our subsidiaries are registered with the SEC as investment advisers
under the Advisers Act, which imposes numerous obligations on registered investment advisers including, among other
things, fiduciary duties, record-keeping and reporting requirements, operational requirements and disclosure obligations,
as well as general anti-fraud prohibitions. Investment advisers are subject to periodic examination by the SEC, and the
SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from censure
to termination of an investment adviser’s registration.
Our Funds are registered as investment companies with the SEC under the ICA, and various filings are made with
states under applicable state rules and regulations. The ICA regulates the relationship between a mutual fund and its
investment adviser and prohibits or severely restricts principal transactions and joint transactions. Various regulations
cover certain investment strategies that may be used by the Funds for hedging and/or speculative purposes. To the extent
the Funds purchase futures contracts, options on futures contracts, swaps and foreign currency contracts, they are subject
to the commodities and futures regulations of the Commodity Futures Trading Commission.
We derive a large portion of our revenues from investment management agreements. Under the Advisers Act,
our investment management agreements terminate automatically if assigned without the client’s consent. Under the ICA,
investment advisory agreements with registered investment companies, such as the Funds, terminate automatically upon
assignment. The term “assignment” is broadly defined and includes direct assignments, as well as assignments that may
be deemed to occur, under certain circumstances, upon the transfer, directly or indirectly, of a controlling interest in the
Company.
The Company is also subject to federal and state laws affecting corporate governance, including the
Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC. Our report on internal controls over financial reporting
for 2016 is included in Part I, Item 9A.
As a publicly traded company, we are also subject to the rules of the New York Stock Exchange (the “NYSE”),
the exchange on which our stock is listed, including the corporate governance listing standards approved by the SEC.
Two of our subsidiaries, W&R and IDI, are registered as broker-dealers with the SEC and the states. Much of the
broker-dealer regulation has been delegated by the SEC to self-regulatory organizations, principally the Municipal
Securities Rulemaking Board and the Financial Industry Regulatory Authority, Inc. (“FINRA”), which is the primary
regulator of our broker-dealer activities. These self-regulatory organizations adopt rules (subject to approval by the SEC)
8
that govern the industry and conduct periodic examinations of our operations over which they have jurisdiction. Securities
firms are also subject to regulation by state securities administrators in those states in which they conduct business. Broker-
dealers are subject to regulations that cover all aspects of the securities business, including sales practices, market making
and trading among broker-dealers, the use and safekeeping of clients’ funds and securities, capital structure,
record-keeping, and the conduct of directors, officers and employees. Violation of applicable regulations can result in the
revocation of broker-dealer licenses, the imposition of censures or fines, and the suspension or expulsion of a firm, its
officers or employees.
W&R and IDI are each subject to certain net capital requirements pursuant to the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Uniform Net Capital Rule 15c3-1 of the Exchange Act (the “Net Capital Rule”)
specifies the minimum level of net capital a registered broker-dealer must maintain and also requires that part of its assets
be kept in a relatively liquid form. The Net Capital Rule is designed to ensure the financial soundness and liquidity of
broker-dealers. Any failure to maintain the required minimum net capital may subject us to suspension or revocation of
our registration or other limitations on our activity by the SEC, and suspension or expulsion by FINRA or other regulatory
bodies, and ultimately could require the broker-dealer’s liquidation. The maintenance of minimum net capital requirements
may also limit our ability to pay dividends. As of December 31, 2016 and 2015, net capital for W&R and IDI exceeded all
minimum requirements.
Pursuant to the requirements of the Securities Investor Protection Act of 1970, W&R is a member of the Securities
Investor Protection Corporation (the “SIPC”). IDI is exempt from the membership requirements and is not a member of
the SIPC. The SIPC provides protection against lost, stolen or missing securities (but not loss in value due to a rise or fall
in market prices) for clients in the event of the failure of a broker-dealer. Accounts are protected up to $500,000 per client
with a limit of $100,000 for cash balances. However, since the Funds, and not our broker-dealer subsidiaries, maintain
customer accounts, SIPC protection would not cover mutual fund shareholders whose accounts are maintained directly
with the Funds, but would apply to brokerage accounts held on our brokerage platform.
Title III of the USA PATRIOT Act, the International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001, imposes significant anti-money laundering requirements on all financial institutions, including domestic
banks and domestic operations of foreign banks, broker-dealers, futures commission merchants and investment companies.
The Company and the independent financial advisors in our retail broker-dealer channel are subject to the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and related provisions of the Internal Revenue
Code of 1986, as amended, to the extent they are considered “fiduciaries” under ERISA with respect to certain clients. The
U.S. Department of Labor, which administers ERISA, adopted regulations in April 2016 that, among other things, treat as
fiduciaries any person who provides investment advice or recommendations to employee benefit plans, plan fiduciaries,
plan participants, plan beneficiaries, IRAs or IRA owners.
Our operations outside the United States are subject to the laws and regulations of various non-U.S. jurisdictions
and non-U.S. regulatory agencies and bodies, including the regulation of the IGI Funds by Luxembourg’s Commission de
Surveillance du Secteur Financier as UCITS. Similar to the United States, non-U.S. regulatory agencies have broad
authority in the event of non-compliance with laws and regulations.
Our businesses may be materially affected not only by regulations applicable to us as an investment adviser,
broker-dealer or transfer agent, but also by law and regulations of general application. For example, the volume of our
principal investment advisory business in a given time period could be affected by, among other things, existing and
proposed tax legislation and other governmental regulations and policies (including the interest rate policies of the Federal
Reserve Board), and changes in the interpretation or enforcement of existing laws and rules that affect the business and
financial communities.
Our business is also subject to new and changing laws and regulations. For additional discussion regarding the
impact of current and proposed legal or regulatory requirements, please see the Legal, Regulatory and Tax risk factors
included in Item 1A—“Risk Factors” in this annual report.
Intellectual Property
We regard our names as material to our business, and have registered certain service marks associated with our
business with the United States Patent and Trademark Office.
9
Employees
At December 31, 2016 we had 1,447 full-time employees, consisting of 1,134 home office employees and 313
employees responsible for advisor field supervision and administration.
Available Information
We make available free of charge our proxy statements, annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports under the “Reports & SEC Filings” menu on
the “Investor Relations” section of our internet website at ir.waddell.com as soon as reasonably practical after such filing
has been made with the SEC.
ITEM 1A. Risk Factors
You should carefully consider the following risk factors as well as the other risks and uncertainties contained in
this Annual Report on Form 10-K or in our other SEC filings. The occurrence of one or more of these risks or uncertainties
could materially and adversely affect our business, financial condition, operating results and cash flows. In this Annual
Report on Form 10-K, unless the context expressly requires a different reading, when we state that a factor could
“adversely affect us,” have a “material adverse effect on our business,” “adversely affect our business” and similar
expressions, we mean that the factor could materially and adversely affect our business, financial condition, operating
results and cash flows. Information contained in this section may be considered “forward-looking statements.” See
“Part I—Forward Looking Statements” for a discussion of cautionary statements regarding forward-looking statements.
MARKET AND COMPETITION RISKS
We Could Experience Adverse Effects On Our Market Share Due To Strong Competition From Numerous
And Sometimes Larger Companies. The investment management industry is highly competitive. We compete with
stock brokerage firms, mutual fund companies, investment banking firms, insurance companies, banks, internet investment
sites, mobile investment products, automated financial advisors, and other financial institutions and individuals registered
investment advisers based on a number of factors, including investment performance, the level of fees charged, the quality
and diversity of products and services offered, name recognition and reputation, and the ability to develop new investment
strategies and products to meet the changing needs of investors. Many of these competitors not only offer mutual fund
investments and services, but also offer an ever-increasing number of other financial products and services. Many of our
competitors have more products and product lines, services and brand recognition and also may have substantially greater
assets under management. See Item 1 – “Business – Competition.”
Many larger mutual fund complexes have developed more extensive relationships with brokerage houses that
have large distribution networks, which may enable those fund complexes to reach broader client bases. In recent years,
there has been a trend of consolidation in the mutual fund industry resulting in stronger competitors with greater financial
resources than us.
There has also been a trend toward online internet financial services and financial services that are based on
mobile applications or automated processes as clients increasingly seek to manage with their investment portfolios
digitally. This is leading to increased utilization of “robo” adviser platforms. If existing or potential customers decide to
invest with our competitors instead of with us, our market share could decline, which could have a material adverse effect
on our business.
We have faced significant competition in recent years from lower fee, passive investment strategies. Investment
advisors that emphasize passive products have gained, and may continue to gain, market share from active managers like
us, which could have a material impact on our business.
We Could Lose Market Share To Competitors That Have Broader Investment Product Offerings. There are a
number of asset classes and product types that are not well covered by our current products and services. When these asset
classes or products are in favor with investors, our competitors may receive outsized flows compared to others in the
industry. As a result, we will miss the opportunity to gain the assets under management that are being invested in these
assets and face the risk of our managed assets being withdrawn in favor of competitors who provide services covering
these classes or products. For example, to the extent there is a trend in the asset management business in favor of passive
10
products, such as index and certain types of exchange-traded funds, it favors our competitors who provide those products
over active managers like us. In addition, our asset managers are not typically the lowest cost provider of asset management
services. To the extent that we compete on the basis of price, we may not be able to maintain our current fee structure,
which could adversely affect our operating revenues.
Our Business And Prospects Could Be Adversely Affected If The Securities Markets Decline. Our results of
operations are affected by certain economic factors, including the success of the securities markets. There are often
substantial fluctuations in price levels in the securities markets. These fluctuations can occur on a daily basis and over
longer periods as a result of a variety of factors, including national and international economic and political events, broad
trends in business and finance, and interest rate movements. Adverse market conditions, particularly the U.S. domestic
stock market due to our high concentration of assets under management in that market, and lack of investor confidence
could result in investors further withdrawing from the markets or decreasing their rate of investment, either of which could
adversely affect our revenues, earnings and growth prospects.
Our revenues are, to a large extent, investment management fees that are based on the market value of assets
under management. A decline in the securities market may cause the value of our assets under management to decline or
cause investors to redeem assets in favor of investments they perceive offer greater opportunity or lower risk, both of
which decrease investment management and other fees and could significantly reduce our revenues and earnings. We do
not hedge our revenue stream from this risk through derivatives or other financial contracts. Our growth is dependent to
a significant degree upon our ability to attract and retain mutual fund assets, and, in an adverse economic environment,
this may prove more difficult. The combination of adverse market conditions reducing both sales and investment
management fees could compound one another and materially affect our business.
There May Be Adverse Effects On Our Business If Our Funds’ Performance Declines.
Success in the
investment management and mutual fund businesses, including the growth and retention of assets under management, is
dependent on the investment performance of client accounts relative to market conditions and the performance of
competing funds. Good relative performance stimulates sales of the Funds’ shares and tends to keep redemptions low.
Sales of the Funds’ shares in turn generate higher management fees and distribution revenues. Good relative performance
also attracts institutional and separate accounts. It may also result in higher ratings or rankings by research services such
as Morningstar, Lipper or eVestment Alliance, which may compound the foregoing effects. Conversely, poor relative
performance results in decreased sales, increased redemptions of the Funds’ shares and the loss of institutional and separate
accounts, resulting in decreases in our assets under management and revenues. Poor investment performance also may
adversely affect our ability to expand the distribution of our products through unaffiliated third parties. Further, any drop
in market share of mutual fund sales by independent financial advisors in our retail broker-dealer channel may further
reduce profits as sales of unaffiliated mutual funds are less profitable than sales of our affiliated mutual funds. As of
December 31, 2016, 27% our assets under management were concentrated in five Funds. As a result, our operating results
are significantly affected by the performance of those Funds and our ability to minimize redemptions from and maintain
assets under management in those Funds. If we experienced a significant amount of redemptions of those Funds for any
reason, our revenues would decline and our operating results would be adversely affected. Further, any adverse
performance of those Funds may also indirectly affect the net sales and redemptions in our other products, which in turn,
may adversely affect our business. We have experienced net outflows in recent years due in part to underperformance of
our mutual funds and depressed sales. During fiscal years 2016 and 2015, we had $25.3 billion and $13.8 billion of net
outflows, respectively.
In addition, in the ordinary course of our business we may reduce or waive investment management fees, or limit
total expenses, on certain products or services for particular time periods to manage fund expenses, or for other reasons,
and to help retain or increase assets under management. If our revenues decline without a commensurate reduction in our
expenses, our net income will be reduced. From time to time, we may experience poor investment performance, on a
relative basis or an absolute basis, in certain products or accounts that we manage, which may contribute to a significant
reduction in our assets under management and revenues. In recent years we have experienced a decline in investment
performance for several of our investment products, particularly in connection with shorter-term performance. There is
typically a lag before improvements in investment performance produce a positive effect on asset flows. There can be no
assurances as to when, or if, investment performance issues will cease to negatively influence our assets under management
and revenues.
11
Changes In The Distribution Channels In Which We Operate Could Reduce Our Net Revenues and Adversely
Affect Our Assets Under Management, Revenues and Growth Prospects. Our ability to market and distribute mutual
funds and other investment products we manage is significantly dependent on access to third party financial intermediaries
that distribute these products. We sell a significant portion of our investment products through a variety of such
intermediaries, including major wire houses, national and regional broker-dealers, defined contribution plan
administrators, retirement platforms and registered investment advisers. Assets under management in our retail
unaffiliated channel at December 31, 2016 were $30.3 billion, or 38% of total assets under management. It would be
difficult for us to acquire or retain the management of those assets without the assistance of the intermediaries. As third
party intermediaries rationalize and reduce the number of product offerings on their platforms in response to the recently
adopted U.S. Department of Labor (the “DOL”) fiduciary standard regulations, we cannot provide assurances that we will
be able to maintain an adequate number of investment product offerings, or access to these intermediaries, which could
have a material adverse effect on our business if we are unable to maintain successful distribution relationships. Relying
on third party intermediaries also exposes us to the risk of increasing costs of distribution, as certain intermediaries with
which we conduct business charge fees (largely determined by the distributor) to maintain access to their distribution
networks. If we choose not to pay such fees, our ability to distribute through those intermediaries would be limited;
significant increases in such fees will cause our distribution costs to increase, which could lower our profitability. In
addition, over time certain sectors of the financial services industry have become considerably more concentrated, as
financial institutions involved in a broad range of financial services have been acquired by or merged into other firms.
The implementation of the DOL fiduciary standard is likely to require modifications to our distribution activities and may
impact our ability to service clients or engage in certain types of distribution or other business activities. The convergence
of all of these activities could result in our competitors gaining greater resources, and we may experience pressure on our
pricing and market share as a result of these factors and as some of our competitors seek to increase market share by
reducing prices. If these changes continue, our distribution costs could increase as a percentage of our revenues generated.
We could experience lower sales or incur higher distribution costs or other developments, which could have an adverse
effect on our results of operations if third party selling agreements are terminated or there is a change in the terms of those
agreements.
A substantial amount of our assets under management, $42.3 billion, or 53%, as of December 31, 2016 is held in
our retail broker-dealer channel. The investment products distributed through independent financial advisors in our retail
broker-dealer channel include our affiliated mutual funds and other products, as well as products issued by unaffiliated
mutual fund companies. A majority of the sales in this channel are sales of affiliated mutual funds, upon which we earn
higher revenues from asset management fees as compared to the sale of unaffiliated funds. Sales of affiliated investment
products in our retail broker-dealer channel may decrease (and redemptions increase) materially with the introduction of
additional unaffiliated investment products in our advisory programs. Further, qualified accounts, particularly IRAs, make
up a significant portion of our assets under management and administration in this channel, and a significant portion of
those retirement assets are invested in our affiliated products. The introduction of additional unaffiliated products to
independent financial advisors in this channel, sustained underperformance of key investment products, and the
implementation of the DOL fiduciary standard, which has significant impacts relative to retirement assets, could cause us
to experience lower sales of our affiliated investment products, increased redemptions, or other developments that may
not be fully offset by higher distribution revenues or other benefits. As a result, our assets under management, revenues
and earnings may decline. See “Legal, Regulatory and Tax Risks.”
Increasingly, investors, particularly in the institutional market, rely on external consultants and other third party
financial professionals for advice on the choice of an investment adviser and investment portfolio. Further, the institutional
separate account business uses referrals from investment consultants, investment advisers and other professionals. These
consultants and third parties tend to exert a significant degree of influence over their clients’ choices, and they may favor
a competitor of ours. We cannot assure that our investment offerings will be among their recommended choices in the
future. The Company cannot be certain that it will continue to have access to these third party distribution channels or
have an opportunity to offer some or all of its investment products through these channels. Further, their recommendations
can change over time and we could lose their recommendation and their client assets under our management. Any failure
to maintain strong business relationships with these distribution sources and the consultant community would impair our
ability to sell our products, which in turn could have a negative effect on our revenues and profitability.
12
A Significant Percentage Of Our Assets Under Management Are Distributed Through Our Retail Unaffiliated
Channel, Which Has Higher Redemption Rates Than Our Retail Broker-Dealer Channel.
In recent years, we have
focused on expanding distribution efforts relating to our retail unaffiliated channel. The percentage of our assets under
management in the retail unaffiliated channel has increased from 10% at December 31, 2003 to 38% at December 31,
2016, and the percentage of our total sales represented by the retail unaffiliated channel has increased from 17% for the
year ended December 31, 2003 to 54% for the year ended December 31, 2016. The success of sales in our retail
unaffiliated channel depends upon our maintaining strong relationships with certain strategic partners, third party
distributors and institutional accounts, as well as on the performance of our investment products marketed through this
channel. Many of those distribution sources also offer investors competing funds that are internally or externally managed,
or may reduce the number of competing products on their platforms through systemic rationalization and reduction, which
could limit the distribution of our products. The loss of any of these distribution channels and the inability to continue to
access new distribution channels could decrease our assets under management and adversely affect our results of
operations and growth. There are no assurances that these channels and their client bases will continue to be accessible to
us. The loss or diminution of the level of business we do with those providers could have a material adverse effect on our
business. Compared to the industry average redemption rate of 25.4% and 24.7% for the years ended December 31, 2016
and 2015, respectively, the retail unaffiliated channel had redemption rates of 63.7% and 43.0% for the years ended
December 31, 2016 and 2015, respectively. Redemption rates were 11.1% and 9.1% for our retail broker-dealer channel
in the same periods, reflecting the higher rate of transferability of investment assets in the retail unaffiliated channel.
However, the modernization of our brokerage and advisory platforms and products and the introduction of additional
unaffiliated investment products in our advisory programs, as well as changes resulting from the DOL fiduciary standard,
may result in a higher redemption rate in our retail broker-dealer channel, as independent financial advisors may move to
sell more unaffiliated products. An increase in the sale of unaffiliated mutual funds compared to sales of our Funds by
independent financial advisors may reduce profits, as sales of unaffiliated mutual funds are less profitable than sales of
our Funds. See “Legal, Regulatory and Tax Risks.”
Fee Pressures Could Reduce Our Revenues And Profitability. There is an accelerating trend toward lower
fees in some segments of the investment management business. The SEC has adopted rules that are designed to alter
mutual fund corporate governance, which could result in further downward pressure on investment advisory fees in the
mutual fund industry. Investors and clients are increasingly fee sensitive. Active management continues to experience
pressure by increased flows to lower fee passive products. This trend will result in pressure on active management firms
to reduce fees to compete with passive products. The DOL fiduciary standard could increase fee pressure as financial
advisors may have more fee sensitivity given their new fiduciary role. In addition, competition could cause us to reduce
the fees we charge for products and services. In the event that competitors charge lower fees for substantially similar
products, we may be forced to compete on the basis of price in order to attract and retain customers. The investment
management agreements with the Funds continue in effect from year to year only if such continuation is approved at least
annually by the Funds’ board of trustees. Periodic review of these advisory agreements could result in a reduction in
investment management fee revenues received from the Funds. Accordingly, there can be no assurance that we will be
able to maintain our current fee structure. Fee reductions on existing or future new business could reduce our operating
revenues and may adversely affect our business future revenue and profitability.
The fees we earn vary depending on the type of asset managed, the type of client, the type of asset management
product or service provided and whether the product is sub-advised. A shift in the mix of our assets under management
from higher revenue-generating assets to lower revenue-generating assets may result in a decrease in our operating
revenues even if our aggregate assets under management do not change. There can be no assurance that we will achieve
a more favorable product mix in the future. See “Legal, Regulatory and Tax Risks.”
Our Ability To Attract And Retain Key Personnel Is Significant To Our Success And Growth. Our success is
largely dependent on our ability to attract and retain highly skilled personnel, including our corporate officers, portfolio
managers, investment analysts, and sales and client relationship personnel, many of whom have specialized expertise and
extensive experience in our industry. The market for experienced asset management personnel is extremely competitive,
and is increasingly characterized by the movement of employees among different firms. The majority of our employees
do not have employment contracts, and generally can terminate their employment with us at any time. Due to the
competitive market for these professionals and the success of our highly skilled employees, our costs to attract and retain
key personnel are significant. If we are unable to offer competitive compensation or otherwise attract and retain talented
individuals, the Company’s ability to compete effectively and retain its existing clients may be materially impacted.
Because the investment track record of many of our products and services is often attributed to a small number of individual
employees, and sometimes one person, the departure of one or more of these employees could damage our reputation and
13
result in the loss of assets or client accounts, which could have a material adverse effect on our results of operations and
financial condition. If we are unable to attract and retain qualified personnel, it could damage our reputation, make it more
difficult to retain and attract new employees, cause our retention costs to increase significantly, and materially adversely
impact our financial condition and results of operations.
Additionally, a significant portion of the sales of our mutual funds, investment products, annuities and insurance
products are sold by independent financial advisors in our retail broker-dealer channel. Our growth prospects are directly
affected by the quality, quantity and productivity of financial advisors we are able to successfully recruit and who continue
to manage their independent practices through their association with us.
There May Be An Adverse Effect On Our Business If Our Investors Redeem The Assets We Manage On Short
Notice.
Our investment management agreements with institutions and other non-mutual fund accounts are generally
terminable upon relatively short notice, and investors in the mutual funds that we manage may redeem their investments
in the funds at any time without prior notice. Institutional and individual clients can terminate their relationships with us,
reduce the aggregate amount of assets under management, or shift their funds to other types of accounts with different rate
structures for any number of reasons, including investment trends, investment performance, changes in prevailing interest
rates, changes in investment preferences of clients, changes in our reputation in the marketplace, changes in management
or control of clients or third party distributors with whom we have relationships, loss of key investment management or
other personnel, and financial market performance. In addition, in a declining securities market, the pace of mutual fund
redemptions and withdrawal of assets from other accounts could accelerate. Poor investment performance generally or
relative to other investment management firms tends to result in decreased purchases of fund shares, increased redemptions
of fund shares, and the loss of institutional or individual accounts. The risk of our investors redeeming their investments
in our mutual funds on short notice has increased materially due to the level of assets in our retail unaffiliated channel and
the high concentration of assets in certain funds in this channel. Additionally, redemptions in our retail broker-dealer
channel may increase materially with the introduction of additional unaffiliated investment products in our advisory
programs. An increase in redemptions and the corresponding decrease in our assets under management may have a
material adverse effect on our business.
There May Be Adverse Effects On Our Business Upon The Termination Of, Or Failure To Renew, Certain
Agreements. A majority of our revenues are derived from investment management agreements with the Funds that, as
required by law, are terminable on 60 days’ notice. Each investment management agreement must be approved and
renewed annually by the disinterested members of each Fund’s board of trustees or its shareholders, as required by law.
Additionally, our investment management agreements provide for automatic termination in the event of assignment, which
includes a change of control, without the consent of our clients and, in the case of the Funds, approval of the Funds’ board
of directors/trustees and shareholders to continue the agreements. There can be no assurances that our clients will consent
to any assignment of our investment management agreements, or that those and other contracts will not be terminated or
will be renewed on favorable terms, if at all, at their expiration and new agreements may not be available. See “Item. 1
Business – Distribution Channels – Retail Unaffiliated Distribution Channel” and “Institutional Channel.” The decrease
in revenues that could result from any such event could have a material adverse effect on our business.
We May Be Unable To Develop New Products And Support Provided To New Products May Reduce Fee
Revenue, Increase Expenses And Expose Us To Potential Loss On Invested Capital. Our financial performance depends,
in part, on our ability to develop, market and manage new investment products and services, which may require significant
time and resources as well as ongoing support and investment. Substantial risk and uncertainties are associated with the
introduction of new products and services, including the implementation of new and appropriate operational controls and
procedures, shifting client and market preferences, the introduction of competing products or services, and compliance
with regulatory requirements. A failure to continue to innovate to introduce new products and services, or to manage
successfully the risks associated with such products and services, may impact our market share relevance and may cause
our assets under management, revenue and earnings to decline.
Additionally, we may support the development of new investment products by waiving a portion of the fees we
usually receive for managing such products by subsidizing expenses or by making seed capital investments. There can be
no assurance that new investment products we develop will be successful, which could have a material adverse effect on
our business. Failure to have or devote sufficient capital to support new products could have an adverse impact on our
future growth. Seed capital investments in new products utilize capital that would otherwise be available for general
corporate purposes and expose us to capital losses due to investment market risk. Our non-operating investment and other
income could be adversely affected by the realization of losses upon the disposition of our investments or the recognition
14
of significant other-than-temporary impairments in the case of our available-for-sale portfolio and the recognition of
unrealized losses related to our sponsored investment portfolios that are held as trading and accounted for under the equity
method. We may use various derivative instruments to mitigate the risk of our seed capital investments, although some
market risk would remain. The risk of loss may be greater for seed capital investments that are not hedged, or if an intended
hedge does not perform as expected. Our use of derivatives would result in counterparty risk in the event of non-
performance by counterparties to these derivative instruments, regulatory risk and the risk that the underlying positions do
not move in relation to the related derivative instruments. As a result, volatility in the capital markets may affect the value
of our seed capital investments, which may increase the volatility of our earnings and adversely affect our business.
The Failure Or Negative Performance Of Products Offered By Competitors May Cause Assets Under
Management In Our Similar Products To Decline Irrespective Of The Performance Of Our Products. Many
competitors offer similar products to those offered by us and the failure or negative performance of competitors’ products
or the loss of confidence in a product type could lead to a loss of confidence in similar products offered by us, irrespective
of the performance of our products. Any loss of confidence in a product type could lead to redemptions in such products,
which may cause the Company’s assets under management to decline and materially affect our business.
The Impairment Or Failure Of Other Financial Institutions Could Adversely Affect Our Business. The
investment management activities expose the Company, and the mutual funds and institutional clients we manage, to many
different industries and counterparties. We routinely execute transactions with counterparties, including brokers-dealers,
commercial and investment banks, clearing organizations, mutual and hedge funds, and other institutional clients that
expose us or the mutual funds or accounts we manage to operational, credit or other risks in the event that a counterparty
with whom the Company transacts defaults on its obligations or if there are other unrelated systemic failures in the markets.
Although we regularly assess risks posed by counterparties, such counterparties may be subject to sudden swings in the
financial and credit markets that may impair their ability to perform or they may otherwise fail to meet their obligations.
Any such impairment failure could negatively impact the performance of products or accounts we manage, which could
lead to the loss of clients and may cause our assets under management, revenue and earnings to decline.
Regulations Restricting The Use Of “Soft Dollars” Could Result In An Increase In Our Expenses. On behalf
of our mutual fund and investment advisory clients, we make decisions to buy and sell securities for each portfolio, select
broker-dealers to execute trades, and negotiate brokerage commission rates. In connection with these transactions, we may
receive “soft dollar credits” from broker-dealers that we can use to defray certain of our research and brokerage expenses
consistent with Section 28(e) of the Investment Company Act of 1940, as amended (the “1940 Act”). If regulations are
adopted eliminating the ability of asset managers to use “soft dollars,” our operating expenses could increase.
LEGAL, REGULATORY AND TAX RISKS
Regulatory Risk Is Substantial In Our Business And Regulatory Reforms Could Have A Material Adverse
Effect On Our Business, Reputation And Prospects. Virtually all aspects of our business, including the activities of our
parent company and our investment advisory and broker-dealer subsidiaries, are heavily regulated, primarily at the federal
level. See Item 1 – “Business – Regulation.” The regulatory environment in which we operate frequently changes and has
seen a significant increase in regulation in recent years. Various changes in laws and regulations have been enacted or
otherwise developed in response to the crisis in the financial markets that began in 2007. Various other proposals remain
under consideration by legislators, regulators, and other government officials and public policy commentators. Certain
enacted provisions and certain other proposals are potentially far reaching and, depending upon their implementation,
could have a material adverse effect on our business.
Potential impacts of current or proposed legal or regulatory requirements include, without limitation, the
following:
• As part of the debate in Washington, D.C. related to the economy and the U.S. deficit, there has been
increasing focus on the framework of the U.S. retirement system. In April 2016, the DOL adopted regulations
that, among other things, treat as fiduciaries any person who provides investment advice or recommendations
to employee benefit plans, plan fiduciaries, plan participants, plan beneficiaries, IRAs or IRA owners (the
“DOL Fiduciary Rule”). Under the DOL Fiduciary Rule, firms and individuals who recommend financial
products to retirement investors would be required to act in the best interest of the investor and, to receive
variable compensation, would be required to enter into a contract with clients and produce complex
disclosure documents intended to highlight financial conflicts of interest that may arise from the
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compensation the financial advisor receives from firms like us. As discussed in more detail below, these
regulations have wide-ranging consequences for the Company. Additionally, changes to the current
retirement system framework may impact our business in other ways. For example, proposals to reduce
contributions to IRAs and defined contribution plans for certain individuals, as well as potential changes to
defined benefit plans, may result in increased plan terminations and reduce our opportunity to manage and
service retirement assets.
•
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was
signed into law. The Dodd-Frank Act established enhanced regulatory requirements for non-bank financial
institutions designated as “systemically important” by the Financial Stability Oversight Committee
(“FSOC”). Under a final rule and interpretive guidance issued by the FSOC in April 2012, certain non-bank
financial companies have been designated as Systemically Important Financial Institutions (“SIFIs”).
Additional non-bank financial companies, which may include large asset management companies such as us,
may be designated as SIFIs in the future. We do not believe that mutual funds should be deemed SIFIs.
Further, we do not believe SIFI designation was intended for traditional asset management businesses.
However, if any of our mutual funds or affiliates is deemed a SIFI, we would be subject to enhanced
prudential measures, which could include capital and liquidity requirements, leverage limits, enhanced public
disclosures and risk management requirements, annual stress testing by the Federal Reserve, credit exposure
and concentration limits, supervisory and other requirements. These heightened regulatory obligations could,
individually or in the aggregate, adversely impact our business and operations.
• Pursuant to the mandate of the Dodd-Frank Act, the Commodity Futures Trading Commission (the “CFTC”)
and the SEC have promulgated rules that increase the regulation of over-the-counter derivatives markets.
The CFTC has adopted certain amendments to its rules that would limit the ability of mutual funds and certain
other products we sponsor to use commodities, futures, swaps, and other derivatives without additional
registration. If our use of these products on behalf of client accounts increases so as to require registration,
we would be subject to additional regulatory requirements and costs associated with registration. The Dodd-
Frank Act also expanded the CFTC’s authority to limit the maximum long or short position that any person
may take in futures contracts, options on futures contracts and certain swaps. Final rules implementing this
authority may be adopted by the CFTC that could require all accounts owned or managed by Commodity
Trading Advisors to be aggregated towards such “speculative position limits.” Complying with these rules
may negatively affect the Company’s financial condition or performance by requiring changes to existing
strategies or preventing an investment strategy from being fully implemented. The SEC has proposed
regulations regarding the use of derivatives by registered open-end and closed-end funds detailing new
exposure limits and asset coverage requirements for investments in derivatives, as well as adopting
derivatives risk management programs. There remains uncertainty related to various requirements under
these regulations and the exact manner in which they will impact current trading strategies for our clients.
• The revised Markets in Financial Instruments Directive and Regulation (“MiFID II”) will apply across the
European Union (“EU”) and member states of the European Economic Area beginning on January 3, 2018,
unless this date is extended. Implementation of MiFID II will significantly impact both the structure and
operation of EU financial markets. Some of the main changes introduced under MiFID II include applying
enhanced disclosure requirements, enhancing conduct of business and governance requirements, broadening
the scope of pre and post trade transparency, increasing transaction reporting requirements, transforming the
relationship between client commissions and research, and further regulation of trading venues. Compliance
with MiFID II will increase our costs.
• On July 23, 2014, the SEC adopted additional reforms regulating money market funds to address the
perceived systemic risks that such funds present. These reforms, which became effective in October 2016,
require certain institutional non-government money market funds to operate with a floating net asset value
(“NAV”), which allows the daily share prices of these funds to fluctuate along with changes in the market-
based value of fund assets, and require all non-government money market funds to impose liquidity fees and
redemption limits or “gates” when fund liquidity is depleted. Government and retail money market funds
will continue using current pricing and accounting methods to seek to maintain a stable NAV. The new rules
do not apply to government (non-municipal) money market funds, although such funds may “opt-in” to the
new liquidity fee and redemption gate provisions if previously disclosed to investors. The SEC also adopted
other reforms for money market funds, including additional disclosure and reporting requirements, tightening
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of diversification requirements, and enhanced stress testing. The impact of the rules that affect the structure
of the funds on our business remains uncertain as clients continue to decide which products fit their
investment needs. The new rules have impacted both the money market funds and shareholders in the form
of additional implementation costs and ongoing operational costs. The changes have required extensive
client communications to avoid confusion concerning product changes and will likely limit the returns these
Funds can generate in exchange for additional liquidity and shortened maturities.
• Distribution fees paid to mutual fund distributors in accordance with Rule 12b-1 are an important element of
the distribution of the mutual funds we manage. Rule 12b-1 service and distribution fees are commonly
found as a means for mutual fund and other managed product manufacturers and distribution platforms to
address the costs of these products and investor education. In 2010, the SEC proposed replacing Rule 12b-
1 with a new regulation that would significantly change current fund distribution practices in the industry.
The SEC continually reviews the distribution fees paid to mutual funds. Any mandated reductions or
restructuring of Rule 12b-1 fees or other servicing fees we charge for our products and services resulting
from regulatory initiatives or proceedings could reduce our revenues and earnings and materially affect our
business.
• The SEC and its staff continue to engage in various initiatives and reviews that seek to modify the regulatory
structure governing the asset management industry, and registered investment companies in particular. In
2016, the SEC adopted new rules to revise Form ADV and establish Form N-PORT, which require mutual
funds to report information about their monthly portfolio holdings to the SEC in a structured data format and
impose further reporting obligations on us and the Funds. These filings have required, and will continue to
require, significant investments in people and systems to ensure timely and accurate reporting. In late 2016,
the SEC adopted new rules that require registered open-end funds to adopt liquidity risk management
programs with specific requirements for measuring and reporting the liquidity of fund holdings. These rules
could limit investment opportunities for certain Funds we manage and will likely increase our management
and administration costs, with potential adverse effects on our revenues, expenses and results of operations.
The SEC has also been directed toward risk identification and controls in trading practices, cyber-security
and the evaluation of systemic risks and has indicated an intention to propose new rules for the stress testing
of registered investment companies and transition planning by asset managers, including the transfer of client
assets. When finalized, these new rules can be expected to add additional reporting and compliance costs
and may affect the development of new products and the ability to continue to offer certain strategies through
a registered investment company format.
• There has been increased global regulatory focus on the manner in which intermediaries are paid for
distribution of mutual funds. Changes to long-standing market practices related to fees or enhanced
disclosure requirements may negatively impact sales of mutual funds by intermediaries, especially if such
requirements are not applied to other investment products.
•
In recent years the asset management and financial services industries have experienced heightened
regulatory examinations and inspections, including enforcement reviews, and a more aggressive posture
regarding commencing enforcement proceedings resulting in fines, penalties and additional remedial
activities to firms and to individuals. Without limiting the generality of the foregoing, regulators in the United
States have taken, and can be expected to continue to take, a more aggressive posture on bringing
enforcement proceedings.
At this time, we cannot predict the nature or full impact of future changes to the legal and regulatory requirements
applicable to our business, nor the extent to which current or future proposals, or possible enforcement proceedings, will
impact our business. All of these new and developing laws and regulations will likely result in greater compliance and
administrative burdens on the Company, including the investment of significant management time and resources in order
to satisfy new regulatory requirements or to compete in a changed business environment, and the imposition of new
compliance costs and/or capital requirements, including costs related to information technology systems. The evolving
regulatory environment may impact a number of our service providers and, to the extent such providers alter their services
or increase their fees, it may impact our expenses or those of the products we offer. Changes in current rules and
regulations that impact the business and financial communities generally, including changes in current legal, regulatory,
accounting or compliance requirements, including state and federal taxation, or in governmental policies, could have a
material adverse impact on our results of operations, financial condition or liquidity.
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The Department Of Labor’s New Fiduciary Regulations Could Result In Material Changes In Our Business
Model, Operations And Procedures, Including Our Distribution Channels And Product Offerings, Which Could Have
A Material Adverse Effect On Our Business and Results Of Operations. On April 8, 2016, the DOL published the DOL
Fiduciary Rule, its final rule regarding the definition of who is an investment advice fiduciary under the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”) and Section 4975 of the Internal Revenue Code, as
amended, a new “best interest contract” prohibited transaction exemption regarding how such advice can be provided to
retirement investors (primarily account holders in 401(k) plans, IRAs and other types of ERISA clients), a new class
prohibited transaction exemption for how ERISA investment advice fiduciaries can engage in certain principal transactions
with retirement investors, and certain amendments and partial revocations of pre-existing exemptions. The DOL Fiduciary
Rule focuses in large part on conflicts of interest related to investment recommendations made by financial advisors,
registered investment advisors, and other investment professionals to retirement investors, how financial advisors are able
to discuss IRA rollovers, as well as how financial advisors and affiliates can transact with retirement investors. Firms and
individuals that recommend financial products to retirement investors would be required to act in the best interest of the
investor and, to receive variable compensation, would be required to enter into a contract with clients and produce complex
disclosure documents intended to highlight financial conflicts of interest that may arise from the compensation the financial
adviser receives from firms like us.
These regulations have wide-ranging consequences for the Company, our distribution partners and our product
offerings. Qualified accounts, particularly IRAs, make up a significant portion of our assets under management and
administration. Further, a significant portion of those retirement assets are invested in our affiliated products. The DOL
Fiduciary Rule, coupled with the introduction of unaffiliated products in our advisory programs and sustained
underperformance of key investment products, could cause us to experience lower sales of our affiliated investment
products, increased redemptions, or other developments that could materially and adversely affect our business.
While there has been much speculation regarding a potential delay in the April 10, 2017 applicability date of the
DOL Fiduciary Rule, we are continuing with the implementation of our business and compliance initiatives in order to
make necessary changes to our distribution methods and operations. We intend to work with, and provide guidance to,
our wealth management and asset management businesses, including independent financial advisors in our retail broker-
dealer channel, to make the necessary changes to effectively implement these new regulations. We are likely to incur
substantial compliance costs in 2017 for required consulting, legal advice and technology enhancements.
The DOL Fiduciary Rule will require various changes in the asset management industry and, among other things,
our distribution methods, compensation models, products, and business operations that could materially and adversely
affect our marketing strategy, our fee structure, our independent financial advisor compensation model, our ability to
engage with independent financial advisors, and the design of our investments and services for qualified accounts, any of
which could materially and adversely affect our results of operations. Similarly, various changes in the asset management
industry due to the DOL Fiduciary Rule may result in product rationalization and reduction, as well as changes to our
share classes and fee structures, revenue sharing arrangements, and investment opportunities for certain funds we
manage. The DOL Fiduciary Rule will require us to implement new policies and procedures designed to comply with the
new requirements and to train independent financial advisors in our retail broker-dealer channel regarding their new
obligations. There are no assurances that we will be able to successfully execute the significant changes and enhancements
to our business model, operations, technology and compliance policies and procedures required by the DOL Fiduciary
Rule in a timely manner, which could materially and adversely affect our business. The new rules create additional
liability exposure to regulatory enforcement activity including litigation or to private arbitration or litigation, which may
result in awards, settlements, penalties, injunctions, reputational risk, costs of defense regardless of outcome, or other
adverse results. The SEC is considering its own fiduciary rule proposal; any such rule may also have an impact on our
business activities.
Compliance Within A Complex Regulatory Environment Imposes Significant Financial And Strategic Costs
On Our Business, and Non-Compliance Could Result in Fines And Penalties. Non-compliance with applicable laws or
regulations could result in criminal and civil liability, the suspension of our employees, sanctions being levied against us,
including fines, penalties and censures, injunctive relief, suspension or expulsion from a certain jurisdiction or market, or
the temporary or permanent revocation of licenses or registrations necessary to conduct our business. A regulatory
proceeding, even one that does not result in a finding of wrongdoing or sanctions, could consume substantial expenditures
of time and capital. Any regulatory investigation and any failure to maintain compliance with applicable laws and
regulations could severely damage our reputation or otherwise adversely affect our business and prospects.
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Our Business Is Subject To Substantial Risk From Litigation, Regulatory Investigations And Potential
Securities Laws Liability. Many aspects of our business involve substantial risks of litigation, regulatory investigations
and/or arbitration, and from time to time, we are involved in various legal proceedings in the course of operating our
business, including employment-related claims. See Item 3 – “Legal Proceedings.” We are exposed to liability under
federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations
promulgated by the SEC, FINRA and other regulatory bodies. These regulatory bodies have the authority to review our
products and business practices, and those of our employees and independent financial advisors, and to bring regulatory
or other legal actions against us if, in their view, our practices, or those of our employees or independent financial advisors,
are improper. Actions brought against us may result in awards, settlements, penalties, injunctions or other adverse results,
including reputational damage. In addition, we may incur significant expenses in connection with our defense against such
actions regardless of their outcome. We, our subsidiaries, and/or certain of our past and present officers, have been named
as parties in legal actions, regulatory investigations and proceedings, and securities arbitrations in the past and have been
subject to claims alleging violation of such laws, rules and regulations, which have resulted in the payment of fines and
settlements. From time to time, we receive subpoenas or other requests for information from governmental and regulatory
authorities in connection with certain industry-wide, company-specific or other investigations or proceedings. These
examinations, inquiries and proceedings, have in the past and could in the future, if compliance failures or other violations
are found, cause the relevant regulator to institute proceedings and impose sanctions for violations. Any such action may
also result in litigation by investors in our Funds, other clients or by our stockholders, which could harm the Company’s
reputation, potentially harm the investment returns of the Funds, or result in the Company being liable for damages.
In addition, the Funds to which we provide investment advisory and management services are subject to litigation
and governmental and self-regulatory organization investigations and proceedings, any of which could harm the
investment returns or reputation of the applicable Fund or result in our asset managers being liable to the Funds for any
resulting damages.
There has been an increase in litigation and regulatory investigations in the asset management and financial
services industries in recent years, including customer claims, class action suits and government actions alleging
substantial monetary damages and penalties. The “best interest contract” prohibited transaction exemption (“PTE”) under
the DOL Fiduciary Rule prohibits class action waivers in best interest contracts. To the extent we rely on the “best interest
contract” PTE, we may be exposed to additional litigation risk associated with claims that we have failed to comply with
the best interest contract and related PTE. An adverse resolution of any lawsuit, legal or regulatory proceeding or claim
against us could result in substantial costs or reputational harm to us, and have a material adverse effect on our business.
In addition to these financial costs and risks, the defense of litigation, regulatory investigations or arbitration may divert
resources and management’s attention from operations.
Insurance May Not Be Available On A Cost Effective Basis To Protect Us From Liability. We face inherent
liability risk related to litigation from mutual fund investors, clients, third party vendors and others, and actions taken by
regulatory agencies. To help protect against these potential liabilities, we purchase insurance in amounts, and against
risks, that we consider appropriate and commercially reasonable, where such insurance is available at prices we deem
acceptable. There can be no assurance, however, that a claim or claims will be covered by insurance or, if covered, will
not exceed the limits of available insurance coverage, that any insurer will remain solvent and will meet its obligations to
provide us with coverage, or that insurance coverage will continue to be available with sufficient limits at a reasonable
cost. Insurance costs are impacted by market conditions and the risk profile of the insured, and may increase significantly
over relatively short periods. In addition, certain insurance coverage may not be available or may only be available at
prohibitive costs. Renewals of insurance policies may expose us to additional costs through higher premiums or the
assumption of higher deductibles or co-insurance liability.
Financial Advisors In Our Retail Broker-Dealer Channel Are Classified As Independent Contractors, And
Changes To Their Classification May Increase Our Operating Expenses. From time to time, various legislative or
regulatory proposals are introduced at the federal or state levels addressing the criteria for determining the status of
independent contractors’ classification as employees for either employment tax purposes (withholding, social security,
Medicare and unemployment taxes) or other employment benefits. Currently, most individuals are classified as employees
or independent contractors for employment tax purposes based on relevant statutory, regulatory and common law tests,
including the multi-factor test utilized by the Internal Revenue Service. We classify financial advisors as independent
contractors for all purposes, including employment tax. There can be no assurance that legislative, judicial or regulatory
(including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would
change the independent contractor/employee classification of those financial advisors currently associated with us or that
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private litigants might file actions seeking to change such classification. The costs associated with potential changes, if
any, with respect to these independent contractor classifications could have a material adverse effect on our business.
Misconduct By Our Employees And/Or Independent Financial Advisors Could Result In Liability, Subject Us
To Regulatory Sanctions Or Otherwise Adversely Affect Our Business, Results of Operations or Financial Condition.
Our business is based on the trust and confidence of our clients, for whom independent financial advisors handle a
significant amount of funds, as well as financial and personal information. Misconduct by our employees or by independent
financial advisors could result in violations of law, regulatory sanctions and/or serious reputational or financial harm.
Misconduct that could occur includes: (i) binding us to transactions that exceed authorized limits; (ii) hiding unauthorized
or unsuccessful activities resulting in unknown and unmanaged risks or losses; (iii) improperly using, disclosing or
otherwise compromising confidential information; (iv) recommending transactions that are not suitable; (v) engaging in
fraudulent or otherwise improper activity, including the misappropriation of funds; (vi) engaging in unauthorized or
excessive trading to the detriment of customers; or (vii) otherwise not complying with laws, regulations or our control
procedures. Although we have implemented a system of internal controls to minimize the risk of misconduct, there can
be no assurance that our controls or precautions to detect and prevent misconduct will be effective in all cases. Preventing
and detecting misconduct among independent financial advisors, who are not employees, presents additional challenges.
We could be liable in the event of misconduct by employees or independent financial advisors and we could also be subject
to regulatory sanctions. Although we believe that we have adequately insured against these risks, there can be no assurance
that our insurance will be maintained or that it will be adequate to meet any liability resulting from these activities. Any
damage to the trust and confidence placed in us by our clients may cause our assets under management to decline, which
could adversely affect our reputation, business and prospects and lead to a material adverse effect on our business, results
of operations or financial condition.
Challenges To Our Tax Positions May Adversely Affect Our Effective Tax Rate and Business. The application
of complex tax laws and regulations involves numerous uncertainties. Tax authorities may disagree with certain tax
positions that we have taken, as we are periodically under audit by various state and federal jurisdictions. We regularly
assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there
can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits
could have a material impact on our financial statements. Tax authorities may assess additional taxes, which could result
in adjustments to, or impact the timing or amount of, taxable income, deductions or other tax allocations, and may
adversely affect our effective tax rate and business.
TECHNOLOGY AND OPERATIONAL RISKS
Our Business Is Subject to Numerous Operational Risks. Sustained Interruptions In Our Operating Systems,
Technology Systems, Or Other Failure In Operational Execution, Could Materially And Adversely Affect Our
Business. We face numerous and complex operational risks related to our business on a day-to-day basis. Operating risks
include, but are not limited to:
•
•
•
•
•
failure to properly perform or oversee mutual fund or portfolio recordkeeping responsibilities, including
portfolio accounting, security pricing, corporate actions, investment restrictions compliance, daily NAV
computations, account reconciliations, and required distributions to Fund shareholders to comply with
tax regulations;
failure to properly perform transfer agent and participant recordkeeping responsibilities, including
transaction processing, supervision of staff, tax reporting, and record retention;
sales and marketing risks, including the intentional or unintentional misrepresentation of products and
services in advertising materials, public relations information, or other external communications, and
failure to properly calculate and present investment performance data accurately and in accordance with
established guidelines and regulations;
failure to properly perform brokerage business responsibilities, including processing trades and client
information timely and accurately, maintenance of books and records, execution of financial planning
activities, and supervisory and compliance activities; and
our reliance on third party vendors who, now or in the future, may perform or support important parts
of our operations as there can be no assurance that they will perform properly or that our processes and
plans to execute, transition or delegate these functions to others will be successful or that there will not
be interruptions in services from these third parties.
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The systems upon which we rely upon to conduct our business may fail to operate properly or become disabled
as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications
services, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other third party
service providers that we use to facilitate, or are component providers to, our brokerage operations, securities transactions
and other product manufacturing and distribution activities. Any such failure, termination or constraint could adversely
impact our ability to effect transactions, service our clients, manage our exposure to risk, or otherwise achieve desired
outcomes. Failure to keep current and accurate books and records can render us subject to disciplinary action by
governmental and self-regulatory authorities, as well as to claims by our clients. In connection with the modernization of
our brokerage and advisory platforms and products, a significant portion of our software is licensed from and supported
by third party vendors upon whom we rely to prevent operating system failure. A suspension or termination of these
licenses or the related support, upgrades and maintenance could cause system delays or interruption. If any of our financial,
portfolio accounting, brokerage or other data processing systems, or the systems of third parties on whom we rely, do not
operate properly or are disabled, or if there are other shortcomings or failures in our internal processes, people or systems,
or those of third parties on whom we rely, we could suffer financial loss, a disruption of our businesses, liability to clients,
regulatory problems or damage to our reputation.
Interruptions could be caused by operational failures arising from service provider, employee or advisor error or
malfeasance, interference by third parties, including hackers, our implementation of new technology, as well as from our
maintenance of existing technology. Our financial, accounting, brokerage, data processing or other operating systems and
facilities may fail to operate or report data properly, experience connectivity disruptions or otherwise become disabled as
a result of events that are wholly or partially beyond our control, adversely affecting our ability to process transactions or
provide products and services to our clients. These interruptions can include fires, floods, earthquakes and other natural
disasters, power losses, equipment failures, attacks by third parties, failures of internal or vendor personnel, software,
equipment or systems and other events beyond our control. Although we have developed and maintain a comprehensive
business continuity plan, and require our key technology vendors and service providers to do the same, there are inherent
limitations in such plans and they might not, despite testing and monitoring, operate as designed. Further, we cannot
control the execution of any business continuity plans implemented by our service providers.
Failure To Implement Our New Information Technology Systems Successfully Could Materially And
Adversely Affect Our Business. We are in the process of modernizing our brokerage and advisory platforms and products
and implementing new information technology systems, including innovative account management systems, real-time
client access to information and financial planning tools that we believe will facilitate and improve our core businesses
and our productivity, and position our retail broker-dealer channel for long-term competitiveness. Additionally, the DOL
Fiduciary Rule will require significant changes to our business operations, including, but not limited to, our distribution
methods, compensation models and product shelf. We might be required to make significant capital expenditures to
maintain competitive infrastructure. Our technology infrastructure is vital to the competitiveness of our business. We
depend on specialized technology to operate our business and a number of our key information technology systems were
developed solely to handle our particular information technology infrastructure. Our continued success depends on our
ability to effectively integrate necessary technology systems across our organization, and to adopt new or adapt existing
technologies to meet client, industry, and regulatory demands. There can be no assurance that we will be successful in
implementing the new information technology systems, that our existing technology infrastructure can support new
systems or changes to existing systems, or that their implementation will be completed in a timely or cost effective manner
or that we will derive the expected benefits from these new systems. Failure to implement or maintain adequate
information technology infrastructure may cause us to lose investors, clients, financial advisors and fail to maintain
regulatory compliance, which could severely damage our reputation, impede our ability to support business growth, and
materially and adversely affect our results of operations.
A Failure In Or Breach Of Our Operational Or Security Systems Or Our Technology Infrastructure, Or Those
Of Third Parties, Or Failure To Maintain Adequate Business Continuity Plans, Could Result In A Material Adverse
Effect On Our Business And Reputation. We are highly dependent upon the use of various proprietary and third party
software applications and other technology systems to operate our business. As part of our normal operations, we process
a large number of transactions on a daily basis and maintain and transmit confidential client and employee information,
the safety and security of which is dependent upon the effectiveness of our information security policies, procedures,
capabilities and employees to protect such systems and the data that reside on or are transmitted through them. Although
we take protective measures and endeavor to modify these protective measures as circumstances warrant, technology is
subject to rapid change and the nature of the threats continue to evolve. As a result, our operating and technology systems,
software and networks may fail to operate properly or become disabled, or may be vulnerable to unauthorized access,
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inadvertent disclosure, loss or destruction of data (including confidential client information), computer viruses or other
malicious code, cyber attacks and other events that could materially damage our operations, have an adverse security
impact, or cause the disclosure or modification of sensitive or confidential information. Most of the software applications
that we use in our business are licensed from, and supported, upgraded and maintained by, third party vendors. A
suspension or termination of certain of these licenses or the related support, upgrades and maintenance could cause
temporary system delays or interruption. We also take precautions to password protect and/or encrypt our laptops and
other mobile electronic hardware. If such hardware is stolen, misplaced or left unattended, it may become vulnerable to
hacking or other unauthorized use, creating a possible security risk and resulting in potentially costly actions by us.
Further, while we have in place a disaster recovery plan to address business continuity and catastrophic and unpredictable
events, there is no guarantee that this plan will be sufficient in responding to or ameliorating the effects of all disaster
scenarios, and we may experience system delays and interruptions as a result of natural disasters, power failures, acts of
war, and third party failures. In addition, we rely to varying degrees on outside vendors for disaster contingency support,
and we cannot be assured that these vendors will be able to perform in an adequate and timely manner.
The breach of our operational or security systems or our technology infrastructure, or those of third parties, due
to one or more of these events could cause interruptions, malfunctions or failures in our operations and/or the loss or
inadvertent disclosure of confidential client information could result in substantial financial loss or costs, liability for stolen
assets or information, breach of client contracts, client dissatisfaction and/or loss, regulatory actions, remediation costs to
repair damage caused by the breach, additional security costs to mitigate against future incidents and litigation costs
resulting from the incident. Although we seek to assess regularly and improve our existing business continuity plans, a
major disaster, or one that affected certain important operating areas, or our inability to recover successfully should we
experience a disaster or other business continuity problem, could materially interrupt our business operations and cause
material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability. These events, and
those discussed above, could have a material adverse effect on our business and reputation.
Failure To Establish Adequate Controls And Risk Management Policies, The Circumvention Of Controls And
Risk Management Policies, Or Fraud Could Have An Adverse Effect On Our Reputation And Financial Position. We
have established a comprehensive risk management process and continue to enhance various controls, procedures, policies
and systems to monitor and manage risks; however, we cannot assure that such controls, procedures, policies and systems
will successfully identify and manage internal and external risks to our business. We are subject to the risk that our
employees, contractors or other third parties may deliberately seek to circumvent established controls to commit fraud or
act in ways that are inconsistent with our controls, policies and procedures. Persistent attempts to circumvent policies and
controls, or repeated incidents involving fraud, conflicts of interests or transgressions of policies and controls, could have
a materially adverse effect on our reputation and lead to costly regulatory inquiries, fines and/or sanctions.
Our Own Operational Failures Or Those Of Third Parties We Rely On, Including Failures Arising Out Of
Human Error, Could Disrupt Our Business And Damage Our Reputation. Our business is highly dependent on our
ability to process, on a daily basis, large numbers of transactions. These transactions generally must comply with client
investment guidelines, as well as stringent legal and regulatory standards. Despite our employees being highly trained and
skilled, due to the large number of transactions we process, errors may occur. If we make mistakes in performing our
services that cause financial harm to our clients, our clients may seek to recover their losses. The occurrence of mistakes,
particularly significant ones, could have a material adverse effect on our reputation and business.
RISKS RELATED TO OUR BUSINESS
A Failure To Protect Our Reputation Could Adversely Affect Our Businesses. Our reputation is one of our
most important assets. Our ability to attract and retain customers, investors, employees and financial advisors is highly
dependent upon external perceptions of our Company. Damage to our reputation could cause significant harm to our
business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver
minimum standards of service and quality, compliance failures, any perceived or actual weakness in our financial strength
or liquidity, technological, cybersecurity, or other security breaches (including attempted breaches) resulting in improper
disclosure of client or employee personal information, unethical behavior, and the misconduct of employees, financial
advisors and counterparties. Negative perceptions or publicity regarding these matters, even if they are baseless or
eventually satisfactorily addressed, could damage our reputation among existing and potential customers, investors,
employees and financial advisors. Reputations may take decades to build, and any negative incidents can quickly erode
trust and confidence, particularly if they result in adverse mainstream and social media publicity, governmental
investigations or litigation. Adverse developments with respect to our industry may also, by association, negatively impact
our reputation or result in greater regulatory or legislative scrutiny or litigation against us.
22
Our reputation is also dependent on our continued identification of and mitigation against conflicts of interest,
including those relating to our proprietary activities. For example, conflicts may arise between our position as a provider
of financial planning services and as an investment adviser to Funds that one of our financial advisors may recommend to
a financial planning client. We have procedures and controls that are designed to identify, address and appropriately
disclose perceived conflicts of interest. However, identifying and appropriately addressing conflicts of interest is complex,
and our reputation could be damaged if we fail, or appear to fail, to address conflicts of interest appropriately.
In addition, the SEC and other federal and state regulators have increased their scrutiny of potential conflicts of
interest, including through the implementation of the DOL Fiduciary Rule. It is possible that potential or perceived
conflicts could give rise to litigation or enforcement actions. It is possible also that the regulatory scrutiny of, and litigation
in connection with, conflicts of interest will make our clients less willing to enter into transactions in which such a conflict
may occur, and may materially affect our business.
Our Expenses Are Subject To Fluctuations That Could Materially Affect Our Operating Results. Our results
of operations are dependent on the level of expenses, which can vary significantly from period to period. Our expenses
may fluctuate as a result of, among other things:
•
•
•
•
•
•
•
•
•
expenses incurred in connection with our strategic plans to strengthen our long-term competitive
position;
variations in the level of total compensation expense due to bonuses, equity compensation, changes in
employee benefit costs due to regulatory or plan design changes, changes in our employee count and
mix, competitive factors and inflation;
expenses incurred to support distribution of our investment products;
expenses incurred to develop new products;
expenses and capital costs incurred to maintain and enhance our administrative and operation services
infrastructure, including compliance systems, technology assets, and related depreciation and
amortization;
the future impairment of intangible assets or goodwill that is currently recognized on our balance sheet;
unanticipated costs incurred to protect investor accounts and client goodwill;
disruptions of third party services such as communications, power, client account management and
processing systems, and mutual fund transfer agency and accounting systems; and
responding to significant changes in our business model brought on by regulatory change.
Increases in our level of expenses, or our inability to reduce our level of expenses, could materially affect our
operating results. We expect that our operating revenues will be lower due to a reduction in the service fees that we charge
the Funds, as a result of the conversion in 2016 of our load-waived Class A shares to Class I shares in our investments
advisory products and the trend towards lower fees in the investment management business. While we are under no
obligation to provide financial support to any of our sponsored investment products, any such support would reduce capital
available for other purposes and may have an adverse effect on revenues and net income. If we are unable to effect
appropriate expense reductions in a timely manner to align with decreases in our revenue due to, among other things, a
decline in the level of our assets under management or our current business environment, through operational changes or
performance improvement, our business may be adversely affected.
We Have Substantial Goodwill and Intangibles On Our Balance Sheet, And Any Impairment Could Adversely
Affect Our Results of Operations. At December 31, 2016, our total assets were approximately $1.4 billion, of which
approximately $148.6 million, or 11%, consisted of goodwill and identifiable intangible assets. See Item 7 –
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies
and Estimates.” We complete an ongoing review of goodwill and intangible assets for impairment on an annual basis or
more frequently whenever events or a change in circumstances warrant. Important factors in determining whether an
impairment of goodwill or intangible assets might exist include significant continued underperformance compared to peers,
the likelihood of termination or non-renewal of a mutual fund advisory or sub-advisory contract or substantial changes in
revenues earned from such contracts, significant changes in our business and products, material and ongoing negative
industry or economic trends, or other factors specific to each asset or subsidiary being tested. Because of the significance
of goodwill and other intangibles to our consolidated balance sheets, the impairment analysis is critical. Any changes in
key assumptions about our business and our prospects, or changes in market conditions or other externalities, could result
in an impairment charge. Any such charge could have a material effect on our results of operations.
23
We May Engage In Strategic Transactions And Opportunities That Could Create Risk In Order To Maintain
Or Enhance Our Competitive Position. The Company has and may acquire or invest in businesses that it believes will
add value to its business and generate positive net returns. Any strategic transaction can involve a number of risks,
including additional demands on our existing employees; additional or new regulatory requirements, operating facilities
and technologies; adverse effects in the event acquired intangible assets or goodwill become impaired; and the existence
of liabilities or contingencies not disclosed to or otherwise known by us prior to closing a transaction. Acquisitions also
pose the risk that any business we acquire may lose customers or employees or could underperform relative to expectations.
We could also experience financial or other setbacks if pending transactions encounter unanticipated problems, including
problems related to closing or the integration of technology and new employees. There can be no assurance that we will
find suitable candidates for strategic transactions at acceptable prices, have sufficient capital resources to pursue such
transactions or be successful in negotiating the required agreements. Following the completion of an acquisition, we may
have to rely on the seller to provide administrative and other support, including financial reporting and internal controls,
to the acquired business for a period of time. There can be no assurance that such sellers will do so in a manner that is
acceptable to us. We may be required to spend additional time or money on integration which could decrease its earnings
and prevent the Company from focusing on the development and expansion of its existing business and services. These
risks could result in decreased earnings and harm to the Company’s competitive position in the investment management
and/or brokerage industry.
Our Ability To Maintain Our Credit Ratings And To Access The Capital Markets In A Timely Manner Should
We Seek To Do So Depends On A Number Of Factors. Our access to the capital markets depends significantly on our
credit ratings. We believe that rating agency concerns include, but are not limited to, the fact that our revenues are exposed
to equity market volatility and the potential impact from regulatory changes to the industry. Additionally, the rating
agencies could decide to downgrade the entire investment management industry based on their perspective of future growth
and solvency. Material deterioration of these factors, and others defined by each rating agency, could result in downgrades
to our credit ratings, thereby limiting our ability to generate additional financing. We cannot predict what actions rating
organizations may take, or what actions we may take in response to the actions of rating organizations, which could
adversely affect our business. As with other companies in the financial services industry, our ratings could be changed at
any time and without any notice by the ratings organizations. Our credit facility borrowing rates are tied to our credit
ratings. Management believes that solid investment grade ratings are an important factor in winning and maintaining
institutional business and strives to manage the Company to maintain such ratings. A downgrade in our credit ratings, or
the announced potential for a downgrade, could have a significant adverse effect on our financial condition and results of
operations.
A reduction in our long-term credit ratings could increase our borrowing costs, could limit our access to the
capital markets, and may result in outflows thereby reducing assets under management and operating revenues. Volatility
in global finance markets may also affect our ability to access the capital markets should we seek to do so. If we are unable
to access capital markets in a timely manner, our business could be adversely affected.
The Terms Of Our Credit Facility And Senior Unsecured Notes Impose Restrictions On Our Operations That
May Adversely Impact Our Prospects And The Operations Of Our Business. There are no assurances that we will be
able to raise additional capital if needed, which could negatively impact our liquidity, prospects and operations. We have
entered into a five year revolving credit facility (the “Credit Facility”) with various lenders providing for total availability
of $125.0 million. Under the Credit Facility, the lenders may, at their option upon our request, expand the Credit Facility
to $200.0 million. At February 10, 2017, there was no balance outstanding under the Credit Facility. We also have
outstanding $190.0 million principal amount of unsecured senior notes comprised of $95 million of 5.0% senior notes,
series A, due 2018 and $95 million of 5.75% senior notes, series B, due 2021, all of which were issued on January 13,
2011 (collectively, the “Senior Notes”). The terms and conditions of the Credit Facility and note purchase agreement
impose restrictions that affect, among other things, our ability to incur additional debt, make capital expenditures and
acquisitions, merge, sell assets, pay dividends and create or incur liens. Our ability to comply with the financial covenants
set forth in the Credit Facility and note purchase agreement could be affected by events beyond our control, and there can
be no assurance that we will achieve operating results that will comply with such terms and conditions, a breach of which
could result in a default under our credit facility and note purchase agreement. In the event of a default under the Credit
Facility and/or note purchase agreement, the banks could elect to declare the outstanding principal amount of the Credit
Facility, all interest thereon, and all other amounts payable under the Credit Facility to be immediately due and payable,
and the Company’s obligations under the senior unsecured notes could be accelerated and become due and payable,
including any make-whole amount, respectively.
24
Our ability to meet our cash needs and satisfy our debt obligations will depend upon our future operating
performance, asset values, the perception of our creditworthiness and, indirectly, the market value of our stock. These
factors will be affected by prevailing economic, financial and business conditions and other circumstances, some of which
are beyond our control. We anticipate that any funds generated by any borrowings from our existing credit facility and/or
cash provided by operating activities will provide sufficient funds to finance our business plans, meet our operating
expenses and service our debt obligations as they become due. However, in the event that we require additional capital,
there can be no assurance that we will be able to raise such capital when needed or on satisfactory terms, if at all, and there
can be no assurance that we will be able to renew or refinance our credit facility or senior unsecured notes upon their
maturity or on favorable terms. If we are unable to raise capital or obtain financing, we may be forced to incur unanticipated
costs or revise our business plan.
Net Capital Requirements May Impede The Business Operations Of Our Subsidiaries. Certain of our
subsidiaries are subject to net capital requirements imposed by various federal, state, and foreign authorities. Each of our
subsidiaries’ net capital meets or exceeds all current minimum requirements; however, a significant change in the required
net capital, an operating loss, or an extraordinary charge against net capital could adversely affect the ability of our
subsidiaries to expand or even maintain their operations if we were unable to make additional investments in them.
RISKS RELATED TO OUR COMMON STOCK
The Market Price Of Our Stock May Fluctuate. The market price of our Class A common stock may fluctuate
widely, depending upon many factors, some of which may be beyond our control, including changes in expectations
concerning our future financial performance and the future performance of the financial services industry in general,
including financial estimates and recommendations by securities analysts; differences between our actual financial and
operating results and those expected by investors and analysts; our strategic moves and those of our competitors, such as
acquisitions, divestitures or restructurings; changes in the regulatory framework of the financial services industry and
regulatory action; changes in and the adoption of accounting standards and securities and insurance rating agency processes
and standards applicable to our businesses and the financial services industry; and changes in general economic or market
conditions. Additionally, stock markets in general have experienced volatility that has often been unrelated to the operating
performance of a particular company. These broad market fluctuations may adversely affect the trading price of our
common stock.
Our Holding Company Structure Results In Structural Subordination And May Affect Our Ability To Fund
Our Operations And Make Payments On Our Debt. We are a holding company and, accordingly, substantially all of
our operations are conducted through our subsidiaries. As a result, our cash flow and our ability to service our debt,
including $190.0 million of our senior notes, are dependent upon the earnings of our subsidiaries and the distribution of
earnings, loans or other payments by our subsidiaries to us. Our subsidiaries are separate and distinct legal entities and
have no obligation to pay any amounts due on our debt or provide us with funds for our payment obligations, whether by
dividends, distributions, loans or other payments. In addition, any payment of dividends, distributions, loans or advances
to us by our subsidiaries could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will
also be contingent upon our subsidiaries’ earnings and business considerations. Our right to receive any assets of any of
our subsidiaries upon their liquidation or reorganization, and therefore the right of the holders of our debt to participate in
those assets, would be effectively subordinated to the claims of those subsidiaries’ creditors, including trade creditors. In
addition, even if we were a creditor of any of our subsidiaries, our rights as a creditor would be effectively subordinate to
any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us.
There Are No Assurances That We Will Pay Future Dividends, Which Could Adversely Affect Our Stock Price.
The Waddell & Reed Financial, Inc. Board of Directors (the “Board of Directors”) currently intends to continue to declare
quarterly dividends on our Class A common stock. However, the declaration and payment of dividends is subject to the
discretion of our Board of Directors. Any determination as to the payment of dividends, as well as the level of such
dividends, will depend on, among other things, general economic and business conditions, our strategic plans, our financial
results and condition, and contractual, legal, and regulatory restrictions on the payment of dividends by us or our
subsidiaries. We are a holding company and, as such, our ability to pay dividends is subject to the ability of our subsidiaries
to provide us with cash. There can be no assurance that the current quarterly dividend level will be maintained or that we
will pay any dividends in any future period. Any change in the level of our dividends or the suspension of the payment of
dividends could adversely affect our stock price. See Item 7 – “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital Resources.”
25
Provisions Of Our Organizational Documents Could Deter Takeover Attempts, Which Some Of Our
Stockholders May Believe To Be In Their Best Interest. Under our Restated Certificate of Incorporation, our Board of
Directors has the authority, without action by our stockholders, to fix certain terms and issue shares of our Preferred Stock,
par value $1.00 per share. Actions of our Board of Directors pursuant to this authority may have the effect of delaying,
deterring or preventing a change in control of the Company. Other provisions in our Restated Certificate of Incorporation
and in our Amended and Restated Bylaws impose procedural and other requirements that could be deemed to have anti-
takeover effects, including replacing incumbent directors. Our Board of Directors is divided into three classes, each of
which is to serve for a staggered three-year term after the initial classification and election, and incumbent directors may
not be removed without cause, all of which may make it more difficult for a third party to gain control of our Board of
Directors. In addition, as a Delaware corporation, we are subject to section 203 of the Delaware General Corporation Law.
With certain exceptions, section 203 imposes restrictions on mergers and other business combinations between us and any
holder of 15% or more of our voting stock.
Our Stockholders Rights Plan Could Deter Takeover Attempts, Which Some Of Our Stockholders May Believe
To Be In Their Best Interest. Under certain conditions, the rights under our stockholders rights plan entitle the holders
of such rights to receive shares of our common stock having a value equal to two times the exercise price of the right. The
rights are attached to each share of our outstanding common stock and generally are exercisable only if a person or group
acquires 15% or more of the voting power represented by our common stock. Our stockholders rights plan could impede
the completion of a merger, tender offer, or other takeover attempt even though some or a majority of our stockholders
might believe that a merger, tender offer or takeover is in their best interests, and even if such a transaction could result in
our stockholders receiving a premium for their shares of our stock over the then current market price of our stock.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
We own three buildings in the vicinity of buildings currently leased by our home office: two 50,000 square foot
buildings and a 52,000 square foot building located in Overland Park, Kansas. Our existing home office lease agreements
cover approximately 298,000 square feet located in Overland Park, Kansas and 38,000 square feet for our disaster recovery
facility. In addition, we lease office space for sales management in various locations throughout the United States totaling
approximately 698,000 square feet. In the opinion of management, the office space owned and leased by the Company is
adequate for existing operating needs.
ITEM 3. Legal Proceedings
The information set forth in response to Item 103 of Regulation S-K under “Legal Proceedings” is incorporated
by reference from Part II, Item 8, Financial Statements and Supplementary Data, Note 17 – Contingencies, of this Annual
Report on Form 10-K.
ITEM 4. Mine Safety Disclosures
Not applicable.
26
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our Class A common stock (“common stock”) is listed on the NYSE under the ticker symbol “WDR.” The
following table sets forth the high and low sale prices of our common stock, as well as the cash dividends paid for the past
two years:
Market Price
2016
2015
High
Low
Dividend
Per
Share
High
Low
Dividend
Per
Share
$ 28.59 $ 20.21 $ 0.46 $ 51.80 $ 41.06 $ 0.43
0.43
0.43
0.43
51.23
48.05
38.85
45.89
33.64
27.82
16.00
15.70
15.02
24.27
19.75
22.45
0.46
0.46
0.46
Quarter
1
2
3
4
Year-end closing prices of our common stock were $19.51 and $28.66 for 2016 and 2015, respectively. The
closing price of our common stock on February 10, 2017 was $18.51.
According to the records of our transfer agent, we had 2,454 holders of record of common stock as of February 10,
2017. We believe that a substantially larger number of beneficial stockholders hold such shares in depository or nominee
form.
Dividends
The declaration of dividends is subject to the discretion of the Board of Directors. We intend, from time to time,
to pay cash dividends on our common stock as our Board of Directors deems appropriate, after consideration of our
operating results, financial condition, cash and capital requirements, compliance with covenants in the Credit Facility, note
purchase agreement and such other factors as the Board of Directors deems relevant. To the extent assets are used to meet
minimum net capital requirements under the Net Capital Rule, they are not available for distribution to stockholders as
dividends. See Part I, Item 1. “Business—Regulation.” We anticipate that quarterly dividends will continue to be paid.
27
Common Stock Repurchases
Our Board of Directors has authorized the repurchase of our common stock in the open market and/or private
purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in our
stock-based compensation programs. During the year ended December 31, 2016, we repurchased 2,320,726 shares in the
open market and privately at an aggregate cost, including commissions, of $49.8 million, including 423,726 shares from
employees to cover their tax withholdings from the vesting of shares granted under our stock-based compensation
programs. The aggregate cost of shares obtained from related parties during 2016 was $9.2 million. The purchase price
paid by us for private repurchases of our common stock from related parties is the closing market price on the purchase
date.
The following table sets forth certain information about the shares of common stock we repurchased during the
fourth quarter of 2016.
Total Number Average Part of Publicly
Period
October 1 - October 31 . . . . . . . . . . . . . . . . . . . . . . . . . .
November 1 (cid:827) November 30 . . . . . . . . . . . . . . . . . . . . .
December 1 (cid:827) December 31 . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
of Shares
Price Paid
Purchased (1) per Share
— $
—
19.13
58
90,634
19.51
90,692 $ 19.51
Shares
Purchased as
Total Number of Maximum Number (or
Approximate Dollar
Value) of Shares That
May Yet Be
Purchased Under The
Program
Announced
Program
—
—
—
—
n/a (1)
n/a (1)
n/a (1)
(1) On August 31, 1998, we announced that our Board of Directors approved a program to repurchase shares of our
common stock on the open market. Under the repurchase program, we are authorized to repurchase, in any seven-day
period, the greater of (i) 3% of our outstanding common stock or (ii) $50 million of our common stock. We may
repurchase our common stock in privately negotiated transactions or through the New York Stock Exchange, other
national or regional market systems, electronic communication networks or alternative trading systems. Our stock
repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that
may be repurchased. Our Board of Directors reviewed and ratified the stock repurchase program in October 2012.
During the fourth quarter of 2016, we did not repurchase any shares of our common stock pursuant to the repurchase
program and 90,692 shares, reflected in the table above, were purchased in connection with funding employee income
tax withholding obligations arising from the vesting of nonvested shares.
28
Total Return Performance
Comparison of Cumulative Total Return (1)
300
280
260
240
220
200
180
160
140
120
100
e
u
l
a
V
x
e
d
n
I
Waddell & Reed Financial, Inc.
SNL Asset Manager
S&P 500
80
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
The above graph compares the cumulative total stockholder return on the Company’s common stock from
December 31, 2011 through December 31, 2016, with the cumulative total return of the Standard & Poor’s 500 Stock
Index and the SNL Asset Manager Index. The SNL Asset Manager Index is a composite of 42 publicly traded asset
management companies (including, among others, the companies in the peer group reviewed by the Compensation
Committee for executive compensation purposes) prepared by SNL Financial, Charlottesville, Virginia. The graph
assumes the investment of $100 in the Company’s common stock and in each of the two indices on December 31, 2011
with all dividends being reinvested. The closing price of the Company’s common stock on December 31, 2011 was $24.77
per share. The stock price performance on the graph is not necessarily indicative of future price performance.
Index
Waddell & Reed Financial, Inc. . . . . . . . . . . . . . . . . . .
SNL Asset Manager . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Period Ending
12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016
99.64
187.66
198.18
148.47
128.30
116.00
100.00
100.00
100.00
222.92
208.00
174.60
284.90
197.16
153.57
133.43
177.39
177.01
(1) Cumulative total return assumes an initial investment of $100 on December 31, 2011, with the reinvestment of all
dividends through December 31, 2016.
29
ITEM 6. Selected Financial Data
The following table sets forth our selected consolidated financial and other data as of the dates and for the periods
indicated, and reflects continuing operations data. Selected financial data should be read in conjunction with, and is
qualified in its entirety by, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this report.
2016
For the Year Ended December 31,
2014
(in thousands, except per share data, percentages)
2013
2015
2012
Revenues from:
Investment management fees . . . . . . . . . . . $
Underwriting and distribution fees . . . . . .
Shareholder service fees . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . .
557,112
561,670
120,241
1,239,023
709,562
663,998
143,071
1,516,631
768,102
678,678
150,979
1,597,759
650,442
582,819
137,093
1,370,354
549,231
496,465
128,109
1,173,805
Net income attributable to Waddell & Reed
Financial, Inc. . . . . . . . . . . . . . . . . . . . . . . $
146,907
245,536
313,331
252,998
192,528
Operating margin . . . . . . . . . . . . . . . . . . . . . .
Net income per share from continuing
19 %
27 %
30 %
28 %
26 %
operations, basic and diluted . . . . . . . . . . . $
Dividends declared per common share . . . . $
Shares outstanding at December 31, . . . . . .
1.78
1.84
83,118
2.94
1.75
82,850
3.71
1.45
83,654
2.96
1.18
85,236
2.25
2.03
85,679
2016
As of December 31,
2013
2014
(in millions, except for percentages)
2015
2012
Assets under management . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,521 104,399 123,650 126,543 96,365
Balance sheet data:
Goodwill and identifiable intangible assets . . . . . . . . . . . . $ 148.6
1,406.3
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
189.6
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
551.6
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
844.0
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
158.1
1,555.2
189.4
708.7
846.5
158.1
1,511.1
189.3
725.0
786.1
162.0
1,336.0
189.1
648.7
687.3
162.0
1,151.5
188.9
641.3
510.2
30
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with the “Selected Financial Data” and our Consolidated Financial
Statements and Notes thereto appearing elsewhere in this report.
Executive Overview
We are one of the oldest mutual fund and asset management firms in the country, with expertise in a broad range
of investment styles and across a variety of market environments. Our earnings and cash flows are heavily dependent on
financial market conditions. Significant increases or decreases in the various securities markets can have a material impact
on our results of operations, financial condition and cash flows.
Revenue Sources
We derive our revenues from providing investment management and advisory services, investment product
underwriting and distribution, and shareholder services administration to the Funds, the IGI Funds, and institutional and
separately managed accounts. Investment management and/or advisory fees are based on the amount of average assets
under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets.
Our underwriting and distribution revenues consist of fees earned on fee-based asset allocation products and related
advisory services, Rule 12b-1 asset-based service and distribution fees, distribution fees on certain variable products, and
commissions derived from sales of investment and insurance products. The products sold have various commission
structures and the revenues received from those sales vary based on the type and dollar amount sold. Shareholder service
fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and
administration fees, and is earned based on assets under management or number of client accounts.
Expense Drivers
Our major expenses are for commissions, employee compensation, field services, dealer services and information
technology.
Our Distribution Channels
One of our distinctive qualities is that we distribute our investment products through a balanced distribution
network. Our retail products are distributed through our retail unaffiliated distribution channel, which includes third parties
such as other broker-dealers, registered investment advisers and various retirement platforms or through our retail broker-
dealer channel and associated W&R financial advisors. Through our institutional channel, we distribute a variety of
investment styles for a variety of types of institutions.
Through our retail unaffiliated distribution channel, we distribute retail mutual funds through broker-dealers,
registered investment advisers and various retirement platforms through a team of external, internal and hybrid wholesalers
as well as a team dedicated to national accounts.
The Ivy Funds maintain strong positions on many of the leading third party distribution platforms, and we
continue efforts to diversify our sales. During 2016, we had seven funds exceed gross sales of $250 million. We expect
the retail unaffiliated distribution channel to be critical in driving our organic growth rate in the coming years.
In our retail broker-dealer channel, 1,780 W&R financial advisors are spread throughout the United States, who
provide financial advice for retirement, education funding, estate planning and other financial needs for our clients. A
distinguishing aspect of this channel is its low redemption rate, which can be attributed to the personal and customized
nature in which W&R advisors provide service to our clients by focusing on meeting their long-term financial objectives;
this, in turn, leads to a more stable asset base for the channel.
Through our institutional channel we manage assets in a variety of investment styles for a variety of types of
institutions as well as the IGI Funds. The largest percentage of our clients hire us to act as subadviser for their branded
products; they are typically domestic or foreign distributors of investment products who lack scale or the track record to
manage internally, or choose to market multi-manager styles. Our subadvisory relationships accounted for more than 60%
31
of the channel’s $7.9 billion in assets at the end of 2016. Our diverse client list also includes pension funds, Taft-Hartley
plans and endowments.
Strategic Initiatives
In 2016, we announced the modernizing of our brokerage and product platform, which included the restructuring
of our share classes. This new platform moved us from a paper-based, labor intensive environment to one utilizing
innovative brokerage platform technology, which we expect to enhance both advisor and back-office efficiency. As part
of this effort, we converted load-waived Class A shares into the more widely used institutional shares (Class I or Y) as the
exclusive share classes in our investment advisory programs. This step is consistent with industry trends and will allow us
to compete more effectively for investment advisory assets. The share class conversion occurred in July of 2016, and the
platform launched in the fourth quarter of 2016. In 2017, we will continue the implementation of significant enhancements
to our investment advisory programs and financial planning capabilities, referred to internally as “Project E.” We believe
that Project E positions the retail broker-dealer channel for long-term competitiveness.
In 2016, operating results decreased $5.4 million due to one-time costs associated with Project E, and a reduction
of $3.9 million in our Rule 12b-1 asset-based service and distribution fee revenue, net of underwriting and distribution
expenses following the conversion of assets under management in our investment advisory programs from load-waived
Class A shares to institutional share classes. Load-waived Class A shares held in advisory programs have historically
charged a maximum fee of 0.25% of the average daily net assets under management pursuant to the applicable Rule 12b-1
service and distribution plan; institutional share classes do not charge a Rule 12b-1 fee. Since the Company currently pays
a large portion of the Rule 12b-1 service and distribution fees it receives from load-waived Class A share mutual funds
held in advisory program accounts to the financial advisors servicing and distributing the shares, the impact of the loss of
Rule 12b-1 fee revenue is partially offset by the corresponding reduction in Rule 12b-1 fee payments to be made to
financial advisors.
To offset the decrease in 2016 operating income, we successfully executed a significant cost reduction effort and
reduced fixed costs by 9% on an annual run-rate basis.
On April 8, 2016, the DOL Fiduciary Rule was published. The final rule has a phased implementation from April
10, 2017 through January 1, 2018. We incurred $2.4 million in implementation costs related to this rule during 2016 and
anticipate a range of $8.0 to $12.0 million in implementation costs during 2017, which includes filing a registration
statement with the SEC to register five new index funds, the first passively managed funds offered by the Company. These
estimates could be impacted should the rule be delayed, withdrawn or modified. For additional discussion regarding the
impact of the DOL Fiduciary Rule, please see the Legal, Regulatory and Tax risk factors included in Item 1A – “Risk
Factors” in this annual report.
Operating Results
The Company ended the year with $1.2 billion in revenues. The revenue decrease of 18% relative to 2015 was
reflective of a decrease in our average managed assets of 24%, partially offset by an increase in the average management
fee rate. Average assets under management were $88.8 billion in 2016 compared to $117.6 billion in 2015. Net income
attributable to Waddell & Reed Financial, Inc. decreased 40% compared to 2015 while our operating margin declined to
19.1% from 27.4%.
Our balance sheet remains strong, as we ended the year with cash and investments of $883.9 million. At
December 31, 2016, we had no borrowings outstanding under the Credit Facility.
Assets Under Management
Assets under management of $80.5 billion on December 31, 2016 decreased $23.9 billion, or 23%, compared to
$104.4 billion on December 31, 2015. The decrease in assets under management is primarily due to outflows of
$25.3 billion, of which $15.6 billion was in the retail unaffiliated distribution channel, partially offset by market
appreciation of $1.4 billion.
32
Change in Assets Under Management (1)
Retail
Retail
Unaffiliated
Distribution
Broker-
Dealer
Institutional
Total
(in millions)
2016
Beginning Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,641
Sales(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,362
(22,438)
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
458
(15,618)
Net Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
272
Ending Assets at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,295
2015
Beginning Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,335
Sales(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,218
(23,686)
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
809
Net Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,659)
(4,035)
Market Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending Assets at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,641
2014
Beginning Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,055
Sales(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,534
(23,524)
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(101)
Net Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,091)
Net Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,629)
Market Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending Assets at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,335
43,344
4,287
(5,736)
(712)
(2,161)
1,139
42,322
45,517
5,073
(5,044)
(809)
(780)
(1,393)
43,344
43,667
5,545
(4,575)
(384)
586
1,264
45,517
15,414
1,065
(8,860)
254
(7,541)
31
7,904
104,399
11,714
(37,034)
—
(25,320)
1,442
80,521
17,798
2,743
(5,081)
—
(2,338)
(46)
15,414
123,650
20,034
(33,811)
—
(13,777)
(5,474)
104,399
15,821
3,392
(2,920)
485
957
1,020
17,798
126,543
27,471
(31,019)
—
(3,548)
655
123,650
(1)
Includes all activity of the Funds, the IGI Funds and institutional and separate accounts, including money market
funds and transactions at net asset value, accounts for which we receive no commissions.
(2) Primarily gross sales (net of sales commission), but also includes net reinvested dividends and capital gains and
investment income.
Average assets under management, which are generally more indicative of trends in revenue for providing
investment management services than the year over year change in ending assets under management, decreased by 24%
compared to 2015.
33
Average Assets Under Management
2016
Percentage
Average
of Total
2015
Percentage
of Total
Average
2014
Percentage
of Total
Average
(in millions, except percentage data)
Distribution Channel:
Retail Unaffiliated Distribution
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,078
7,289
Fixed income . . . . . . . . . . . . . . . . . . . . .
159
Money market . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,526
Retail Broker-Dealer
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,681
9,828
Fixed income . . . . . . . . . . . . . . . . . . . . .
2,029
Money market . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,538
Institutional
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,026
711
Fixed income . . . . . . . . . . . . . . . . . . . . .
—
Money market . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,737
Total by Asset Class:
79 % 45,434
9,848
21 %
154
—
100 % 55,436
82 % 54,563
18 % 13,203
168
—
100 % 67,934
72 % 33,799
9,911
23 %
1,864
5 %
100 % 45,574
74 % 32,999
9,935
22 %
1,966
4 %
100 % 44,900
93 % 15,440
1,134
7 %
—
—
100 % 16,574
93 % 16,483
824
7 %
—
—
100 % 17,307
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,785
17,828
Fixed income . . . . . . . . . . . . . . . . . . . . .
2,188
Money market . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,801
77 % 94,673
20 % 20,893
2,018
3 %
100 % 117,584
80 % 104,045
18 % 23,962
2,134
2 %
100 % 130,141
80 %
20 %
—
100 %
74 %
22 %
4 %
100 %
95 %
5 %
—
100 %
80 %
18 %
2 %
100 %
The following table summarizes our five largest mutual funds as of December 31, 2016 by ending assets under
management and investment management fees, with the comparative positions in 2015 and 2014. The assets under
management and management fees of these mutual funds are presented as a percentage of our total assets under
management and total management fees.
Five Largest Mutual Funds by Ending Assets Under Management and Investment Management Fees
2016
Ending
Percentage
of Total
2015
Percentage
of Total
2014
Percentage
of Total
Ending
Ending
(in millions, except percentage data)
By Assets Under Management:
Ivy Asset Strategy . . . . . . . . . . . . . . . . . . . . $
Ivy High Income . . . . . . . . . . . . . . . . . . . . .
Ivy International Core Equity . . . . . . . . . .
Ivy Science & Technology . . . . . . . . . . . . .
Advisors Core Investment . . . . . . . . . . . . .
5,017
4,616
4,405
3,829
3,820
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,687
By Management Fees:
6 % 15,261
5,263
6 %
4,505
5 %
5,921
5 %
4,131
5 %
27 % 35,081
(in thousands, except percentage data)
15 % 27,431
8,341
5 %
2,715
4 %
5,926
6 %
4,507
4 %
34 % 48,920
Ivy Asset Strategy . . . . . . . . . . . . . . . . . . . . $ 50,501
36,428
Ivy Science & Technology . . . . . . . . . . . . .
35,181
Ivy International Core Equity . . . . . . . . . .
25,698
Advisors Science & Technology . . . . . . . .
25,106
Ivy High Income . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 172,914
9 % 126,688
7 % 49,199
6 % 31,074
5 % 30,019
5 % 37,938
32 % 274,918
18 % 189,106
7 % 43,950
4 % 19,556
4 % 30,296
5 % 54,252
38 % 337,160
22 %
7 %
2 %
5 %
4 %
40 %
25 %
5 %
3 %
4 %
7 %
44 %
34
Results of Operations
Net Income
Net income attributable to Waddell & Reed
For the Year ended
December 31,
2016
2015
2014
Variance
2016 vs. 2015 vs.
2014
2015
(in thousands, except per share and percentage data)
Financial, Inc. (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . $ 146,907
1.78
Earnings per share, basic and diluted . . . . . . . . . . . . . . . . . . . $
Operating Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
245,536
2.94
313,331
3.71
19 %
27 %
30 %
(40) %
(39) %
(8) %
(22)%
(21)%
(3)%
Total Revenues
Total revenues decreased 18% in 2016 compared to 2015, attributable to a decrease in average assets under
management of 24% and a decrease in sales of 42%. Total revenues decreased 5% in 2015 compared to 2014, attributable
to a decrease in average assets under management of 10% and a decrease in sales of 27%.
For the Year ended
December 31,
2016
2015
2014
Variance
2016 vs. 2015 vs.
2014
2015
(in thousands, except percentage data)
Investment management fees . . . . . . . . . . . . . . . . . . . . . . . . $
Underwriting and distribution fees . . . . . . . . . . . . . . . . . . . .
Shareholder service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . .
768,102
678,678
150,979
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,239,023 1,516,631 1,597,759
557,112
561,670
120,241
709,562
663,998
143,071
(21)%
(15)%
(16)%
(18)%
(8)%
(2)%
(5)%
(5)%
Investment Management Fee Revenues
Investment management fee revenues are earned by providing investment advisory services to the Funds, the IGI
Funds and to institutional and separate accounts. Investment management fee revenues decreased $152.5 million, or 21%,
in 2016 and decreased $58.5 million, or 8%, in 2015.
35
Investment management fee revenues are based on the level of average assets under management and are affected
by sales, financial market conditions, redemptions and the composition of assets. The following graph illustrates the direct
relationship between average assets under management and investment management fee revenues for the years ending
December 31, 2016, 2015 and 2014.
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$120
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$700
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$500
$400
$300
$200
$100
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I
2016
2015
2014
Average Assets Under Management
Investment Management Fees
The following table summarizes investment management fee revenues, related average assets under management,
fee waivers and investment management fee rates for the years ending December 31, 2016, 2015 and 2014.
For the Year ended
December 31,
Variance
2016
2016 vs. 2015 vs.
2014
(in thousands, except for management fee rate, average assets and
percentage data)
2015
2014
2015
Retail investment management fees . . . . . . . . . . . . . . . . . . . $ 521,207
78,065
Retail average assets (in millions) . . . . . . . . . . . . . . . . . . . .
0.6677 % 0.6460 %
Retail management fee rate . . . . . . . . . . . . . . . . . . . . . . . . .
652,494
101,010
709,179
112,834
(20)%
(23)%
(8)%
(10)%
0.6285 %
Money market fee waivers . . . . . . . . . . . . . . . . . . . . . . . . . .
Other fee waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fee waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,158
4,952
8,110
7,239
3,646
10,885
7,844
3,958
11,802
(56)%
36 %
(25)%
(8)%
(8)%
(8)%
Institutional investment management fees . . . . . . . . . . . . . . $ 37,594
10,737
Institutional average assets (in millions) . . . . . . . . . . . . . . .
0.3502 % 0.3443 %
Institutional management fee rate . . . . . . . . . . . . . . . . . . . .
57,068
16,574
58,923
17,307
0.3405 %
(34)%
(35)%
(3)%
(4)%
Revenues from investment management services provided to our retail mutual funds, which are distributed
through the retail unaffiliated distribution and retail broker-dealer channels, decreased $131.3 million in 2016, or 20%,
compared to 2015. Revenues from investment management services provided to our retail mutual funds decreased
$56.7 million in 2015, or 8%, compared to 2014. For both comparative periods, investment management fee revenues
declined less on a percentage basis than the related average assets under management due to an increase in the average
management fee rate. A lower asset base in the Ivy Asset Strategy fund has resulted in increased management fee rates for
both comparative periods, due to the fund having a management fee rate less than our average management fee rate. Fee
waivers for the Funds are recorded as an offset to investment management fees up to the amount of fees earned and
declined in 2016 due to lower money market fee waivers as a result of a federal interest rate hike in 2016.
36
Institutional and separate account revenues in 2016 decreased $19.5 million, or 34%, compared to 2015 due to a
35% decrease in average assets under management. Institutional and separate account revenues in 2015 decreased
$1.9 million, or 3%, compared to 2014 due to a 4% decrease in average assets under management. For both comparative
periods, account revenues declined less on a percentage basis than the related average assets under management due to an
increase in the average management fee rate driven by a mix-shift of assets into investment styles and account types with
higher management fee rates.
Retail Unaffiliated Distribution channel . . . .
Retail Broker-Dealer channel . . . . . . . . . . . . .
Institutional channel . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annualized long-term redemption rates
(excludes money market redemptions)
for the year ended December 31,
2014
2015
2016
34.8 %
43.0 %
63.7 %
8.3 %
9.1 %
11.1 %
16.9 %
30.7 %
82.5 %
23.4 %
28.3 %
41.1 %
The increased long-term redemption rate in both comparative periods for the retail unaffiliated distribution
channel was primarily driven by redemptions in the Asset Strategy funds, which comprised over 40% of retail unaffiliated
distribution channel redemptions in 2016, 2015 and 2014. Prolonged redemptions in the retail unaffiliated distribution
channel could negatively affect revenues in future periods. In the retail broker-dealer channel, we historically experienced
a long-term redemption rate lower than that of the industry average. With the modernizing of our retail broker-dealer
platform and the introduction of new fee-based products, which increase the availability of third party products, we expect
the long-term redemption rate to increase for our proprietary products. The increased long-term redemption rate for our
institutional channel in 2016 compared to 2015 was primarily driven by a $2.0 billion redemption from an Asset Strategy
account that we subadvise, a $2.1 billion redemption from an institutional account in our Large Cap Growth strategy, and
an $800.0 million redemption from an institutional account in our Municipal High Income strategy. The increased
long-term redemption rate for our institutional channel in 2015 compared to 2014 was primarily driven by an institutional
account moving from an active core strategy to a smart beta strategy. Our overall redemption rate of 41.1% in 2016 is
higher than the industry average of 25.4% based on data provided by the ICI.
Underwriting and Distribution
We earn underwriting and distribution fee revenues primarily by distributing the Funds pursuant to an
underwriting agreement with each Fund (except Ivy VIP as explained below) and, to a lesser extent, by distributing mutual
funds offered by other unaffiliated companies. Pursuant to each agreement, we offer and sell the Funds’ shares on a
continuous basis (open-end funds) and pay certain costs associated with underwriting and distributing the Funds, including
the costs of developing and producing sales literature and printing of prospectuses, which may be either partially or fully
reimbursed by the Funds. The Funds are sold in various classes that are structured in ways that conform to industry
standards (i.e., “front-end load,” “back-end load,” “level-load” and institutional).
We offer several fee-based asset allocation products. These products offer clients a selection of traditional asset
allocation models, as well as features such as systematic rebalancing and client and advisor participation in determining
asset allocation across asset classes. We earn asset-based fees on our asset allocation products. In connection with Project
E, we converted the load-waived Class A shares previously offered in our investment advisory programs to institutional
share classes, which do not charge a Rule 12b-1 fee. As a result, we no longer collect Rule 12b-1 asset-based service and
distribution fee revenue on these assets under management, which reduced our pre-tax operating income by $3.9 million
in 2016, net of underwriting and distribution expenses. We expect that, given current asset levels, the full year impact of
this change in 2017 on our pre-tax operating income will be approximately $15.4 million, net of underwriting and
distribution expenses.
We distribute variable products offering Ivy VIP as investment vehicles pursuant to general agency arrangements
with our business partners and receive commissions, marketing allowances and other compensation as stipulated by such
agreements. In connection with these arrangements, Ivy VIP is offered and sold on a continuous basis.
In addition to distributing variable products, we distribute a number of other insurance products through our
insurance agency subsidiary, including individual term life, group term life, whole life, accident and health, long-term
care, Medicare supplement and disability insurance. We receive commissions and compensation from various underwriters
for distributing these products. We are not an underwriter for any insurance policies.
37
Underwriting and Distribution Fee Revenues and Expenses
The following tables illustrate our underwriting and distribution fee revenues and expenses segregated by
distribution channel for the years ended December 31, 2016, 2015 and 2014:
2016
Total
2015
2014
2016 vs.
2015
2015 vs.
2014
(in thousands, except percentage data)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 561,670
678,678
663,998
(477,314) (589,810) (615,954)
(193,791) (179,971) (167,373)
Net Distribution (Costs)/Excess . . . . . . . . . . . . . . . . . . . . . . . . $ (109,435) (105,783) (104,649)
Expenses—Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses—Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15) %
(19) %
8 %
(3) %
(2)%
(4)%
8 %
(1)%
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125,415
2014
2015
234,939
194,041
(164,641) (254,778) (302,459)
(51,675)
(55,944)
Net Distribution (Costs)/Excess . . . . . . . . . . . . . . . . . . . . . . . . $ (92,073) (116,681) (119,195)
Expenses—Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses—Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(52,847)
2016
2015
2015 vs.
2014
(35)% (17) %
(35)% (16) %
8 %
(6) %
2%
21 %
Retail Unaffiliated Distribution Channel 2016 vs.
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 436,255
Expenses—Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses—Indirect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Distribution (Costs)/Excess . . . . . . . . . . . . . . . . . . . . . . . . $ (17,362)
2016
Retail Broker-Dealer Channel
2014
2015
443,739
469,957
(312,673) (335,032) (313,495)
(140,944) (124,027) (115,698)
14,546
10,898
2016 vs.
2015
2015 vs.
2014
6 %
7 %
7 %
(25)%
(7)%
(7)%
14 %
(259)%
The following tables summarize the significant components of underwriting and distribution fee revenues
segregated by distribution channel for the years ended December 31, 2016, 2015 and 2014:
2016
Total
2015
(in thousands)
2014
Underwriting and distribution fee revenues:
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,186
224,319
Fee-based asset allocation product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67,734
Sales commissions on front-end load mutual fund and variable annuity sales . . . . .
31,246
Sales commissions on other products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,185
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 561,670
309,279
224,918
78,923
24,096
26,782
663,998
346,304
202,178
78,484
24,024
27,688
678,678
Underwriting and distribution fee revenues:
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121,926
565
Sales commissions on front-end load mutual fund sales . . . . . . . . . . . . . . . . . . . . . .
2,924
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125,415
186,994
3,091
3,956
194,041
224,669
5,843
4,427
234,939
Retail Unaffiliated Distribution Channel
2016
2015
(in thousands)
2014
38
Underwriting and distribution fee revenues:
Retail Broker-Dealer Channel
2015
2016
(in thousands)
2014
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,260 122,285 121,635
224,319 224,918 202,178
Fee-based asset allocation product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,641
Sales commissions on front-end load mutual fund and variable annuity sales . . . . .
24,024
Sales commissions on other products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,261
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 436,255 469,957 443,739
75,832
24,096
22,826
67,169
31,246
20,261
A significant portion of underwriting and distribution revenues are received from Rule 12b-1 asset-based service
and distribution fees earned on load, load-waived and deferred-load products sold by W&R financial advisors and third
party intermediaries. Underwriting and distribution revenues also include asset-based fees earned on our asset allocation
products and commissions, sales commissions charged on front-end load products sold by W&R financial advisors,
including mutual fund Class A shares (those sponsored by the Company and those underwritten by other non-proprietary
mutual fund companies), variable annuities, sales of other insurance products, and financial planning fees. A significant
amount of retail unaffiliated distribution channel mutual fund sales are load-waived.
We divide the costs of underwriting and distribution into two components—direct costs and indirect costs. Direct
selling costs fluctuate with sales volume, such as advisor commissions and management commissions paid to field
management, advisor incentive compensation, commissions paid to third parties and to our own wholesalers, and related
management commissions in our retail unaffiliated distribution channel. Direct selling costs also fluctuate with assets
under management, such as Rule 12b-1 service and distribution fees paid to third parties. Indirect selling costs are fixed
costs that do not necessarily fluctuate with sales levels. Indirect costs include expenses such as wholesaler salaries,
marketing costs, and promotion and distribution of our products through the retail unaffiliated distribution and retail
broker-dealer channels; services and management of W&R financial advisors such as field office overhead, sales programs
and technology infrastructure; and costs of managing and supporting our wholesale efforts through technology
infrastructure and personnel. While the institutional channel does have marketing expenses, those expenses are accounted
for in compensation and related costs and general and administrative expense instead of underwriting and distribution
because of the channel’s integration with our investment management division, its relatively small size and the fact that
there are no Rule 12b-1 service and distribution fees, loads, contingent deferred sales charges (“CDSCs”), or any other
charges to separate account clients except investment management fees.
We recover certain of our underwriting and distribution costs through Rule 12b-1 service and distribution fees,
which are paid by the Funds. All Rule 12b-1 service and distribution fee revenue received from the Funds is recorded on
a gross basis.
Underwriting and distribution revenues earned in 2016 decreased by $102.3 million, or 15%, compared to 2015.
Rule 12b-1 asset based service and distribution fees across both channels decreased $94.1 million, or 30%, year over year,
driven by a decrease in average mutual fund assets under management for which we earn Rule 12b-1 revenues and the
share class conversion from load-waived Class A shares previously in our advisory products to institutional share classes,
which do not charge a Rule 12b-1 fee. Revenues from fee-based asset allocation products continued to be a meaningful
contributor to revenues, increasing to 51% of the retail broker-dealer channel’s underwriting and distribution revenues in
2016 compared to 48% in 2015. Fee-based asset allocation revenue decreased less than 1% due to a decrease in fee-based
asset allocation average assets of less than 1%.
Underwriting and distribution revenues earned in 2015 decreased by $14.7 million, or 2%, compared to 2014.
Rule 12b-1 asset based service and distribution fees decreased $37.0 million, or 11%, year over year, driven by a decrease
in average mutual fund assets under management for which we earn Rule 12b-1 revenues. Revenues from fee-based asset
allocation products continued to be a meaningful contributor to revenues, increasing to 48% of retail broker-dealer channel
underwriting and distribution revenues in 2015 compared to 46% in 2014. Fee-based asset allocation assets grew from
$17.3 billion at December 31, 2014 to $17.6 billion at December 31, 2015, generating an increase of fee-based asset
allocation revenue of $22.7 million, or 11%.
39
Underwriting and distribution expenses in 2016 decreased by $98.7 million, or 13%, compared to 2015. Direct
expenses in the retail unaffiliated distribution channel decreased $90.1 million compared to 2015 as a result of a decrease
in average wholesale assets under management and lower sales volume year over year, which resulted in lower Rule 12b-1
asset-based service and distribution expenses paid to third party distributors, dealer compensation and wholesaler
commissions. Direct expenses in the retail broker-dealer channel declined 7% in relation to the decline in revenue. Indirect
expenses across both channels increased $13.8 million, or 8%, compared to 2015, primarily due to increased computer
services and software expenses, employee compensation and benefits related to severance and related charges and pension
settlement charges. Partially offsetting the increases were a curtailment gain as a result of discontinuing the availability
of coverage in our defined benefit postretirement medical plan for any individuals who retired after December 31, 2016,
lower advertising costs and lower business meetings and travel expenses. Indirect costs in the retail broker-dealer channel
included $5.4 million related to Project E implementation costs.
Underwriting and distribution expenses in 2015 decreased by $13.5 million, or 2%, compared to 2014. Direct
expenses in the retail unaffiliated distribution channel decreased $47.7 million compared to 2014 as a result of a decrease
in average wholesale assets under management and lower sales volume year over year, which resulted in lower dealer
compensation, wholesaler commissions and Rule 12b-1 asset-based service and distribution expenses paid to third party
distributors. Direct expenses in the retail broker-dealer channel grew in relation to revenue, offsetting the decrease in the
retail unaffiliated distribution channel. Indirect expenses across both channels increased $12.6 million, or 8%, compared
to 2014, primarily due to increased employee compensation and benefits, consulting expenses, rent expense and
advertising expenses, partially offset by lower computer services and software expenses.
Shareholder Service Fees Revenue
Shareholder service fee revenue primarily includes transfer agency fees, custodian fees from retirement plan
accounts, and portfolio accounting and administration fees. Transfer agency fees and portfolio accounting and
administration fees are asset-based revenues or account-based revenues, while custodian fees from retirement plan
accounts are based on the number of client accounts.
During 2016, shareholder service fees revenue decreased $22.8 million, or 16%, over 2015. Account-based fees
decreased $18.5 million compared to 2015 due to a decrease in the number of accounts, primarily as a result of the share
class conversion in 2016 from account-based, load-waived Class A shares to asset-based, institutional share classes offered
in our advisory programs. We expect that, given current asset levels, the full year impact of this change in 2017 on our
pre-tax operating income will be approximately $11.8 million. Asset-based fees for the I, Y, R and R6 share classes
decreased $4.1 million, or 11%, compared to 2015. Assets in the I, Y, R and R6 share classes declined from an average of
$25.6 billion at December 31, 2015 to an average of $23.3 billion at December 31, 2016, representing a decrease of 9%.
During 2015, shareholder service fees revenue decreased $7.9 million, or 5%, over 2014. Of the total decrease,
asset-based fees accounted for $8.1 million, partially offset by an increase in account-based fees. A majority of the decrease
in asset-based fees was driven by fees for the I, Y, R and R6 share classes which decreased $8.4 million, or 18%, when
compared to 2014. Assets in the I, Y, R and R6 share classes declined from an average of $31.0 billion at December 31,
2014 to an average of $25.6 billion at December 31, 2015, representing a decrease of 17%.
Total Operating Expenses
Operating expenses decreased $98.1 million, or 9%, in 2016 compared to 2015 primarily due to decreased
underwriting and distribution expenses and general and administrative expenses, partially offset by intangible asset
impairment charges of $9.7 million recorded in 2016 and increased compensation and related costs driven by pension and
severance costs discussed below. Underwriting and distribution expenses are discussed above.
40
Operating expenses decreased $12.6 million, or 1%, in 2015 compared to 2014 primarily due to decreased
underwriting and distribution expenses, as well as a $7.9 million intangible asset impairment charge recorded in 2014,
partially offset by increased compensation and related costs.
For the Year ended
December 31,
2016
2015
2014
Variance
2016 vs. 2015 vs.
2014
2015
(in thousands, except percentage data)
Underwriting and distribution . . . . . . . . . . . . . . . . . . . . . . . . $ 671,105
209,849
Compensation and related costs . . . . . . . . . . . . . . . . . . . . . .
83,996
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . .
9,572
Subadvisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,359
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,749
Intangible asset impairment . . . . . . . . . . . . . . . . . . . . . . . . .
769,781
200,752
105,066
9,134
16,046
—
783,327
194,410
104,637
8,436
14,634
7,900 NM
(13)%
5 %
(20)%
5 %
14 %
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,002,630 1,100,779 1,113,344
(9)%
(2) %
3 %
— %
8 %
10 %
NM
(1) %
Cost Reduction Efforts
The Company successfully completed a significant cost reduction effort, which led to a 9% reduction in 2016
fixed operating costs compared to 2015. The cost reduction effort was executed to offset the projected decrease in
operating income related to lower assets under management and the implementation of Project E. Project E includes the
ongoing modernization of our brokerage and product platform, as well as the restructuring of our share classes completed
in July 2016. These reductions impacted general and administrative costs, compensation costs and indirect underwriting
and distribution costs. The Company’s workforce was reduced by approximately 10% during the second quarter of 2016
resulting in a pre-tax restructuring charge of $17.0 million in the second quarter of 2016 related to employee-termination
benefits, including cash severance costs, the acceleration of stock-based compensation and outplacement services.
Compensation and Related Costs
For the Year Ended
December 31,
Variance
2016
2015
2014
2016 vs. 2015 vs.
2014
2015
(in thousands, except percentage data)
Compensation and related costs . . . . . . . . . . . . . . . . . . . . . . . $ 209,849
200,752
194,410
As a percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17 %
13 %
12 %
5 %
4 %
3 %
1 %
Compensation and related costs in 2016 increased $9.1 million, or 5%, compared to 2015. The primary drivers
of the increase were an increase in pension expense of $16.0 million and an increase in severance expense of $7.1 million.
Partially offsetting these increases was a decrease in incentive compensation of $7.0 million, a decrease in group health
insurance costs of $4.7 million and a decrease of base compensation of $4.4 million. The increase in pension expense was
due to a settlement charge related to the Company offering eligible terminated, vested pension plan participants an option
to elect a one-time voluntary lump sum window distribution equal to the present value of the participant’s pension benefit,
in settlement of all future pension benefits to which they would otherwise have been entitled. The increase in severance
expense was a result of workforce reductions. The decrease in group health insurance costs is due to a curtailment gain
realized on the amendment of our defined benefit postretirement medical plan to discontinue coverage for any individuals
who retire after December 31, 2016, and the decrease in base compensation is due to a decrease in headcount.
Compensation and related costs in 2015 increased $6.3 million, or 3%, compared to 2014. An increase in base
salaries of $5.3 million due to an increase in headcount and annual merit raises, and an increase in pension expense of
$3.3 million were the primary drivers. Expense also increased $1.5 million related to incentive compensation, increased
$1.4 million related to our deferred compensation program for portfolio managers, and increased $1.3 million related to
miscellaneous compensation. Partially offsetting these increases was a decrease in share-based compensation of
$6.6 million due to forfeitures and lower non-employee expense.
41
General and Administrative Expenses
For the Year Ended
December 31,
2016
2015
2014
Variance
2016 vs. 2015 vs.
2014
2015
(in thousands, except percentage data)
General and administrative expenses . . . . . . . . . . . . . . . . . . . . $ 83,996
As a percent of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 %
105,066
104,637
7 %
7 %
(20) %
— %
— %
— %
General and administrative expenses are operating costs, including, but not limited to, computer services and
software costs, telecommunications, facilities costs of our home offices, costs of professional services including legal and
accounting, and insurance.
General and administrative expenses decreased $21.1 million for the year ended December 31, 2016 compared
to 2015. Dealer service costs, which primarily represent pass-through account servicing costs to third party dealers,
decreased $9.1 million due to lower asset levels in certain share classes. There were also decreases in advertising costs,
fund expenses, temporary office staff expense, and travel and entertainment expenses in 2016 compared to 2015, offset
partly by increased consulting costs for implementation of the DOL Fiduciary Rule.
General and administrative expenses increased $0.4 million for the year ended December 31, 2015 compared to
2014. Technology consulting expenses and computer services and software costs increased $8.7 million related to the
implementation of technology infrastructure initiatives. Offsetting these increases were lower consulting costs of
$3.1 million, lower temporary office staff expense of $2.6 million, lower shareholder adjustments of $1.2 million and
lower dealer service costs of $1.2 million.
Subadvisory Fees
Subadvisory fees represent fees paid to other asset managers for providing advisory services for certain mutual
fund portfolios. These expenses reduce our operating margin since we pay out approximately half of our management fee
revenues received from subadvised products.
Subadvisory expenses for the years ended 2016, 2015 and 2014 were $9.6 million, $9.1 million and $8.4 million,
respectively. Subadvisory expenses increased $0.5 million for the year ended December 31, 2016 due to an increase in
subadvised average assets of 2%, as well as the launch of three new subadvised funds, the Ivy Apollo Multi-Asset Income
Fund, the Ivy Apollo Strategic Income Fund, and the Ivy Targeted Return Bond Fund. Subadvisory expenses increased
$0.7 million for the year ended December 31, 2015 due to an increase in subadvised average assets of 14%, as well as
termination fees related to internalizing management of the Micro Cap Growth funds during 2015. For both comparative
periods, subadvisory expenses were also impacted by a decrease in the average subadvisory fee rate due to a mix-shift of
assets into subadvised funds with lower subadvisory fee rates.
Intangible Asset Impairment
During the third quarter of 2016, we recorded an intangible asset impairment charge of $5.7 million related to
our subadvisory agreement to manage certain mutual fund products. The impairment charge was a result of a decline in
assets under management primarily attributable to a realignment of fund offerings. It is possible that the assets we manage
may decrease in the future, which would require us to assess the need for an additional write-down of the intangible asset
associated with our subadvisory agreement. At December 31, 2016, the remaining balance of our subadvisory intangible
asset was $2.7 million. The deferred tax liability established as a part of purchase accounting related to this intangible
asset was $1.0 million as of December 31, 2016.
During the fourth quarter of 2016, we delayed our strategic initiative to globalize our distribution network for the
IGI funds. As a result of this decision, the valuation model for the advisory contract associated with the IGI funds was
updated. Based upon the updated valuation model, we determined that the fair value of this intangible asset for the advisory
contract was less than the carrying amount, creating an impairment of $4.0 million, which was the remaining balance of
this intangible asset.
42
Other Income and Expenses
Investment and Other Income (Loss)
Investment and other loss decreased $4.5 million in 2016 compared to 2015. The majority of the change is related
to minority interest activity in our consolidated sponsored funds (Advisors Funds, Ivy Funds, IGI Funds and Ivy
Nextshares) held as trading in our investment portfolio. Mark-to-market gains in 2016 on our consolidated sponsored
funds, sponsored funds held as equity method securities and trading securities increased $30.0 million compared to 2015.
The mark-to-market increases were offset by a $31.5 million increase in losses on our economic hedging program that
uses total return swap contracts to hedge market risk in certain sponsored funds for the same comparative period.
Investment and other income decreased $22.0 million in 2015 compared to 2014. The majority of the decrease is
related to mark-to-market activity on sponsored funds (Advisors Funds, Ivy Funds and IGI Funds) held as equity method
investments and sponsored funds held as trading in our investment portfolio. We recorded mark-to-market losses of
$15.4 million in 2015, compared to mark-to-market gains of $2.4 million in 2014. Realized gains on the sale of available
for sale sponsored funds decreased $2.2 million in 2015 compared to 2014. Sponsored fund dividend income and capital
gain distributions decreased $1.0 million in 2015, compared to 2014.
Interest Expense
Interest expense was $11.1 million in 2016 and 2015, and $11.0 million in 2014. The majority of our interest
expense is fixed based on our $190.0 million senior unsecured notes.
Income Taxes
Our effective income tax rate was 33.9%, 38.5% and 36.1% in 2016, 2015 and 2014, respectively. The Company
has a deferred tax asset related to a capital loss carryforward, which is available to offset current and future capital gains.
Further, the Company has a deferred tax asset for unrealized losses in investment securities that would be capital losses if
realized. Due to the character of these losses and the limited carryforward period permitted by law upon realization, the
Company recorded a valuation allowance against a portion of these deferred tax assets. During 2016, unrealized gains on
equity method investments and consolidated investments, capital gain distributions from investments, and realized capital
gains on the sale of securities in the Company’s investment portfolios decreased the valuation allowance. As a result, the
Company recorded a $7.7 million income tax benefit, which decreased the effective income tax rate. During 2015,
unrealized losses on equity method investments and the trading securities portfolio exceeded capital gain distributions
from investments and realized capital gains on the sale of securities in the Company’s investment portfolios. As a result,
a $3.7 million increase in the valuation allowance was recorded as a charge to income tax expense, which increased our
effective income tax rate. During 2014, realized capital gains allowed for a release of a portion of the valuation allowance,
which resulted in an income tax benefit of $5.0 million. The lower effective tax rate in 2016 as compared to 2015 was
primarily the result of investment gains in 2016 compared to losses in 2015. The higher effective tax rate in 2015 as
compared to 2014 was primarily the result of investment losses in 2015 as compared to investment gains in 2014.
Our 2016, 2015 and 2014 effective income tax rates, removing the effects of the valuation allowance, would have
been 37.4%, 37.6% and 37.1%, respectively. The effective income tax rate, exclusive of the valuation allowance, was
lower in 2016 as compared to 2015 due to lower income before taxes in 2016, which increased the impact of state tax
incentives. The effective income tax rate, exclusive of the valuation allowance, increased in 2015 as compared to 2014
due to increases in expenses that are not deductible for income tax purposes as well as lower income before taxes in 2015,
which increased the impact of nondeductible expenses.
43
Liquidity and Capital Resources
The following table summarizes certain key financial data relating to our liquidity and capital resources:
For the Year Ended
December 31,
Variance
2016 vs.
2015 vs.
2016
2015
2014
2015
2014
(in thousands, except percentage data)
Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 555,102
31,137
Cash and cash equivalents—restricted . . . . . . . . . . . . . . . . . . .
328,750
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
189,605
Cash Flow Data:
Cash flows from operating activities . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities . . . . . . . . . . . . . . . . . . . .
123,647
75,871
558,495
66,880
291,743
189,432
566,621
76,595
243,283
189,258
(1) %
(53) %
13 %
— %
(1)%
(13)%
20 %
— %
233,950
(22,595)
345,042
(39,108) NM
(47) %
(202,911) (219,481) (227,158)
8 %
(32)%
(42)%
3 %
Our operations provide much of the cash necessary to fund our priorities, as follows:
• Pay dividends
• Finance internal growth
• Repurchase our stock
Pay Dividends
The Board of Directors approved a quarterly dividend on our common stock of $0.46 per share payable on
February 1, 2017 to stockholders of record on January 11, 2017. Dividends on our common stock resulted in financing
cash outflows of $152.8 million, $144.0 million and $115.3 million in 2016, 2015 and 2014, respectively.
Finance Internal Growth
We use cash to fund growth in our distribution channels. Our retail unaffiliated distribution channel requires cash
outlays for wholesaler commissions and commissions to third parties on deferred load product sales. We continue to invest
in our retail broker-dealer channel by offering home office resources, wholesaling efforts and enhanced technology tools,
including the modernization of our brokerage and product platform associated with Project E. Across both channels, we
provide seed money for new products.
Repurchase Our Stock
In 2016, we purchased 2.3 million shares of our common stock, compared to 2.0 million shares and 2.3 million
shares in 2015 and 2014, respectively. These share repurchase amounts included 423,726 shares, 432,353 shares and
599,340 shares from employees who elected to tender shares to cover their minimum tax withholdings with respect to
vesting of stock awards during the years ended December 31, 2016, 2015 and 2014, respectively.
In the future, we plan to repurchase shares to offset dilution from shares issued for employee stock-based
compensation programs. During 2017, we estimate that we will repurchase approximately 400,000 shares from employees
who elect to tender shares to cover their minimum tax withholdings arising from the vesting of nonvested shares.
44
Operating Cash Flows
Cash from operations is our primary source of funds and decreased $110.3 million from 2015 to 2016. The
decrease is primarily due to a decrease in net income of $97.2 million in 2016. Additionally, deferred sales commission
payments related to deferred sales load and fee based products decreased $12.0 million in 2016. During 2016, we paid
W&R financial advisors and third parties upfront commissions on the sale of Class C shares and certain fee-based asset
allocation products. Funding of such commissions during the years ended December 31, 2016, 2015 and 2014 totaled
$3.4 million, $10.9 million and $41.0 million, respectively. In 2016 and 2015, 100% of the commission funding was
related to Class C shares. During 2014, commission funding for Class C Shares and fee-based asset allocation products
was 57% and 43% of the annual commission funding, respectively.
The payable to investment companies for securities, payable to customers and other receivables accounts can
fluctuate significantly based on trading activity at the end of a reporting period. Changes in these accounts result in
variances within cash from operations on the statement of cash flows; however, there is no impact to the Company’s
liquidity and operations for the variances in these accounts.
A contribution of $10.0 million was made to our pension plan in February 2017, and no further contributions are
planned for 2017.
Investing Cash Flows
Investing activities consist primarily of the seeding and sale of sponsored investment securities, as well as capital
expenditures. We expect our 2017 capital expenditures to be in the range of $15.0 to $25.0 million.
Financing Cash Flows
As noted previously, dividends and stock repurchases accounted for a majority of our financing cash outflows in
2016.
On August 31, 2010, the Company entered into an agreement to complete a $190.0 million private placement of
the Senior Notes. The agreement contained a delayed funding provision that allowed the Company to draw down the
proceeds in January 2011 when the 5.6% senior notes (the “Notes”) matured. The Company used the proceeds of the
issuance and sale of the Senior Notes to repay the Notes in full. Interest is payable semi-annually in January and July of
each year. The most restrictive provisions of the agreement require the Company to maintain a consolidated leverage ratio
not to exceed 3.0 to 1.0 for four consecutive quarters and a consolidated interest coverage ratio of not less than 4.0 to 1.0
for four consecutive quarters. The Company was in compliance with these covenants for all periods presented. As of
December 31, 2016, the Company’s consolidated leverage ratio was 0.6 to 1.0, and consolidated interest coverage ratio
was 27.5 to 1.0.
The Company entered into the Credit Facility with various lenders, effective June 28, 2013, which provides for
initial borrowings of up to $125.0 million and replaced the Company’s previous revolving credit facility. Lenders may, at
their option upon the Company’s request, expand the facility to $200.0 million. There were no borrowings under the Credit
Facility at December 31, 2016 or at any point during the year. The Credit Facility’s covenants match those outlined above
for the Senior Notes.
Short Term Liquidity and Capital Requirements
Management believes its available cash, marketable securities and expected cash flow from operations will be
sufficient to fund its short-term operating and capital requirements during 2017. Expected short-term uses of cash include
dividend payments, interest on indebtedness and maturities of outstanding debt, income tax payments, seed money for new
products, capital expenditures including those related to the Project E initiatives, share repurchases, payment of deferred
commissions to our financial advisors and third parties, pension funding, collateral funding for margin accounts established
to support derivative positions, expenditures related to compliance with the DOL Fiduciary Rule, and home office
leasehold and building improvements, and could include strategic acquisitions. Our seed investments in consolidated
sponsored funds are not treated as liquid assets because they may be longer term in nature. Our strong balance sheet allows
us some flexibility around our dividend as we evaluate the longer-term earnings power of the Company. We are also
evaluating options for the upcoming maturity of $95.0 million in senior unsecured notes in 2018.
45
Long Term Liquidity and Capital Requirements
Expected long-term capital requirements include interest on indebtedness and maturities of outstanding debt,
operating leases and purchase obligations, and potential recognition of tax liabilities, summarized in the following table
as of December 31, 2016. Purchase obligations include amounts that will be due for the purchase of goods and services to
be used in our operations under long-term commitments or contracts.
Long-term debt obligations, including interest . . . . . . . . . . $ 221,707
75,678
Non-cancelable operating lease commitments . . . . . . . . . .
154,363
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,504
Unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
Total
2020-
2021
2018-
2019
(in thousands)
10,213 108,300 103,194
12,707
30,634
22,494
19,313
63,610
70,783
—
—
212
$ 463,252 103,702 202,544 135,214
Thereafter/
Indeterminate
—
9,843
657
11,292
21,792
Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of
technology infrastructure, strategic acquisitions, payment of dividends, income tax payments, seed money for new
products, pension funding, repurchases of our common stock, and payment of upfront fund commissions for Class C shares
and certain fee-based asset allocation products. We expect payment of upfront fund commissions for certain fee-based
asset allocation products will decline in future years due to a change in our advisor compensation plan whereby a smaller
population of advisors are eligible for upfront fund commissions on the sale of these products.
Off-Balance Sheet Arrangements
Other than operating leases, which are included in the table above, the Company does not have any off-balance
sheet financing. The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the
purpose of raising capital, incurring debt or operating its business.
Critical Accounting Policies and Estimates
Management believes the following critical accounting policies affect its significant estimates and judgments
used in the preparation of its consolidated financial statements.
Accounting for Goodwill and Intangible Assets
As of December 31, 2016, our total goodwill and intangible assets were $148.6 million, or 11%, of our total
assets. Two significant considerations arise with respect to these assets that require management estimates and judgment:
(i) the valuation in connection with the initial purchase price allocation, and (ii) the ongoing evaluation of impairment.
In connection with all of our acquisitions, an evaluation is completed to determine reasonable purchase price
allocations. The purchase price allocation process requires management estimates and judgments as to expectations for the
various products, distribution channels and business strategies. For example, certain growth rates and operating margins
were assumed for different products and distribution channels. If actual growth rates or operating margins, among other
assumptions, differ from the estimates and judgments used in the purchase price allocation, the amounts recorded in the
financial statements for identifiable intangible assets and goodwill could be subject to charges for impairment in the future.
We complete an ongoing review of the recoverability of goodwill and intangible assets using a fair-value or
income based approach on an annual basis or more frequently whenever events occur or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its carrying amount. Intangible assets with indefinite
lives, primarily acquired mutual fund advisory contracts, are also tested for impairment annually by comparing their fair
value to the carrying amount of the asset. We consider mutual fund advisory contracts indefinite lived intangible assets as
they are expected to be renewed without significant cost or modification of terms. Factors that are considered important
in determining whether an impairment of goodwill or intangible assets might exist include significant continued
underperformance compared to peers, the likelihood of termination or non-renewal of a mutual fund advisory or
subadvisory contract or substantial changes in revenues earned from such contracts, significant changes in our business
and products, material and ongoing negative industry or economic trends, or other factors specific to each asset or
46
subsidiary being evaluated. Because of the significance of goodwill and other intangibles to our consolidated balance
sheets, the annual impairment analysis is critical. Any changes in key assumptions about our business and our prospects,
or changes in market conditions or other externalities, could result in an impairment charge.
In 2016, the Company’s annual impairment test completed during the second quarter indicated that goodwill and
identifiable intangible assets were not impaired. Related to goodwill, the fair value of the investment management and
related services reporting unit exceeded its carrying value by more than 100%. The fair value of indefinite life intangible
assets excluding the intangible asset related to our subadvisory agreement to manage certain mutual fund products also
exceeded its carrying value by more than 100%. The fair value of the intangible asset related to our subadvisory agreement
exceeded its carrying amount by 6%. Based on the result of our annual test, we increased the frequency of our impairment
analysis for this intangible asset, and during the third quarter of 2016, we recorded an intangible asset impairment charge
of $5.7 million as a result of a decline in assets under management primarily attributable to a realignment of fund offerings.
It is possible that the assets we manage under this subadvisory agreement may decrease in the future, which would require
us to assess the need for a write-down of the intangible asset. During the fourth quarter of 2016, we recorded an intangible
asset impairment charge of $4.0 million on the advisory contract associated with the IGI Funds due to a delay in our
strategic initiative to globalize our distribution network for the IGI Funds.
Accounting for Income Taxes
In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In
addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax
filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. We
adjust our income tax provision in the period in which we determine the actual outcomes will likely be different from our
estimates. The recognition or derecognition of income tax expense related to uncertain tax positions is determined under
the guidance as prescribed by Accounting Standards Codification (“ASC”) “Income Taxes Topic” ASC 740. During 2016,
2015, and 2014, the Company settled two, three, and six open tax years, respectively, that were undergoing audit by state
jurisdictions in which the Company operates. These audits were settled in all material respects with no significant
adjustments. The Company is currently under federal audit for the 2014 tax year. Additionally, the Company was notified
in December 2016 that one state jurisdiction will begin an audit in 2017.
We recognize an asset or liability for the deferred tax consequences of temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial statements, including the determination of any
valuation allowance that might be required for deferred tax assets. These temporary differences will result in taxable or
deductible amounts in future years when the reported amounts of assets are recovered or liabilities are settled.
The Company has a capital loss carryforward that is available to offset current and future capital gains. Any
unutilized capital loss carryforward will expire in 2018. Due to the character of the loss and the limited carryforward
period permitted by law, the Company may not realize the full tax benefit of the capital loss. Management believes it is
not more likely than not that the Company will generate sufficient future capital gains to realize the full benefit of these
capital losses. Accordingly, a valuation allowance has been recorded on the deferred tax assets that were capital in nature
as of December 31, 2016, December 31, 2015, and December 31, 2014.
As of December 31, 2016, two of the Company’s subsidiaries have state net operating loss carryforwards in
certain states in which those companies file on a separate company basis. These entities have recognized a deferred tax
asset for such carryforwards. The carryforwards, if not utilized, will expire between 2017 and 2036. Management believes
it is not more likely than not that the subsidiaries will generate sufficient future taxable income in these states to realize
the benefit of these state net operating loss carryforwards and, accordingly, a valuation allowance has been recorded at
December 31, 2016, December 31, 2015 and December 31, 2014.
We have not recorded a valuation allowance on any other deferred tax assets as of the current reporting period
based on our belief that operating income will, more likely than not, be sufficient to realize the benefit of these assets over
time. In the event that actual results differ from estimates or if our historical trend of positive operating income changes,
we may be required to record a valuation allowance on deferred tax assets, which could have a significant effect on our
consolidated financial condition and results of operations.
Income taxes are recorded at the rates in effect in the various tax jurisdictions in which we operate. Tax law and
rate changes are reflected in the income tax provision in the period in which such changes are enacted.
47
Pension and Other Postretirement Benefits
Accounting for our pension and postretirement benefit plans requires us to estimate the cost of benefits to be
provided well into the future and the current value of our benefit obligations. Three critical assumptions affecting these
estimates are the discount rate, the expected return on assets and the expected health care cost trend rate. The discount rate
assumption was based on the Aon Hewitt AA Only Above Median Yield Curve. This discount rate was determined
separately for each plan by plotting the expected benefit payments from each plan against a yield curve of high quality,
zero coupon bonds and calculating the single rate that would produce the same present value of liabilities as the yield
curve. The expected return on plan assets and health care cost trend rates are based upon an evaluation of our historical
trends and experience, taking into account current and expected future market conditions. Other assumptions include rates
of future compensation increases, participant withdrawals and mortality rates, and participant retirement ages. These
estimates and assumptions impact the amount of net pension expense or income recognized each year and the measurement
of our reported benefit obligation under the plans.
In 2016, we utilized a discount rate of 4.39% for our pension plan compared to 4.60% in 2015 and 4.13% in 2014
to reflect market rates. The discount rate for our postretirement medical plan was 3.46%, 4.44% and 4.07% in 2016, 2015
and 2014 respectively. In 2016, we assumed long-term asset returns of 7.50% on the assets in our pension plan,
representing a 25 basis point drop from our assumption in 2015 and 2014 of 7.75%. Our pension plan assets at
December 31, 2016 were 100% invested in the Asset Strategy style and while we have targeted this same investment
strategy going forward, we will assume long-term asset returns of 7.0% beginning in 2017.
Effective January 1, 2017, the Company changed its method to estimate the service and interest cost components
of net periodic benefit cost for our pension plan. Historically, we estimated these two cost components utilizing a single
discount rate derived from the yield curve, as described above. The new method utilizes a full yield curve approach in the
estimation of these components by applying the specific spot-rates along the yield curve used in the determination of the
benefit obligation to their underlying projected cash flows. The new estimate provides a more precise measurement of
service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot-
rates. The change does not affect the measurement of our pension benefit obligation and it will be accounted for as a
change in accounting estimate, which is applied prospectively. For 2017, the change in estimate is expected to reduce
pension periodic benefit plan cost by approximately $2 million when compared to the prior estimate.
The effect of hypothetical changes to selected assumptions on the Company’s retirement benefit plans would be
as follows:
Assumptions
Change
As of
December 31,
2016
Increase
(Decrease)
PBO/APBO (1)
For the year
ended
December 31,
2017
Increase
(Decrease)
Expense (2)
(in thousands)
Pension
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +/(cid:237)50 bps $ (11,352)/12,647 $ (1,582)/1,752
(1,464)/1,464
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +/(cid:237)100 bps
2,164/(1,938)
Salary scale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +/(cid:237)100 bps
Other Postretirement
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +/(cid:237)50 bps
Health care cost trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +/(cid:237)100 bps
N/A
9,054/(8,129)
(57)/60
108/(97)
(9)/10
33/(29)
(1) Projected benefit obligation (“PBO”) for pension plans and accumulated postretirement benefit obligation (“APBO”)
for other postretirement plans.
(2) Pre-tax impact on expense.
48
Deferred Sales Commissions
We pay upfront sales commissions to W&R financial advisors and third party intermediary broker/dealers in
connection with the sale of certain classes of mutual fund shares sold without a front-end sales charge. These costs are
capitalized and amortized over the period during which the shareholder is subject to a CDSC, not to exceed five years. We
recover these costs through Rule 12b-1 and other distribution plan fees, which are paid by the applicable share classes of
the Advisors Funds, Ivy Funds and InvestEd, along with CDSCs paid by shareholders who redeem their shares prior to
completion of the specified holding periods. Should we lose our ability to recover such sales commissions through
distribution plan payments and CDSCs, the value of these assets would immediately decline, as would future cash flows.
We periodically review the recoverability of deferred sales commission assets as events or changes in circumstances
indicate that the carrying amount of deferred sales commission assets may not be recoverable and adjust the deferred assets
accordingly.
Valuation of Investments
We record substantially all investments in our financial statements at fair value. Where available, we use prices
from independent sources such as listed market prices or broker-dealer price quotations. We evaluate our available for sale
securities for other than temporary declines in value on a periodic basis. This may exist when the fair value of an investment
security has been below the current value for an extended period of time. If an other than temporary decline in value is
determined to exist, the unrealized investment loss recorded net of tax in accumulated other comprehensive income is
realized as a charge to net income, in the period in which the other than temporary decline in value is determined. While
we believe that we have accurately estimated the amount of the other than temporary decline in the value of our portfolio,
different assumptions could result in changes to the recorded amounts in our financial statements.
Loss Contingencies
The likelihood that a loss contingency exists is evaluated using the criteria of “Contingencies Topic,” ASC 450
through consultation with legal counsel. A loss contingency is recorded if the contingency is considered probable and
reasonably estimable as of the date of the financial statements.
Seasonality and Inflation
We do not believe our operations are subject to significant seasonal fluctuation. We have historically experienced
increased sales activity in the first and fourth quarters of the year due to funding of retirement accounts by our clients. The
Company has not suffered material adverse effects from inflation in the past. However, a substantial increase in the
inflation rate in the future may adversely affect customers’ purchasing decisions, may increase the costs of borrowing, or
may have an impact on the Company’s margins and overall cost structure.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We use various financial instruments with certain inherent market risks, primarily related to interest rates and
securities prices. The principal risks of loss arising from adverse changes in market rates and prices to which we are
exposed relate to interest rates on debt and marketable securities. Generally, these instruments have not been entered into
for trading purposes. Management actively monitors these risk exposures; however, fluctuations could impact our results
of operations and financial position. As a matter of policy, we only execute derivative transactions to manage exposures
arising in the normal course of business and not for speculative or trading purposes. The following information, together
with information included in other parts of Management’s Discussion and Analysis of Financial Condition and Results of
Operations, which are incorporated herein by reference, describe the key aspects of certain financial instruments that have
market risk to us.
49
Interest Rate Sensitivity
Our interest sensitive liabilities include our long-term fixed rate Senior Notes and obligations for any balances
outstanding under the Credit Facility or other short-term borrowings. Increases in market interest rates would generally
cause a decrease in the fair value of the Senior Notes and an increase in interest expense associated with short-term
borrowings and borrowings under the Credit Facility. Decreases in market interest rates would generally cause an increase
in the fair value of the Senior Notes and a decrease in interest expense associated with short-term borrowings and
borrowings under the Credit Facility. We had no short-term borrowings outstanding as of December 31, 2016.
Investment Securities Sensitivity
We maintain an investment portfolio of various holdings, types and maturities. Our portfolio is diversified and
consists primarily of sponsored funds. A portion of investments are classified as available for sale investments. At any
time, a sharp increase in interest rates or a sharp decline in the United States stock market could have a significant negative
impact on the fair value of our investment portfolio. If a decline in fair value is determined to be other than temporary by
management, the cost basis of the individual security or mutual fund accounted for as AFS is written down to fair value.
We have established a hedging program that uses a total return swap to hedge our exposure to fluctuations in the value of
our investment portfolio classified as trading, recorded using equity method, or consolidated within our consolidated
financial statements. Conversely, declines in interest rates or a sizeable rise in the United States stock market could have
a significant positive impact on our investment portfolio, the results of which may be mitigated due to the hedging program.
However, unrealized gains are not recognized in operations on available for sale securities until they are sold.
The following is a summary of the effect that a 10% increase or decrease in equity or fixed income prices would
have on our investment portfolio subject to equity or fixed income price fluctuations at December 31, 2016:
Investment Securities
Fair Value
Fair Value
Assuming a 10% Assuming a 10%
Fair Value
Increase
(in thousands)
Decrease
Available for sale:
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,806
Sponsored privately offered funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
570
Trading:
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Method:
26,775
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,234
Sponsored privately offered funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 328,750
13
101
145,710
29,541
135,087
627
110,525
513
14
111
160,281
32,495
29,453
3,557
361,625
12
91
131,139
26,587
24,098
2,911
295,875
Securities Price Sensitivity
Our revenues are dependent on the underlying assets under management in the Funds and IGI Funds to which
investment advisory services are provided. The Funds include portfolios of investments comprised of various combinations
of equity, fixed income and other types of securities and commodities. Fluctuations in the value of these securities are
common and are generated by numerous factors, including, without limitation, market volatility, the overall economy,
inflation, changes in investor strategies, availability of alternative investment vehicles, government regulations and others.
Accordingly, declines in any one or a combination of these factors, or other factors not separately identified, may reduce
the value of investment securities and, in turn, the underlying assets under management on which our revenues are earned.
These declines have an impact in our investment sales, and our trading portfolio, thereby compounding the impact on our
earnings if our hedging strategy is not fully effective.
50
ITEM 8. Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements referred to in the Index on page 56 setting forth our
consolidated financial statements, together with the report of KPMG LLP dated February 24, 2017 on page 57.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
(a)
(b)
Evaluation of Disclosure Controls and Procedures. The Company maintains a system of disclosure controls and
procedures that is designed to ensure that information required to be disclosed by the Company in the reports that
it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A
control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. The Company’s Chief Executive Officer and Chief Financial
Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2016, have concluded that the Company’s
disclosure controls and procedures were effective as of December 31, 2016.
Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and our principal financial officer, we evaluated of the
effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework in
“Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the
Treadway Commission. All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance
with respect to financial statement preparation and presentation. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in “Internal Control-Integrated Framework (2013),” management
concluded that, as of December 31, 2016, our internal control over financial reporting was effective. KPMG LLP,
the independent registered public accounting firm that audited the financial statements included in this Annual
Report on Form 10-K, also audited the effectiveness of our internal control over financial reporting as of
December 31, 2016, as stated in their attestation report which follows.
51
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Waddell & Reed Financial, Inc.:
We have audited Waddell & Reed Financial, Inc.’s (the Company) internal control over financial reporting as of December
31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Waddell & Reed Financial, Inc.’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Waddell & Reed Financial, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Waddell & Reed Financial, Inc. and subsidiaries as of December 31, 2016 and
2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2016, and our report dated February 24, 2017 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Kansas City, Missouri
February 24, 2017
52
(c)
Changes in Internal Control over Financial Reporting. The Company’s internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. There
were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter
ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
ITEM 9B. Other Information
None.
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
Information required by this Item 10 is incorporated herein by reference to our definitive proxy statement for our
2017 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 11. Executive Compensation
Information required by this Item 11 is incorporated herein by reference to our definitive proxy statement for our
2017 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by Item 403 of Regulation S-K is incorporated herein by reference to our definitive proxy
statement for our 2017 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
The following table provides information as of December 31, 2016 with respect to shares of the Company’s
Class A common stock that may be issued under our existing equity compensation plans.
Equity Compensation Plan Information
(a)
Number of Securities to be
issued upon exercise of
outstanding options, warrants
and rights
(b)
Number of securities remaining available
for future issuance under equity
compensation plans (excluding securities
reflected in column (a)) (1)
Plan Category
Equity compensation plans
approved by security holders . .
4,786,103 (2)
3,467,465 (3)
Equity compensation plans not
approved by security holders . .
-
-
Total . . . . . . . . . . . . . . . . . . . . . . . .
4,786,103
3,467,465
(1) All shares may be issued in the form of restricted stock.
(2) Represents shares of the Company’s unvested restricted common stock.
(3) Represents shares available for future issuance from the Stock Incentive Plan.
53
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this Item 13 is incorporated herein by reference to our definitive proxy statement for our
2017 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 14. Principal Accounting Fees and Services
Information required by this Item 14 is incorporated herein by reference to our definitive proxy statement for our
2017 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements.
PART IV
Reference is made to the Index to Consolidated Financial Statements on page 56 for a list of all financial
statements filed as part of this Report.
(a)(2) Financial Statement Schedules.
(b)
None.
Exhibits.
Reference is made to the Index to Exhibits beginning on page 89 for a list of all exhibits filed as part of this
Report.
54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Overland Park, State of Kansas, on February 24, 2017.
SIGNATURES
WADDELL & REED FINANCIAL, INC.
By: /s/ PHILIP J. SANDERS
Philip J. Sanders
Chief Executive Officer and Chief Investment Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed
below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Name
Title
Date
/s/ PHILIP J. SANDERS
Philip J. Sanders
Chief Executive Officer, Chief Investment
Officer and Director (Principal Executive
Officer)
/s/ BRENT K. BLOSS
Brent K. Bloss
Senior Vice President, Chief Financial
Officer and Treasurer (Principal Financial
Officer)
February 24, 2017
February 24, 2017
/s/ BENJAMIN R. CLOUSE
Benjamin R. Clouse
/s/ HENRY J. HERRMANN*
Henry J. Herrmann
Vice President and Chief Accounting Officer
February 24, 2017
(Principal Accounting Officer)
Chairman of the Board and Director
February 24, 2017
/s/ SHARILYN S. GASAWAY*
Sharilyn S. Gasaway
Director
/s/ THOMAS C. GODLASKY*
Thomas C. Godlasky
Director
/s/ ALAN W. KOSLOFF*
Alan W. Kosloff
/s/ DENNIS E. LOGUE*
Dennis E. Logue
Director
Director
/s/ MICHAEL F. MORRISSEY*
Michael F. Morrissey
Director
Director
Director
/s/ JAMES M. RAINES*
James M. Raines
/s/ JERRY W. WALTON*
Jerry W. Walton
/s/ JEFFREY P. BENNETT
Jeffrey P. Bennett
* By: Attorney-in-fact
February 24, 2017
February 24, 2017
February 24, 2017
February 24, 2017
February 24, 2017
February 24, 2017
February 24, 2017
Attorney-in-fact
February 24, 2017
55
WADDELL & REED FINANCIAL, INC.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Consolidated Balance Sheets at December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2016 . . . . . . 59
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2016 . . 62
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
56
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Waddell & Reed Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Waddell & Reed Financial, Inc. and subsidiaries
(the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income,
comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Waddell & Reed Financial, Inc. and subsidiaries as of December 31, 2016 and 2015, and the
results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2016, in conformity with U.S. generally accepted accounting principles.
As discussed in notes 2, 3 and 12 to the consolidated financial statements, in 2016, the Company adopted ASU 2015-
02, Amendments to the Consolidation Analysis.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Waddell & Reed Financial, Inc.’s internal control over financial reporting as of December 31, 2016, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February 24, 2017 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Kansas City, Missouri
February 24, 2017
57
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2016 and 2015
2016
2015
(in thousands)
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents - restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables:
$
555,102
31,137
328,750
558,495
66,880
291,743
Funds and separate accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customers and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,181
128,095
933
20,641
1,091,839
34,399
220,660
10,594
34,800
1,217,571
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred sales commissions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102,449
4,096
148,569
31,430
27,889
$ 1,406,272
105,434
24,262
158,118
32,692
17,074
1,555,151
Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to investment companies for securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to third party brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued pension and postretirement costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,023
53,691
31,735
82,918
38,764
61,847
296,978
189,605
38,379
26,655
551,617
32,858
113,648
49,848
120,420
69,335
57,104
443,213
189,432
48,810
27,241
708,696
Commitments and contingencies
Redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,653
—
Stockholders’ equity:
Preferred stock—$1.00 par value: 5,000 shares authorized; none issued . . . . . . . . . . . . . . . . . . . . .
Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued;
83,118 shares outstanding (82,850 at December 31, 2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of 16,583 common shares in treasury (16,851 at December 31, 2015) . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
997
291,908
1,135,694
(531,268)
(53,329)
844,002
997
331,611
1,141,608
(566,256)
(61,505)
846,455
Total liabilities, redeemable noncontrolling interests and stockholders’ equity. . . . . . . . . . . . . . .
$ 1,406,272
1,555,151
See accompanying notes to consolidated financial statements.
58
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2016, 2015 and 2014
2016
2015
(in thousands, except per share data)
2014
Revenues:
Investment management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Underwriting and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
557,112
561,670
120,241
1,239,023
709,562
663,998
143,071
1,516,631
768,102
678,678
150,979
1,597,759
Operating expenses:
Underwriting and distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and related costs (including share-based compensation
of $51,514, $47,518 and $54,144, respectively) . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subadvisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
671,105
769,781
783,327
209,849
83,996
9,572
18,359
9,749
1,002,630
200,752
105,066
9,134
16,046
—
1,100,779
194,410
104,637
8,436
14,634
7,900
1,113,344
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment and other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to redeemable noncontrolling interests . . . . . . . . .
Net income attributable to Waddell & Reed Financial, Inc . . . . . . . . . $
236,393
(763)
(11,122)
224,508
76,187
148,321
1,414
146,907
415,852
(5,244)
(11,068)
399,540
154,004
245,536
—
245,536
484,415
16,790
(11,042)
490,163
176,832
313,331
—
313,331
Net income per share attributable to Waddell and Reed Financial, Inc.
common shareholders, basic and diluted: . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.78
2.94
3.71
Weighted average shares outstanding, basic and diluted: . . . . . . . . . . . . . . .
82,668
83,499
84,485
See accompanying notes to consolidated financial statements.
59
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2016, 2015 and 2014
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 148,321 245,536 313,331
2016
2015
(in thousands)
2014
Other comprehensive income:
Unrealized depreciation of available for sale investment securities during the
period, net of income tax expense (benefit) of $(2), $2, and $1, respectively . . . . . .
(391)
(4,771)
(6,158)
Pension and postretirement (expense) benefit, net of income tax expense (benefit)
of $4,978, $(3,794), and $(16,725) respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,567
(6,291)
(28,426)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income attributable to redeemable noncontrolling interests . . . . . .
1,414
Comprehensive income attributable to Waddell & Reed Financial, Inc. . . . . . . . . $ 155,083
156,497 234,474 278,747
—
278,747
—
234,474
See accompanying notes to consolidated financial statements.
60
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2016, 2015 and 2014
(in thousands)
Accumulated Other
Total
Redeemable
Non
Common Stock
Additional
Shares Amount Paid-in Capital Earnings Stock
Retained Treasury
Balance at December 31, 2013 . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of equity compensation . . . . . . .
Net issuance/forfeiture of nonvested shares . . .
Dividends accrued, $1.45 per share . . . . . . . .
Excess tax benefits from share-based payment
arrangements . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of equity compensation . . . . . . .
Net issuance/forfeiture of nonvested shares . . .
Dividends accrued, $1.75 per share . . . . . . . .
Excess tax benefits from share-based payment
arrangements . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . . . . . . . .
Adoption of consolidation guidance on January
1, 2016 - redeemable noncontrolling interests
in sponsored funds . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Net redemption of redeemable noncontrolling
interests in sponsored funds . . . . . . . . . . . .
Recognition of equity compensation . . . . . . .
Net issuance/forfeiture of nonvested shares . . .
Dividends accrued, $1.84 per share . . . . . . . .
Tax impact of share-based payment
arrangements . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . . . .
99,701 $
—
—
—
—
—
—
—
99,701
—
—
—
—
—
—
—
99,701
—
—
—
—
—
—
997
—
—
—
—
—
—
—
997
—
—
—
—
—
—
—
997
—
—
—
—
—
—
267,406
—
53,912
(21,817)
—
850,600
313,331
232
—
(122,254)
(415,802)
—
—
21,817
—
19,135
—
—
318,636
—
47,256
(39,094)
—
—
—
—
1,041,909
245,536
262
—
(146,099)
—
(131,030)
—
(525,015)
—
—
39,094
—
4,813
—
—
331,611
—
—
—
1,141,608
—
(80,335)
—
(566,256)
—
—
—
146,907
—
—
—
51,382
(84,741)
—
—
132
—
(152,953)
—
—
84,741
—
—
—
—
99,701 $
—
—
—
997
(6,344)
—
—
291,908
—
—
—
1,135,694
—
(49,753)
—
(531,268)
Comprehensive
Income (Loss)
Stockholders’ Controlling
Equity
interest
(15,859)
—
—
—
—
—
—
(34,584)
(50,443)
—
—
—
—
—
—
(11,062)
(61,505)
—
—
—
—
—
—
—
—
8,176
(53,329)
687,342
313,331
54,144
—
(122,254)
19,135
(131,030)
(34,584)
786,084
245,536
47,518
—
(146,099)
4,813
(80,335)
(11,062)
846,455
—
146,907
—
51,514
—
(152,953)
(6,344)
(49,753)
8,176
844,002
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14,330
1,414
(5,091)
—
—
—
—
—
—
10,653
See accompanying notes to consolidated financial statements.
61
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2016, 2015 and 2014
2016
2015
(in thousands)
2014
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
148,321
245,536
313,331
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write down of impaired assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based payment arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments (gain) loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net purchases and sales or maturities of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in trading securities held by consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Cash and cash equivalents - restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to investment companies for securities and payable to customers . . . . . . . . . . . . . . . . . .
Receivables from funds and separate accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and payable to third party brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Purchases of available for sale and equity method securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of available for sale and equity method securities . . . . . . . . . . . . . . . . . . . . .
Additions to property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash of sponsored funds on consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,358
9,749
23,601
51,514
(2,972)
(12,075)
(24,352)
(3,715)
(79,065)
451
35,743
92,565
(97,459)
7,218
2,255
(3,435)
(22,948)
(20,107)
123,647
(72,096)
156,965
(15,691)
6,887
(194)
75,871
16,050
—
43,074
47,518
(4,813)
12,412
(75,160)
(1,410)
—
680
9,715
(3,817)
(5,964)
4,711
(25,111)
(10,864)
(17,510)
(1,097)
233,950
14,754
7,900
64,380
54,144
(19,135)
(7,496)
(38,662)
728
—
1,774
44,824
(75,428)
17,283
(2,643)
(5,568)
(40,958)
21,640
(5,826)
345,042
(27,388)
36,657
(29,610)
—
(2,254)
(22,595)
(166,302)
164,247
(35,606)
—
(1,447)
(39,108)
Cash flows from financing activities:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net redemptions and distributions to redeemable noncontrolling interests in sponsored funds . . . .
Excess tax benefits from share-based payment arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(152,830)
(49,753)
(3,473)
2,972
173
(143,959)
(80,335)
—
4,813
—
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for:
Income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
(202,911)
(3,393)
558,495
555,102
(219,481)
(8,126)
566,621
558,495
76,982
10,289
152,262
10,297
165,189
10,291
(115,263)
(131,030)
—
19,135
—
(227,158)
78,776
487,845
566,621
See accompanying notes to consolidated financial statements.
62
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016, 2015 and 2014
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Amounts in
the accompanying financial statements and notes are rounded to the nearest thousand unless otherwise stated. Certain
amounts in the prior years’ financial statements have been reclassified for consistent presentation.
The Company operates in one business segment as the Company’s management utilizes a consolidated approach
to assess performance and allocate resources.
Consolidation
In the normal course of our business, we sponsor and manage various types of investment products. These
investment products include open-end mutual funds, a closed-end mutual fund, privately offered funds, exchange-traded
managed funds, and a Luxembourg SICAV. When creating and launching a new investment product, we typically fund
the initial cash investment, commonly referred to as “seeding,” so that the investment product can generate an investment
performance track record so that it is able to attract third party investors in the product. Our initial investment in a new
product typically represents 100% of the ownership in that product. We generally redeem our investment in seeded
products when the related product establishes a sufficient track record, when third party investments in the related product
are sufficient to sustain the strategy, or when a decision is made to no longer pursue the strategy. The length of time we
hold a majority interest in a product varies based on a number of factors, including market demand, market conditions and
investment performance. Our exposure to risk in these investment products is generally limited to any equity investment
we have and any earned but uncollected management or other fund-related service fees.
In accordance with financial accounting standards, we consolidate certain sponsored investment products in
which we have a controlling interest or the investment product meets the criteria of a Variable Interest Entity (“VIE”) and
we are deemed to be the primary beneficiary. In order to make this determination, an analysis is performed to determine
if the investment product is a VIE or a Voting Interest Entity (“VOE”). Assessing if an entity is a VIE or VOE involves
judgment and analysis on an entity by entity basis. Factors included in this assessment include the legal organization of
the entity, the Company’s contractual involvement with the entity and any implications resulting from or associated with
related parties’ involvement with the entity.
A VIE is an entity which does not have adequate equity to finance its activities without subordinated financial
support, the equity investors do not have the normal characteristics of equity investors for a potential controlling financial
interest as a group, or the voting rights are not proportional to their obligations to absorb the expected losses or their rights
to receive the expected residual returns of the entity. The Company is deemed to be the primary beneficiary if it absorbs
a majority of the VIE’s expected losses, expected residual returns, or both. If the Company is the primary beneficiary of
a VIE, we are required to consolidate the assets, liabilities, results of operations and cash flows of the VIE into our
consolidated financial statements.
If an entity does not meet the criteria and is not considered a VIE, it is treated as a VOE, which is subject to
traditional consolidation concepts based on ownership rights. Sponsored investments products that are considered VOEs
are consolidated if we have a controlling financial interest in the entity absent substantive investor rights to replace the
investment manager of the entity (kick-out rights).
63
Use of Estimates
GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses in the consolidated financial statements and accompanying notes, and related disclosures of
commitments and contingencies. Estimates are used for, but are not limited to, depreciation and amortization, income
taxes, valuation of assets, pension and postretirement obligations, and contingencies. Management evaluates its estimates
and assumptions on an ongoing basis using historical experience and other factors, including the current economic
environment. Actual results could differ from our estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments. We consider all highly liquid
investments with maturities upon acquisition of 90 days or less to be cash equivalents. Cash and cash equivalents –
restricted represents cash held for the benefit of customers and non-customers segregated in compliance with federal and
other regulations.
Disclosures About Fair Value of Financial Instruments
Fair value of cash and cash equivalents, receivables and payables approximates carrying value. Fair value of
long-term debt is disclosed in Note 7. Fair values for investment securities are based on quoted market prices, where
available. Otherwise, fair values for investment securities are based on Level 2 or Level 3 inputs detailed in Note 3.
Investment Securities and Investments in Sponsored Funds
Our investments are comprised of United States, government obligations, investments in sponsored funds and
sponsored privately offered funds. Sponsored funds, which include the 1940 Act Mutual Funds, IVH, the IGI Funds and
the LLCs, are investments we have made for both general corporate investment purposes and to provide seed capital for
new investment products. The Company has classified its investments in certain sponsored funds as either equity method
investments (when the Company owns between 20% and 50% of the fund) or as available for sale investments (when the
Company owns less than 20% of the fund) as described in Note 3. Investments held by our broker-dealer entities or certain
investments that are anticipated to be purchased and sold on a more frequent basis are classified as trading.
Unrealized holding gains and losses on securities available for sale, net of related tax effects, are excluded from
earnings until realized and are reported as a separate component of comprehensive income. For trading securities,
unrealized holding gains and losses are included in earnings. Realized gains and losses are computed using the specific
identification method for investment securities, other than sponsored funds. For sponsored funds, realized gains and losses
are computed using the average cost method. Substantially all of the Company’s equity method investees are investment
companies which record their underlying investments at fair value. Therefore, under the equity method of accounting, our
share of the investee's underlying net income or loss is predominantly representative of fair value adjustments in the
investments held by the equity method investee. Our share of the investee's net income or loss is based on the most current
information available and is recorded as a net gain or loss on investments within investment and other income (loss).
Our available for sale investments are reviewed each quarter and adjusted for other than temporary declines in
value. We consider factors affecting the issuer and the industry in which the issuer operates, general market trends
including interest rates, and our ability and intent to hold an investment until it has recovered. Consideration is given to
the length of time an investment’s market value has been below carrying value as well as prospects for recovery to carrying
value. When a decline in the fair value of equity securities is determined to be other than temporary, the unrealized loss
recorded net of tax in other comprehensive income is realized as a charge to net income, and a new cost basis is established.
When a decline in the fair value of debt securities is determined to be other than temporary, the amount of the impairment
recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required
to sell the security before recovery of its amortized cost basis less any current-period credit loss. If so, the other than
temporary impairment recognized in earnings is equal to the entire difference between the investment’s amortized cost
basis and its fair value at the balance sheet date. If not, the portion of the impairment related to the credit loss is recognized
in earnings while the portion of the impairment related to other factors is recognized in other comprehensive income, net
of tax.
64
Property and Equipment
Property and equipment are carried at cost. The costs of improvements that extend the life of a fixed asset are
capitalized, while the costs of repairs and maintenance are expensed as incurred. Depreciation and amortization are
calculated and recorded using the straight-line method over the estimated useful life of the related asset (or lease term if
shorter), generally three to 10 years for furniture and fixtures; one to 10 years for computer software; one to five years for
data processing equipment; one to 30 years for buildings; two to 26 years for other equipment; and up to 15 years for
leasehold improvements, which is the lesser of the lease term or expected life.
Software Developed for Internal Use
Certain internal costs incurred in connection with developing or obtaining software for internal use are capitalized
in accordance with ASC 350, “Intangibles – Goodwill and Other Topic.” Internal costs capitalized are included in property
and equipment, net in the consolidated balance sheets, and were $13.3 million and $13.9 million as of December 31, 2016
and 2015, respectively. Amortization begins when the software project is complete and ready for its intended use and
continues over the estimated useful life, generally one to 10 years.
Goodwill and Identifiable Intangible Assets
Goodwill represents the excess of cost over fair value of the identifiable net assets of acquired companies.
Indefinite-lived intangible assets represent advisory and subadvisory management contracts for managed assets obtained
in acquisitions. The Company considers these contracts to be indefinite-lived intangible assets as they are expected to be
renewed without significant cost or modification of terms. Goodwill and indefinite-lived intangible assets are tested for
impairment annually or more frequently if events or circumstances indicate that the carrying value may not be recoverable.
Goodwill and intangible assets require significant management estimates and judgment, including the valuation
determination in connection with the initial purchase price allocation and the ongoing evaluation for impairment.
Additional information related to the indefinite-lived intangible assets is included in Note 6.
Deferred Sales Commissions
We defer certain costs, principally sales commissions and related compensation, which are paid to financial
advisors and broker-dealers in connection with the sale of certain mutual fund shares sold without a front-end load sales
charge. The costs incurred at the time of the sale of Class B shares sold prior to January 1, 2014 are amortized on a straight-
line basis over five years, which approximates the expected life of the shareholders’ investments. Effective January 1,
2014, the Company suspended sales of Class B shares. The costs incurred at the time of the sale of Class C shares are
amortized on a straight-line basis over 12 months. Prior to June 16, 2014, the costs incurred at the time of the sale of
shares for certain fee-based asset allocation products were deferred and amortized on a straight-line basis, not to exceed
three years. We recover deferred sales commissions and related compensation through Rule 12b-1 and other distribution
fees, which are paid on the Class B and Class C shares of the Advisors Funds and Ivy Funds, along with CDSCs paid by
shareholders who redeem their shares prior to completion of the specified holding period (three years for shares of certain
fee-based asset allocation products sold prior to June 16, 2014, six years for a Class B share and 12 months for a Class C
share), as well as through client fees paid on the asset allocation products sold prior to June 16, 2014. Effective June 16,
2014 we no longer assess a CDSC to investors upon early redemption of fee-based asset allocation products and amounts
deferred for sales commissions and related compensation are classified in the prepaid and other current asset and other
non-current assets in our consolidated balance sheet. Should we lose our ability to recover deferred sales commissions
through distribution fees or CDSCs, the value of these assets would immediately decline, as would future cash flows. We
periodically review the recoverability of the deferred sales commission assets as events or changes in circumstances
indicate that their carrying amount may not be recoverable and adjust them accordingly. Impairment adjustments are
recognized in operating income as a component of amortization of deferred sales commissions.
Revenue Recognition
Investment Management and Advisory Fees
We recognize investment management fees as earned over the period in which services are rendered. We charge
the Funds daily based upon average daily net assets under management in accordance with investment management
agreements between the Funds and the Company. The majority of investment and/or advisory fees earned from the IGI
65
Funds and from institutional and separate accounts are charged either monthly or quarterly based upon an average of net
assets under management in accordance with such investment management agreements. The Company may waive certain
fees for investment management services at its discretion, or in accordance with contractual expense limitations, and these
waivers are reflected as a reduction to investment management fees on the consolidated statements of income.
Our investment advisory business receives research products and services from broker-dealers through “soft
dollar” arrangements. Consistent with the “soft dollar” safe harbor established by Section 28(e) of the Securities Exchange
Act of 1934, as amended, the investment advisory business does not have any contractual obligation requiring it to pay for
research products and services obtained through soft dollar arrangements with brokers. As a result, we present “soft dollar”
arrangements on a net basis.
The Company has contractual arrangements with third parties to provide subadvisory services. Investment
advisory fees are recorded gross of any subadvisory payments and are included in investment management fees based on
management’s determination that the Company is acting in the capacity of principal service provider with respect to its
relationship with the Funds. Any corresponding fees paid to subadvisors are included in operating expenses.
Distribution, Underwriter and Shareholder Service Fees
Underwriting and distribution commission revenues resulting from the sale of investment products are recognized
on the trade date. When a client purchases Class A or Class E shares (front-end load), the client pays an initial sales charge
of up to 5.75% of the amount invested. The sales charge for Class A or Class E shares typically declines as the investment
amount increases. In addition, investors may combine their purchases of all fund shares to qualify for a reduced sales
charge. When a client invests in a fee-based asset allocation product, Class I or Y shares are purchased at net asset value,
and we do not charge an initial sales charge.
Under a Rule 12b-1 service plan, the Funds may charge a maximum fee of 0.25% of the average daily net assets
under management for Class B, C, E and Ivy Funds Y shares for expenses paid to broker-dealers and other sales
professionals in connection with providing ongoing services to the Funds’ shareholders and/or maintaining the Funds’
shareholder accounts, with the exception of the Funds’ Class R shares, for which the maximum fee is 0.50% and for the
Class I, R6 and Advisors Funds Y shares, which do not charge a service fee. The Funds’ Class B and Class C shares may
charge a maximum of 0.75% of the average daily net assets under management under a Rule 12b-1 distribution plan to
broker-dealers and other sales professionals for their services in connection with distributing shares of that class. The
Funds’ Class A shares may charge a maximum fee of 0.25% of the average daily net assets under management under a
Rule 12b-1 service and distribution plan for expenses detailed previously. The Rule 12b-1 plans are subject to annual
approval by the Funds’ board of trustees, including a majority of the disinterested members, by votes cast in person at a
meeting called for the purpose of voting on such approval. All Funds may terminate the service and distribution plans at
any time with approval of fund trustees or portfolio shareholders (a majority of either) without penalty.
Fee-based asset allocation revenues are charged monthly based upon average daily net assets under management.
For certain types of investment products, primarily variable annuities, distribution revenues are generally calculated based
upon average daily net assets under management and are recognized monthly. Fees collected from financial advisors for
services related to technology and errors and omissions insurance are recorded in underwriting and distribution fees on a
gross basis, as the Company is the primary obligor in these arrangements.
Shareholder service fees are recognized monthly and are calculated based on the number of accounts or assets
under management as applicable. Other administrative service fee revenues are recognized when contractual obligations
are fulfilled or as services are provided.
Advertising and Promotion
We expense all advertising and promotion costs as the advertising or event takes place. Advertising expense was
$9.4 million, $15.7 million and $15.7 million for the years ended December 31, 2016, 2015 and 2014, respectively, and is
classified in both underwriting and distribution expense and general and administrative expense in the consolidated
statements of income.
66
Leases
The Company leases office space under various leasing arrangements. Most lease agreements contain renewal
options, rent escalation clauses and/or other inducements provided by the landlord. As leases expire, they are typically
renewed or replaced in the ordinary course of business. Rent expense is recorded on a straight-line basis, including
escalations and inducements, over the term of the lease.
Share-Based Compensation
We account for share-based compensation expense using the fair value method. Under the fair value method,
share-based compensation expense reflects the fair value of share-based awards measured at grant date, is recognized over
the service period, and is adjusted each period for anticipated forfeitures. The Company also issues share-based awards to
our financial advisors, who are independent contractors, and to our Board of Directors. Changes in the Company’s share
price result in variable compensation expense over the vesting period of awards granted to our financial advisors and Board
of Directors.
Accounting for Income Taxes
Income tax expense is based on pre-tax financial accounting income, including adjustments made for the
recognition or derecognition related to uncertain tax positions. The recognition or derecognition of income tax expense
related to uncertain tax positions is determined under the guidance as prescribed by “Income Taxes Topic,” ASC 740.
Deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is
recognized for deferred tax assets if, based on available evidence, it is more likely than not that all or some portion of the
asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period
that includes the enactment date.
2. New Accounting Guidance
Accounting Guidance Adopted During Fiscal Year 2016
During the first quarter of 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-02,
“Amendments to the Consolidation Analysis,” which affects all companies required to evaluate consolidation of another
entity. The Company determined that this ASU did not have a material impact on its previous consolidation analysis for
its seeded investments in the 1940 Act Mutual Funds, Canadian Mutual Fund, and LLCs. This ASU did impact the
consolidation analysis for its seeded investments in the IGI Funds. Prior to ASU 2015-02, the amount of ownership interest
held by the Company was determined at the SICAV legal entity level. Under ASU 2015-02, the ownership percentage
and consolidation analysis of the IGI Funds is evaluated at each individual sub-fund. To the extent material, the Company
is required to consolidate any of its seeded investments if ownership, directly or indirectly, represents more than 50%.
During the first quarter of 2016, the Company adopted ASU 2015-03, “Simplifying the Presentation of Debt
Issuance Costs.” This ASU requires that debt issuance costs related to a recognized debt liability be presented in the
balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Prior to
the implementation of this ASU, the Company classified its debt issuance costs related to a recognized debt liability as
either current or non-current assets. Previously, the Company reported $0.2 million of debt issuance costs as current assets
and $0.4 million of debt issuance costs as non-current assets on the balance sheet for the period ended December 31, 2015.
After implementation of ASU 2015-03, the debt issuance costs have been netted with long-term debt, so that long-term
debt is presented as $189.4 million on the balance sheet as of December 31, 2015, to be consistent with the presentation
of the December 31, 2016 balance.
New Accounting Guidance Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue
to which it expects to be entitled for the transfer of promised goods or services to customers. This standard also specifies
the accounting for certain costs to obtain or fulfill a contract with a customer. This ASU will supersede much of the
67
existing revenue recognition guidance in accounting principles generally accepted in the United States and is effective for
annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period; early
application is permitted for the first interim period within annual reporting periods beginning after December 15, 2016.
ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We have evaluated our
population of contracts and concluded that the adoption of this ASU will have an immaterial impact on our consolidated
financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and
Financial Liabilities,” which provides updated guidance on the recognition, measurement, presentation and disclosure of
certain financial assets and financial liabilities. This ASU is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. We have evaluated our financial assets and financial liabilities and
concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and
related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which increases transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. This ASU will be presented using a modified retrospective approach, which includes a
number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted.
We are evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and
related disclosures.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,”
which requires recognition of all excess tax benefits and tax deficiencies as income tax expense or benefit in the income
statement and classification of excess tax benefits along with other income tax cash flows as an operating activity; allows
an entity to either estimate the number of awards that are expected to vest or account for forfeitures when they occur; and
permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. ASU 2016-09 is effective for
annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption
permitted. Upon adoption of this standard on January 1, 2017, the Company will account for forfeitures when they occur.
We do not expect a material impact on our consolidated financial statements and related disclosures upon adoption of this
ASU. However, after the adoption date, recognition of excess tax benefits as income tax benefit and tax deficiencies as
income tax expense in the income statement may result in increased volatility in our provision for income taxes and
effective tax rate.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The
ASU changes the impairment model for most financial assets, and will require the use of an “expected loss” model for
instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit
loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net
presentation of the amount expected to be collected on the financial asset. ASU 2016-13 is effective for fiscal years, and
for interim periods within those fiscal years, beginning after December 15, 2019. We have concluded that the adoption of
this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.”
This ASU eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt
prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising
from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and
beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow
classification, including requirements to allocate certain components of these cash receipts and payments among operating,
investing and financing activities. This ASU is effective for fiscal years, and interim periods within those fiscal years
beginning after December 15, 2017, with early adoption permitted. We are evaluating the estimated impact the adoption
of ASU 2016-15 will have on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” This
ASU is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than
inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when an asset
is sold to an outside party. The amendments in this ASU should be applied on a modified retrospective basis through a
cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU 2016-16 is
68
effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017, with early
adoption permitted. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated
financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted
Cash”. This ASU is intended to reduce diversity in practice by adding or clarifying guidance on classification and
presentation of changes in restricted cash on the statement of cash flows. The amendments in this ASU require that a
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. ASU 2016-16 is effective for fiscal years, and interim periods
within those fiscal years beginning after December 15, 2017, with early adoption permitted. The amendments in this ASU
should be applied retrospectively to all periods presented. We are evaluating the estimated impact the adoption of ASU
2016-18 will have on our consolidated financial statements and related disclosures.
3. Investment Securities
Investment securities at December 31, 2016 and 2015 are as follows:
December 31, December 31,
2016
2015
(in thousands)
Available for sale securities:
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122,806
570
Sponsored privately offered funds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,376
Total available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities:
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
—
101
145,710
29,541
175,365
Equity method securities:
40,552
825
41,377
20
5
87
—
29,701
29,813
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored privately offered funds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity method securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,775
3,234
30,009
Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 328,750
217,380
3,173
220,553
291,743
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for
sale at December 31, 2016:
Amortized Unrealized Unrealized
gains
losses
cost
Fair value
Available for sale securities:
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129,427
265
Sponsored privately offered funds . . . . . . . . . . . .
$ 129,692
828
305
1,133
(7,449) 122,806
570
(7,449) 123,376
—
(in thousands)
69
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for
sale at December 31, 2015:
Amortized Unrealized Unrealized
gains
losses
cost
Fair value
Available for sale securities:
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,800
500
Sponsored privately offered funds . . . . . . . . . . . . . .
$ 47,300
(in thousands)
434
325
759
(6,682)
—
(6,682)
40,552
825
41,377
Mortgage-backed securities, accounted for as trading, and held as of December 31, 2016 mature in 2022.
Investment securities with fair values of $234.4 million, $102.2 million and $301.0 million were sold during
2016, 2015 and 2014, respectively. During 2016, net realized gains of $3.6 million were recognized from the sale of $98.2
million in available for sale securities and net realized losses of $2.3 million were recognized from the sale of $58.7 million
in equity method securities. During 2015, net realized gains of $3.0 million and $0.6 million were recognized from the
sale of $31.6 million in available for sale securities and the sale of $65.9 million in trading securities, respectively, and net
realized losses of $0.5 million were recognized from the sale of $5.3 million in equity method securities. During 2014, net
realized gains of $5.1 million and $4.1 million were recognized from the sale of $149.8 million in available for sale
securities and the sale of $151.2 million in trading securities, respectively.
Sponsored Funds
The Company did not hold a majority interest in any of our sponsored funds as of December 31, 2015. As a result
there are no sponsored funds consolidated in our financial statement for the year ended December 31, 2015. See
“Consolidated Sponsored Funds” below for a description of our investments in certain sponsored funds that were
consolidated during 2016.
During 2015, $160.2 million of investments previously classified as available for sale securities were classified
as equity method securities, representing seed investments in which the Company owned between 20% and 50% of the
fund. As a result, in 2015, $2.1 million of unrealized losses were reclassified from other comprehensive income and
recognized in the consolidated statement of income.
A summary of available for sale sponsored funds with fair values below carrying values at December 31, 2016 is
as follows:
December 31, 2016
Less than 12 months
Unrealized
losses
12 months or longer
Unrealized
Fair value
Fair value
losses
Fair value
Total
Unrealized
losses
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,051
(1,834) 34,182
(5,615) 105,233
(7,449)
(in thousands)
Based upon our assessment of these sponsored funds, the time frame the sponsored funds have been in a loss
position and our intent to hold the sponsored funds until they have recovered, we determined that the recognition of an
other than temporary impairment loss by recognizing these losses through the statement of income was not necessary at
December 31, 2016.
Sponsored Privately Offered Funds
The Company holds voting interests in certain sponsored privately offered funds that are structured as investment
companies in the legal form of LLCs. The Company held investments in these funds totaling $3.8 million and $4.0 million
as of December 31, 2016 and December 31, 2015, respectively, which is our maximum loss exposure.
70
Consolidated Sponsored Funds
There were no consolidated sponsored funds at December 31, 2015. The following table details the balances
related to consolidated sponsored funds at December 31, 2016, as well as the Company’s net interest in these funds:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest in consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,885
145,710
763
(390)
(10,653)
142,315
December 31, 2016
(in thousands)
During the year ended December 31, 2016, we consolidated certain of the 1940 Act Mutual Funds and the IGI
Funds in which we provided initial seed capital at the time of the fund’s formation. When we no longer have a controlling
financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements. We deconsolidated
$44.2 million of these investments from our consolidated balance sheet during the year ended 2016. There was no impact
to the consolidated statement of income as a result of this deconsolidation.
Fair Value
Accounting standards establish a framework for measuring fair value and a three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of the asset. Inputs may be observable or
unobservable and refer broadly to the assumptions that market participants would use in pricing the asset. An individual
investment’s fair value measurement is assigned a level based upon the observability of the inputs that are significant to
the overall valuation. The three-level hierarchy of inputs is summarized as follows:
• Level 1 – Investments are valued using quoted prices in active markets for identical securities.
• Level 2 – Investments are valued using other significant observable inputs, including quoted prices in active
markets for similar securities.
• Level 3 – Investments are valued using significant unobservable inputs, including the Company’s own
assumptions in determining the fair value of investments.
Assets classified as Level 2 can have a variety of observable inputs. These observable inputs are collected and
utilized, primarily by an independent pricing service, in different evaluated pricing approaches depending upon the specific
asset to determine a value. The fair value of municipal bonds is measured based on pricing models that take into account,
among other factors, information received from market makers and broker-dealers, current trades, bid-wants lists,
offerings, market movements, the callability of the bond, state of issuance and benchmark yield curves. The fair value of
corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the
issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to
the issuer. The fair value of equity derivatives is measured based on active market broker quotes, evaluated broker quotes
and evaluated prices from vendors.
Securities’ values classified as Level 3 are primarily determined through the use of a single quote (or multiple
quotes) from dealers in the securities using proprietary valuation models. These quotes involve significant unobservable
inputs, and thus, the related securities are classified as Level 3 securities.
71
The following tables summarize our investment securities as of December 31, 2016 and 2015 that are recognized
in our consolidated balance sheets using fair value measurements based on the differing levels of inputs. There were no
transfers between levels for the years ended December 31, 2016 or 2015.
December 31, 2016
Level 1
Level 2 Level 3
(in thousands)
Other Assets
Not Held at
Fair Value
Total
—
Available for sale securities:
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . $ 122,806
Sponsored privately offered funds measured at
net asset value (1) . . . . . . . . . . . . . . . . . . . . . . .
Trading securities:
Mortgage-backed securities . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . .
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . .
Equity method securities: (2)
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored privately offered funds measured at
net asset value (1) . . . . . . . . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 280,070
101
100,847
29,541
26,775
—
—
—
13
—
44,863
—
—
—
44,876
—
—
—
—
—
—
—
—
—
—
122,806
570
570
—
—
—
—
13
101
145,710
29,541
—
26,775
3,234
3,804
3,234
328,750
December 31, 2015
Level 1
Level 2 Level 3
(in thousands)
Other Assets
Not Held at
Fair Value
Total
—
Available for sale securities:
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . $ 40,552
Sponsored privately offered funds measured at
net asset value (1) . . . . . . . . . . . . . . . . . . . . . . .
Trading securities:
Mortgage-backed securities . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . .
Equity method securities: (2)
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored privately offered funds measured at
net asset value (1) . . . . . . . . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 287,720
—
—
87
29,701
217,380
—
—
—
40,552
—
—
825
825
20
5
—
—
—
—
25
—
—
—
—
—
—
—
—
—
—
—
20
5
87
29,701
—
217,380
3,173
3,998
3,173
291,743
(1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical
expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are
intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance
sheets.
(2) Substantially all of the Company’s equity method investments are investment companies that record their underlying
investments at fair value.
4. Derivative Financial Instruments
In January 2016, the Company implemented an economic hedge program that uses total return swap contracts to
hedge market risk with its investments in certain sponsored funds. As of December 31, 2016, we had 93% of our
investments in sponsored funds, excluding our available for sale portfolio, hedged, 81% of which were hedged with total
return swap contracts. Certain of the consolidated sponsored funds may utilize derivative financial instruments within
their portfolios in pursuit of their stated investment objectives. We do not hedge for speculative purposes.
72
As of December 31, 2016, excluding derivative financial instruments held in certain consolidated sponsored
funds, the Company was party to three total return swap contracts with a combined notional value of $160.2 million. These
derivative instruments are not designated as hedges for accounting purposes. Changes in fair value of the total return swap
contracts are recognized in investment and other income (loss), net on the Company’s consolidated statement of income.
The Company posted $7.1 million in cash collateral with the counterparties of the total return swap contracts as
of December 31, 2016. The cash collateral is included in customers and other receivables on the Company’s consolidated
balance sheet. The Company does not record its fair value in derivative transactions against the posted collateral; instead
the market appreciation or depreciation is included in other current assets or liabilities, respectively, on the Company’s
consolidated balance sheets.
The following table presents the fair value of the derivative financial instruments, excluding derivative financial
instruments held in certain consolidated sponsored funds as of December 31, 2016:
December 31, 2016
Balance sheet
location
Fair value
(in thousands)
Total return swap contracts . . . . . . . . . . . . . . . . . . . Other current liabilities $
475
The following is a summary of net losses recognized in income for the year ended December 31, 2016:
Income statement
location
Year ended
December 31, 2016
(in thousands)
Total return swap
contracts . . . . . . . . Investment and other income (loss)
$
(31,974)
5. Property and Equipment
A summary of property and equipment at December 31, 2016 and 2015 is as follows:
2016
2015
(in thousands)
Estimated
useful lives
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . $ 22,426 21,741 1 - 15 years
29,462 3 - 10 years
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,901 2 - 26 years
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96,310 1 - 10 years
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,335
Data processing equipment . . . . . . . . . . . . . . . . . . . . . . .
1 - 5 years
12,860 1 - 30 years
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,804
208,484 205,413
Property and equipment, at cost . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . .
(99,979)
(106,035)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . $ 102,449 105,434
30,501
20,616
100,941
19,458
11,699
2,843
Depreciation expense was $18.4 million, $16.0 million and $14.6 million during the years ended December 31,
2016, 2015 and 2014, respectively.
At December 31, 2016, we had property and equipment under capital leases with a cost of $1.8 million and
accumulated depreciation of $0.8 million. At December 31, 2015, we had property and equipment under capital leases
with a cost of $2.1 million and accumulated depreciation of $1.1 million.
73
6. Goodwill and Identifiable Intangible Assets
Goodwill represents the excess of cost over fair value of the identifiable net assets of acquired companies.
Indefinite-lived intangible assets represent advisory and subadvisory management contracts for managed assets obtained
in acquisitions. Goodwill and identifiable intangible assets (all considered indefinite-lived) at December 31, 2016 and
2015 are as follows:
December 31, December 31,
2016
2015
(in thousands)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,970
106,970
Mutual fund management advisory contracts . . . . . . . . . . . . . . . . . .
Mutual fund management subadvisory contract . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
38,699
2,700
200
41,599
42,748
8,400
—
51,148
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 148,569
158,118
We performed a review of the intangible asset associated with the subadvisory contract during the third quarter
of 2016 due to a recent decline in the related assets under management. The decline can be attributed to a realignment of
fund offerings. We recorded an impairment charge of $5.7 million in the third quarter of 2016 to this intangible asset as a
result of the reduction in assets and associated cash flows, and reduced the associated deferred tax liability by $2.1 million.
During the fourth quarter of 2016, we delayed our strategic initiative to globalize our distribution network for the
IGI Funds. As a result of this decision, the valuation model for the subadvisory contract associated with the IGI Funds was
updated. Based upon the updated valuation model, we determined that the fair value of this intangible asset for the
subadvisory contract was less than the carrying amount, creating an impairment of $4.0 million.
7. Indebtedness
On August 31, 2010, the Company entered into an agreement to complete a $190.0 million private placement of
the Senior Notes. Interest is payable semi-annually in January and July of each year. The most restrictive provisions of the
agreement require the Company to maintain a consolidated leverage ratio not to exceed 3.0 to 1.0 for four consecutive
quarters and a consolidated interest coverage ratio of not less than 4.0 to 1.0 for four consecutive quarters. The Company
was in compliance with these covenants for all periods presented. As of December 31, 2016, the Company’s consolidated
leverage ratio was 0.6 to 1.0, and consolidated interest coverage ratio was 27.5 to 1.0.
The Company entered into the Credit Facility with various lenders, effective June 28, 2013, which provides for
initial borrowings of up to $125.0 million and replaced the Company’s previous revolving credit facility. Lenders could,
at their option upon the Company’s request, expand the Credit Facility to $200.0 million. At December 31, 2016 and 2015,
there were no borrowings outstanding under the facility. Borrowings under the Credit Facility bear interest at various rates
including adjusted LIBOR or an alternative base rate plus, in each case, an incremental margin based on the Company’s
credit rating. The Credit Facility also provides for a facility fee on the aggregate amount of commitments under the
revolving facility (whether or not utilized). The facility fee is also based on the Company’s credit rating level. The Credit
Facility’s covenants match those outlined above for the Senior Notes.
Debt is reported at its carrying amount in the consolidated balance sheets. The fair value of the Company’s
outstanding indebtedness is approximately $200.7 million at December 31, 2016 compared to the carrying value net of
debt issuance costs of $189.6 million. Fair value is calculated based on Level 2 inputs.
74
8. Income Taxes
The provision for income taxes from continuing operations for the years ended December 31, 2016, 2015 and
2014 consists of the following:
Current taxes:
2016
2015
(in thousands)
2014
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,711 142,576 161,863
14,206
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
176,104
728
176,832
7,174
17
79,902
(3,715)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . $ 76,187
12,800
38
155,414
(1,410)
154,004
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The following table reconciles the statutory federal income tax rate with our effective income tax rate from
continuing operations for the years ended December 31, 2016, 2015 and 2014:
Statutory federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal tax benefits . . . . . . . . . . . . . . . .
State tax incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance on losses capital in nature . . . . . . . . . . . . . . .
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2014
2015
35.0 % 35.0 % 35.0 %
2.0
2.2
(0.1)
(0.3)
0.9
(3.4)
0.4
0.7
33.9 % 38.5 % 36.1 %
2.1
(0.2)
(1.0)
0.2
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred
tax assets at December 31, 2016 and 2015 are as follows:
2016
2015
(in thousands)
Deferred tax liabilities:
Deferred sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets:
(484)
(13,906)
(12,137)
(11,118)
(1,968)
(39,613)
10,678
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,204
Additional pension and postretirement liability . . . . . . . . . . . . . . . . . .
7,058
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,834
Unrealized losses on investment securities and partnerships . . . . . . .
3,920
Capital loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,516
Nonvested stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,115
Unused state tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,716
State net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . .
3,430
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82,471
Total gross deferred assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11,428)
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,430
(2,337)
(9,775)
(14,058)
(13,705)
(2,231)
(42,106)
11,015
32,183
5,851
7,426
5,919
20,608
1,470
5,666
3,463
93,601
(18,803)
32,692
The Company has a deferred tax asset for a capital loss carryforward that is available to offset current and future
capital gains. As of December 31, 2016 and 2015, the deferred tax asset, net of federal tax effect, related to this capital
loss carryforward is $3.9 million and $5.9 million, respectively. The capital loss carryforward, if not utilized, will expire
in 2018. Other deferred tax assets that could generate potential future capital losses if realized include unrealized losses
on investment securities and partnerships of $1.8 million and $7.4 million as of December 31, 2016 and 2015, respectively.
75
Due to the character of the losses and the limited carryforward period permitted by law upon realization, the Company
may not realize the full tax benefit of the capital losses. Management believes it is not more likely than not that the
Company will generate sufficient future capital gains to realize the full benefit of these capital losses and accordingly, a
valuation allowance in the amount of $5.8 million and $13.3 million has been recorded at December 31, 2016 and 2015,
respectively.
Certain subsidiaries of the Company have net operating loss carryforwards in certain states in which these
companies file on a separate company basis. The deferred tax asset, net of federal tax effect, relating to these carryforwards
as of December 31, 2016 and 2015 is approximately $5.7 million. The carryforwards, if not utilized, will expire between
2017 and 2036. Management believes it is not more likely than not that these subsidiaries will generate sufficient future
taxable income in these states to realize the benefit of the net operating loss carryforwards and, accordingly, a valuation
allowance in the amount of $5.6 million and $5.5 million has been recorded at December 31, 2016 and 2015, respectively.
The Company has state tax credit carryforwards of $2.1 million and $1.5 million as of December 31, 2016 and
2015, respectively. Of these state tax credit carryforwards, $1.9 million will expire between 2024 and 2032 if not utilized
and $0.2 million will expire in 2026 if not utilized. The Company anticipates these credits will be fully utilized prior to
their expiration date.
As of January 1, 2016, the Company had unrecognized tax benefits, including penalties and interest, of $11.9
million ($8.7 million net of federal benefit) that, if recognized, would impact the Company’s effective tax rate. As of
December 31, 2016, the Company had unrecognized tax benefits, including penalties and interest, of $11.5 million ($8.4
million net of federal benefit) that, if recognized, would impact the Company’s effective tax rate. The unrecognized tax
benefits that are not expected to be settled within the next 12 months are included in other liabilities in the accompanying
consolidated balance sheets; unrecognized tax benefits that are expected to be settled within the next 12 months are
included in income taxes payable; and unrecognized tax benefits that reduce a net operating loss, similar tax loss, or tax
credit carryforward are presented as a reduction to noncurrent deferred income taxes.
The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to
classify these amounts as income taxes. As of January 1, 2016, the total amount of accrued interest and penalties related
to uncertain tax positions recognized in the consolidated balance sheet was $3.4 million ($2.8 million net of federal
benefit). The total amount of penalties and interest, net of federal benefit, related to tax uncertainties recognized in the
statement of income for the period ended December 31, 2016 was $0.2 million. As of December 31, 2016, the Company
had total accrued penalties and interest related to uncertain tax positions of $3.8 million ($3.1 million net of federal benefit)
in the consolidated balance sheet, which is included in the total unrecognized tax benefits described above.
The following table summarizes the Company's reconciliation of unrecognized tax benefits, excluding penalties
and interest, for the years ended December 31, 2016, 2015 and 2014:
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,448 8,105 9,013
Increases during the year:
Gross increases - tax positions in prior period . . . . . . . . . . . . .
Gross increases - current-period tax positions . . . . . . . . . . . . .
465 1,401
700
494
433
656
Decreases during the year:
2016
2015
(in thousands)
2014
Gross decreases - tax positions in prior period . . . . . . . . . . . .
Decreases due to settlements with taxing authorities . . . . . . .
Decreases due to lapse of statute of limitations . . . . . . . . . . . .
(308)
(486)
(964)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,734 8,448
(167)
(21)
(1,485)
(192)
(877)
(928)
8,105
In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In
addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax
filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions.
During 2016, the Company settled two open tax years that were undergoing audit by a state jurisdiction in which the
Company operates. During 2015, the Company settled three open tax years that were undergoing audit by a state
jurisdiction in which the Company operates. During 2014, the Company settled six open tax years that were undergoing
audit by state jurisdictions in which the Company operates. The Company is currently under federal audit for the 2014
76
tax year. The 2013, 2015, and 2016 federal income tax returns are open tax years that remain subject to potential future
audit. State income tax returns for all years after 2012 and, in certain states, income tax returns for 2012, are subject to
potential future audit by tax authorities in the Company’s major state tax jurisdictions.
9. Pension Plan and Postretirement Benefits Other Than Pension
We provide a non-contributory retirement plan that covers substantially all employees and certain vested
employees of our former parent company (the “Pension Plan”). Benefits payable under the Pension Plan are based on
employees’ years of service and compensation during the final ten years of employment.
During the third quarter of 2016, the Company offered eligible terminated, vested pension plan participants an
option to elect a one-time voluntary lump sum window distribution equal to the present value of the participant’s pension
benefit, in settlement of all future pension benefits to which they would otherwise have been entitled. This offer was made
in an effort to reduce pension obligations and ongoing annual pension expense. Payments were distributed to participants
who accepted the lump sum offer in December 2016 from the assets of the Pension Plan. The Company recognized a non-
cash settlement charge of $20.7 million in the fourth quarter of 2016. The charge was actuarially determined based on the
acceleration of the recognition of the accumulated unrecognized actuarial loss associated with the Pension Plan.
We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially
all employees, as well as W&R advisors, who are independent contractors. The medical plan is contributory with
participant contributions adjusted annually. The medical plan does not provide for post age 65 benefits with the exception
of a small group of employees that were grandfathered when such plan was established. During the third quarter of 2016,
the Company amended this plan to discontinue the availability of coverage for any individuals who retire after December
31, 2016. Qualified employees who retired on or before December 31, 2016 may continue to participate in retiree coverage
under the plan. The plan amendment resulted in an $8.5 million curtailment gain, recorded as part of net other
postretirement benefit costs.
77
A reconciliation of the funded status of these plans and the assumptions related to the obligations at December 31,
2016, 2015 and 2014 are as follows:
Pension Benefits
Other
Postretirement Benefits
2016
2015
2014
2016
2015
2014
(in thousands)
Change in projected benefit obligation:
Net benefit obligation at beginning of year . . . . . $ 210,783
12,199
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,432
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(52,288)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
795
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . .
—
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Retiree contributions . . . . . . . . . . . . . . . . . . . . . . .
Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Net benefit obligation at end of year . . . . . . . . . . . $ 180,921
208,085 172,105
10,084
12,080
8,395
8,420
(8,733)
(10,184)
26,410
(7,618)
(176)
—
—
—
—
—
208,085
210,783
9,902
8,421
910
555
397
297
(674)
(505)
1,790 (2,632)
—
349
—
8,421
—
532
(8,475)
2,446
8,172
719
397
(527)
760
—
381
—
9,902
The accumulated benefit obligation for the Pension Plan was $150.1 million and $177.1 million at December 31,
2016 and 2015, respectively.
Pension Benefits
2015
2016
2014
Other
Postretirement Benefits
2015
2014
2016
Change in plan assets:
Fair value of plan assets at beginning of year . . $ 173,885
2,932
Actual return on plan assets . . . . . . . . . . . . . . . . .
20,000
Employer contributions . . . . . . . . . . . . . . . . . . . .
Retiree contributions . . . . . . . . . . . . . . . . . . . . . .
—
(52,288)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year. . . . . . . $ 144,529
Funded status at end of year . . . . . . . . . . . . . . . . . . . $ (36,392)
175,548
(11,479)
20,000
—
(10,184)
173,885
(36,898)
170,430
(6,149)
20,000
—
(8,733)
175,548
(32,537)
—
—
142
532
(674)
—
(2,446)
—
—
156
349
(505)
—
(8,421)
—
—
146
381
(527)
—
(9,902)
(in thousands)
78
2016
Pension Benefits
2015
2014
2016
Other
Postretirement Benefits
2015
2014
(in thousands, except percentage data)
Amounts recognized in the statement of
financial position:
—
Current liabilities . . . . . . . . . . . . . . . . . . . $
Noncurrent liabilities . . . . . . . . . . . . . . . .
(36,392)
Net amount recognized at end of year . . $ (36,392)
Amounts not yet reflected in net periodic
benefit cost and included in accumulated
other comprehensive income:
Transition obligation . . . . . . . . . . . . . . . . $
Prior service credit (cost) . . . . . . . . . . . . .
Accumulated gain (loss) . . . . . . . . . . . . .
Accumulated other comprehensive
(11)
(346)
(73,775)
—
(36,898)
(36,898)
—
(32,537)
(32,537)
(458)
(1,988)
(2,446)
(316)
(8,105)
(8,421)
(279)
(9,623)
(9,902)
(16)
(720)
(88,882)
(21)
(1,179)
(75,681)
—
6
954
—
2
2,897
—
(17)
265
income (loss) . . . . . . . . . . . . . . . . . . . . .
(74,132)
(89,618)
(76,881)
960
2,899
248
Cumulative employer contributions in
excess of (less than) net periodic
benefit cost . . . . . . . . . . . . . . . . . . . . . . .
37,740
Net amount recognized at end of year . . $ (36,392)
52,720
(36,898)
44,344
(32,537)
(3,406)
(2,446)
(11,320)
(8,421)
(10,150)
(9,902)
Weighted average assumptions used to
determine benefit obligation at
December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . .
4.39 %
5.12 %
4.60 %
5.12 %
4.13 %
5.12 %
3.46 %
4.44 %
Not applicable
4.07 %
The discount rate assumption used to determine the pension and other postretirement benefits obligations was
based on the Aon Hewitt AA Only Above Median Yield Curve. This discount rate was determined separately for each
plan by plotting the expected benefit payments from each plan against a yield curve of high quality, zero coupon bonds
and calculating the single rate that would produce the same present value of liabilities as the yield curve.
Our Pension Plan asset allocation at December 31, 2016 and 2015 is as follows:
Percentage of
Plan Assets at
Percentage of
Plan Assets at
December 31, 2016 December 31, 2015
Plan assets by category
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gold bullion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18 %
49 %
17 %
10 %
6 %
100 %
24 %
53 %
15 %
5 %
3 %
100 %
The primary investment objective is to maximize growth of the Pension Plan assets to meet the projected
obligations to the beneficiaries over a long period of time and to do so in a manner that is consistent with the Company’s
earnings strength and risk tolerance. Asset allocation is the most important decision in managing the assets and is reviewed
regularly. The asset allocation policy considers the Company’s financial strength and long-term asset class risk/return
expectations since the obligations are long-term in nature. As of December 31, 2016, our Pension Plan assets were invested
in our Asset Strategy investment style and are managed by our in-house investment professionals.
Asset Strategy invests in the domestic or foreign market that is believed to offer the greatest probability of return
or, alternatively, that provides the highest degree of safety in uncertain times. This style may allocate its assets among
stocks, bonds and short-term investments and since the allocation is dynamically managed and able to take advantage of
opportunities as they are presented by the market, there is not a predetermined asset allocation. Dependent on the outlook
for the U.S. and global economies, our investment managers make top-down allocations among stocks, bonds, cash,
precious metals and currency markets around the globe. After determining allocations, we seek the best opportunities
79
within each market. Derivative instruments play an important role in this style’s investment process to manage risk and
maximize stability of the assets in the portfolio. At December 31, 2016, the Pension Plan had a significant weighting of
plan assets invested in equity securities, a concentration not typical of a classic pension plan.
Risk management is primarily the responsibility of the investment portfolio manager, who incorporates it with
day-to-day research and management. Although investment flexibility is essential to this style’s investment process, the
Pension Plan does not invest in a number of asset classes that are commonly referred to as alternative investments; namely
venture capital, direct real estate properties, timber, or oil, gas or other mineral explorations or development programs or
leases. The Pension Plan also has a number of specific guidelines that serve to manage investment risk by placing limits
on net securities exposure and concentration of assets within specific companies or industries.
We determine the fair value of our Pension Plan assets using broad levels of inputs as defined by related
accounting standards and categorized as Level 1, Level 2 or Level 3, as described in Note 3. The following tables
summarize our Pension Plan assets as of December 31, 2016 and 2015. There were no transfers between levels for the
years ended December 31, 2016 or 2015.
2016
Equity securities:
Level 1
Level 2 Level 3
(in thousands)
Total
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,159
24,622
International . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity derivatives . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Fixed income securities:
—
—
12
—
—
—
71,159
24,622
12
Mortgage-backed securities . . . . . . . . . . . . . . . .
U.S.treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bond . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Bonds . . . . . . . . . . . . . . . . . . . . . . . . . .
Gold bullion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . .
Cash and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
8,420
10
4,801
526
8,897
—
104,201 14,246
10
—
4,801
—
526
—
8,897
—
—
8,420
— 118,447
26,082
$ 144,529
2015
Equity securities:
Level 1
Level 2 Level 3
Total
(in thousands)
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,037
25,822
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Fixed income securities:
—
—
280
—
—
—
92,037
25,822
280
Mortgage-backed securities . . . . . . . . . . . . . . . . .
U.S.treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gold bullion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . . .
Cash and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
5,226
123,085
11
8,113
—
8,404
11
—
8,113
—
—
5,226
— 131,489
42,396
$ 173,885
The following table summarizes the activity of plan assets categorized as Level 3 for the years ended
December 31, 2016 and 2015:
Level 3 plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Level 3 plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
—
3,402
(3,432)
30
—
2016
2015
(in thousands)
80
The 7.50% expected long-term rate of return on Pension Plan assets reflects management’s expectations of
long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligations.
The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering
historical returns, asset allocation and investment strategy. The plan expects a relatively high return because of the types
of investments the portfolio incorporates, the long-term success the portfolio managers have had with generating returns
in excess of passive management in those types of investments, and the past history of returns. The ability to use a high
concentration of equities, especially international equities, presents portfolio managers the opportunity to earn higher
returns than other investment strategies that are restricted to owning lower returning asset classes.
The components of net periodic pension and other postretirement costs consisted of the following for the years
ended December 31, 2016, 2015 and 2014:
Pension Benefits
2015
2016
Other
Postretirement Benefits
2014
2016
2015
2014
(in thousands)
Components of net periodic benefit cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,199
9,432
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,927)
Expected return on plan assets . . . . . . . . . . . . . . . . .
6,215
Actuarial (gain) loss amortization . . . . . . . . . . . . . . .
374
Prior service cost amortization . . . . . . . . . . . . . . . . .
5
Transition obligation amortization . . . . . . . . . . . . . .
20,681
Settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,979
12,080
8,420
10,084
8,395
(14,510) (14,016)
1,496
468
5
—
—
910
555
397
297
—
—
—
(153)
19
4
—
—
—
—
—
(8,475)
6,432 (7,772) 1,326
5,171
459
5
—
—
11,625
719
397
—
(17)
55
—
—
—
1,154
(1) For the year ended December 31, 2016, $19.6 million of net periodic pension and other postretirement benefit
costs were included in compensation and related costs and $7.6 million included in underwriting and distribution
expense.
The estimated net actuarial loss, prior service cost and net transition obligation for the Pension Plan that will be
amortized from accumulated other comprehensive income into net periodic benefit cost in 2017 are $5.3 million, $123
thousand and $5 thousand, respectively. The estimated net actuarial gain and prior service credit for the postretirement
medical plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2017
are $180 thousand and $4 thousand, respectively.
81
The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31,
2016, 2015 and 2014 are as follows:
2014
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.60 % 4.13 % 4.97 % 4.44 % 4.07 % 4.94 %
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.50 % 7.75 % 7.75 %
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.12 % 5.12 % 5.12 %
Not applicable
Not applicable
2016
2016
2014
Pension Benefits
2015
Other
Postretirement Benefits
2015
We expect the following benefit payments to be paid, which reflect future service as appropriate:
Other
Pension
Benefits
Postretirement
Benefits
(in thousands)
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,492
7,066
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,496
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,240
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,613
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,588
2022 through 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 102,495
458
416
404
319
237
559
2,393
Our policy with respect to funding the Pension Plan is to fund at least the minimum required by the Employee
Retirement Income Security Act of 1974, as amended, and not more than the maximum amount deductible for tax purposes.
All contributions made to the Pension Plan for 2016, 2015 and 2014 were voluntary. A contribution of $10 million was
made to the Pension Plan in February 2017 and no further contributions are planned for 2017.
All Company contributions to other postretirement medical benefits are voluntary, as the postretirement medical
plan is not funded and is not subject to any minimum regulatory funding requirements. The contributions for each year
represent claims paid for medical expenses, and we anticipate making the 2017 expected contribution with cash generated
from operations. Contributions by participants to the postretirement plan were $532 thousand, $349 thousand and
$381 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.
For measurement purposes, the initial health care cost trend rate was 6.82% for 2016, 7.55% for 2015 and 8.04%
for 2014. The health care cost trend rate reflects anticipated increases in health care costs. The initial assumed growth rate
of 6.82% for 2016 is assumed to gradually decline over the next 9 years to a rate of 4.5%. The effect of a 1% annual
increase in assumed cost trend rates would increase the December 31, 2016 accumulated postretirement benefit obligation
by approximately $108 thousand, and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost by approximately $133 thousand. The effect of a 1% annual decrease in assumed cost trend
rates would decrease the December 31, 2016 accumulated postretirement benefit obligation by approximately
$97 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by
approximately $112 thousand.
We also sponsored the Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan, as amended
and restated (the “SERP”), a non-qualified deferred compensation plan covering eligible employees. The SERP was
adopted to supplement the annual pension benefit for certain senior executive officers that the Pension Plan was prevented
from providing because of compensation and benefit limits in the Internal Revenue Code (the “IRC”).
Each calendar year, the Compensation Committee of the Board of Directors (the “Compensation Committee”)
credited participants’ SERP accounts with (i) an amount equal to 4% of the participant’s base salary, less the amount of
the maximum employer matching contribution available under our 401(k) plan, and (ii) a non formula award, if any, as
determined by the Compensation Committee in its discretion. There were no discretionary awards made to participants
during 2016, 2015 or 2014. Additionally, each calendar year, participants’ accounts were credited (or charged) with an
amount equal to the performance of certain hypothetical investment vehicles since the last preceding year. Upon a
participant’s separation, or at such other time based on a pre-existing election by a participant, benefits accumulated under
the SERP are payable in installments or in a lump sum. As of December 31, 2016 and 2015, the aggregate liability to
82
participants was $3.8 million. Following a lump sum payment of $3.8 million in February 2017 to the sole remaining
participant in the SERP, the Board of Directors terminated the SERP.
At December 31, 2016, the accrued pension and postretirement liability recorded in the consolidated balance
sheet was comprised of accrued pension costs of $36.4 million and a liability for postretirement benefits in the amount of
$2.0 million. The accrued liability for SERP benefits of $3.8 million and the current portion of postretirement liability of
$0.4 million is included in other current liabilities on the consolidated balance sheet. At December 31, 2015, the accrued
pension and postretirement liability recorded on the consolidated balance sheet was comprised of accrued pension costs
of $36.9 million, a liability for postretirement benefits in the amount of $8.1 million and an accrued liability for SERP
benefits of $3.8 million. The current portion of postretirement liability of $0.3 million is included in other current liabilities
on the consolidated balance sheet.
10. Employee Savings Plan
We sponsor a defined contribution plan that qualifies under Section 401(k) of the IRC to provide retirement
benefits to substantially all of our employees. As allowed under Section 401(k), the plan provides tax-deferred salary
deductions for eligible employees. Our matching contributions to the plan for the years ended December 31, 2016, 2015
and 2014 were $6.8 million, $6.6 million and $6.4 million, respectively.
11. Stockholders’ Equity
Earnings per Share
For the years ended December 31, 2016, 2015 and 2014, earnings per share were computed as follows:
2016
2015
2014
Net income attributable to Waddell & Reed Financial, Inc. . . . . . . . . . . . . . . . . . $ 146,907 245,536 313,331
Weighted average shares outstanding, basic and diluted . . . . . . . . . . . . . . . . . . . .
82,668
83,499
84,485
Earnings per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.78
2.94
3.71
Dividends
We declared dividends on our common stock of $1.84 per share, $1.75 per share and $1.45 per share for the years
ended December 31, 2016, 2015 and 2014, respectively. The Board of Directors approved a quarterly dividend on its
common stock of $0.46 per share payable on February 1, 2017 to stockholders of record as of January 11, 2017. As of
December 31, 2016 and 2015, other current liabilities included $38.2 million and $38.1 million, respectively, for dividends
payable to stockholders.
Common Stock Repurchases
The Board of Directors has authorized the repurchase of our common stock in the open market and/or private
purchases. The acquired shares may be used for corporate purposes, including as shares issued to employees in our
stock-based compensation programs. There were 2,320,726 shares, 1,955,509 shares and 2,252,152 shares repurchased in
the open market or privately during the years ended December 31, 2016, 2015 and 2014, respectively. The repurchased
shares include; 423,726 shares, 432,353 shares and 599,340 shares repurchased from employees who elected to tender
shares to cover their minimum tax withholdings with respect to vesting of stock awards during the years ended
December 31, 2016, 2015 and 2014, respectively.
83
Accumulated Other Comprehensive Loss
The following table summarizes other comprehensive income (loss) activity for the years ended December 31,
2016 and 2015.
Year ended December 31, 2016
Unrealized
gains (losses)
on investment
securities
Change in
valuation
allowance for
unrealized
gains
(losses) on
investment
securities
Pension and
postretirement
benefits
unrealized
gains (losses)
Total
accumulated
other
comprehensive
income (loss)
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss) before reclassification . .
Amount reclassified from accumulated other comprehensive
(in thousands)
(3,729)
1,948
(3,240)
1,195
(54,536)
(8,538)
(61,505)
(5,395)
income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive income (loss) . . . . .
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . $
(2,191)
(243)
(3,972) $
(1,343)
(148)
(3,388)
17,105
8,567
(45,969)
13,571
8,176
(53,329)
Year ended December 31, 2015
Unrealized
gains (losses)
on investment
securities
Change in
valuation
allowance for
unrealized
gains
(losses) on
investment
securities
Pension and
postretirement
benefits
unrealized
gains (losses)
Total
accumulated
other
comprehensive
income (loss)
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive loss before reclassification . . . . . . . . . .
Amount reclassified from accumulated other comprehensive
(in thousands)
(727)
(2,464)
(1,471)
(1,463)
(48,245)
(9,897)
(50,443)
(13,824)
loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive loss . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . $
(538)
(3,002)
(3,729) $
(306)
(1,769)
(3,240)
3,606
(6,291)
(54,536)
2,762
(11,062)
(61,505)
Reclassifications from accumulated other comprehensive income and included in net income are summarized in
the table that follows for the years ended December 31, 2016 and 2015:
For the year ended December 31, 2016
Tax
(expense)
benefit
(in thousands)
Pre-tax
Net of tax
Statement of income line item
Reclassifications included in net
income:
Sponsored funds investment gains $
Valuation allowance . . . . . . . . . . . .
Amortization and settlement of
pension and postretirement
benefits . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,489
—
(1,298)
1,343
2,191 Investment and other income (loss)
1,343 Provision for income taxes
(27,126)
(23,637)
10,021
10,066
(17,105)
(13,571)
Underwriting and distribution
expense and Compensation and
related costs
84
For the year ended December 31, 2015
Tax
(expense)
benefit
(in thousands)
Pre-tax
Net of tax
Statement of income line item
Reclassifications included in net
income:
Realized gain on sale of sponsored
investment securities . . . . . . . . . . . $
Valuation allowance . . . . . . . . . . . . .
850
—
(312)
306
538 Investment and other income (loss)
306 Provision for income taxes
Amortization of pension and
postretirement benefits . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(5,654)
(4,804)
2,048
2,042
(3,606)
(2,762)
Underwriting and distribution
expense and Compensation and
related costs
12. Redeemable Noncontrolling Interests
The earnings related to redeemable noncontrolling interests included in net income for the year ended December
31, 2016 were $1.4 million.
Noncontrolling interests in consolidated sponsored funds may fluctuate from period to period and are impacted
by changes in the Company’s percentage of ownership in sponsored funds, changes in third party investment in sponsored
funds and market volatility in the sponsored funds’ underlying investments.
Year ended
December 31, 2016
(in thousands)
Redeemable noncontrolling interests in sponsored funds upon adoption of new consolidation
accounting guidance on January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Redeemable noncontrolling interests in sponsored funds consolidated during the period . . . . . . .
Redeemable noncontrolling interests ownership change during the period . . . . . . . . . . . . . . . . . . .
Redeemable noncontrolling interests deconsolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance of redeemable noncontrolling interest in consolidated sponsored funds . . . . . . . . $
14,330
18,249
20,894
(44,234)
1,414
10,653
13. Share-Based Compensation
During 2016 the Company utilized one stock based compensation plan: the Company 1998 Stock Incentive Plan,
as amended and restated (the “SI Plan”). Two other plans, the Company 1998 Executive Stock Award Plan, as amended
and restated, and the Company 1998 Non Employee Director Stock Award Plan, as amended and restated, had no
outstanding awards, and, effective February 2016, the Board of Directors terminated both plans.
The SI Plan allows us to grant equity compensation awards, including, among other awards, and nonvested stock
as part of our overall compensation program to attract and retain key personnel and encourage a greater personal financial
investment in the Company, thereby promoting the long-term growth of the Company. In April 2016, our stockholders
approved amendments to the SI Plan to, among other things, increase by 5.6 million the number of shares available for
awards. Following those amendments, a maximum of 35.6 million shares of common stock are authorized for issuance
under the SI Plan and as of December 31, 2016, 3,467,465 shares of common stock were available for issuance under the
SI Plan. In addition, we may make incentive payments under the Company 2003 Executive Incentive Plan, as amended
and restated (the “EIP”) in the form of cash, stock options, nonvested stock or a combination thereof. Incentive awards
paid under the EIP in the form of stock options or nonvested stock are issued out of shares reserved for issuance under the
SI Plan. Generally, shares of common stock covered by terminated, surrendered or cancelled options, by forfeited
nonvested stock, or by the forfeiture of other awards that do not result in issuance of shares of common stock are again
available for awards under the plan from which they were terminated, surrendered, cancelled or forfeited.
Nonvested stock awards are valued on the date of grant, have no purchase price and generally vest over four years
in 331/3% increments on the second, third and fourth anniversaries of the grant date. However, nonvested stock awards
granted on December 31, 2016 vest in 25% increments on the first anniversary of the grant date. The Company also issues
85
nonvested stock awards to W&R financial advisors who are independent contractors. These awards have the same terms
as awards issued to employees; however, changes in the Company’s share price result in variable compensation expense
over the vesting period. Nonvested shares are forfeited upon the termination of employment with or service to the
Company, as applicable, or service on the Board of Directors, dependent upon the circumstances of termination. Except
for restrictions placed on the transferability of nonvested stock, holders of nonvested stock have full stockholders’ rights
during the term of restriction, including voting rights and the rights to receive cash dividends.
A summary of nonvested share activity and related fair value for the year ended December 31, 2016 follows:
Weighted
Average
Grant Date
Stock Shares Fair Value
3,405,207 $ 50.09
Nonvested at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.89
2,700,977
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48.70
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,207,677)
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40.96
(112,404)
4,786,103 $ 34.74
Nonvested at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested
For the years ended December 31, 2016, 2015 and 2014, compensation expense related to nonvested stock totaled
$51.5 million, $47.5 million and $54.1 million, respectively.
The income tax benefit from the compensation expense related to nonvested stock was $19.2 million, $17.6
million and $20.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. These benefits will be
recognized upon vesting and may increase or decrease depending on the fair value of the shares on the date of vesting. As
of December 31, 2016, the remaining unamortized expense of $112.5 million is expected to be recognized over a weighted
average period of 2.7 years.
The total fair value of shares vested (at vest date) during the years ended December 31, 2016, 2015 and 2014,
was $26.7 million, $53.9 million and $104.8 million, respectively. The Company withholds a portion of each employee’s
vested shares to satisfy the minimum tax withholding obligations of the Company with respect to vesting of the shares.
14. Uniform Net Capital Rule Requirements
Two of our subsidiaries, W&R and IDI are registered broker-dealers and members of the Financial Industry
Regulatory Authority, Inc. Broker-dealers are subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which
requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both
as defined, shall not exceed 15.0 to 1.0. The primary difference between net capital and stockholders’ equity is the
non-allowable assets that are excluded from net capital.
A broker-dealer may elect not to be subject to the Aggregate Indebtedness Standard of paragraph (a)(1)(i) of
Rule 15c3-1, in which case net capital must exceed the greater of $250 thousand or 2% of aggregate debit items computed
in accordance with the Formula for Determination of Reserve Requirements for broker-dealers. W&R made this election
and thus is not subject to the aggregate indebtedness ratio as of December 31, 2016 or 2015.
Net capital and aggregated indebtedness information for our broker-dealer subsidiaries is presented in the
following table as of December 31, 2016 and 2015:
2016
2015
(in thousands)
Net capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Required capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess of required capital . . . . . . . . . . . . . . . . . . . . . . . . . $
Ratio of aggregate indebtedness to net capital . . . . . . . .
W&R
52,639
250
52,389
IDI
12,894
2,152
10,742
W&R
21,719
250
21,469
Not
IDI
17,310
2,956
14,354
2.50 to 1.0 applicable
2.56 to 1.0
Not
applicable
86
15. Rental Expense and Lease Commitments
We lease certain home office buildings, certain sales and other office space and equipment under long-term
operating leases. Rent expense was $24.3 million, $23.7 million and $22.6 million, for the years ended December 31,
2016, 2015 and 2014, respectively. Future minimum rental commitments under non-cancelable operating leases are as
follows:
Year
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments
(in thousands)
22,494
17,759
12,875
7,859
4,847
9,843
75,677
$
New leases are expected to be executed as existing leases expire. Thus, future minimum lease commitments are
not expected to be materially different than those in 2016.
16. Related Party Transactions
We earn investment management fee revenues from the Funds and IGI Funds for which we act as an investment
adviser, pursuant to an investment management agreement with each Fund. In addition, we have agreements with the
Funds pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, pursuant to which distribution
and service fees are collected from the Funds for distribution of mutual fund shares, for costs such as advertising and
commissions paid to broker-dealers, and for providing ongoing services to shareholders of the Funds and/or maintaining
shareholder accounts. We also earn service fee revenues by providing various services to the Funds and their shareholders
pursuant to a shareholder servicing agreement with each Fund (except Ivy VIP) and an accounting service agreement with
each Fund. Certain of our officers and directors are also officers and/or trustees for the various Funds for which we act as
an investment adviser. These agreements are approved or renewed on an annual basis by each Fund’s board of trustees,
including a majority of the disinterested members.
Revenues for services provided or related to the Funds and IGI Funds for the years ended December 31, 2016,
2015 and 2014 are as follows:
Investment management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2016
2015
(in thousands)
2014
709,179
654,727
523,304
338,846
303,046
208,901
150,979
143,071
120,241
852,446 1,100,844 1,199,004
Included in Funds and separate accounts receivable at December 31, 2016 and 2015 are receivables due from the
Funds of $21.6 and $26.7 million respectively.
17. Contingencies
The Company is involved from time to time in various legal proceedings, regulatory investigations and claims
incident to the normal conduct of business, which may include proceedings that are specific to us and others generally
applicable to business practices within the industries in which we operate. A substantial legal liability or a significant
regulatory action against us could have an adverse effect on our business, financial condition and on the results of
operations in a particular quarter or year.
The Company establishes reserves for litigation and similar matters when those matters present material loss
contingencies that management determines to be both probable and reasonably estimable in accordance with ASC 450,
“Contingencies Topic.” These amounts are not reduced by amounts that may be recovered under insurance or claims
against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The
87
Company regularly revises such accruals in light of new information. The Company discloses the nature of the contingency
when management believes it is reasonably possible the outcome may be significant to the Company’s consolidated
financial statements and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency
disclosures, “significant” includes material matters as well as other items that management believes should be disclosed.
Management’s judgment is required related to contingent liabilities because the outcomes are difficult to predict.
In an action filed on April 18, 2016 in the District Court of Johnson County, Kansas, Hieu Phan and Audrey
Ohman v. Ivy Investment Management Company, et. al. (Case No. I6CV02338 Div. 4), two individuals who allegedly
purchased shares of certain affiliated registered investment companies (mutual funds) for which two of the Company’s
subsidiaries provide investment management services filed a putative derivative action on behalf of the mutual funds
alleging breach of fiduciary duty and breach of contract claims relating to investments held in the affiliated mutual funds
by the Company's registered investment advisor subsidiaries, the trustees of two of the Company's affiliated mutual funds,
and an officer of the Company (who plaintiffs subsequently voluntarily dismissed). On behalf of the mutual funds,
plaintiffs seek monetary damages and demand a jury trial. That Court has set this case for trial on July 16, 2018 through
August 10, 2018, although there can be no assurance that the trial will take place on those dates. The Company denies that
any of its subsidiaries breached their fiduciary duties to, or committed a breach of the investment management agreement
with, the mutual funds at issue. To date, no discovery has taken place.
In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. Given the
preliminary nature of the proceedings and the Company's dispute over the merits of the claims, the Company is unable to
estimate a range of reasonably possible loss, if any, that such matter may represent. While the ultimate resolution of this
matter is uncertain, an adverse determination against the Company could have a material adverse impact on our business,
financial condition and results of operations.
18. Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of
cash and cash equivalents held. The Company maintains cash and cash equivalents with various financial institutions.
Cash deposits maintained at financial institutions may exceed the federally insured limit.
19. Selected Quarterly Information (Unaudited)
2016
Quarter
First
Second
Third
Fourth
(in thousands)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 323,816 319,208 303,086 292,913
22,417
Net income attributable to Waddell & Reed Financial Inc. . . . . . . . $ 36,968
0.27
0.45
Net income per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . $
53,827
0.65
33,695
0.41
2015
Quarter
First
Second
Third
Fourth
(in thousands)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 385,458 393,990 376,109 361,074
62,920
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,113
0.76
0.80
Net income per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . $
48,058
0.58
67,445
0.80
88
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
4.3.1
4.4
4.5
10.1
10.2
10.3
10.4
Exhibit Description
Restated Certificate of Incorporation of Waddell & Reed Financial, Inc. Filed as Exhibit 3.1 to the
Company’s Quarterly Report on Form 10-Q, File No. 333-43687, for the quarter ended June 30, 2006 and
incorporated herein by reference.
Amended and Restated Bylaws of Waddell & Reed Financial, Inc. Filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K, File No. 001-13913, filed July 26, 2016 and incorporated herein by reference.
Specimen of Class A Common Stock Certificate, par value $0.01 per share. Filed as Exhibit 4.1 to the
Company’s Registration Statement on Form S-1/A, File No. 333-43687, on February 27, 1998 and
incorporated herein by reference.
Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock of
Waddell & Reed Financial, Inc., as filed on April 9, 2009 with the Secretary of State of the State of Delaware.
Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, File No. 333-43687, on April 10, 2009
and incorporated herein by reference.
Rights Agreement, dated as of April 8, 2009, by and between Waddell & Reed Financial, Inc. and
Computershare Trust Company, N.A., which includes the Certificate of Designation, Preferences and Rights
of Series B Junior Participating Preferred Stock of the Company, as filed on April 9, 2009 with the Secretary
of State of Delaware, as Exhibit A and the form of Rights Certificate as Exhibit B. Filed as Exhibit 4.2 to the
Company’s Current Report on Form 8-K, File No. 333-43687, on April 10, 2009 and incorporated herein by
reference.
First Amendment to Rights Agreement, dated July 22, 2016, by and between Waddell & Reed Financial, Inc.
and Computershare Trust Company, N.A., as rights agent. Filed as Exhibit 4.1 to the Company’s Current
Report on Form 8-K, File No. 001-13913, filed July 26, 2016 and incorporated herein by reference.
Form of Indenture to be used in connection with the Senior Debt Securities. Filed as Exhibit 4.6 to the
Company’s Form S-3ASR, File No. 333-201536, on January 16, 2015 and incorporated herein by reference.
Form of Indenture to be used in connection with the Subordinated Debt Securities. Filed as Exhibit 4.7 to the
Company’s Form S-3ASR, File No. 333-201536, on January 16, 2015 and incorporated herein by reference.
General Agent Contract, dated as of October 20, 2000, by and among Nationwide Life Insurance Company,
Nationwide Life and Annuity Insurance Company and Waddell & Reed, Inc. and its affiliated insurance
companies. Filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K, File No. 001-13913, for
the year ended December 31, 2000 and incorporated herein by reference.
Administrative and Marketing Services Agreement, dated as of January 1, 2012, by and among Nationwide
Life Insurance Company, Nationwide Life and Annuity Insurance Company and Waddell & Reed, Inc. and
its affiliated insurance companies. Filed as Exhibit 10.2 to the Company’s Annual Report on Form 10-K, File
No. 001-13913, for the year ended December 31, 2012 and incorporated herein by reference.
Fund Participation Agreement, dated as of December 1, 2000, by and among Nationwide Life Insurance
Company and/or Nationwide Life and Annuity Insurance Company, Waddell & Reed Services Company and
Waddell & Reed, Inc. Filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K, File
No. 001-13913, for the year ended December 31, 2000 and incorporated herein by reference.
Fund Participation Agreement, dated as of September 19, 2003, by and among Minnesota Life Insurance
Company, Waddell & Reed, Inc. and Ivy VIP. Filed as Exhibit 10.3 to the Company’s Annual Report on
Form 10-K, File No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.
89
Exhibit
No.
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Exhibit Description
Variable Products Distribution Agreement, dated as of December 12, 2003, by and among Minnesota Life
Insurance Company, Securian Financial Services, Inc. and Waddell & Reed, Inc. and its affiliated insurance
companies. Filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for
the year ended December 31, 2004 and incorporated herein by reference.
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.7
to the Company’s Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2011
and incorporated herein by reference.*
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K, File No. 001-13913, filed April 14, 2016 and incorporated
herein by reference.*
Credit Agreement, dated June 28, 2013, by and among Waddell & Reed Financial, Inc., the lenders party
thereto, Bank of America, N.A., as Administrative Agent for the lenders, Bank of America Merrill Lynch
and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Managers, Wells Fargo Bank,
National Association as Syndication Agent, and Citibank, N.A., The Bank of New York Mellon and The
Bank of Nova Scotia as Co-Documentation Agents. Filed as Exhibit 10.1 to the Company’s Current Report
on Form 8-K, File No. 001-13913, filed July 3, 2013 and incorporated herein by reference.
Note Purchase Agreement, dated August 31, 2010, by and among Waddell & Reed Financial, Inc. and the
purchasers party thereto. Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, File
No. 001-13913, on September 7, 2010 and incorporated herein by reference.
Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan, as amended and restated. Filed as
Exhibit 10.11 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the year ended
December 31, 2008 and incorporated herein by reference.*
Waddell & Reed Financial, Inc. 2003 Executive Incentive Plan, as amended and restated. Filed as
Exhibit 10.17 to the Company’s Annual Report on Form 10-K, File No. 001-13913, for the year ended
December 31, 2013 and incorporated herein by reference.*
Waddell & Reed Financial, Inc. 2003 Executive Incentive Plan, as amended and restated. Filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 001-13913, on April 17, 2014 and
incorporated herein by reference.*
Investment Management Agreement, dated January 30, 2009, by and between the Advisors Funds and
Waddell & Reed Investment Management Company. Filed as Exhibit 10.21 to the Company’s Annual Report
on Form 10-K, File No. 001-13913, for the year ended December 31, 2009 and incorporated herein by
reference.
Investment Management Agreement, dated April 10, 2009, by and between Ivy VIP and Waddell & Reed
Investment Management Company. Filed as Exhibit 10.26 to the Company’s Annual Report on Form 10-K,
File No. 001-13913, for the year ended December 31, 2009 and incorporated herein by reference.
Investment Management Agreement, dated April 10, 2009, by and between Ivy VIP and Waddell & Reed
Investment Management Company. Filed as Exhibit 10.27 to the Company’s Annual Report on Form 10-K,
File No. 001-13913, for the year ended December 31, 2009 and incorporated herein by reference.
Investment Management Agreement, dated July 29, 2016, by and between Ivy Variable Insurance Portfolios
and Ivy Investment Management Company. Filed as Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q, File No. 001-13913, for the quarter ended September 30, 2016 and incorporated herein by
reference.
90
Exhibit
No.
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
Exhibit Description
Investment Management Agreement, dated July 29, 2016, by and between Ivy Variable Insurance Portfolios
and Ivy Investment Management Company. Filed as Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q, File No. 001-13913, for the quarter ended September 30, 2016 and incorporated herein by
reference.
Investment Management Agreement, dated November 13, 2008, by and between Ivy Funds and Ivy
Investment Management Company. Filed as Exhibit 10.18 to the Company’s Annual Report on Form 10-K,
File No. 001-13913, for the year ended December 31, 2011 and incorporated herein by reference.
Investment Management Agreement, dated October 1, 2016, by and between InvestEd Portfolios and Ivy
Investment Management Company.
First Amended and Restated Investment Management Agreement, dated December 4, 2015, by and between
Ivy Global Investors Fund, Lemanik Asset Management S.A. and Ivy Investment Management Company.
Filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K, File No. 001-13913, for the year
ended December 31, 2015 and incorporated herein by reference.
Investment Management Agreement, dated September 1, 2016 by and between Ivy NextShares and Ivy
Investment Management Company. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q,
File No. 001-13913, for the quarter ended September 30, 2016 and incorporated herein by reference.
Form of Change in Control Employment Agreement, dated December 14, 2001, by and between Henry J.
Herrmann and Waddell & Reed Financial, Inc. Filed as Exhibit 10.30 to the Company’s Annual Report on
Form 10-K, File No. 333-43687, for the year ended December 31, 2001 and incorporated herein by
reference.*
First Amendment to Change in Control Employment Agreement, dated December 17, 2008, by and between
Henry J. Herrmann and Waddell & Reed Financial, Inc. Filed as Exhibit 10.26 to the Company’s Annual
Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2008 and incorporated herein
by reference.*
Second Amendment to Change in Control Employment Agreement, dated December 17, 2009, by and
between Henry J. Herrmann and Waddell & Reed Financial, Inc. Filed as Exhibit 10.52 to the Company’s
Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2009 and incorporated
herein by reference.*
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed Financial, Inc. 1998
Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.28 to the Company’s Annual Report on
Form 10-K, File No. 001-13913, for the year ended December 31, 2011 and incorporated herein by
reference.*
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed Financial, Inc. 1998
Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.26 to the Company’s Annual Report on
Form 10-K, File No. 001-13913, for the year ended December 31, 2015 and incorporated herein by
reference.*
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed Financial, Inc. 1998
Stock Incentive Plan, as amended and restated.*
Form of Restricted Stock Award Agreement for awards to Non-Employee Directors pursuant to the
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.2
to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687, for the quarter ended September 30,
2007 and incorporated herein by reference.*
91
Exhibit
No.
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
12
21
23
24
31.1
31.2
32.1
32.2
Exhibit Description
Form of Restricted Stock Award Agreement for awards to Non-Employee Directors pursuant to the
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.28
to the Company’s Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2015
and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards to Non-Employee Directors pursuant to the
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated.*
Portfolio Managers Revenue Sharing Plan for Flow Accounts. Filed as Exhibit 10.64 to the Company’s
Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2010 and incorporated
herein by reference.*
Portfolio Managers Revenue Sharing Schedule. Filed as Exhibit 10.65 to the Company’s Annual Report on
Form 10-K, File No. 001-13913, for the year ended December 31, 2010 and incorporated herein by
reference.*
Portfolio Managers Revenue Sharing Schedule—Large Cap Growth. Filed as Exhibit 10.36 to the
Company’s Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2011 and
incorporated herein by reference.*
Form of Indemnification Agreement. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K,
File No. 001-13913, on November 16, 2009 and incorporated herein by reference.*
Confidential Separation Agreement and Release of All Claims, dated July 22, 2015, by and between Michael
D. Strohm and W&R Corporate LLC. Filed as Exhibit 10.38 to the Company’s Annual Report on
Form 10-K, File No. 001-13913, for the year ended December 31, 2015 and incorporated herein by
reference.*
Employment Retention Agreement, dated February 1, 2016, by and between Michael L. Avery and
Waddell & Reed Financial, Inc. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, File
No. 001-13913, on February 2, 2016 and incorporated herein by reference.*
Form of Employment Agreement by and between Waddell & Reed Investment Management Company and
its portfolio managers. Filed as Exhibit 10.40 to the Company’s Annual Report on Form 10-K, File
No. 001-13913, for the year ended December 31, 2015 and incorporated herein by reference.*
Offer of Settlement. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 333-
43687, on July 24, 2006 and incorporated herein by reference.
Assurance of Discontinuance. Filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, File No.
333-43687, on July 24, 2006 and incorporated herein by reference.
Stipulation for Consent Order. Filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K, File No.
333-43687, on July 24, 2006 and incorporated herein by reference.
Statement re computation of ratios of earnings to fixed charges
Subsidiaries of Waddell & Reed Financial, Inc.
Consent of KPMG LLP
Powers of Attorney
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
Section 1350 Certification of the Chief Executive Officer
Section 1350 Certification of the Chief Financial Officer
92
Exhibit
No.
101
Exhibit Description
Materials from the Waddell & Reed Financial, Inc. Annual Report on Form 10-K for the year ended
December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated
Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive
Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows,
and (vi) related Notes to the Consolidated Financial Statements, tagged in detail.
*
Indicates management contract or compensatory plan, contract or arrangement.
93
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HIGHLIGHTSINFORMATION2WADDELL & REED FINANCIAL, INC.2016 ANNUAL REPORT15FINANCIAL HIGHLIGHTS($ IN THOUSAND, EXCEPT PER SHARE DATA)20162015Operating revenues$1,239,023 $1,516,631 Net income146,907 245,536 Diluted earnings per share$1.78 $2.94 Cash & cash equivalents (unrestricted)$555,102 $558,495 Investment securities328,750 291,743 Long-term debt189,605 189,432 Shareholder's equity844,002 846,455 CAPITAL RETURNED TO STOCKHOLDERSShare Repurchases$49,753 $80,335 Dividends paid152,830 143,959 Dividend rate$1.84 $1.72 Business profile & financial highlightsOUR DISTINCT BUSINESS MODEL is built upon proven, professional investment management and financial planning services that we provide to individuals, businesses and institutional investors. As we enter our 80th year in business, our culture remains firmly established, centered on preparedness, collaboration, accountability and an understanding that every day we serve our clients, stockholders, employees and financial advisors. We consistently work to bring individual skills and innovative ideas together as we continue to fortify our business model in a changing environment. Ultimately, we believe the strength of our company stems from the confluence of three key elements: a collaborative, risk management-focused culture in our Investment Management Division; a balanced distribution model; and our experienced executive management team.Corporate InformationANNUAL MEETING OF STOCKHOLDERSApril 27, 2017, 10:00 a.m. Corporate HeadquartersCORPORATE HEADQUARTERSWaddell & Reed Financial, Inc. 6300 Lamar Avenue Overland Park, KS 66202STOCK EXCHANGE LISTINGSClass A Common Stock New York Stock Exchange Symbol: WDRTRANSFER AGENT AND REGISTRARComputershare Trust Company, N.A. P.O. Box 30170 College Station, TX 77842-3170 Toll Free Number: 877.498.8861 Hearing Impaired: 800.952.9245 www.computershare.comINDEPENDENT AUDITORSKPMG LLP 1000 Walnut, Suite 1100 Kansas City, MO 64106STOCKHOLDER INQUIRIESFor general information regarding your Waddell & Reed Financial, Inc. stock, call 800.532.2757 or visit our web site at www.ir.waddell.com. For stock transfers, call 877.498.8861.MUTUAL FUND INFORMATIONFor information regarding our mutual funds, please call 888.WADDELL or visit www.waddell.com or www.ivyinvestments.com.INSTITUTIONAL MARKETING INFORMATIONFor information regarding institutional marketing, please call 877.887.0867 or visit www.institutional.ivyinvestments.comQUESTIONS ABOUT CORPORATE INFORMATION CAN BE DIRECTED TO THE ATTENTION OF:Nicole Russell Vice President — Investor Relations 913.236.1880 nrussell@waddell.comDIVIDEND REINVESTMENTWaddell & Reed Financial, Inc. maintains a dividend reinvestment plan for all holders of its common stock. Under the plan, stockholders may reinvest all or part of their dividends in additional shares of common stock. Participation is entirely voluntary. More information on the plan can be obtained from our Transfer Agent.STOCKHOLDER AND ANALYST RESOURCESWe believe that in today’s digital world, the Internet allows us to disseminate our corporate information much more quickly and efficiently. In addition to the standard information typically found on corporate web sites, such as general, corporate and stock information, access to archived press releases and SEC filings, and answers to frequently asked questions, we supply our stockholders and analysts with timely supplemental data including quarterly corporate presentations, access to live and archived web casts, data tables and more. If you elect to request information alerts, we will send you an e-mail when new information is posted to our corporate web site.7263_Cover.indd 22/17/17 11:12 PM Annual ReportTWO THOUSAND SIXTEENWADDELL & REEDwaddell.com ANN-CORP-2016/34341 (02/17)7263_Cover.indd 12/17/17 11:12 PM