W A D D EL
L & REE
D
CHANGING
LANDSCAPE,
NEW HORIZONS
2018 ANNU AL REPOR T
W
A
D
D
E
L
L
&
R
E
E
D
F
I
N
A
N
C
I
A
L
,
I
N
C
.
2
0
1
8
A
N
N
U
A
L
R
E
P
O
R
T
waddell.com
WADDELL & REED FINANCIAL, INC. ANN-CORP-2018/41520 (02/19)
1331_Cover.indd 1
2/15/19 8:32 PM
OUR BUSINESS MODEL
CORPORA TE INFORMA TION
OUR M ISSION is to consistently work to bring individual skills and innovative ideas together to help investors
realize their long-term financial goals. Our distinct business model is built upon a unique combination of
skilled asset management, balanced distribution and exceptional client service. Our brands include:
ASSET MANA GER
BROKER-DEALER
Skilled and pr oven investment
management capabilities
Targeted distribution of in vestment
Nationally based indep endent financial ad visors
Breadth of products offered, including full service
brokerage, advisory services, and mutual funds
products to retail and institu tional clients
from affiliated and unaffiliated asset mana gers
2018
222
184
$2.28
20 17
220
141
$1.69
2016
259
157
$1.90
FINAN CIAL H IGHLIGHTS
(DOLLARS IN MILLIONS, E XCEPT PER SHARE DATA)
Operating Income
Net Income
Earnings Per Diluted Share
See accompanying Form 10-K.
ASSET S UN DER MANA GEMENT
$ IN BILLIONS
Annual Meeting of Stockholders
April 23, 2019, 10:00 a.m.
Corporate Headquarters
Waddell & Reed Financial, Inc.
6300 Lamar Avenue
Overland Park, KS 66202
NYSE Listing
Class A Common Stock
Stock Symbol: WDR
Independent Auditors
KPMG LLP
1000 Walnut, Suite 1100
Kansas City, MO 64106
Transfer Agent and Registrar
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, KY 40233-5000
Toll Free Number: 877.498.8861
Hearing Impaired: 800.952.9245
www.computershare.com
Mutual Fund Information
For information regarding our mutual
funds, please call 888.WADDELL or visit
www.waddell.com or www.ivyinvestments.com
Institutional Marketing Information
For information regarding institutional
marketing, please call 877.887.0867 or visit
www.institutional.ivyinvestments.com
Dividend Reinvestment
Waddell & 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 Inquiries
For information regarding Waddell & Reed Financial, Inc.
stock, please call the Investor Relations office at
800.532.2757 or visit www.ir.waddell.com
$140
$120
$100
$80
$60
$40
$20
$0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Institutional
Broker-Dealer
Retail-unafilliated
2
W A D D E L L & RE
E D
1331_Cover.indd 2
2/22/19 10:03 PM
EXECUTING ON OUR S TRATEGIC INITIA TIVES
2018 W AS A P IVOTAL Y EAR for Waddell & Reed, as we made solid pr ogress on suc cessfully implementing
initiatives to revitalize all phases of our business.
KEY I MPERATIVES T O B UILDING O UR FU TURE:
⊲ Strengthen investment management resources,
processes and results
⊲ Reinvigorate product line and sales
Progress to date:
• Continued investment performance improvement
across 1-year, 3-year and 5-year periods. At Dec. 31,
2018, 52% of our assets under management had
either a 4-star or a 5-star overall Morningstar rating,
and 58% of our assets under management ranked
in the top half of their Morningstar peer group over
one-year period.
• Added nine investment analysts during 2018
with average experience of eight years.
• Continued realignment of portfolio management
resources into teams.
• Implemented technology that facilitates
collaboration and fundamental research
sharing across teams.
Progress to date:
• Completed targeted pricing adjustments in
selected funds, as well as the merger of similar
funds, resulting in operational efficiencies and
added fund-level scale.
• Net outflows improved 9% on the strength of
sales growth of 1.5% and improved redemptions
compared to 2017.
• Evaluated and realigned resources to provide
optimal coverage in order to maximize sales
among all distribution channels.
• Enhanced data capabilities to inform targeted
sales strategies.
⊲ Evolve broker-dealer to self-sustaining,
competitive, profitable entity
⊲ Focus investment on support of business
model, improving operating efficiency
Progress to date:
• Developing an integrated advisor technology
platform in conjunction with leading financial
services technology partners.
• Expanded product offerings and partners,
notably the launch of a new advisory program.
• Announced plans to exit field real-estate, while
enhancing our advisor payout grid to best-in-class.
• Realigning field support model to deliver more
robust practice development resources, while
expanding recruiting and creating an elite
service group for top advisors.
Progress to date:
• Achieved goal of adding $30 million, on a
2019 run-rate basis, to pre-tax income
through targeted cost reductions.
• Decreased controllable operating expenses
nearly 8% from 2015, while making targeted
investments in growth areas.
• Returned capital of $217.1 million through share
repurchases and dividends; continue to focus
on shareholder returns through disciplined
capital management.
• Advancing our values-based culture through
ongoing investment in our people as we align
our workforce with an evolving industry.
1331_Insert.indd 3
2/22/19 10:03 PM
20
1 8 A
N N U A L R
E P O R T
3
TO OUR S TOCKHOLDERS
A Y EAR T HAT B ROUGHT R ECORD H IGHS in the
global equity markets drew to a dramatic close with
volatility and market disruption, er asing annual
gains for most in vestors. The U.S. stock market
concluded 2018 with the w orst quarter for U .S.
equities since 2011, contributing to a 6% decline in
the S&P 500 Index o ver the 12-month p eriod. As
the year progressed, trade disputes, geop olitical
tensions and uncertain global gr owth rates
provided a choppy ride for in vestors.
This environment proved challenging for active
asset managers, as outflo ws pressured overall assets
under management for Waddell & Reed Financial,
Inc. and man y in our p eer universe. While v olatility
can at times provide a favorable backdrop for active
managers, and we firmly believe that the research
and insights pr ovided by acti ve managers can
identify differ entiated ideas for in vestors, the flo w
toward passive index strategies remained steady in
2018. Organic growth across the industry r emains
muted. As uncertainties continue into 2019,
however, investors are likely to seek out financial
guidance to tar get their goals, r ealizing the merits
that can come fr om a long-term financial plan built
around distinct investment products. As has held
true across the history of our compan y, our
diversified business mo del resonates even as we
face a changing landscap e.
Within that landscap e, we had a pivotal year
overall, as we made solid pr ogress in executing on
our corporate initiatives to reinvigorate all phases
of our business, with the goal of b est serving our
clients, advisors and sto ckholders.
For 2018, we reported net income of $183.6
million, or $2.28 p er share, compared to $141.3
million, or $1.69 p er share, during the prior y ear.
This represents an incr ease in net income p er share
of approximately 35 percent compared to the prior
year, primarily due to b enefits from corporate tax
reform. Op erating income for 2018 incr eased
moderately at 1% compared to 2017.
Assets under mana gement declined to $6 5.8 billion
by year-end 2018, a decr ease of 19% compar ed to
year-end 2017. Net outflows were $10.4 billion for
2018, a mo dest improvement over net outflo ws of
$11.4 billion in 2017, and consider ably better than
net outflows of $25.3 billion in 2016.
WE MADE SOLID PROGRESS
IN EXECUTING ON OUR
CORPORATE INITIATIVES
TO REINVIGORATE ALL
PHASES OF OUR BUSINESS
As highlighted b elow and on the pr evious page,
we made progress under each of the pillars of our
strategic plan as w e pursue a str onger comp etitive
position. These pillars continue to centr alize our
priorities in 2019, as w e focus on strengthening
resources while reinvigorating products and sales
across our asset mana gement business, e volving
our broker-dealer business, mana ging operational
efficiencies and continuing to strategically reinvest
in foundational programs throughout our
organization. As we analyze our business and
our opportunities, our mission statement guides
our process: to help investors r ealize their long-term
financial goals through superior investment
performance, sound advice and exceptional
client ser vice.
4
W A D D E L L & RE
E D
1331_Insert.indd 4
2/22/19 10:03 PM
LET’S L OOK AT O UR A CCOMPLISHMENTS A ND O NGOING I NIT IATIVES U NDER
EACH A SPEC T O F T HE S TRATEG IC P LAN F OR 2 019 A ND B EYOND.
WITH IN I V Y I NVESTM ENT S, our asset
management business, w e continue to tak e steps
WITHIN O UR WADDEL L & REED , I NC. broker-
dealer business, w e are progressing on recently-
to further build out o verall resources and to ols
that will help impr ove performance, enhance
announced initia tives as we continue to e volve the
business and supp ort its ongoing pr ofitability and
our product line and r einvigorate sales.
sustainabilit y.
• Over the last 12 months, w e’ve added anal yst
resources, continued r ealignment of p ortfolio
management resources into teams, and ar e
implementing technology tha t facilitates
collaboration and fundamental r esearch sharing
across teams.
• In early 2019, we launched plans for an
advisor technology pla tform that integrates our
enterprise technology applica tions and pr ovides
a desktop solution wher e advisors can mana ge
all aspects of their business, allo wing advisors
to work efficientl y and seamlessl y.
• Those efforts ar e showing results. At Dec. 31,
• In response to growing advisor and investor
2018, 52% of our assets under mana gement had
either a 4-star or a 5-star o verall Mornin gstar
rating, and 58% of our assets under mana gement
ranked in the top half of their r espective
needs, we continue to gr ow our advisory product
lineup and pr oviders, adding a thir d-party
strategist program called G uided Investment
Strategies with pr ograms offering b oth ETFs and
Morningstar p eer group over the one -year period.
mutual funds with multiple p ortfolio opti ons.
• We reduced exp enses on 10 k ey funds and
completed the mer ger of a range of funds to
• We have reduced the br oker-dealer’s real estate
footprint to align mor e closely with an industry-
create scale and op erational efficiencies as w e
continue to refine our product set and fo cus on
standard independent mo del, while enh ancing
the payout grid for a ffiliated advisors to b e among
strategies where we feel we are best positioned
to compete.
• We continue to enhance our da ta capabilities
to inform tar geted sales str ategies across all
sales channels.
• We consistentl y review our overall product
capabilities with an e ye toward opportunities
or gaps in our lineup . In 2019, w e intend to
introduce seven portfolios in a mo del-delivered
format, providing advisors and in vestors a new
way to access existing str ategies.
the industry’ s best-in-class.
• We are realigning the field supp ort model to
deliver more robust practice development
resources, while expanding r ecruiting and
creating an elite service gr oup for top ad visors.
• In the midst of this, w e’ve slowed the pace
of advisor attrition, while incr easing overall
advisor productivity.
1331_Insert.indd 5
2/22/19 10:03 PM
20
1 8 A
N N U A L R
E P O R T
5
WADDELL & REED6AND, ACROSS OUR ORGANIZATION, we are focused on operational efficiencies, transforming our culture and investing in our people.• We achieved our goal of adding $30 million, on a 2019 run-rate basis, to pre-tax income through targeted cost reductions.• As part of our efforts, we are continuing our focus on expense management, as we have decreased controllable operating expenses nearly 8% from 2015, while making targeted investments in growth areas.• We have instituted enhanced efficiency and accountability through an enterprise project management organization, with a focus on the deliberate allocation of our resources.• We are advancing our culture by focusing on our core values and further investing in our people through areas such as talent management, employee experiences, diversity and inclusion, and total rewards.• Overall, we are working to ensure our resources are aligned in the most productive and effective manner as we build a framework for long-term success.Clearly, it is an important time for our company. We have undertaken a comprehensive review of every aspect of our business, and we are taking action to better position the company for long-term growth. The steps above are specific examples of our progress and our plans, though they represent only the beginning of our path toward a strong future. As the industry changes, our mandate is to adapt and grow our business in a fashion that fortifies the ongoing trust of clients and advisors.We remain committed to progress, and to success, on behalf of our employees, our clients and our stockholders.Thank you for your shared commitment,Philip J. Sanders, CFA Chief Executive Officer Chief Investment OfficerWE ARE WORKING TO ENSURE OUR RESOURCES ARE ALIGNED IN THE MOST PRODUCTIVE AND EFFECTIVE MANNER AS WE BUILD A FRAMEWORK FOR LONG-TERM SUCCESS.CONTROLLABLE EXPENSES1 (DOLLARS IN MILLIONS)$400$420$440$460$480201820158%decrease1 Controllable expenses: defined as Compensation and benefits, G&A, Technology, Occupancy and Marketing and advertising1331_Insert.indd 62/22/19 10:03 PM Clearly, it is an imp ortant time for our compan y.
We have undertaken a comprehensive review of
every aspect of our business, and w e are taking
action to b etter position the compan y for long-term
growth. The steps ab ove are specific examples of
our progress and our plan s, though the y represent
only the beginning of our pa th toward a strong
future. As the industry changes, our manda te is to
adapt and g row our business in a fashion tha t
fortifies the ongoing trust of clients and ad visors.
We remain committed to pr ogress, and to
success, on behalf of our employ ees, our clients
and our sto ckholders.
Thank you for your shared commitment,
Philip J. Sanders, CFA
Chief Executive Officer
Chief Investment Officer
DIRECT ORS
Thomas C. Godlasky
Chairman of the Board
Former CEO
Aviva North America
Director (since 2010)3, 4
Sharilyn S. Gasaway
Former EVP and CFO
Alltel Corporation
Director (since 2010)1,3
James M. Raines*
President,
James M. Raines and Co.
Director (since 1998)2,3
Alan W. Kosloff
Chairman, Kosloff & Partners, LLC
Director (since 2003)2,3,4
Dennis E. Logue
Chairman,
Ledyard Financial Group
Director (since 2002)1,3
Jerry W. Walton
Former CFO,
J.B. Hunt Transportation Services, Inc.
Director (since 2000)1,2,3,4
Philip J. Sanders
Chief Executive Officer and
Chief Investment Officer
of the Company
Director (since 2016) 4
Michael F. Morrissey
Former Partner,
Ernst and Young, LLP
Director (since 2010)1,2,3
Kathie J. Andrade
Former Senior EVP and CEO
of Retail Financial Services,
TIAA-CREF
Director (since 2019)3
¹ Audit Committee ² Compensation Committee ³ Nominating and Corporate Governance Committee ⁴ Ex ecutive Committee
* Retiring from the Board in April 2019
OFFICERS
Philip J. Sanders
Chief Executive Officer,
Chief Investment Officer
and Director
• 30 Years of Industry Experience
• 20 Years with Waddell & Reed
Mark P. Buyle
Senior Vice President,
Chief Legal Officer,
General Counsel and Secretary
• 23 Years of Industry Experience
• 23 Years with Waddell & Reed
Brent K. Bloss
Executive Vice President
and Chief Operating Officer
• 18 Years of Industry Experience
• 17 Years with Waddell & Reed
Benjamin R. Clouse
Senior Vice President,
Chief Financial Officer
and Treasurer
• 3 Years of Industry Experience
• 3 Years with Waddell & Reed
Shawn M. Mihal
Senior Vice President, Broker-Dealer
• 19 years of Industry Experience
• 4 years with Waddell & Reed
Amy J. Scupham
Senior Vice President, Distribution
• 21 years Industry Experience
• 11 years with Waddell & Reed
Christopher W. Rackers
Senior Vice President and
Chief Human Resources Officer
• 2 years Industry Experience
• 2 years with Waddell & Reed
1331_Insert.indd 7
2/22/19 10:03 PM
20
1 8 A
N N U A L R
E P O R T
7
(THIS PAGE INTENTIONALLY LEFT BLANK.)
1331_Insert.indd 8
2/22/19 10:03 PM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2018
OR
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 NO
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 NO .
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 No .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit such files). Yes No .
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes No .
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, 2018 was $1.41 billion.
Shares outstanding of each of the registrant’s classes of common stock as of February 8, 2019 Class A common stock, $.01 par value:
76,332,069
In Parts II and III of this Form 10-K, portions of the definitive proxy statement for the 2019 Annual Meeting of Stockholders to be held
DOCUMENTS INCORPORATED BY REFERENCE
April 23, 2019.
Index of Exhibits (Pages 49 through 51)
Total Number of Pages Included Are 86
WADDELL & REED FINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2018
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
3
10
25
25
25
25
25
28
29
44
45
45
46
48
48
48
48
49
49
49
51
52
2
Forward-Looking Statements
PART I
This Annual Report on Form 10-K and the letter to stockholders contain “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’ve 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”); the Ivy Global
Investors 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”); and 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”). In February 2018, we completed the merger of all Advisors Funds into
Ivy Funds with substantially similar objectives and strategies. In May 2018, we started the process of liquidating the IGI
Funds, which was substantially complete in 2018. In addition to the Funds and IGI Funds, our assets under management
(“AUM”) include institutional accounts managed by the Company.
We derive our revenues from providing investment management and advisory services, investment product
underwriting and distribution, and shareholder services administration to the Funds, institutional accounts, and the IGI
Funds prior to their liquidation. We also provide brokerage services, primarily to retail clients through Waddell & Reed,
Inc. (“W&R”), and independent financial advisors associated with W&R (“Advisors”), who provide financial planning
and advice to their clients. Investment management and advisory fees and certain underwriting and distribution revenues
are based on the level of AUM and assets under administration (“AUA”) 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 programs and related advisory services, asset-based service and distribution fees promulgated
under the 1940 Act (“Rule 12b-1”), 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 client
AUM or number of client accounts. Our major expenses are for distribution of our products, compensation related costs,
occupancy, general & administrative, and information technology.
3
Organization
We deliver our investment management advisory services through our subsidiary companies, primarily Ivy
Investment Management Company (“IICO”), the registered investment adviser for the Ivy Funds, Ivy VIP, InvestEd, and
Ivy NextShares; and, prior to completion of the Advisors Funds mergers into Ivy Funds in 2018, Waddell & Reed
Investment Management Company (“WRIMCO”), a registered investment adviser for the Advisors Funds. WRIMCO
merged into IICO, effective December 31, 2018.
Our underwriting and distribution services are delivered through our two broker-dealers: W&R and Ivy
Distributors, Inc. (“IDI”). W&R is a registered broker-dealer and investment adviser that acts as the national distributor
and underwriter for shares of InvestEd, other mutual funds, and the former Advisors Funds, and as a distributor of variable
annuities and other insurance products issued by our business partners. 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 management and advisory services provide one of our largest sources of revenues. We earn
investment management fee revenues by providing investment management and advisory 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
institutional and other private investors and we provide subadvisory services to other investment companies. We also
acted as investment advisor to the IGI Funds prior to their liquidation. Such services are provided pursuant to various
written agreements, and our fees are generally based on a percentage of AUM.
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 client assets—a sound approach that seeks to capture asset appreciation
when market conditions are favorable and strives to manage risk during difficult market periods.
4
These three principles shape our investment philosophy and money management approach. For over 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 long-term clients 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 89 professionals, including 32 portfolio managers who average
23 years of industry experience and 16 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. We continue to move towards team-based
portfolio management on our funds, and have fortified our research team with additional investment analysts, while
continuing to foster a collaborative culture across our investment management professionals. We also engage subadvisors
who bring additional expertise in specific asset classes, when appropriate.
Investment Management Products
Our mutual funds provide a wide variety of investment options. We are the exclusive underwriter and distributor
of 83 registered mutual fund portfolios in the Funds, which includes 14 investment styles. During the first quarter of 2018,
the remaining Advisors Funds merged into Ivy Funds with substantially similar objectives and strategies. During 2018,
six Ivy Funds and one Ivy VIP fund merged into Ivy Funds and an Ivy VIP fund, respectively, with generally similar
investment objectives. Variable products, Ivy VIP and InvestEd are offered primarily through Advisors in the broker-
dealer channel; in some circumstances, certain of those funds are also offered through the unaffiliated channel. The Ivy
Funds are offered through both our unaffiliated channel and broker-dealer channel. The Funds’ AUM are included in either
our unaffiliated channel or our broker-dealer channel depending on which channel marketed the client account or is the
broker of record. As of December 31, 2018, we had $65.8 billion in AUM.
Broker-Dealer Products and Services
Since 1937, W&R has been committed to our client’s financial goals. W&R offers a variety of sophisticated and
personalized financial planning services to address virtually any client goal, objective or situation including retirement
planning, education planning, addressing survivor needs, asset allocation, estate planning, business planning, income tax
planning, disability and long-term care. In 2017, W&R introduced a new, industry-leading financial planning platform
centered around technology provided by eMoney Advisor. This platform enables Advisors to better serve their client’s
financial planning needs and provides clients with access to their financial plan, important financial planning documents
and a holistic view of their entire financial situation all through a convenient wealth management portal.
W&R offers clients full-service brokerage services as well as a variety of fee-based asset allocation programs,
including Managed Allocation Portfolio (“MAP”), MAP Choice, MAP Flex, MAPSelect, MAPLatitude and Strategic
Portfolio Allocation (“SPA”). These programs utilize a variety of underlying investment options including mutual funds,
individual stocks and bonds and exchange traded funds. During 2017, we launched MAPNavigator, an open architecture
mutual fund advisory program and enhanced the SPA program, partnering with Wilshire Associates, Inc., an independent
consultant, to develop a series of taxable and tax-sensitive investment models consisting of our affiliated Ivy Funds. As of
December 31, 2018, clients had $21.2 billion invested in our fee-based asset allocation programs.
Through our broker-dealer, we distribute various variable annuity products, some of which offer our affiliated
Ivy VIP funds as an investment vehicle. In 2017, IICO enhanced InvestEd by lowering fees and expanding the available
investment options. InvestEd offers lower sales charges, reduced minimum initial investment, an increased number of
aged-based and static portfolios and individual fund options, along with an expanded range of underlying funds within
aged-based and static portfolios. Through our insurance agency subsidiaries, Advisors also offer clients retirement and life
insurance products underwritten by our business partners. We offer unaffiliated mutual fund products, other variable
annuity products, and full service brokerage products and services through a third-party clearing broker-dealer. AUA were
$51.3 billion at December 31, 2018.
5
Distribution Channels
One of our distinctive qualities is that we distribute our investment products through a balanced distribution
network. Our distribution channels cover both retail and institutional unaffiliated sales channels, described below, as well
as our affiliated broker-dealer, W&R.
Unaffiliated Channel
In 2018, IDI leadership realigned its distribution model to respond to a changing marketplace and to reinvigorate
sales using a more focused approach. The moves centered on two sales channels, National Distribution and Professional
Buyers Distribution, in an effort to diversify asset flow and the AUM profile of the Company.
National Distribution, inclusive of National Accounts and National Wholesale, was enhanced to increase focus
and drive fund sales throughout the nationwide broker-dealer network. With the National Accounts team focused on firm
home office interactions and the National Wholesale team focused on driving sales at the financial advisor level. This
alignment provides a holistic, cohesive and collaborative sales and service approach to our national broker-dealer partners.
National Wholesale includes 24 external wholesalers, four of which are exclusively devoted to W&R.
Professional Buyers Distribution was enhanced to focus on sales and service across the institutional, consultant
relations, insurance, registered investment advisor (“RIA”) and defined contribution investment only (“DCIO”) categories.
Unifying sales strategies within the Professional Buyers Distribution group brings collaboration, shared knowledge and
enhanced service levels to key institutional, retirement, insurance and RIA clients that require specialized interactions and
communication.
The Distribution Operations team supports IDI’s sales and service-related processes including training, business
intelligence, client relationship management and sales systems, and practice management. This group also includes IDI’s
professional client experience team, which creates key client-facing deliverables utilized by both distribution groups. The
Distribution Operations team is designed to help increase the overall knowledge and responsiveness of the entire
distribution channel.
AUM in this channel were $25.0 billion at the end of 2018.
Broker-Dealer Channel
Throughout our history, Advisors sold investment products to individuals, families and businesses across the
country in geographic markets of all sizes. Advisors assist clients on a wide range of financial issues with a significant
focus on helping them plan, generally, for long-term goals and offer one-on-one consultations that emphasize long-term
relationships through continued service.
Over the past several years, we have expanded our brokerage platform technology and product offering, while
continuing to make investments that allow Advisors to simplify the way they conduct business with clients. We continued
to work to transform W&R into a self-sustaining, fully competitive and profitable entity. These efforts include enhancing
the compensation program for Advisors, investing in a new advisor technology platform, transitioning advisors currently
leasing space in W&R offices to personal branch offices and redesigning services offered to Advisors. These additional
enhancements will continue in the future and are designed to increase our ability to retain and competitively recruit
experienced Advisors.
As of December 31, 2018, there were 1,060 Advisors and 343 licensed advisor associates, for a total of 1,403
individuals associated with W&R who operate out of offices located throughout the United States. We believe, based on
industry data, that W&R ranks among the largest independent broker-dealers. As of December 31, 2018, our broker-dealer
channel had approximately 380,000 mutual fund clients and AUM of $37.2 billion. Assets under administration (“AUA”)
includes both client assets invested in the Funds and in other companies’ products that are distributed through W&R held
in brokerage accounts, within our fee-based asset allocation programs, or held directly with the funds.
6
Institutional Channel
We also manage assets in a variety of investment styles for a variety of types of institutions. The largest client
type is other asset managers that 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 diverse client list includes pension funds, Taft-Hartley plans and endowments. AUM in the
institutional channel were $3.7 billion at December 31, 2018.
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.
Competition
The financial services industry is a highly competitive global industry. According to the Investment Company
Institute (the “ICI”), at the end of 2018 there were more than 9,300 open-end investment companies, more than 500
closed-end investment companies and more than 1,900 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
investment performance, fees, brand recognition, business reputation, quality of service and the continuity of both client
relationships and AUM. 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 influenced by the achievement of competitive
investment management performance, distribution methods, the type and quality of shareholder services, the success of
marketing efforts and the ability to develop investment products for certain market segments to meet the changing needs
of investors.
We compete with 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 and unaffiliated advisors offer services and
products similar to ours. 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.
The distribution of mutual funds and other investment products has experienced significant developments in
recent years, which have intensified the competitive environment. These developments include the introduction of new
products, the rationalization of the number of products offered on third party platforms, increasingly complex distribution
systems with multiple classes of shares, the development of investors’ ability to invest online, 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
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. Competition is impacted by sales techniques,
personal relationships and skills, and the quality of financial planning products and services offered. We compete against
a broad range of asset managers that are both larger and smaller than our firm, but we believe that the breadth and depth
7
of our products position us to compete in this environment. Second, we believe our business model targets clients seeking
personal assistance from financial advisors or planners. The market for financial advice is extremely broad and fragmented.
Advisors compete with large and small broker-dealers, unaffiliated advisors, registered investment advisers, financial
institutions, insurance representatives and others. 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 employees and Advisors. To maximize our ability
to compete effectively in our business, we offer competitive compensation. We are advancing our culture by focusing on
our Core Values and further investing in our people through areas such as talent management, employee experiences,
diversity & inclusion and total rewards. For Advisors, we enhanced the compensation program, are investing in a new
advisor technology platform and have expanded our brokerage platform technology and product offering.
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.
The 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 above certain de
minimis thresholds established by the Commodity Futures Trading Commission (the “CFTC”), they are subject to the
commodities and futures regulations of the CFTC.
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 2018 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.
8
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)
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, employees and associated persons. 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, 2018 and 2017, 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 $250,000 for cash balances. However, since the Funds, and not our broker-dealer subsidiaries, maintain
client 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 Advisors in our 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. Although in 2018 the U.S. Court of
Appeals for the Fifth Circuit vacated regulations adopted by the U.S. Department of Labor that, among other things, treated
as fiduciaries any person who provides investment advice or recommendations to employee benefit plans, plan fiduciaries,
plan participants, plan beneficiaries, IRAs or IRA owners, other regulators have enacted or proposed other fiduciary
standards that could 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.
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.
9
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.
Employees
At December 31, 2018 we had 1,332 full-time employees, consisting of 1,198 home office employees and 134
employees responsible for 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, registered investment advisers, and other financial
institutions and individuals 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 AUM. 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 their investment portfolios digitally.
This is leading to increased utilization of “robo” adviser platforms. If existing or potential clients 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
advisers 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.
10
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 may miss the opportunity to gain the AUM 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 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, we 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 in the U.S. domestic
stock market due to our high concentration of AUM 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 AUM. A
decline in the securities markets may cause the value of our AUM 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 AUM, 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 may also attract
institutional 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 accounts, resulting in decreases
in our AUM 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 in our 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, 2018, 37% our AUM 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
AUM 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 2018 and 2017, we had $10.4 billion and $11.4 billion of net outflows, respectively.
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 AUM. 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 or absolute basis, in
certain products or accounts that we manage, which may contribute to a significant reduction in our AUM and revenues.
There is typically a lag before improvements in investment performance produce a positive effect on asset flows. The
implementation of new fiduciary standards could also reduce asset flows in the event of underperformance. There can be
no assurances as to when, or if, investment performance issues will cease to negatively influence our AUM and revenues.
11
Changes In The Distribution Channels In Which We Operate Could Reduce Our Net Revenues and Adversely
Affect Our AUM, 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. AUM in our unaffiliated channel at December 31, 2018 were $25.0 billion, or 38% of
total AUM. 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,
including in response to new fiduciary standards, 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. 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. In April 2016, the U.S. Department of Labor (the “DOL”) adopted regulations that, among other things,
treated 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”). Although the DOL
Fiduciary Rule has been vacated by the U.S. Court of Appeals for the Fifth Circuit, other regulators have enacted or
proposed other fiduciary standards that could 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, 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.
Approximately half of our AUM, $37.2 billion, or 57%, as of December 31, 2018 are held in our broker-dealer
channel. The investment products distributed in our broker-dealer channel include our affiliated mutual funds and other
products, as well as products issued by unaffiliated mutual fund companies. A significant portion 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 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 AUM and AUA in this
channel, and a significant portion of those retirement assets are invested in our affiliated products. The introduction of
additional unaffiliated products in this channel, sustained underperformance of key investment products, and the
implementation of new fiduciary standards 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 AUM, 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
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 could impair our
ability to sell our products, which in turn could have a negative effect on our revenues and profitability.
A Significant Percentage Of Our AUM Are Distributed Through Our Unaffiliated Channel, Which Has
Higher Redemption Rates Than Our Broker-Dealer Channel.
In recent years, we have focused on expanding
distribution efforts relating to our unaffiliated channel. The percentage of our AUM in the unaffiliated channel was 38%
at December 31, 2018, and the percentage of our total sales represented by the unaffiliated channel was 61% for the year
ended December 31, 2018. The success of sales in our 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
12
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
AUM 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 24.9% and
22.9% for the years ended December 31, 2018 and 2017, respectively, the unaffiliated channel had redemption rates of
38.7% and 40.1% for the years ended December 31, 2018 and 2017, respectively. Redemption rates were 13.9% and
15.6% for our broker-dealer channel in the same periods, reflecting the higher rate of transferability of investment assets
in the 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
possible implementation of new fiduciary standards, may result in a higher redemption rate in our broker-dealer channel,
as Advisors may move to sell more unaffiliated products. An increase in the sale of unaffiliated mutual funds compared
to sales of the Funds in our broker-dealer channel 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 has resulted in pressure on active management firms
to reduce fees to compete with passive products. New fiduciary standards 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 clients. Effective July 31, 2018, we
implemented fee reductions in selected mutual funds. The investment management agreements with the Funds continue
in effect from year to year only if approved 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 AUM from higher revenue-
generating assets to lower revenue-generating assets may result in a decrease in our operating revenues even if our
aggregate AUM do not change. There can be no assurance that we will achieve a more favorable product mix in the future.
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. Most of our employees do not
have employment contracts, and generally can terminate their employment with us at any time. Those employees who are
subject to employment contracts are generally eligible to terminate their employment at any time upon written notice. 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, the departure of one or more of these employees could damage our reputation and 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 in our broker-dealer channel. Our growth prospects are directly affected by the quality, quantity and
productivity of Advisors who continue to manage their independent practices through their association with us.
13
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 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 AUM, 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. Historically, the risk of our investors redeeming their investments in
the Funds on short notice has been greater for assets in our unaffiliated channel. Additionally, redemptions in our broker-
dealer channel may increase materially with the introduction of additional unaffiliated investment products in our advisory
programs. The implementation of new fiduciary standards could also result in increased redemptions. An increase in
redemptions and the corresponding decrease in our AUM 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 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. 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 AUM, 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
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.
14
The Failure Or Negative Performance Of Products Offered By Competitors May Cause AUM 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
AUM 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 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 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 AUM, revenue and earnings to decline.
Restrictions On Our Inability To Use “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 Securities Exchange Act of 1934, as amended. We may be limited in our
ability to use “soft dollars,”. If our use of “soft-dollars” decreases or is eliminated, including due to the adoption of
regulations, our operating expenses could increase. The Markets in Financial Instruments Directive II (“MiFID II”), which
was effective in Europe in January 2018, regulates the use of “soft dollars” to pay for research and other services. Although
MiFID II does not apply to our investment management business in the United States, it may result in changes to industry
practice that limits our use of “soft dollars”.
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, which 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. Although the DOL Fiduciary Rule has been
vacated, the Company already had implemented a number of business and compliance initiatives in order to
change our distribution methods and operations in response to the Rule. The DOL could promulgate in the
future a rule to replace the DOL Fiduciary Rule that imposes materially different requirements on the
Company and makes such changes implemented in response to the DOL Fiduciary Rule unnecessary or no
longer appropriate. Such a rule could also impose additional or different requirements on the Company than
the rule proposed recently by the SEC imposing a fiduciary standard on broker-dealers discussed in greater
detail below, which could increase costs. 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 April 2018, the SEC proposed its own fiduciary rule that would impose a new standard of care on broker-
dealers when making recommendations to both retirement and non-retirement account recommendations. If
adopted, the proposed SEC rule could have wide ranging impact on our business and the businesses of those
parties through which we distribute our products. For example, such a rule could require us to implement
new policies and procedures designed to comply with the new requirements. 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 new fiduciary standards in a
15
timely manner, which could materially and adversely affect our business. Such a rule could necessitate
changes in our product structures in order to accommodate the new rule or changed business conditions,
including 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. In addition, it
could reduce our opportunities to distribute our products through our current network of business partners
and hinder our ability to develop new business relationships. New fiduciary standards could create additional
liability exposure to regulatory enforcement activity, including litigation and arbitration, which may result
in awards, settlements, penalties, injunctions, reputational risk, costs of defense regardless of outcome, or
other adverse results. New fiduciary standards, 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. Fiduciary regulations at the state level could also result in
increased costs or regulatory risks for the Company.
•
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 the Funds or our 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. CFTC rules implementing this
authority could apply to the activities of the Company and 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.
• 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
of diversification requirements, and enhanced stress testing. 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.
16
• 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 may 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, cybersecurity and the
evaluation of systemic risks and has indicated an intention to propose new rules for 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. In 2018, the
SEC included the re-proposal of a rule regulating the use of derivatives by registered investment companies
on its regulatory agenda. The ultimate impact on our Funds, and thus the Company, is unclear if the SEC
adopts such a rule, although certain Funds might be required to alter their principal investment strategies or
pursue them in a different manner, which could lead to investment losses or shareholder redemptions.
• 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. Such an enforcement proceeding, if involving the Company, also could
lead to potential harm to business reputation and could result in loss of client relationships. Without limiting
the generality of the foregoing, regulators in the U.S. 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 are likely to 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.
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.
17
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 the Advisors, and to bring regulatory or other legal actions
against us if, in their view, our practices, or those of our employees or the 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/or 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 the 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 investment adviser subsidiaries 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 client claims, class action suits and government actions alleging substantial
monetary damages and penalties. 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, including prior claims, 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 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 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 classification of those Advisors or that 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.
18
Misconduct By Our Employees And/Or By 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 Advisors handle a significant amount of funds, as well as
financial and personal information. Misconduct by our employees or by 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 clients; 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 Advisors, who are not employees,
presents additional challenges. We could be liable in the event of misconduct by employees or 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 AUM 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.
The Application of Tax Laws and Regulations and 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.
19
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 New Information Technology Systems Successfully Could Materially And Adversely
Affect Our Business. We are in the process of continuing to modernize our brokerage and advisory platforms and products
and implementing new information technology systems, including a new business administration platform and integrated
data repository that we believe will facilitate and improve our core businesses and our productivity, and position our
broker-dealer channel for long-term competitiveness. Additionally, new fiduciary standards could require significant
changes to our business operations, including, but not limited to, our distribution methods, compensation models and
product shelf. We may 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 successfully implement new information technology systems,
that our existing technology infrastructure can support new systems or changes to existing systems, 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, 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,
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. Further, a cybersecurity intrusion
could occur and persist for an extended period of time without detection, and any investigation of a cybersecurity intrusion
20
could require a substantial amount of time. During all this time we might not know the extent of the harm or how best to
remediate it, and errors or omissions could be repeated or compounded before being discovered and remediated, all of
which could aggravate the costs and consequences of the intrusion. 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. While we collaborate
with clients, vendors and other third parties to develop secure transmission capabilities and protect against cyber-attacks,
we cannot ensure that we or any third parties has all appropriate controls in place to protect the confidentiality of such
information. 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 clients, investors, employees and 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, 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 clients, investors, employees and
Advisors. Reputations may take decades to re-build, and negative incidents can quickly erode trust and confidence,
21
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.
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 an Advisor 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 new fiduciary standards. 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. 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 AUM or our current business environment, through
operational changes or performance improvement, our business may be adversely affected.
We Have Significant Goodwill and Intangibles On Our Balance Sheet, And Any Impairment Could Adversely
Affect Our Results of Operations. At December 31, 2018, our total assets were approximately $1.34 billion, of which
approximately $145.9 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
22
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.
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 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 clients 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 rating. 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, 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 rating could be changed at
any time and without any notice by the ratings organizations. Our credit facility borrowing rates are tied to our credit
rating. 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 rating, 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 rating could increase our borrowing costs, could limit our access to the capital
markets, and may result in outflows thereby reducing AUM 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. On October
20, 2017, we entered into a three-year revolving credit facility (the “Credit Facility”) with various lenders providing for
total availability of $100 million. Under the Credit Facility, the lenders may, at their option upon our request, expand the
Credit Facility to $200 million. At February 8, 2019, there was no balance outstanding under the Credit Facility. We also
have outstanding $95 million of 5.75% senior notes, series B, due 2021, which were issued on January 13, 2011 pursuant
to a note purchase agreement. 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
23
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.
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 may 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 the 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 the 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 $95 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
24
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.”
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.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
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. We also own three buildings on our home office campus:
two 50,000 square foot buildings and a 52,000 square foot building. In the opinion of management, the office space owned
and leased by the Company is adequate for existing home office operating needs. In addition, we lease office space utilized
by Advisors and field office support staff in various locations throughout the United States totaling approximately 518,000
square feet. Starting in 2018, we are transitioning all of the Advisors currently leasing space from W&R to personal branch
offices.
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.
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.”
According to the records of our transfer agent, we had 2,341 holders of record of common stock as of February 8,
2019. We believe that a substantially larger number of beneficial stockholders hold such shares in depository or nominee
form.
25
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. See
Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources.”
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 share-
based compensation programs. During the year ended December 31, 2018, we repurchased 6,963,269 shares in the open
market and privately at an aggregate cost, including commissions, of $135.9 million, including 729,882 shares repurchased
from employees to cover their tax withholdings from the vesting of shares granted under our share-based compensation
programs at a cost of $14.5 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 2018:
Total Number of Maximum Number (or
Shares
Purchased as
Approximate Dollar
Value) of Shares That
Period
October 1 - October 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 1 - November 30 . . . . . . . . . . . . . . . . . . . . . . . .
December 1 - December 31 . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
of Shares
Price Paid
Purchased
per Share
699,000 $ 20.26
19.68
705,242
18.12
1,039,481
2,443,723 $ 19.18
Announced
Program (1)
Purchased Under The
Program (1)
699,000
705,000
940,000
2,344,000
n/a
n/a
n/a
Total Number Average Part of Publicly
May Yet Be
(1) In August 1998, our Board of Directors approved a program to repurchase shares of our Class A 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 Class A common stock or (ii) $50 million of our Class A common stock. We may
repurchase our Class A 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 2018, 99,723 shares were purchased in connection with funding employee income tax
withholding obligations arising from the vesting of restricted shares.
In connection with our existing capital return policy, we intend to complete the repurchase of $250 million of our
Class A common stock through late 2019, which is inclusive of buybacks to offset dilution of our equity grants. We
continue to engage in opportunistic share repurchases to fulfill the targeted buybacks having repurchased $155.9
million since the fourth quarter of 2017 at a weighted average share price of $19.75.
26
Total Return Performance
Comparison of Cumulative Total Return (1)
Total Return Performance
Waddell & Reed Financial, Inc.
S&P 500 Index
SNL Asset Manager Index
200
150
100
50
e
u
l
a
V
x
e
d
n
I
0
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
The above graph compares the cumulative total stockholder return on the Company’s common stock from
December 31, 2013 through December 31, 2018 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 41 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 S&P Global Market Intelligence. The graph assumes the investment of
$100 in the Company’s common stock and in each of the two indices on December 31, 2013 with all dividends being
reinvested. The closing price of the Company’s common stock on December 31, 2013 was $65.12 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
12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018
37.52
95.35
150.33
78.25
105.50
113.69
46.83
89.97
115.26
34.97
95.18
129.05
100.00
100.00
100.00
44.13
126.39
157.22
(1) Cumulative total return assumes an initial investment of $100 on December 31, 2013, with the reinvestment of all
dividends through December 31, 2018.
27
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 Annual Report.
2018
For the Year Ended December 31,
2016
(in thousands, except per share data and percentages)
2015
2017
2014
Revenues from:
Investment management fees . . . . . . . . . . . $
Underwriting and distribution fees . . . . . .
Shareholder service fees . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . .
507,906
550,010
102,385
1,160,301
531,850
518,699
106,595
1,157,144
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
Net income attributable to Waddell &
Reed Financial, Inc. . . . . . . . . . . . . . . . . . . $
183,588
141,279
156,695
237,578
285,360
Operating margin . . . . . . . . . . . . . . . . . . . . . .
Net income per share from continuing
19 %
19 %
21 %
27 %
30 %
operations, basic and diluted . . . . . . . . . . . $
Dividends declared per common share . . . . $
Shares outstanding at December 31, . . . . . .
2.28
1.00
76,790
1.69
1.63
82,687
1.90
1.84
83,118
2.85
1.75
82,850
3.38
1.45
83,654
2018
2017
As of December 31,
2016
(in millions)
2015
2014
Assets under management . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,809 81,082 80,521 104,399 123,650
Balance sheet data:
Goodwill and identifiable intangible assets . . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Waddell & Reed stockholders’ equity . . . . . . . . . . . . .
145.9
1,344.1
94.9
449.2
883.5
147.1
1,384.4
94.8
497.0
872.9
148.6
1,406.3
189.6
551.6
844.0
158.1
1,555.2
189.4
708.7
846.5
158.1
1,511.1
189.3
725.0
786.1
28
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 Annual Report.
Strategic Initiatives
In 2017, we announced an actionable plan around four strategic pillars. These pillars include (1) strengthening
our investment management resources, processes and results; (2) reinvigorating our product line and sales; (3) continuing
the evolution of our broker-dealer to a self-sustaining, fully competitive and profitable entity; and (4) making investments
in support of our evolving business model, while improving efficiency. The following includes highlights of our progress
to-date.
To strengthen our investment management resources, processes and results, we are working to align investment
management resources and our philosophy toward the strongest growth opportunities, key products and new initiatives,
and to fortify the foundation of our active management heritage. Over the course of 2018, we continued to invest in our
people, technology resources, and risk management capabilities. We continue to move towards team-based portfolio
management of the Funds, and have fortified our research team with additional investment analysts, while continuing to
foster a collaborative culture across our investment management professionals. We are encouraged by recent performance
improvements, in fact, despite market volatility in the fourth quarter of 2018, relative investment performance at year-end
2018 improved compared to the prior year across much of our complex.
To reinvigorate our product line and sales, we continue to manage the product line dynamically to respond to the
competitive environment and opportunities for growth, and are directing sales activities to the best opportunities across
product, channel, distributor and advisor. In 2018, we completed the merger of the remaining Advisors Funds into Ivy
Funds, resulting in operational efficiency and added fund-level scale. We also announced and completed the merger of six
Ivy Funds and one Ivy VIP fund into other Ivy Funds, and one Ivy VIP fund, respectively, with generally similar investment
objectives, creating more economies of scale for the benefit of fund shareholders. Finally, we implemented fee reductions
in selected mutual funds, effective July 31, 2018, as we continue to focus on strategies where we feel we are best positioned
to compete. Although there are many factors at play, net outflows have slowed 9% year-over-year on a reported basis and
24% excluding the outsized impact of Institutional flows due to personnel changes.
To continue the evolution of our broker-dealer to a self-sustaining, fully competitive and profitable entity, we are
improving competitiveness by evolving the platform and product offerings and moving to an industry standard
compensation and services model. During 2018, we further realigned our field resources and announced plans to exit
leased field real-estate, while enhancing our Advisor payout grid to what we believe is best-in-class. We continue to direct
efforts around a field services model focused on delivering robust practice development, while expanding recruiting efforts
and creating a diamond service group for top Advisors. We also continue to enhance the technology platform and launched
plans for an advisor technology platform that integrates all of our enterprise technology applications and provides a desktop
solution where Advisors can manage all aspects of their business, allowing Advisors to work efficiently and seamlessly.
To focus investment in support of our evolving business model, while improving efficiency, we are advancing
our culture by further investing in our people through talent management, while ensuring our resources are aligned in the
most productive and effective manner as we build a framework for long-term success. Additionally, we introduced an
enterprise project management organization (PMO) and related project processes and governance, and are driving targeted
allocation and efficient utilization of corporate resources. We continue to focus on long-term controllable expenses, which
includes compensation, general and administrative, technology, occupancy and marketing and advertising costs. We’ve
made considerable progress on this front, achieving our previously stated goal of adding $30 million, on a run-rate basis,
to pre-tax income by the end of 2018, and having reduced controllable expenses nearly 8% since 2015, while making
targeted investments in growth areas.
Operating Results
We earned $1.2 billion in revenues in 2018, which was relatively unchanged as compared to 2017. Average AUM
were $78.3 billion in 2018 compared to $81.0 billion in 2017. Net income attributable to Waddell & Reed Financial, Inc.
increased 30% compared to 2017, while our operating margin was relatively unchanged from 2017.
29
Our balance sheet remains strong, as we ended the year with cash and investments of $837.9 million, excluding
noncontrolling interests. There were no borrowings under the Credit Facility at December 31, 2018 or at any point during
the year.
Assets Under Management
AUM of $65.8 billion at December 31, 2018 decreased $15.3 billion, or 19%, compared to $81.1 billion at
December 31, 2017. The decrease in AUM is due to net outflows of $10.4 billion and market depreciation of $4.9 billion.
Change in Assets Under Management (1)
Unaffiliated (2)
Institutional
Broker-
Dealer
Total
(in millions)
2018
Beginning Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sales(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending Assets at December 31, 2018 . . . . . . . . . . . . . . . . . . . . $
2017
Beginning Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sales(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending Assets at December 31, 2017 . . . . . . . . . . . . . . . . . . . . $
2016
Beginning Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sales(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending Assets at December 31, 2016 . . . . . . . . . . . . . . . . . . . . $
31,133
7,287
(11,399)
759
(3,353)
(2,803)
24,977
30,295
7,243
(11,990)
1,001
(3,746)
4,584
31,133
45,641
6,362
(22,438)
458
(15,618)
272
30,295
6,289
873
(4,108)
511
(2,724)
90
3,655
7,904
356
(3,446)
6
(3,084)
1,469
6,289
15,414
1,065
(8,860)
254
(7,541)
31
7,904
43,660
3,835
(6,889)
(1,270)
(4,324)
(2,159)
37,177
42,322
4,221
(7,753)
(1,007)
(4,539)
5,877
43,660
43,344
4,287
(5,736)
(712)
(2,161)
1,139
42,322
81,082
11,995
(22,396)
—
(10,401)
(4,872)
65,809
80,521
11,820
(23,189)
—
(11,369)
11,930
81,082
104,399
11,714
(37,034)
—
(25,320)
1,442
80,521
(1) Includes all activity of the Funds, the IGI Funds and institutional accounts, including money market funds and
transactions at net asset value, accounts for which we receive no commissions.
(2) Unaffiliated includes National channel (home office and wholesale), Defined Contribution Investment Only “DCIO”,
Registered Investment Advisor “RIA” and Variable Annuity “VA”.
(3) Sales is primarily gross sales (net of sales commission). This amount also includes net reinvested dividends and capital
gains and investment income.
30
Average AUM, which are generally more indicative of trends in revenue from investment management services
than the change in ending AUM, decreased by 3% compared to 2017.
Average Assets Under Management
2018
Percentage
of Total
Average
2017
Percentage
of Total
Average
2016
Percentage
of Total
Average
(in millions, except percentage data)
Distribution Channel:
Unaffiliated
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,164
5,607
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . .
92
Money market . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,863
Institutional
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,410
54
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . .
—
Money market . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,464
Broker-Dealer
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,446
9,870
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . .
1,696
Money market . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,012
Total by Asset Class:
81 % 23,549
19 % 6,662
105
—
100 % 30,316
78 % 28,078
22 % 7,289
159
—
100 % 35,526
99 % 6,773
298
1 %
—
—
100 % 7,071
96 % 10,026
711
4 %
—
—
100 % 10,737
73 % 31,485
23 % 10,243
4 % 1,862
100 % 43,590
72 % 30,681
24 % 9,828
4 % 2,029
100 % 42,538
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,020
15,531
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . .
1,788
Money market . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,339
78 % 61,807
20 % 17,203
2 % 1,967
100 % 80,977
76 % 68,785
21 % 17,828
3 % 2,188
100 % 88,801
79 %
21 %
—
100 %
93 %
7 %
—
100 %
72 %
23 %
5 %
100 %
77 %
20 %
3 %
100 %
31
The following table summarizes our five largest mutual funds as of December 31, 2018 by ending AUM and
investment management fees, with the comparative positions in 2017 and 2016. The AUM and management fees of these
mutual funds are presented as a percentage of our total AUM and total management fees. The increase in AUM in the Ivy
Science & Technology, Ivy Mid Cap Growth and Ivy Large Cap Growth Funds is primarily due to the Advisors Fund
mergers during the first quarter of 2018.
Five Largest Mutual Funds by Ending Assets Under Management and Investment Management Fees
2018
Ending
Percentage
of Total
2017
Percentage
of Total
Ending
2016
Percentage
of Total
Ending
(in millions, except percentage data)
By AUM:
Ivy Science & Technology . . . . . . . . . . . . $
Ivy International Core Equity . . . . . . . . .
Ivy High Income . . . . . . . . . . . . . . . . . . . .
Ivy Mid Cap Growth . . . . . . . . . . . . . . . . .
Ivy Large Cap Growth . . . . . . . . . . . . . . .
6,345
5,438
4,857
3,983
3,873
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,496
4,116
10 %
7,140
8 %
4,180
7 %
2,377
6 %
1,898
6 %
37 % 19,711
3,829
5 %
4,405
9 %
4,616
5 %
2,363
3 %
1,539
2 %
24 % 16,752
(in thousands, except percentage data)
By Management Fees:
Ivy Science & Technology . . . . . . . . . . . . $ 56,997
49,645
Ivy International Core Equity . . . . . . . . .
30,885
Ivy Mid Cap Growth . . . . . . . . . . . . . . . . .
28,264
Ivy Core Equity . . . . . . . . . . . . . . . . . . . . .
27,971
Ivy High Income . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193,762
11 % 32,933
10 % 45,017
6 % 19,198
6 % 11,044
5 % 23,672
38 % 131,864
6 % 36,428
8 % 35,181
4 % 23,528
2 %
6,675
4 % 25,106
24 % 126,918
5 %
5 %
6 %
3 %
2 %
21 %
7 %
6 %
4 %
1 %
5 %
23 %
Assets Under Administration
AUA includes both client assets invested in the Funds and in other companies’ products that are distributed
through W&R and held in brokerage accounts, within our fee-based asset allocation programs, or held directly with the
funds. AUA decreased 10% as compared to 2017, primarily due to a reduction in non-advisory assets, primarily due to
market action. At the end of 2018, there were 1,060 Advisors and 343 licensed advisor associates, both associated with
W&R, for a total of 1,403. Average productivity per Advisor for the year ended December 31, 2018 was $378 thousand,
an increase of 48% as compared to 2017. The decrease in Advisors, along with an increase in productivity is due to our
efforts to transform W&R into a self-sustaining, fully competitive and profitable entity, with a focus on higher producing
Advisors.
32
For the Year ended December 31,
2018
2017
(in millions, except advisor data
and percentages)
AUA
Advisory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-advisory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total AUA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
21,207
30,059
51,266
21,613
35,073
56,686
Net new advisory assets (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net new non-advisory assets (1), (2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net new assets (1), (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
575
(3,670)
(3,095)
471
(3,573)
(3,102)
Annualized advisory AUA growth (3) . . . . . . . . . . . . . . . . . . . . . . .
Annualized AUA growth (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.7 %
(5.5)%
2.6 %
(5.9)%
Advisor count . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average trailing 12-month production per Advisor (4) (in
1,060
1,367
thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Advisor associate count . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
378
343
256
265
(1) Net new assets is calculated as total client deposits and net transfers less client withdrawals.
(2) Excludes activity related to products held outside of our broker-dealer platform. These assets represent less than 10%
of total AUA.
(3) Annualized growth is calculated as annualized net new assets divided by beginning AUA.
(4) Production per Advisor is calculated as trailing 12-month Total Underwriting and distributions fees less “other”
underwriting and distribution fees divided by the average number of Advisors. “Other” underwriting and distribution
fees predominantly include fees paid by Advisors for programs and services.
Results of Operations
Net Income
Net income attributable to Waddell & Reed
2018
For the Year ended
December 31,
Variance
2016
(in thousands, except per share and percentage data)
2017
2017
2018 vs.
2017 vs.
2016
30 %
35 %
—
(10)%
(11)%
(10)%
Financial, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 183,588
2.28
Earnings per share, basic and diluted . . . . . . . . . . . . . . $
Operating Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
141,279
1.69
156,695
1.90
19 %
19 %
21 %
33
Total Revenues
Total revenues were relatively consistent in 2018 as compared to 2017. Total revenues decreased 7% in 2017
compared to 2016, primarily due to a decrease in average AUM of 9%.
For the Year ended
December 31,
2018
2017
2016
Variance
2018 vs.
2017
2017 vs.
2016
Investment management fees . . . . . . . . . . . . . . . . $
Underwriting and distribution fees . . . . . . . . . . . .
Shareholder service fees . . . . . . . . . . . . . . . . . . . .
507,906
550,010
102,385
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,160,301
(in thousands, except percentage data)
531,850
518,699
106,595
1,157,144
557,112
561,670
120,241
1,239,023
(5)%
6 %
(4)%
—
(5)%
(8)%
(11)%
(7)%
Investment Management Fee Revenues
Investment management fee revenues decreased $23.9 million, or 5%, in 2018 and decreased $25.3 million, or
5%, in 2017. Investment management fee revenues are based on the level of average client AUM and are affected by sales,
financial market conditions, redemptions and the composition of assets. The following graph illustrates the direct
relationship between average client AUM and investment management fee revenues for the years ending December 31,
2018, 2017 and 2016.
)
s
n
o
i
l
l
i
b
n
i
$
(
t
n
e
m
e
g
a
n
a
M
r
e
d
n
U
s
t
e
s
s
A
e
g
a
r
e
v
A
$140
$120
$100
$80
$60
$40
)
s
n
o
i
l
l
i
m
n
i
$
(
s
e
e
F
t
n
e
m
e
g
a
n
a
M
t
n
e
m
t
s
e
v
n
I
$800
$700
$600
$500
$400
$300
$200
$100
$-
2018
2017
2016
Average Assets Under Management
Investment Management Fees
34
The following table summarizes investment management fee revenues, related average AUM, fee waivers and
investment management fee rates for the years ending December 31, 2018, 2017 and 2016. Fee waivers for the Funds are
recorded as an offset to investment management fees up to the amount of fees earned.
For the Year ended
December 31,
Variance
2018 vs. 2017 vs.
2018
2016
(in thousands, except for management fee rate, average assets and
percentage data)
2016
2017
2017
Funds investment management fees (net) . . . . . . . . . . . . $ 486,181
72,875
Funds average assets (in millions) . . . . . . . . . . . . . . . . . .
0.6671 %
Funds management fee rate (net) . . . . . . . . . . . . . . . . . . .
506,868
73,906
0.6858 % 0.6677 %
521,207
78,065
(4) %
(1) %
(3)%
(5)%
Total fee waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,696
7,648
8,110
131 %
(6)%
Institutional investment management fees (net) . . . . . . . $ 21,725
Institutional average assets (in millions) . . . . . . . . . . . . .
5,464
0.4057 %
Institutional management fee rate (net) . . . . . . . . . . . . . .
24,982
7,071
0.3786 % 0.3502 %
35,905
10,737
(13) %
(23) %
(30)%
(34)%
Revenues from investment management services provided to our retail mutual funds, which are distributed
through the unaffiliated and broker-dealer channels, decreased $20.7 million in 2018, or 4%, compared to 2017, primarily
due to an increase in fee waivers due to fee reductions in selected mutual funds that were implemented as of July 31, 2018,
as well as the merger of the remaining Advisors Funds into Ivy Funds. Additionally, revenues decreased due to a slight
decrease in average AUM and a shift in the mix of our AUM. Absent improvement in flow trends or markets, our revenues
in 2019 could be further reduced by a full year impact of fee reductions we put into place during 2018. Revenues from
investment management services provided to our mutual funds decreased $14.3 million in 2017, or 3%, compared to 2016.
Investment management fee revenues declined less on a percentage basis than the related average AUM due to an increase
in the average management fee rate. A lower asset base in the Ivy Asset Strategy Fund resulted in increased management
fee rates from 2016 to 2017, due to the fund having a management fee rate less than our average management fee rate. Fee
waivers declined in 2017 primarily due to lower money market fee waivers as a result of federal interest rate hikes in 2017
and 2016 and were partially offset by increases due to the launch of new funds.
Institutional account revenues in 2018 decreased $3.3 million, or 13%, compared to 2017 due to a 23% decrease
in average AUM, which was partially offset by an increased management fee rate. Outflows in assets for 2018 in this
channel are primarily due to personnel changes at the portfolio manager level. Additionally, we have been notified of
approximately $0.5 billion of redemptions in our institutional channel for first half of 2019. Institutional account revenues
in 2017 decreased $10.9 million, or 30%, compared to 2016 due to a 34% decrease in average AUM. For both comparative
periods, the increase in the average management fee rate was due to a mix-shift of assets to client accounts with higher
management fee rates.
Unaffiliated channel . . . . . . . . . . . . . . . . . . . .
Institutional channel . . . . . . . . . . . . . . . . . . . .
Broker-Dealer channel . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term redemption rates
(excludes money market redemptions)
for the year ended December 31,
2016
2017
2018
63.7 %
40.1 %
38.7 %
82.5 %
48.7 %
75.2 %
11.1 %
15.6 %
13.9 %
41.1 %
27.8 %
27.8 %
In 2018, as compared to 2017, the long-term redemption rate improved slightly as we saw lower redemptions in
key strategies due to improving performance and market dynamics. The decreased long-term redemption rate in 2017
compared to 2016 for the unaffiliated channel was primarily driven by improved redemption rates in the Asset Strategy
funds. Prolonged redemptions in the unaffiliated channel could negatively affect revenues in future periods. The increased
long-term redemption rate for our institutional channel in 2018 compared to 2017 was driven by larger client redemptions
than the comparative period, primarily due to portfolio manager turnover. In 2017, the institutional channel experienced
an overall decrease in redemption activity with less significant redemptions from our core equity, core fixed income and
large cap core strategies, compared to 2016. In the broker-dealer channel, we historically experienced a long-term
redemption rate lower than that of the industry average. With the modernizing of our broker-dealer platform and the
35
introduction of new fee-based products, such as the launch of the MAP Navigator product in 2017 (which increases the
availability of third party products), we experienced pressure on the long-term redemption rate in 2017 but saw a slight
improvement in 2018. The industry average redemption rate in 2018, based on data provided by the ICI, was 24.9% versus
our rate of 27.8% in total and 24.1% excluding the institutional channel, which had elevated redemptions in 2018, primarily
due to certain portfolio manager departures.
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 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 2016, 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 AUM.
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 subsidiaries, 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.
Underwriting and Distribution Fee Revenues
The following tables summarize the significant components of underwriting and distribution fee revenues
segregated by distribution channel for the years ended December 31, 2018, 2017 and 2016:
Underwriting and distribution fee revenues:
2018
Total
2017
(in thousands)
2016
Fee-based asset allocation product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 269,069 240,089 224,319
148,979 167,163 215,186
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 550,010 518,699 561,670
56,791
31,286
23,370
56,781
36,131
39,050
Underwriting and distribution fee revenues:
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,041
1,886
Sales commissions on front-end load mutual fund sales . . . . . . . . . . . . . . . . . . . . . .
568
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,495
91,313 121,926
565
1,498
1,182
2,924
93,993 125,415
2018
Unaffiliated Channel
2017
(in thousands)
2016
36
2018
Broker-Dealer Channel
2017
(in thousands)
2016
Underwriting and distribution fee revenues:
Fee-based asset allocation product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 269,069 240,089 224,319
93,260
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67,169
Sales commissions on front-end load mutual fund and variable annuity sales . . . . .
31,246
Sales commissions on other products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,261
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 469,515 424,706 436,255
75,850
55,293
31,286
22,188
70,938
54,895
36,131
38,482
A significant portion of underwriting and distribution revenues are received from asset-based fees earned on our
asset allocation products and commissions. Underwriting and distribution revenues also include Rule 12b-1 asset-based
service and distribution fees earned on load, load-waived and deferred-load products sold by Advisors and third party
intermediaries, sales commissions charged on front-end load products sold by 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 unaffiliated
channel mutual fund sales are load-waived. 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 2018 increased by $31.3 million, or 6%, compared to 2017.
Revenues from fee-based asset allocation products increased 12% due to an increase in fee-based asset allocation average
assets of 12%. Sales commissions on other products increased $4.8 million, or 15%, primarily due to an increase in fixed
indexed annuity sales. Other revenues increased $16.3 million, or 73%, compared to 2017, primarily due to an increase in
payments received from Advisors for services. Starting in 2018, the compensation structure for Advisors has been revised
to align W&R more closely with industry standards, while offering competitive programs and services to Advisors. Under
the new structure, the Company receives compensation for certain services made available to our Advisors, including, but
not limited to, facilities, technology and supervision. These increases were partially offset by a decrease in Rule 12b-1
asset based service and distribution fees across both channels of $18.2 million, or 11%, compared to 2017, driven by a
decrease in average mutual fund AUM for which we earn Rule 12b-1 revenues. Due to current industry trends toward
institutional share classes in fee based programs we anticipate a continued decrease in 12b-1 service and distribution fees
and sales commissions.
Underwriting and distribution revenues earned in 2017 decreased by $43.0 million, or 8%, compared to 2016.
Rule 12b-1 asset based service and distribution fees across both channels decreased $48.0 million, or 22%, year over year,
driven by a decrease in average mutual fund AUM 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. Sales commissions on front-end load mutual fund and variable annuity sales decreased $10.9 million, or
16%, due to decreases in sales volume and revenue rates. Fee-based asset allocation revenue increased $15.8 million, or
7%, due to an increase in fee-based asset allocation average assets of 4%.
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 2018, shareholder service fees revenue decreased $4.2 million, or 4%, over 2017. Account-based fees
decreased $2.6 million compared to 2017 due to a decrease in the number of accounts, partially offset by increased fees
for custodian and retail accounts due to a 2018 fee schedule change. Service fees based on assets decreased $1.6 million,
or 3%, compared to 2017, primarily due to a decrease in fund administrative and accounting services fees due to the 2017
and 2018 fund mergers.
During 2017, shareholder service fees revenue decreased $13.6 million, or 11%, compared to 2016. Account-
based fees decreased $22.3 million compared to 2016 due to a decrease in the number of accounts, and were partially
37
offset by an increase in asset-based fees of $9.0 million, or 26%, compared to 2016. The change was primarily 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. Assets in the institutional share classes increased from an average of $23.3 billion
at December 31, 2016 to an average of $30.9 billion at December 31, 2017, representing an increase of 33%.
Total Operating Expenses
Operating expenses for the years ended December 31, 2018, 2017 and 2016 are set forth in the following table:
For the Year ended
December 31,
2018
2017
2017
(in thousands, except percentage data)
2016
Variance
2018 vs. 2017 vs.
2016
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 456,832 432,264 485,981
263,329 271,276 267,839
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80,820
88,951
73,643
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,045
66,078
65,275
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,406
30,721
27,197
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,080
12,425
10,323
Marketing and advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,358
20,983
25,649
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,572
13,174
14,805
Subadvisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,749
1,500
1,200
Intangible asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 938,253 937,372 979,850
6 %
(3)%
(17)%
(1)%
(11)%
(17)%
22 %
12 %
(20)%
—
(11)%
1 %
10 %
5 %
(2)%
(5)%
14 %
38 %
(85)%
(4)%
Distribution Expenses
Distribution costs fluctuate with sales volume, such as Advisor commissions and commissions paid to field
management, Advisor incentive compensation, commissions paid to third parties and to our own wholesalers, and related
management commissions in our unaffiliated channel. Direct selling costs also fluctuate with AUM, such as Rule 12b-1
service and distribution fees paid to third parties.
Distribution expenses in 2018 increased by $24.6 million, or 6%, compared to 2017. Expenses in the broker-
dealer channel increased $42.1 million compared to 2017, primarily due to an increase in average advisory assets and the
changes made to our Advisor pay structure starting in 2018. Additionally, in late 2018, the Company announced further
enhancements to the compensation grid for Advisors, which we believe are best in class payout rates. Expenses in the
unaffiliated channel decreased $17.5 million compared to 2017 due to lower Rule 12b-1 asset-based service and
distribution expenses paid to third party distributors and lower dealer compensation due to lower client assets.
Distribution expenses in 2017 decreased by $53.7 million, or 11%, compared to 2016. Expenses in the broker-
dealer channel declined $19.1 million compared to 2016, primarily due to the changes we made to the management
structure in our broker-dealer channel and a decrease in deferred acquisition expense due to a share class conversion in
our advisory products in 2016. Compensation for managers has moved from commissions and overrides, which were
captured as distribution expense, to a salary and bonus, which is compensation and benefits expense. Partially offsetting
the expense decreases, advisory fee commissions increased due to the increase in fee-based asset allocation average assets
and changes to the compensation plan. Expenses in the unaffiliated channel decreased $34.6 million compared to 2016 as
a result of a decrease in average unaffiliated AUM, which resulted in lower Rule 12b-1 asset-based service and distribution
expenses paid to third party distributors and lower dealer compensation.
Compensation and Benefits
Compensation and benefits in 2018 decreased $7.9 million, or 3%, compared to 2017. The primary drivers of the
decrease were a decrease in share-based compensation of $6.2 million, a decrease in pension costs of $8.4 million due to
the freeze of the Pension Plan in 2017, and a decrease of $4.0 million due to a discretionary 401k contribution in 2017.
The decrease in share-based compensation is primarily due to shifting the employee grant date to January from April in
2017, larger grant years being fully amortized and, to a lesser extent, revaluation of cash-settled restricted stock units
(“RSUs”). Partially offsetting these decreases were an increase of $5.1 million in salaries and wages due to annual merit
increases and $5.1 million due to increases in incentive compensation and severance expense.
38
Compensation and related costs in 2017 increased $3.4 million, or 1%, compared to 2016. The primary drivers
of the increase were an increase in share-based compensation (including RSUs) of $6.2 million, an increase in salaries and
wages of $1.4 million, an increase in group health insurance costs of $4.2 million and an increase of $4.7 million primarily
due to a discretionary 401k contribution in 2017. Partially offsetting these increases were a decrease in other compensation
of $5.5 million and a $3.8 million decrease in pension expenses due to the freeze of the Pension Plan in 2017. The increase
in share-based compensation is primarily due to the grant date shifting to January from April in 2017, revaluation of RSUs
and changes in forfeitures. The increase in salaries and wages was due to the change to our broker-dealer market structure
in 2017, partially offset by decrease in headcount due to 2016 workforce reductions. The increase in group health insurance
costs is due to a curtailment gain realized on the amendment of our defined benefit postretirement medical plan in 2016.
The decrease in other compensation was primarily due to severance expense in 2016 as a result of workforce reductions.
General and Administrative Expenses
General and administrative expenses are operating costs, including, but not limited to, dealer services,
professional services, including legal, audit and consulting, travel and meetings and temporary office staff.
General and administrative expenses decreased $15.3 million for the year ended December 31, 2018, compared
to 2017. Temporary office staff expense decreased $7.9 million primarily due to reduced technology consulting services
and reduced consulting services primarily due to DOL Fiduciary Rule implementation in the prior year. There were also
decreases in legal, audit and consulting costs and fund expenses in 2018 compared to 2017.
General and administrative expenses increased $8.1 million for the year ended December 31, 2017 compared to
2016. Temporary office staff expense increased $8.0 million primarily due to increased technology consulting services
and consulting services related to DOL Fiduciary Rule implementation. There were also increases in legal, audit and
consulting costs and fund expenses in 2017 compared to 2016, offset partially by decreased dealer service costs, which
primarily represent account servicing costs to third party dealers, as a result of lower asset levels in certain share classes.
Occupancy
Occupancy expenses include facilities costs of our home offices, as well as rent expense for our leased home
office and field office space. Occupancy expenses decreased $3.5 million in 2018 as compared to 2017 primarily due to
the elimination of the Advisor and field office allowance program that ceased in 2017 and lower rent expense due to the
closure of some field offices. From 2017 to 2016 occupancy costs were relatively unchanged.
Marketing and advertising
Marketing and advertising expense decreased in both comparative periods as we focus our marketing efforts on
the highest impact markets and activities.
Depreciation
Depreciation expense increased in 2018 as compared to 2017 due to an adjustment to the useful life of certain
internally developed software assets. The increase in 2017 as compared to 2016 was due to assets placed in service during
the latter part of 2016. We expect depreciation expense to decrease in 2019 as a number of fixed assets reached the end
of their useful lives during 2018 and we continue to shift our technologies toward Software-as-a-Service.
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, as we pay out approximately half of our management fee
revenues received from subadvised products.
Subadvisory expenses increased $1.6 million for the year ended December 31, 2018 due to an increase in
subadvised average assets of 8% and an increase in the average subadvisory fee rate. Subadvisory expenses increased $3.6
million for the year ended December 31, 2017 due to an increase in subadvised average assets of 97%, due to the launch
in 2017 of Ivy ProShares, the Ivy IG International Small Cap Fund, the Ivy PineBridge High Yield Fund, and the
39
introduction of the Advisors Wilshire Global Allocation Fund. This period was 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 2018 and 2017, we recorded intangible asset impairment charges of $1.2 million and $1.5 million,
respectively, related to our subadvisory agreement to manage certain mutual fund products, as a result of a decline in AUM
in 2017 primarily attributable to a realignment of fund offerings and the termination of the subadvisory agreement in 2018.
At December 31, 2018, there was no remaining balance of our subadvisory intangible asset.
Other Income and Expenses
Investment and Other Income (Loss)
Investment and other income decreased $14.4 million in 2018 compared to 2017. Mark-to-market losses in 2018
on our consolidated sponsored funds, equity method sponsored funds and equity securities caused a decrease of $67.8
million compared to gains in 2017. The mark-to-market decreases were offset by a $51.5 million increase in mark-to-
market gains generated by our economic hedging program that uses total return swap contracts to hedge market risk in
certain sponsored funds for the same comparative period. In addition, unrealized gains attributable to noncontrolling
interests in sponsored funds where the Company held majority ownership decreased $4.9 million and the gain related to
revaluation of the Pension Plan liability decreased $3.6 million compared to 2017. Partially offsetting these decreases,
interest and dividend income increased $10.4 million compared to 2017 primarily due to the laddered fixed income
portfolio.
Investment and other income increased $45.1 million in 2017 compared to 2016. Mark-to-market gains in 2017
on our consolidated sponsored funds, equity method sponsored funds and equity securities increased $19.9 million
compared to 2016. The mark-to-market increases were offset by a $4.4 million increase in mark-to-market losses generated
by our economic hedging program that uses total return swap contracts to hedge market risk in certain sponsored funds for
the same comparative period. In 2017, interest and dividend income increased $4.3 million compared to 2016. The increase
is due in part to a laddered fixed income investment portfolio we implemented in the second quarter of 2017 to optimize
the return on our cash. In addition, gains related to the Pension Plan in 2017 increased $28.7 million as compared to 2016,
including gains related to the freeze of the Pension Plan on September 30, 2017. Partially offsetting these increases, losses
on the sales of sponsored funds and impairment charges on securities held as available for sale decreased $3.9 million.
Interest Expense
Interest expense was $6.5 million, $11.3 million and $11.1 million in 2018, 2017 and 2016, respectively. The
majority of our interest expense in 2016 and 2017 was related to our $190.0 million Series A and Series B senior unsecured
notes. The $95.0 million Series A senior unsecured notes matured and were repaid in January 2018. As a result, we
experienced $4.8 million in annual interest expense savings from 2017 to 2018.
Income Taxes
Our effective income tax rate was 23.3%, 41.3%, and 34.1% in 2018, 2017, and 2016, respectively. The lower
effective tax rate in 2018 as compared to 2017 was primarily the result of U.S. tax reform that was enacted on December 22,
2017, which reduced the federal statutory tax rate from 35% to 21%.
In addition, during 2018, the Company recognized a tax shortfall from share-based payments of $4.4 million,
which was less than the $8.4 million shortfall experienced in 2017, causing our effective tax rate to decrease. The tax
effects of share-based payments could create continued volatility in the effective tax rate in future periods. The lower
effective tax rate in 2018 as compared to 2017 was also a result of $6.4 million that was reversed in 2018 upon the
completion of a voluntary disclosure agreement with a state tax jurisdiction during the year and the 2017 charge of $5.4
million to revalue the Company's net deferred tax assets for U.S. tax reform. These decreases were partially offset by the
removal of a $1.3 million deferred tax asset in 2018 related to the Company's tax basis in Ivy Global Investors SICAV,
pursuant to the pending liquidation of that entity.
40
The higher effective tax rate in 2017 as compared to 2016 was primarily the result of a tax shortfall from share-
based payments in 2017 as compared to no such impact in 2016, a reduction in the year over year release of valuation
allowance on capital losses, and the 2017 charge to revalue the Company's net deferred tax assets for U.S. tax reform.
Liquidity and Capital Resources
We strive to maintain a capital structure that supports our business strategies and to maintain the appropriate
amount of liquidity at all times. Expected uses of cash include capital expenditures for enhancement of technology
infrastructure, repurchases of our common stock, dividend payments, interest on indebtedness, income tax payments, seed
money for new products, payment of deferred commissions to Advisors and third parties, collateral funding for margin
accounts established to support derivative positions, and leasehold and building improvements, and could include strategic
acquisitions. Our seed investments in consolidated sponsored funds are not managed as liquid assets because they may be
longer term in nature.
For the Year Ended
December 31,
2017
2018
Variance
2018 vs.
2017
2017 vs.
2016
2016
(in thousands, except percentage data)
Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 231,997
617,135
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,854
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flow Data:
Cash flows from operating activities . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities . . . . . . . . . . . . . . . . . . . .
357,015
207,829
700,492
94,996
94,783
555,102
328,750
—
189,605
12 %
(63)%
(12)% 113 %
(100)% 100 %
(50)%
—
50,851
10,343 (212,395)
87,904
75,871 NM
602 %
(42)%
NM
(311,788) (188,710) (202,911)
(65)%
7 %
Our operations provide much of the cash necessary to fund our priorities, as follows:
• Repurchase our stock
• Pay dividends
• Finance internal growth
Repurchase Our Stock
We repurchased 7.0 million shares of our Class A common stock in the open market or privately in 2018 compared
to 1.8 million and 2.3 million shares in 2017 and 2016, respectively, resulting in share repurchases of $135.9 million, $35.8
million and $49.8 million, respectively. These share repurchases included 729,882 shares, 402,337 shares and 423,726
shares tendered by employees to cover their tax withholdings with respect to vesting of share-based awards during the
years ended December 31, 2018, 2017 and 2016, respectively.
In connection with our existing capital return policy, we intend to complete the repurchase of $250 million of our
Class A common stock by late 2019, which is inclusive of buybacks to offset dilution of our equity grants. We continue
to engage in opportunistic share repurchases to fulfill the targeted buybacks. We have repurchased $155.9 million of our
Class A common stock since the announcement of this policy at a weighted average share price of $19.75.
Pay Dividends
We paid quarterly dividends on our Class A common stock that resulted in financing cash outflows of $81.2
million, $154.0 million and $152.8 million in 2018, 2017 and 2016, respectively.
In December 2018, the Board of Directors declared a quarterly dividend on our common stock of $0.25 per share
payable on February 1, 2019 to stockholders of record as of January 11, 2019.
41
Finance Internal Growth
We use cash to fund growth in our distribution channels. We continue to invest in our broker-dealer channel by
offering home office resources, wholesaling efforts and enhanced technology tools, including the modernization of our
brokerage and product platform. Our unaffiliated channel requires cash outlays for wholesaler commissions and
commissions to third parties on deferred load product sales. We also provide seed money for new products to further
enhance our product offerings and distribution efforts. As we continue to advance our investment in improved technology,
we expect increased costs in this area in the near term.
On October 20, 2017, we entered into a three-year unsecured revolving credit facility (the “Credit Facility”) with
various lenders, which initially provides for borrowings of up to $100.0 million and may be expanded to $200.0 million.
The Credit Facility replaced the prior credit facility, which was set to expire in June 2018. There were no borrowings under
the Credit Facility at December 31, 2018 and no borrowings at any point during the year. The covenants in the Credit
Facility are consistent with the covenants in the prior credit facility, including the required consolidated leverage ratio and
the consolidated interest coverage ratio, which match those outlined below for the senior unsecured notes.
On August 31, 2010, the Company entered into an agreement to complete a $190.0 million private placement of
the Series A and Series B senior unsecured notes. The $95.0 million Series A, senior unsecured notes that matured on
January 13, 2018 were repaid. 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 for four
consecutive quarters and a consolidated interest coverage ratio of not less than 4.0 for four consecutive quarters. The
Company was in compliance with these covenants for all periods presented. As of December 31, 2018, the Company’s
consolidated leverage ratio was 0.3, and consolidated interest coverage ratio was 48.7.
Cash Flows
Cash from operations is our primary source of funds. In 2018, cash from operations increased primarily due to
increased sales of trading securities held by consolidated sponsored funds, due to the liquidation of the IGI Funds, and an
increase in net income as compared to 2017. In 2017, cash from operations decreased due to increased purchases of trading
securities, a decrease in the amortization of deferred sales commission payments related to deferred sales load and fee
based products and a decrease in net income as compared to 2016. In 2016, cash from operations decreased due to a
decrease in the amortization of deferred sales commission payments related to deferred sales load and fee based products
and a decrease in net income as compared to 2015.
In addition to the items noted above, 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.
Investing activities consist primarily of the seeding and sale of sponsored investment securities, purchases and
maturities of investments held in our fixed income laddering program and capital expenditures.
Financing activities include payment of dividends and repurchase of our common stock. Additionally, in 2018,
financing activities included repayment of our Series A senior unsecured notes at maturity. Future financing cash flows
will be affected by our existing capital return policy.
42
Contractual Obligations and Contingencies
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, 2018. 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.
Total
2019
2020-
2021
(in thousands)
2022-
2023
Thereafter/
Indeterminate
Short-term and long-term debt obligations, including
Non-cancelable operating lease commitments . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . .
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,657
42,436
76,778
2,741
$ 230,612
5,463 103,194
15,554
16,488
36,123
36,465
—
390
58,806 154,871
—
5,233
4,190
—
9,423
—
5,161
—
2,351
7,512
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
Two significant considerations arise with respect to goodwill and intangible 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 two-step
impairment 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. Annually, the Company performs
a qualitative assessment before calculating the fair value of the reporting unit. If the Company determines, on the basis of
qualitative factors, that the fair value of the reporting unit is more likely than the carrying amount, the two-step impairment
test would not be required. 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
subsidiary relationship 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.
43
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”) 740, “Income Taxes Topic.”
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.
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.
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 clients’ 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.
Interest Rate Sensitivity
Our interest sensitive assets and liabilities include the debt security holdings in our fixed income laddering
program, 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
debt security holdings in the fixed income laddering program and 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 debt security holdings in the fixed income laddering program and Senior
Notes, and a decrease in interest expense associated with short-term borrowings and borrowings under the Credit Facility.
There were no borrowings under the Credit Facility at December 31, 2018 or at any point during the year.
Investment Securities Sensitivity
We maintain an investment portfolio of various holdings, types and maturities. Our portfolio is diversified and
consists primarily of sponsored funds and debt securities. We have a hedging program that uses total return swaps to hedge
our exposure to fluctuations in the value of our investment portfolio classified as equity securities measured through net
income, recorded using the equity method, or consolidated within our consolidated financial statements. 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. 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 fluctuations in interest
rates and stock market volatility on our investment portfolio may be offset due to the hedging program. A portion of debt
securities are classified as available for sale investments. If a decline in fair value is determined to be other than temporary
by management or the Company intends or is required to sell the available for sale security prior to recovery of the
amortized cost, the cost basis of the individual security accounted for as available for sale is written down to fair value.
However, unrealized gains are not recognized in operations on available for sale debt securities until they are sold.
44
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, 2018:
Investment Securities
Fair Value
Fair Value
Assuming a 10% Assuming a 10%
Fair Value
Increase
(in thousands)
Decrease
Available for sale:
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,001
7,970
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
218,121
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,672
Trading:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Securities:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored privately offered funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Method:
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,840
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 617,135
1,993
77,250
5,884
7
33,088
21,204
153,548
678
24,879
5,501
8,767
239,933
21,639
2,192
84,975
6,472
8
36,397
23,324
168,903
746
27,367
4,501
7,173
196,309
17,705
1,794
69,525
5,296
6
29,779
19,084
138,193
610
22,391
52,624
678,849
43,056
555,422
Securities Price Sensitivity
Our revenues are dependent on the underlying AUM and AUA for which we provide services. These assets are
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 caused by numerous factors, including, without limitation, market
volatility, the overall economy, inflation, changes in investor strategies, availability of alternative investment vehicles and
government regulations. 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 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.
ITEM 8. Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements referred to in the Index on page 53 setting forth our
consolidated financial statements, together with the report of KPMG LLP dated February 22, 2019 on page 54.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
45
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, 2018, have concluded that the Company’s
disclosure controls and procedures were effective as of December 31, 2018.
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 the
effectiveness of our internal control over financial reporting as of December 31, 2018 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, 2018, 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, 2018, as stated in their attestation report which follows.
46
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Waddell & Reed Financial, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Waddell & Reed Financial, Inc. and subsidiaries’ (the Company) internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated financial
statements), and our report dated February 22, 2019 expressed an unqualified opinion on those consolidated financial
statements.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ KPMG LLP
Kansas City, Missouri
February 22, 2019
47
(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, 2018 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
2019 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
2019 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 2019 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
The following table provides information as of December 31, 2018 with respect to shares of the Company’s
common stock that may be issued under our existing equity compensation plans.
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(a)
Number of Securities to be
issued upon exercise of
outstanding options,
warrants and rights
(b)
Weighted-average
price of outstanding
options, warrants
and rights
(c)
Number of Securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
—
—
—
—
—
—
2,121,728 (1)
—
2,121,728
(1) Represents shares available for future issuance from the Stock Incentive Plan.
48
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
2019 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
2019 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 53 for a list of all
financial statements filed as part of this Report.
(a)(2) Financial Statement Schedules.
None.
(b) Exhibits.
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
10.1
10.2
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 December 21, 2017 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.
Certificate of Elimination of Series B Junior Participating Preferred Stock of Waddell & Reed
Financial, Inc., as filed on February 16, 2018 with the Secretary of the State of Delaware. Filed as
Exhibit 4.3 to the Company’s Annual Report on Form 10 K, File No. 001 13913, for the year ended
December 31, 2017 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.*
Credit Agreement, dated October 20, 2017, by and among Waddell & Reed Financial, Inc., the
lenders party thereto, Bank of America, N.A., as Administrative Agent for the lenders and Swingline
Lender, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole
Bookrunner. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, File
No. 001-13913, filed October 27, 2017 and incorporated herein by reference.
49
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
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. Executive Incentive Plan, as amended and restated.*
Investment Management Agreement, dated July 29, 2016, by and between Ivy Variable Insurance
Portfolios and Ivy Investment Management Company.
Investment Management Agreement, dated July 29, 2016, by and between Ivy Variable Insurance
Portfolios and Ivy Investment Management Company.
Investment Management Agreement, dated November 13, 2008, by and between Ivy Funds and Ivy
Investment Management Company.
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. 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,
2016 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
10.13 to the Company’s Annual Report on Form 10 K, File No. 001 13913, for the year ended
December 31, 2017 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. Filed as Exhibit
10.14 to the Company’s Annual Report on Form 10 K, File No. 001 13913, for the year ended
December 31, 2017 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. Filed as Exhibit
10.15 to the Company’s Annual Report on Form 10 K, File No. 001 13913, for the year ended
December 31, 2017 and incorporated herein by reference.*
Waddell & Reed Financial, Inc. Cash Settled RSU Plan. Filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q, File No. 001 13913, filed November 2, 2018 and incorporated herein
by reference. *
Form of Restricted Stock Unit Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. Cash Settled RSU Plan. Filed as Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q, File No. 001 13913, filed November 2, 2018 and incorporated herein by reference. *
Form of Restricted Stock Unit Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. Cash Settled RSU Plan. *
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.*
50
10.19
10.20
21
23
24
31.1
31.2
32.1
32.2
101
Severance Agreement and Release of All Claims, effective January 13, 2018, by and between
Thomas W. Butch and W&R Corporate LLC. Filed as Exhibit 10.1 to the Company’s Current Report
on Form 8-K, File No. 001-13913, on January 18, 2018 and incorporated herein by reference.*
Severance Agreement and Release of All Claims, dated April 18, 2018, by and between Wendy J.
Hills and W&R Corporate LLC. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q, File No. 001 13913, filed August 3, 2018 and incorporated herein by reference. *
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
formatted
Materials from the Waddell & Reed Financial, Inc. Annual Report on Form 10-K for the year ended
December 31, 2018,
(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.
in Extensible Business Reporting Language
* Indicates management contract or compensatory plan, contract or arrangement.
ITEM 16. Form 10-K Summary
Not applicable.
51
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 22, 2019.
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/ BENJAMIN R. CLOUSE
Benjamin R. Clouse
Senior Vice President, Chief Financial
Officer and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
February 22, 2019
February 22, 2019
/s/ THOMAS C. GODLASKY*
Thomas C. Godlasky
Chairman of the Board and Director
February 22, 2019
/s/ SHARILYN S. GASAWAY*
Sharilyn S. Gasaway
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 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
Attorney-in-fact
February 22, 2019
52
WADDELL & REED FINANCIAL, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at December 31, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2018 . . . . . .
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2018 . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
54
55
56
57
58
59
60
53
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Waddell & Reed Financial, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Waddell & Reed Financial, Inc. and subsidiaries (the
Company) as of December 31, 2018 and 2017, 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, 2018, and the
related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the
results of its operations and its cash flows for each of the years in the three year period ended December 31, 2018, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated February 22, 2019 expressed an unqualified opinion on the effectiveness
of the Company’s internal control over financial reporting.
Basis for Opinion
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 are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1981.
Kansas City, Missouri
February 22, 2019
54
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
2018
2017
(in thousands)
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents - restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables:
$
231,997
59,558
617,135
207,829
28,156
700,492
Funds and separate accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customers and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,112
151,515
27,164
1,105,481
25,664
131,108
25,593
1,118,842
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,429
145,869
12,321
16,979
$ 1,344,079
87,667
147,069
13,308
17,476
1,384,362
Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to investment companies for securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to third party brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued pension and postretirement costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,253
100,085
19,891
86,184
—
54,129
51,580
338,122
94,854
798
15,392
449,166
38,998
43,422
25,153
66,830
94,996
47,643
44,797
361,839
94,783
15,137
25,210
496,969
Redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,463
14,509
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;
76,790 shares outstanding (82,687 at December 31, 2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of 22,911 common shares in treasury (17,014 at December 31, 2017) . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
997
311,264
1,198,445
(627,587)
331
883,450
997
301,410
1,092,394
(522,441)
524
872,884
Total liabilities, redeemable noncontrolling interests and stockholders’ equity. . . . . . . . . . . . . . .
$ 1,344,079
1,384,362
See accompanying notes to consolidated financial statements.
55
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2018, 2017 and 2016
2018
2017
(in thousands, except per share data)
2016
Revenues:
Investment management fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Underwriting and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
507,906
550,010
102,385
1,160,301
531,850
518,699
106,595
1,157,144
557,112
561,670
120,241
1,239,023
Operating expenses:
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and benefits (including share-based compensation of
$51,565, $57,716 and $51,514, respectively) . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subadvisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment and other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income attributable to redeemable noncontrolling interests . . . .
Net income attributable to Waddell & Reed Financial, Inc. . . . . . . . . . $
456,832
432,264
485,981
263,329
73,643
65,275
27,197
10,323
25,649
14,805
1,200
938,253
222,048
22,705
(6,461)
238,292
55,480
182,812
(776)
183,588
271,276
88,951
66,078
30,721
12,425
20,983
13,174
1,500
937,372
219,772
37,084
(11,279)
245,577
101,368
144,209
2,930
141,279
267,839
80,820
63,045
31,406
13,080
18,358
9,572
9,749
979,850
259,173
(8,058)
(11,122)
239,993
81,884
158,109
1,414
156,695
Net income per share attributable to Waddell and Reed Financial, Inc.
common shareholders, basic and diluted: . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.28
1.69
1.90
Weighted average shares outstanding, basic and diluted: . . . . . . . . . . . . . . .
80,468
83,573
82,668
See accompanying notes to consolidated financial statements.
56
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2018, 2017 and 2016
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 182,812 144,209 158,109
2018
2017
(in thousands)
2016
Other comprehensive income:
Unrealized gain (loss) on available for sale investment securities during the
period, net of income tax expense (benefit) of $2, $(956) and $(2), respectively . .
13
7,505
(391)
Postretirement benefit, net of income tax expense (benefit) of $202, $(99) and
$(718), respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
642
(224)
(1,220)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive (loss) income attributable to redeemable noncontrolling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(776)
Comprehensive income attributable to Waddell & Reed Financial, Inc. . . . . . . . . . . $ 184,243
2,930
148,560
1,414
155,084
183,467 151,490 156,498
See accompanying notes to consolidated financial statements.
57
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2018, 2017 and 2016
(in thousands)
Additional
Accumulated
Other
Total
Redeemable
Non
Common Stock
Shares Amount Capital Earnings Stock
331,611
99,701 $
1,085,248
997
(566,256)
Income (Loss)
(5,145)
Equity
interest
846,455
—
Paid-In Retained Treasury Comprehensive Stockholders’ Controlling
—
—
—
—
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 loss . . . . . . . . . . . . . . . . . . . . . .
—
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . 99,701
Adoption of share-based compensation guidance on
January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net subscription of redeemable noncontrolling interests
in sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of equity compensation . . . . . . . . . . . . . .
Net issuance/forfeiture of nonvested shares . . . . . . . . . .
Dividends accrued, $1.63 per share . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . 99,701 $
Adoption of recognition and measurement of financial
assets and liabilities guidance (ASU 2016-01) on
January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption of reclassification of tax effects from
accumulated other comprehensive income (loss)
guidance (ASU 2018-02) on January 1, 2018 . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net redemption of redeemable noncontrolling interests
in sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of equity compensation . . . . . . . . . . . . . .
Net issuance/forfeiture of nonvested shares . . . . . . . . . .
Dividends accrued, $1.00 per share . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . 99,701 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
997
—
—
—
—
—
—
—
—
997
—
—
—
156,695
—
—
—
—
—
156,695
—
51,382
(84,741)
—
(6,344)
—
—
291,908
—
132
—
(152,953)
—
—
—
1,089,122
—
—
84,741
—
—
(49,753)
—
(531,268)
3,504
—
(2,200)
141,279
—
—
—
50,593
(44,595)
—
—
—
301,410
—
690
—
(136,497)
—
—
1,092,394
—
—
44,595
(35,768)
—
(522,441)
—
—
—
—
—
—
(1,612)
(6,757)
—
—
—
—
—
—
7,281
524
—
51,514
—
(152,953)
(6,344)
(49,753)
(1,612)
844,002
1,304
141,279
—
51,283
—
(136,497)
(35,768)
7,281
872,884
14,330
1,414
(5,091)
—
—
—
—
—
—
10,653
—
2,930
926
—
—
—
—
—
14,509
—
—
812
—
(812)
—
—
—
—
—
—
—
—
—
—
997
—
—
36
183,588
—
—
—
40,598
(30,744)
—
—
—
311,264
—
1,383
(79,768)
—
—
1,198,445
—
—
30,744
—
(135,890)
—
(627,587)
(36)
—
—
—
—
—
—
655
331
—
183,588
—
41,981
—
(79,768)
(135,890)
655
883,450
—
(776)
(2,270)
—
—
—
—
—
11,463
See accompanying notes to consolidated financial statements.
58
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2018, 2017 and 2016
2018
2017
(in thousands)
2016
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
182,812
144,209
158,109
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments loss (gain), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net purchases of trading and equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and postretirement plan benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in equity securities and trading debt securities held by consolidated sponsored funds . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Customer and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to investment companies for securities and payable to customers . . . . . . . . . . . . . . . . . . .
Receivables from funds and separate accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and payable to third party brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,278
1,538
3,348
51,565
26,449
(30,237)
783
(15,380)
81,119
1,158
(20,407)
76,017
7,552
2,194
(18,007)
(21,767)
357,015
20,983
1,500
4,855
57,716
(17,104)
(43,714)
20,481
(17,714)
(101,457)
3,276
(3,013)
(26,357)
1,517
10,134
4,395
(8,856)
50,851
18,359
9,749
23,601
51,514
(12,075)
(24,352)
1,982
3,166
(79,065)
(2,523)
92,565
(97,459)
7,218
2,255
(22,948)
(42,192)
87,904
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 . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash of sponsored funds on consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(113,975)
1,157
125,727
(2,566)
—
—
10,343
(365,770)
160,158
—
(6,783)
—
—
(212,395)
(72,096)
156,965
—
(15,691)
6,887
(194)
75,871
Cash flows from financing activities:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of short-term debt, net of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net subscriptions, (redemptions, distributions and deconsolidations) of redeemable
noncontrolling interests in sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(81,215)
(133,378)
(94,925)
(154,042)
(35,768)
—
(152,830)
(49,753)
—
(2,270)
—
(311,788)
926
174
(188,710)
(3,473)
3,145
(202,911)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents, and restricted cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents, and restricted cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for:
Income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
55,570
235,985
291,555
(350,254)
586,239
235,985
(39,136)
625,375
586,239
59,147
7,948
85,299
10,299
76,982
10,289
See accompanying notes to consolidated financial statements.
59
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
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.
Effective January 1, 2018, the Company changed the presentation of certain line items in the consolidated
statements of income that are intended to improve the transparency of the Company’s financial statements through clearer
alignment of operating expenses with financial statement captions. Specifically, the Company revised its accounting policy
related to the reporting of indirect underwriting and distribution expenses in the former underwriting and distribution
caption and certain expenses historically reported as general and administrative. Expenses previously recorded as
underwriting and distribution expenses were retrospectively reclassified into (a) the following existing operating expense
captions: Compensation and benefits and General and administrative, and (b) the following newly created operating
expense captions: Distribution, Technology, Occupancy, and Marketing and advertising. Certain expenses historically
reported as general and administrative were retrospectively reclassified into the following newly created operating expense
captions: Technology, Occupancy, and Marketing and advertising. The Company considers the change in policy to be
preferable and does not consider the change to be material to its consolidated financial statements. These changes were
applied retrospectively to all periods presented and do not affect net income attributable to the Company. The Company
also adopted Accounting Standards Update (“ASU”) 2017-07, “Compensation — Retirement Benefits (Topic 715):
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. As a result, the
Company retrospectively reclassified all net periodic pension costs, other than the historical service cost, from
Compensation and benefits to Investment and other income (loss) within the consolidated statements of income. The
reclassification of expenses as a result of the adoption of ASU 2017-07 does not affect net income attributable to the
Company.
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,” to allow the investment product the ability to generate an
investment performance track record so that it is able to attract third party investors. 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 in
the product 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
60
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 investment 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).
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 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 4. Fair value of long-term debt is disclosed in Note 8.
Investment Securities and Investments in Sponsored Funds
Our investments are comprised of debt and equity securities, investments in sponsored funds and sponsored
privately offered funds. Sponsored funds, which include the Funds and the IGI Funds, are investments we have made 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 equity securities
measured at fair value through net income (when the Company owns less than 20% of the fund).
Unrealized gains and losses on debt securities classified as 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 debt
securities classified as trading and equity securities, unrealized gains and losses are included in earnings. Realized gains
and losses are computed using the specific identification method for all 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 that 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).
61
Our available for sale debt securities 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 its amortized cost basis as well as prospects for recovery
to the amortized cost basis. 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.
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, determined by 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 $6.4 million and $10.5 million as of December 31, 2018
and 2017, 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 7.
Revenue Recognition
As of January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” and all
subsequent ASUs that modified Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with
Customers.” The Company elected to apply the standard utilizing the cumulative effect approach. The implementation of
the new standard did not have a material impact on the measurement or recognition of revenue.
Investment Management and Advisory Fees
We recognize investment management and advisory fees as earned over the period in which investment
management and advisory services are provided. While our investment management and advisory contracts are long-term
in nature, the performance obligations are generally satisfied daily or monthly based on AUM. We calculate investment
management fees from the Funds daily based upon average daily net AUM in accordance with investment management
agreements between the Funds and the Company. The majority of investment and/or advisory fees earned from institutional
accounts are calculated either monthly or quarterly based upon an average of net AUM in accordance with such investment
management agreements. The Company may waive certain fees for investment management services at its discretion, or
62
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.
Underwriting, Distribution and Shareholder Service Fees
Fee-based asset allocation 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. Underwriting and distribution fee-based asset allocation revenues are calculated monthly based upon beginning
of month client assets and are earned over the period in which services are provided. Performance obligations are generally
satisfied daily or monthly based on client assets.
Under a Rule 12b-1 service plan, the Funds may charge a maximum fee of 0.25% of the average daily net AUM
for Ivy Funds Class B, C, E and 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%. The Funds’ Class B and C shares may
charge a maximum of 0.75% of the average daily net AUM 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 AUM 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.
Underwriting and distribution commission revenues resulting from the sale of investment products are recorded
upon satisfaction of performance obligations, which occurs on the trade date. For certain types of investment products,
primarily variable annuities, distribution revenues are generally calculated based upon average daily net assets. 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.
Underwriting and distribution revenues resulting from payments from Advisors for office space, compliance
oversight and affiliation fees are earned over the period in which the service is provided, which is generally monthly and
is based on a fee schedule. Fees collected from Advisors for various services are recorded in underwriting and distribution
fees on a gross basis, as the Company is the principal in these arrangements.
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. Custodian fees, transfer agency fees and portfolio accounting and
administration fees are earned upon completion of the service when all performance obligations have been satisfied.
63
Advertising and Promotion
We expense all advertising and promotion costs as the advertising or event takes place. Advertising expense was
$8.1 million, $9.7 million and $9.4 million for the years ended December 31, 2018, 2017 and 2016, respectively, and is
classified in marketing and advertising expense in the consolidated statements of income.
Leases
The Company leases office space under various leasing arrangements. Certain lease agreements contain renewal
options, rent escalation clauses and/or other inducements provided by the landlord. 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, and is recognized
over the service period. The Company also issues share-based awards 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 Board of Directors.
The Company’s Cash Settled RSU Plan (the “RSU Plan”) allows the Company to grant cash-settled restricted
stock units (“RSUs”). Unvested RSUs have no purchase price and vest in 25% increments over four years, beginning on
the first anniversary of the grant date. On the vesting date, RSU holders receive a lump sum cash payment equal to the
fair market value of one share of the Company’s common stock, par value $0.01, for each RSU that has vested, subject to
applicable tax withholdings. We treat RSUs as liability-classified awards and, therefore, account for them at fair value
based on the closing price of our common stock on the reporting date, which results in variable compensation expense
over the vesting period.
Accounting for Income Taxes
Income tax expense is based on pre-tax 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 ASC 740, “Income Taxes Topic.” 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 to reduce 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 that will be in effect when they are expected to be realized or settled.
The effect on the measurement of deferred tax assets and liabilities of a change in income tax law is recognized in earnings
in the period that includes the enactment date.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted, which significantly
revised the U.S. corporate income tax system by, among other things, permanently reducing the federal statutory tax rate
from 35% to 21% effective January 1, 2018. The Company recorded a one-time charge of $5.4 million in the fourth
quarter of 2017 to measure net deferred tax assets at the reduced federal statutory rate. According to guidance from SEC
Staff Accounting Bulletin 118, the Company recognized a provisional tax impact related to the revaluation of deferred tax
assets and liabilities and included those amounts in its consolidated financial statements for the year ended December 31,
2017. In the third quarter of 2018, we finalized our 2017 U.S. corporate income tax return and revised provisional
adjustments made to our net deferred tax asset. Accordingly, we recorded a discrete tax benefit of $1.0 million. The
Company now considers its accounting for the income tax effects of the Tax Reform Act to be complete.
2. New Accounting Guidance
Accounting Guidance Adopted During Fiscal Year 2018
On January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers.” This ASU
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. The Company applied the five-step method detailed in this ASU to all revenue streams and elected the
64
cumulative effect approach. The implementation of this ASU did not have a material impact on the measurement or
recognition of revenue from prior periods. See Note 1 - Summary of Significant Accounting Policies and Note 3 – Revenue
Recognition, for additional accounting policy information and the additional disclosures required by this ASU.
On January 1, 2018, the Company adopted ASU 2016-01, “Recognition and Measurement of Financial Assets
and Financial Liabilities.” This ASU provided updated guidance on the recognition, measurement, presentation and
disclosure of certain financial assets and financial liabilities. After January 1, 2018, the guidance requires substantially all
equity investments in non-consolidated entities to be measured at fair value with changes recognized in earnings, except
for those accounted for using the equity method of accounting. As such, the guidance eliminated the available for sale
investment category for equity securities, which required unrealized holding gains to be recognized in accumulated other
comprehensive income. Upon adoption, we reclassified net unrealized holding gains, net of taxes, related to our available
for sale investment portfolio from accumulated other comprehensive income to retained earnings. See consolidated
statement of stockholders’ equity and redeemable noncontrolling interests for the financial statement reclassification
impact of adopting this ASU.
On January 1, 2018, the Company adopted ASU 2016-15, “Classification of Certain Cash Receipts and Cash
Payments.” This ASU eliminated 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. This ASU designates the appropriate cash
flow classification, including requirements to allocate certain components of these cash receipts and payments among
operating, investing and financing activities. The adoption of this ASU did not impact our consolidated financial statements
and related disclosures.
On January 1, 2018, the Company adopted ASU 2016-18, “Statement of Cash Flows: 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 required that a statement of cash
flows include the change during the period in the total of cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. Cash and cash equivalents – restricted is included as a component of cash
and cash equivalents on the Company’s consolidated statements of cash flows for all periods presented.
On January 1, 2018, the Company adopted ASU 2017-07, “Compensation-Retirement Benefits: Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU changed the income
statement presentation of our noncontributory retirement plan that covers substantially all employees and certain vested
employees of our former parent company (the “Pension Plan”) by requiring separation between operating expense (service
cost component) and non-operating expense (all other components, including interest cost, amortization of prior service
cost, curtailments and settlements, etc.). In addition, only the service cost component is eligible for capitalization as part
of an asset. The adoption of this ASU had no effect on our net income because it only impacts the classification of certain
information on the consolidated statements of income. An amendment to freeze our noncontributory retirement plan that
covers substantially all employees and certain vested employees of our former parent company was approved effective
September 30, 2017; therefore, after September 30, 2017, we no longer incur service costs. The service cost component of
net periodic benefit cost is recognized in compensation and related costs through September 30, 2017. The other
components of net periodic cost were reclassified to investment and other income (loss) on a retrospective basis.
On January 1, 2018, the Company adopted ASU 2017-09, “Compensation-Stock Compensation: Scope of
Modification Accounting.” This ASU provided guidance about which changes to the terms or conditions of a share-based
payment award require an entity to apply modification accounting in Topic 718, “Compensation – Stock Compensation
Topic.” The adoption of this ASU had an immaterial impact our consolidated financial statements and related disclosures.
On January 1, 2018, the Company early adopted ASU 2018-02, “Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income.” This ASU allows entities to reclassify stranded tax effects attributable to the
Tax Reform Act from accumulated other comprehensive income (“AOCI”) to retained earnings. Tax effects that are
stranded in other comprehensive income for reasons unrelated to the Tax Reform Act, such as other changes in tax law,
will be reclassified in future periods in accordance with the Company’s policy. Under the policy, the Company releases
stranded income tax effects on available for sale securities on a security-by-security basis as securities are sold, matured,
or extinguished. For the post retirement plan, the Company will release stranded income tax effects when the entire plan
is liquidated or terminated. The adoption of this ASU did not have a material impact on our consolidated financial
65
statements and related disclosures. See consolidated statement of stockholders’ equity for the financial statement
reclassification impact of adopting this ASU.
On January 1, 2018, the Company adopted ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118.” This ASU updates the income tax accounting in U.S. GAAP to reflect SEC interpretive
guidance released on December 22, 2017 when the Tax Reform Act became law. Staff Accountant Bulletin No. 118 states
the SEC permits companies to use “reasonable estimates” and “provisional amounts” for some of their line items for taxes
for their fourth quarter and year-end 2017 financial statements and regulatory filings. The Company has applied this
guidance to its consolidated financial statements and related disclosures. See Note 1 - Summary of Significant Accounting
Policies for additional information on the adoption of this ASU.
During the fourth quarter of 2018, the company early adopted ASU 2018-14, Compensation – Retirement Benefits
– Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements
for Defined Benefit Plans, which removes certain disclosures that are not considered cost beneficial, clarifies certain
required disclosures and adds additional disclosures. See Note 10 – Pension Plan and Postretirement Benefits Other Than
Pension for updated disclosures as a result of the adoption of this ASU.
New Accounting Guidance Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, which
increases transparency and comparability among organizations by establishing a right-of-use model that requires a lessee
to record a right-of-use asset and a lease liability on the balance sheet with additional disclosures of key information about
leasing arrangements. The new standard, and related ASUs, are effective for us on January 1, 2019, with early adoption
permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the
date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest
comparative period presented in the financial statements as its date of initial application. We expect to adopt the new
standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information
will not be updated and the disclosures required under the new standard will not be provided for dates and periods before
January 1, 2019. The new standard provides a number of optional practical expedients in transition. We expect to elect all
of the new standard’s available transition practical expedients. We expect that this ASU will have a material effect on our
financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant
effects relate to the recognition of new right-of-use assets and lease liabilities on our balance sheet for our real estate and
equipment leases ranging from $35.0-45.0 million and the addition of significant new disclosures about our leasing
activities. The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect
to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we
will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets or lease
liabilities for existing short-term leases of those assets in transition.
In June 2018, FASB issued ASU 2018-07, Compensation – Stock Compensation: Improvements to Nonemployee
Share-Based Payment Accounting, which simplifies the accounting for share–based payments granted to nonemployees
by aligning the accounting with the requirements for employee share–based compensation. This ASU is effective for fiscal
years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.
The Company will adopt the provisions of this guidance on January 1, 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 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements
for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements.
This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15,
2019, with early adoption permitted. Upon adoption of this ASU, disclosure changes will be reflected in our consolidated
financial statements and related disclosures.
In August 2018, FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic
350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service
Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years,
66
and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We
are evaluating the impact the adoption of this ASU will have on our consolidated financial statements and related
disclosures.
3. Revenue Recognition
All revenue recognized in the consolidated statements of income is considered to be revenue from contracts with
customers. The vast majority of revenue is determined based on average assets and is earned daily or monthly or is
transactional and is earned on the trade date. As such, revenue from remaining performance obligations is not significant.
The following table depicts the disaggregation of revenue by product and distribution channel:
2018
For the Year ended December 31,
2017
(in thousands)
2016
Investment management fees:
Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Institutional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
486,181
21,725
507,906
506,868
24,982
531,850
521,207
35,905
557,112
Underwriting and distribution fees:
Unaffiliated
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales commissions on front-end load mutual fund and
variable annuity sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total unaffiliated distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,041
91,313
121,926
1,886
568
80,495
1,498
1,182
93,993
565
2,924
125,415
Broker-Dealer
Fee-based asset allocation product revenues . . . . . . . . . . . . . . . . . . . . . . .
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales commissions on front-end load mutual fund and
variable annuity sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales commissions on other products . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total broker-dealer distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
269,069
70,938
240,089
75,850
224,319
93,260
54,895
36,131
38,482
469,515
550,010
55,293
31,286
22,188
424,706
518,699
67,169
31,246
20,261
436,255
561,670
Shareholder service fees:
Total shareholder service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102,385
106,595
120,241
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,160,301
1,157,144
1,239,023
67
4. Investment Securities
Investment securities at December 31, 2018 and 2017 are as follows:
December 31, December 31,
2018
2017
(in thousands)
Available for sale securities:
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,001
7,970
218,121
19,672
250,764
Trading debt securities:
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored funds(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored privately offered funds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity method securities:
—
1,993
77,250
5,884
7
33,088
118,222
21,204
153,548
678
24,879
200,309
12,999
34,978
197,442
19,779
265,198
1,999
—
55,414
4,929
10
62,038
124,390
116
137,857
695
77,048
215,716
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,840
Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 617,135
95,188
700,492
(1) Includes $124.0 million of investments at December 31, 2017, that were previously reported
as available for sale securities prior to the adoption of ASU 2016-01 on January 1, 2018. Refer
to Note 2 – New Accounting Guidance - Accounting Guidance Adopted During Fiscal Year
2018.
Certificates of deposit, commercial paper, corporate bonds and U.S. Treasury bills accounted for as available for
sale and held as of December 31, 2018 mature as follows:
Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
After one year but within five years . . . . . . . . . . . . . . . . . . . . . . . .
$
cost
Fair value
(in thousands)
97,196
154,614
251,810
96,726
154,038
250,764
Amortized
Commercial paper, corporate bonds, U.S. Treasury bills and mortgage-backed securities accounted for as trading
and held as of December 31, 2018 mature as follows:
Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
After one year but within five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After five years but within 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Fair value
(in thousands)
30,929
49,660
4,545
85,134
68
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for
sale at December 31, 2018:
Amortized Unrealized Unrealized
gains
losses
cost
Fair value
Available for sale securities:
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . $ 5,000
7,902
Commercial paper . . . . . . . . . . . . . . . . . . . . . . .
219,236
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . .
19,672
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . .
$ 251,810
1
68
254
—
323
—
—
5,001
7,970
(1,369) 218,121
19,672
(1,369) 250,764
—
(in thousands)
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for
sale at December 31, 2017:
Amortized Unrealized Unrealized
gains
losses
cost
Fair value
Available for sale securities:
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . $ 13,000
34,836
Commercial paper . . . . . . . . . . . . . . . . . . . . . . .
198,404
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . .
20,019
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . .
$ 266,259
(in thousands)
1
142
33
—
176
(2)
—
12,999
34,978
(995) 197,442
19,779
(240)
(1,237) 265,198
Investment securities with fair values of $84.5 million, $237.2 million and $234.4 million were sold or redeemed
during 2018, 2017 and 2016, respectively. During 2018, net realized gains of $0.3 million, less than $0.1 million and $12.8
million were recognized from the sale of $8.3 million in equity securities, the sale of $1.2 million in equity method
securities and the redemption of $75.1 million in consolidated traded securities, respectively. During 2017, net realized
gains of $0.9 million, $6.9 million and $1.5 million were recognized from the sale of $86.9 million in available for sale
securities, the sale of $73.2 million in equity method securities, and the sale of $57.1 million in consolidated traded
securities, respectively, and net realized losses of $0.5 million were recognized from the sale of $19.8 million in trading
securities. 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.
A summary of available for sale sponsored funds with fair values below carrying values at December 31, 2018 is
as follows:
December 31, 2018
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
(in thousands)
Corporate bonds . . . . . . . . . . . . . . . . $
36,302
(160)
119,480
(1,209)
155,782
(1,369)
Less than 12 months
12 months or longer
Total
A summary of available for sale sponsored funds with fair values below carrying values at December 31, 2017 is
as follows:
December 31, 2017
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Less than 12 months
12 months or longer
Total
Certificates of deposit . . . . . . . . . . . . $
Corporate bonds . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . .
192,409
19,779
$ 215,186
2,998
(2)
(995)
(240)
(1,237)
69
(in thousands)
—
—
—
—
—
—
—
—
2,998
192,409
19,779
215,186
(2)
(995)
(240)
(1,237)
The Company’s investment portfolio included 44 securities which were in an unrealized loss position at
December 31, 2018.
During 2018 and 2017, we recorded pre-tax charges of $0.3 million and $1.3 million, respectively, to reflect the
“other than temporary” decline in value of certain of the Company’s available for sale investments with fair value below
amortized cost. These charges were recorded due to either an intent to sell prior to recovery of the amortized cost or the
investment in an unrealized loss position for an extended period of time where the losses were expected to become realized.
These charges are recorded in investment and other income (loss) in the consolidated statement of operations for 2018 and
2017.
The Company evaluated all of the other available for sale securities in an unrealized loss position at December
31, 2018 and concluded no additional other-than-temporary impairment existed at December 31, 2018. The unrealized
losses in the Company’s investment portfolio at December 31, 2018 were primarily caused by changes in interest rates. At
this time, the Company does not intend to sell, and does not believe it will be required to sell these securities before
recovery of their amortized cost, with the exception of the securities mentioned above for which a charge was recorded.
Sponsored Privately Offered Funds
The Company holds a voting interests in a sponsored privately offered fund that is structured as an investment
company in the legal form of an LLC. The Company held an investment in this fund totaling $0.7 million as of December
31, 2018 and December 31, 2017, which is the maximum loss exposure.
Consolidated Sponsored Funds
The following table details the balances related to consolidated sponsored funds at December 31, 2018 and 2017,
as well as the Company’s net interest in these funds:
December 31,
2018
December 31,
2017
(in thousands)
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . .
Net interest in consolidated sponsored funds . . . . . . . . . . . . . . $
4,285
57,967
872
(79)
(11,463)
51,582
8,472
139,086
1,588
(1,040)
(14,509)
133,597
During the year ended December 31, 2018, we consolidated one sponsored privately offered fund, Ivy Funds, IGI
Funds and Ivy NextShares in which we provided initial seed capital at the time of the funds’ formation. When we no longer
have a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements.
During 2018, we liquidated and redeemed our investment in the sponsored privately offered fund and the majority of our
investment in the remaining IGI Funds, which resulted in a decrease in investments in the consolidated sponsored funds.
One Ivy Fund, the IGI Funds and the Ivy Nextshares funds remain consolidated as of December 31, 2018. There was no
impact to the consolidated statement of income as a result of the sponsored privately offered fund or IGI liquidation, as
the funds were carried at fair value.
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.
70
• 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 carrying amounts of certificates of deposit and commercial paper are measured at amortized
cost, which approximates fair value due to the short-time between purchase and expected maturity of the investments.
Depending on the nature of the inputs, these investments are generally classified as Level 1 or 2 within the fair value
hierarchy. U.S. Treasury bills are valued upon quoted market prices for similar assets in active markets, quoted prices for
identical or similar assets that are not active and inputs other than quoted prices that are observable or corroborated by
observable market data. 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.
The following tables summarize our investment securities as of December 31, 2018 and 2017 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, 2018 or 2017.
December 31, 2018
Level 1
Level 2
Other Assets
Held at Net
Asset Value
Level 3
(in thousands)
Total
Cash equivalents: (1)
Money market funds . . . . . . . . . . . . . . . . . . . . . $ 121,759
—
U.S. government sponsored enterprise note . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . .
—
Total cash equivalents . . . . . . . . . . . . . . . . . . . . $ 121,759
—
895
74,277
75,172
Available for sale securities:
Certificates of deposit . . . . . . . . . . . . . . . . . . . . $
Commercial paper . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
5,001
7,970
218,121
19,672
Trading debt securities:
—
—
—
—
—
—
—
—
Commercial paper . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . .
—
—
—
—
—
1,993
77,250
5,884
7
33,088
—
—
—
—
—
Equity securities:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored privately offered funds measured
at net asset value (2) . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . .
21,192
153,548
—
24,879
—
—
—
—
Equity method securities: (3)
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . .
47,840
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 247,459
—
368,986
12
—
—
—
—
12
— 121,759
895
—
—
74,277
— 196,931
—
—
—
—
—
—
—
—
5,001
7,970
218,121
19,672
1,993
77,250
5,884
7
33,088
—
—
21,204
153,548
678
—
678
24,879
—
678
47,840
617,135
71
December 31, 2017
Level 1
Level 2
Other Assets
Held at Net
Asset Value
Total
Level 3
(in thousands)
—
—
—
—
Cash equivalents: (1)
Money market funds . . . . . . . . . . . . . . . . . . . . . $ 145,785
Commercial paper . . . . . . . . . . . . . . . . . . . . . . .
—
Total cash equivalents . . . . . . . . . . . . . . . . . . . . $ 145,785
Available for sale securities:
Certificates of deposit . . . . . . . . . . . . . . . . . . . . $
Commercial paper . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . .
Trading debt securities:
Certificates of deposit . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . .
Equity securities:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored privately offered funds measured
at net asset value (2) . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . .
Equity method securities: (3)
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . .
95,188
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 310,209
116
137,857
—
77,048
—
—
—
—
—
—
11,064
11,064
12,999
34,978
197,442
19,779
1,999
55,414
4,929
10
62,038
—
—
—
—
—
389,588
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 145,785
—
11,064
— 156,849
—
—
—
—
—
—
—
—
12,999
34,978
197,442
19,779
1,999
55,414
4,929
10
62,038
—
—
116
137,857
695
—
695
77,048
—
695
95,188
700,492
(1) Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments
in actively traded money market funds are measured at NAV and are classified as Level 1. Cash investments in
commercial paper are measured at cost, which approximates fair value because of the short time between
purchase of the instrument and its expected realization, and are classified as Level 2.
(2) 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.
(3) Substantially all of the Company’s equity method investments are investment companies that record their
underlying investments at fair value.
The following table summarizes the activity of investments categorized as Level 3 for the year ended
December 31, 2018:
Level 3 assets at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Level 3 assets at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
359
5
(352)
12
For the year ended
December 31, 2018
(in thousands)
72
5. Derivative Financial Instruments
The Company has in place an economic hedge program that uses total return swap contracts to hedge market risk
related to its investments in certain sponsored funds. 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.
Excluding derivative financial instruments held in certain consolidated sponsored funds, the Company was party
to five total return swap contracts with a combined notional value of $194.4 million and six total return swap contracts
with a combined notional value of $213.9 million as of December 31, 2018 and 2017, respectively. 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) on the Company’s consolidated statement of income.
The Company posted $5.2 million and $9.7 million in cash collateral with the counterparties of the total return
swap contracts as of December 31, 2018 and 2017, respectively. 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.
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, 2018 and 2017 calculated based on Level 2
inputs:
Total return swap contracts . . . . . . . . . . . Prepaid expenses and other current assets
Total return swap contracts . . . . . . . . . . . Other current liabilities
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance sheet
location
December 31,
2018
Fair value
December 31,
2017
Fair value
(in thousands)
$
$
4,968
—
4,968
—
1,093
1,093
The following is a summary of net gains (losses) recognized in income for the years ended December 31, 2018
and 2017:
Total return swap contracts . . . . . . . . . . . . Investment and other income (loss)
$
15,163
(36,368)
Income statement
location
Year ended
December 31,
2018
2017
(in thousands)
6. Property and Equipment
A summary of property and equipment at December 31, 2018 and 2017 is as follows:
2018
2017
(in thousands)
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
21,790
28,482
20,248
100,507
17,056
11,772
2,843
202,698
(139,269)
63,429
22,106
30,529
20,802
99,644
18,678
11,759
2,843
206,361
(118,694)
87,667
Estimated
useful lives
1 - 15 years
3 - 10 years
2 - 26 years
1 - 10 years
1 - 5 years
1 - 30 years
73
Depreciation expense was $25.6 million, $21.0 million and $18.4 million during the years ended December 31,
2018, 2017 and 2016, respectively.
At December 31, 2018, we had property and equipment under capital leases with a cost of $1.6 million and
accumulated depreciation of $1.1 million. At December 31, 2017, we had property and equipment under capital leases
with a cost of $1.9 million and accumulated depreciation of $1.0 million.
7. Goodwill and Identifiable Intangible Assets
Goodwill and identifiable intangible assets (all considered indefinite-lived) at December 31, 2018 and 2017 are
as follows:
December 31, December 31,
2018
2017
(in thousands)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,970
106,970
Mutual fund management advisory contracts . . . . . . . . . . . . . . . . . .
Mutual fund management subadvisory contract . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
38,699
—
200
38,899
38,699
1,200
200
40,099
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 145,869
147,069
During 2018, the balance of the mutual fund management subadvisory contract intangible asset was determined
to be impaired due to a termination of the subadvisory agreement.
8. Indebtedness
On August 31, 2010, the Company entered into a note purchase agreement to complete a $190.0 million private
placement Series A and Series B senior unsecured notes. The $95.0 million Series A, senior unsecured notes that matured
on January 13, 2018 were repaid. Interest is payable semi-annually in January and July of each year. The agreement
requires 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, 2018, the Company’s consolidated leverage
ratio was 0.3 to 1.0, and the consolidated interest coverage ratio was 48.7 to 1.0.
Debt is reported at its carrying amount in the consolidated balance sheet. The fair value of the Company’s Series
B Senior Notes maturing January 13, 2021 was $98.0 million at December 31, 2018 compared to the carrying value net of
debt issuance costs of $94.9 million, which is listed under long-term debt in the consolidated balance sheet. Fair value is
calculated based on Level 2 inputs.
On October 20, 2017, we entered into a three-year unsecured revolving credit facility (the “Credit Facility”) with
various lenders, which initially provides for borrowings of up to $100.0 million and may be expanded to $200.0 million.
The Credit Facility replaced the prior credit facility, which was set to expire in June 2018. At December 31, 2018 and
2017, there were no borrowings outstanding under the Credit 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 imposes 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
covenants in the Credit Facility are consistent with the covenants in the prior credit facility, including the required
consolidated leverage ratio and the consolidated interest coverage ratio, which match those outlined above for the Senior
Notes.
74
9. Income Taxes
The provision for income taxes from continuing operations for the years ended December 31, 2018, 2017 and
2016 consists of the following:
Current taxes:
2018
2017
(in thousands)
2016
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,071
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
625
1
54,697
783
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . $ 55,480
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73,167
7,720
—
80,887
20,481
101,368
72,711
7,174
17
79,902
1,982
81,884
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, 2018, 2017 and 2016:
Statutory federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal tax benefit . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effects of U.S. tax rate decrease . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance on losses capital in nature . . . . . . . . . . . . . . .
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2016
2017
21.0 % 35.0 % 35.0 %
2.2
2.4
3.4
1.8
2.2
(0.4)
(0.2)
(2.2)
(1.0)
—
0.7
(0.3)
23.3 % 41.3 % 34.1 %
2.0
—
—
(0.1)
(3.2)
0.4
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred
tax assets at December 31, 2018 and 2017 are as follows:
2018
2017
(in thousands)
Deferred tax assets:
Benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued compensation and related costs . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses on investment securities and partnerships . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unused state tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
—
5,868
3,861
6,272
10,300
2,618
7,266
1,171
37,356
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,700)
(1,872)
Benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,206)
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Unrealized gains on investments securities and partnerships . . . . . . .
(2,478)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(513)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,769)
Total gross deferred liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,266)
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,321
3,381
5,558
4,094
—
15,047
2,788
7,235
2,874
40,977
(7,301)
—
(7,419)
(3,554)
(1,679)
(481)
(20,434)
(7,235)
13,308
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, 2018 and 2017 is approximately $7.3 million and $7.2 million, respectively. The carryforwards, if not
75
utilized, will expire between 2019 and 2038. 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 $7.3 million and $7.2 million has been recorded at December 31,
2018 and 2017, respectively.
The Company has state tax credit carryforwards of $2.6 million and $2.8 million as of December 31, 2018 and
2017, respectively. Of these state tax credit carryforwards, $2.3 million will expire between 2024 and 2034 if not utilized,
$0.2 million will expire in 2026 if not utilized, and $0.1 million can be carried forward indefinitely. The Company
anticipates these credits will be fully utilized prior to their expiration date.
In the accompanying consolidated balance sheet, unrecognized tax benefits that are not expected to be settled
within the next 12 months are included in other liabilities; unrecognized tax benefits that are expected to be settled within
the next 12 months are included as a reduction to income taxes receivable; unrecognized tax benefits that reduce a net
operating loss, similar tax loss, or tax credit carryforward are presented as a reduction to non-current deferred income
taxes. As of December 31, 2018 and December 31, 2017, the Company’s consolidated balance sheet included unrecognized
tax benefits, including penalties and interest, of $2.7 million ($2.4 million net of federal benefit) and $10.9 million ($8.9
million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate. The
Company finalized a voluntary disclosure agreement with a state tax jurisdiction in June 2018, which reduced
unrecognized tax benefits by $9.3 million ($7.6 million net of federal benefit).
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 December 31, 2018, and December 31, 2017, the total amount of accrued
interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $0.7 million ($0.6
million net of federal benefit) and $4.0 million ($3.5 million net of federal benefit), respectively. The total amount of
penalties and interest, net of federal expense, related to tax uncertainties recognized in the statement of income for the
period ended December 31, 2018 was a benefit of $2.8 million, which was comprised of a $3.0 million benefit related to
settlement of the previously mentioned voluntary disclosure agreement and offset by the accrual of $0.2 million additional
penalties and interest on outstanding uncertain tax positions.
The following table summarizes the Company's reconciliation of unrecognized tax benefits, excluding penalties
and interest, for the years ended December 31, 2018, 2017 and 2016:
2018
2017
(in thousands)
2016
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,843 7,734 8,448
Increases during the year:
Gross increases - tax positions in prior period . . . . . . . . . . . .
Gross increases - current-period tax positions . . . . . . . . . . . . .
712
331
244
97
465
494
Decreases during the year:
Gross decreases - tax positions in prior period . . . . . . . . . . . .
Decreases due to settlements with taxing authorities . . . . . . .
Decreases due to lapse of statute of limitations. . . . . . . . . . . .
(4,219)
(1,385)
(212)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,070
(167)
(56)
(178)
(21)
(998) (1,485)
7,734
6,843
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. The
Company is currently under audit in one state jurisdiction in which the Company operates. During 2017, the Company
closed an Internal Revenue Service audit of the 2014 tax year. This audit was settled with no significant adjustments.
During 2016, the Company settled two open tax years that were undergoing audit by a state jurisdiction in which the
Company operates. The 2015, 2016, 2017 and 2018 federal income tax returns are open tax years that remain subject to
potential future audit. State income tax returns for all years after 2014 and, in certain states, income tax returns for 2014,
are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.
76
10. Pension Plan and Postretirement Benefits Other Than Pension
Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the
final 10 years of employment. The Compensation Committee of the Company’s Board of Directors approved an
amendment to freeze the Pension Plan effective September 30, 2017. After September 30, 2017, participants in the Pension
Plan no longer accrue additional benefits for future service or compensation. Participants will retain benefits accumulated
as of September 30, 2017 in accordance with the terms of the Pension Plan. In accordance with applicable accounting
standards, the Pension Plan’s assets and liabilities were remeasured as of July 31, 2017, the date participants were notified
of the freeze. This resulted in a reduction of the accrued pension liability of approximately $30.0 million and a curtailment
gain of $31.6 million.
During 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 2016 from the assets of the Pension Plan. The Company recognized a non-cash settlement charge of $20.7
million in 2016 related to this event.
We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially
all employees, as well as Advisors. The medical plan is contributory with participant contributions adjusted annually. The
medical plan does not provide for benefits after age 65 with the exception of a small group of employees that were
grandfathered when such plan was established. During 2016, the Company amended this plan to discontinue the
availability of coverage for any individuals who retire after December 31, 2016. The plan amendment resulted in an $8.5
million curtailment gain, recorded in 2016 as part of net other postretirement benefit costs.
A reconciliation of the funded status of these plans and the assumptions related to the obligations at December 31,
2018, 2017 and 2016 are as follows:
2018
Pension Benefits
2017
2016
(in thousands)
Other
Postretirement Benefits
2017
2016
2018
Change in projected benefit obligation:
Net benefit obligation at beginning of year . . . . $ 184,245
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
5,986
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,690)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(22,013)
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . .
—
Retiree contributions . . . . . . . . . . . . . . . . . . . . . .
—
Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Net benefit obligation at end of year . . . . . . . . . . $ 154,528
180,921
8,367
6,248
(8,511)
28,841
—
(31,621)
—
184,245
210,783
12,199
9,432
(52,288)
(19,886)
—
—
20,681
180,921
2,195
—
54
(602)
(965)
366
—
—
1,048
2,446
—
58
(954)
139
506
—
—
2,195
8,421
555
297
(674)
1,790
532
(8,475)
—
2,446
Pension Benefits
2017
2018
Other
Postretirement Benefits
2017
2016
2018
2016
(in thousands)
Change in plan assets:
Fair value of plan assets at beginning of year . . $ 170,881
1,808
Actual return on plan assets . . . . . . . . . . . . . . . . .
4,000
Employer contributions . . . . . . . . . . . . . . . . . . . .
Retiree contributions . . . . . . . . . . . . . . . . . . . . . .
—
(13,690)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year. . . . . . . $ 162,999
Funded status at end of year . . . . . . . . . . . . . . . . . . . $ 8,471
77
144,529 173,885
2,932
24,863
20,000
10,000
—
—
(52,288)
(8,511)
170,881 144,529
(13,364)
—
—
448
506
(954)
—
(36,392) (1,048) (2,195)
—
—
236
366
(602)
—
—
—
142
532
(674)
—
(2,446)
2018
Pension Benefits
2017
2016
Other
Postretirement Benefits
2017
2016
2018
Amounts recognized in the statement of
financial position:
Noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . $ 8,471
—
Current liabilities . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . .
—
Net amount recognized at end of year . . . . . . $ 8,471
—
—
(13,364)
(13,364)
—
—
(36,392)
(36,392)
—
(250)
(798)
(1,048)
—
(422)
(1,773)
(2,195)
—
(458)
(1,988)
(2,446)
(in thousands, except percentage data)
Weighted average assumptions used to
determine benefit obligation at December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.45 %
Rate of compensation increase . . . . . . . . . . . .
Not applicable
3.76 %
4.39 %
5.12 %
4.08 %
3.28 %
Not applicable
3.46 %
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, 2018 and 2017 is as follows:
Percentage of
Plan Assets at
Percentage of
Plan Assets at
Plan assets by category
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
December 31, 2018 December 31, 2017
2 %
40 %
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gold bullion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
98 %
—
100 %
29 %
18 %
8 %
5 %
100 %
Historically, the primary investment objective has been 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. Prior to the Pension Plan freeze in 2017, assets were
invested in our Asset Strategy investment style, managed by our in-house investment professionals. Subsequent to the
freeze, the Company adjusted the Pension Plan’s asset allocation to decrease the exposure to equity securities. In 2018,
the Company implemented a new pension de-risking strategy designed to more closely match assets to the pension
obligations by shifting exposure from return-seeking assets to liability-hedging assets.
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 4. The following tables
summarize our Pension Plan assets as of December 31, 2018 and 2017. As of December 31, 2018 and 2017 a portion of
the international equity securities were valued utilizing Level 2 inputs, in accordance with company policy based on market
movement greater than or equal to 0.50% on the final trading day of the year.
78
2018
Level 1
Level 2
Level 3
Total
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ —
Equity securities:
(in thousands)
465
—
465
International . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
4
—
4
Fixed income securities:
U.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bond . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equity securities:
—
—
—
—
46,415
91,521
21,870
160,275
—
—
—
—
46,415
91,521
21,870
160,275
2,724
$ 162,999
Level 1
Level 2
Level 3
Total
(in thousands)
— 66,779
—
66,779
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,540
4,889
—
26,542
—
—
49,540
31,431
Fixed income securities:
U.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bond . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Bonds . . . . . . . . . . . . . . . . . . . . . . . . . .
Gold bullion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,455
—
587
—
6,591
—
8,369
—
62,798 106,954
6,455
—
587
—
6,591
—
—
8,369
— 169,752
1,129
$ 170,881
The 6.00% expected long-term rate of return utilized after the Pension Plan freeze in 2017 reflected 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 was based on the outlook for inflation, fixed income returns and equity returns, while
also considering historical returns, asset allocation and investment strategy. In 2018, we adjusted the expected long-term
rate of return to 5.00% to reflect a further decrease to the Plan’s equity securities’ holdings based on expected investment
mix at the beginning of the year. During the year, we accelerated the de-risking strategy and as such, expect to further
reduce the long-term rate of return in the future.
The components of net periodic pension and other postretirement costs consisted of the following for the years
ended December 31, 2018, 2017 and 2016:
Pension Benefits
2017
2018
2016
(in thousands)
Other
Postretirement Benefits
2017
2016
2018
Components of net periodic benefit cost:
—
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,986
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,320)
Expected return on plan assets . . . . . . . . . . . . . . . . . .
(15,501)
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Actuarial gain amortization . . . . . . . . . . . . . . . . . . . . .
—
Prior service cost amortization . . . . . . . . . . . . . . . . . .
—
Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (17,835)
79
8,367
6,248
12,199
9,432
(10,113) (13,927)
14,091
(8,891)
—
—
(31,621)
—
(13,028)
555
—
—
297
58
54
—
—
—
—
—
—
(153)
— (120) (180)
4
(4)
(2)
—
(8,475)
—
—
—
—
20,681
—
—
(68) (126) (7,772)
19,494
The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31,
2018, 2017 and 2016 are as follows:
Discount rate . . . . . . . . . . . . . . . . .
Expected return on plan assets . . .
Rate of compensation increase . . . Not applicable
3.76 % 4.39% / 3.96 1%
5.00 % 7.00% / 6.00 1%
5.12 %
2018
Pension Benefits
2017
2016
4.60 %
7.50 %
5.12 %
2018
3.28 %
Other
Postretirement Benefits
2017
3.46 %
Not applicable
Not applicable
2016
4.44 %
(1) Due to the Pension Plan freeze and associated remeasurement as of July 31, 2017, the discount rate changed from
4.39% to 3.96% and the expected return on assets changed from 7.00% to 6.00%.
Under current plan provisions, we expect the following benefit payments to be paid:
Other
Pension
Benefits
Postretirement
Benefits
(in thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,984
8,068
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,371
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,843
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,031
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,521
2024 through 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 89,818
250
179
131
116
79
233
988
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 2018, 2017 and 2016 were voluntary.
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 2019 expected contribution with cash generated
from operations. Contributions by participants to the postretirement plan were $366 thousand, $506 thousand and
$532 thousand for the years ended December 31, 2018, 2017 and 2016, respectively.
For measurement purposes, the initial health care cost trend rate was 8.05% (prior to age 65) and 9.30%
(subsequent to age 65) for 2018, 7.02% (prior to age 65) and 8.47% (subsequent to age 65) for 2017 and 6.82% for 2016.
The health care cost trend rate reflects anticipated increases in health care costs. The initial growth rates for 2018 are
assumed to gradually decline over the next 8 years to a rate of 4.5%.
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”).
The SERP allowed for discretionary contributions, though none were awarded to participants in 2017 or 2016.
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 were payable in
installments or in a lump sum. 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, 2018, the pension asset and postretirement liability recorded in the consolidated balance sheet
was comprised of a pension asset of $8.5 million and a liability for postretirement benefits in the amount of $0.8 million.
80
The current portion of postretirement liability of $0.3 million is included in other current liabilities on the consolidated
balance sheet. At December 31, 2017, the accrued pension and postretirement liability recorded in the consolidated balance
sheet was comprised of accrued pension costs of $13.4 million and a liability for postretirement benefits in the amount of
$1.8 million. The accrued liability for the current portion of postretirement liability of $0.4 million is included in other
current liabilities on the consolidated balance sheet.
11. Defined Contribution 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, 2018, 2017
and 2016 were $6.8 million, $6.0 million and $6.8 million, respectively.
In 2017, in connection with the Pension Plan freeze, the Company amended its 401(k) plan to permit employer
discretionary nonelective contributions to eligible participants. For the 2017 plan year, the Company approved a
discretionary nonelective contribution in an amount equal to 4% of such participant’s eligible compensation. These
contributions, which were expensed over the service period in 2017, totaled $5.5 million and were funded and allocated
to participant accounts during the first quarter of 2018.
12. Stockholders’ Equity
Earnings per Share
For the years ended December 31, 2018, 2017 and 2016, earnings per share were computed as follows:
Net income attributable to Waddell & Reed Financial, Inc. . . . . . . . . . . . . . . . . . . . $ 183,588 141,279 156,695
Weighted average shares outstanding, basic and diluted . . . . . . . . . . . . . . . . . . . . . .
80,468
83,573
82,668
Earnings per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.28
1.69
1.90
2018
2017
2016
Dividends
The Board of Directors declared dividends on our Class A common stock of $1.00 per share, $1.63 per share and
$1.84 per share for the years ended December 31, 2018, 2017 and 2016, respectively. In December 2018, the Board of
Directors declared a quarterly dividend on our Class A common stock of $0.25 per share payable on February 1, 2019 to
stockholders of record as of January 11, 2019. As of December 31, 2018 and 2017, other current liabilities included $19.2
million and $20.7 million, respectively, for dividends payable to stockholders.
Common Stock Repurchases
The Board of Directors has authorized the repurchase of our Class A 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
share-based compensation programs. There were 6,963,269 shares, 1,842,337 shares and 2,320,726 shares repurchased in
the open market or privately during the years ended December 31, 2018, 2017 and 2016, respectively. The repurchased
shares include; 729,882 shares, 402,337 shares and 423,726 shares repurchased from employees who elected to tender
shares to cover their income tax withholdings with respect to vesting of stock awards during the years ended December 31,
2018, 2017 and 2016, respectively.
Accumulated Other Comprehensive Loss
The following tables summarize other comprehensive income (loss) activity for the years ended December 31,
2018 and 2017.
81
Year ended December 31, 2018
securities
Unrealized
gains (losses) on
AFS investment
Postretirement
benefits
unrealized
gains (losses)
(in thousands)
Total
accumulated
other
comprehensive
income (loss)
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amount reclassified to retained earnings for ASUs adopted in 2018 . . .
Other comprehensive (loss) income before reclassification . . . . . . . . . . .
Amount reclassified from accumulated other comprehensive income
(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive (loss) income . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
145
(955)
(360)
373
(942)
(797)
379
107
736
(94)
749
1,128
524
(848)
376
279
(193)
331
Year ended December 31, 2017
Change in
valuation
allowance for
unrealized
gains
(losses) on
investment
securities
Unrealized
gains (losses)
on investment
securities
Postretirement
benefits
unrealized
gains (losses)
Total
accumulated
other
comprehensive
income (loss)
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss) before
(3,972)
(3,388)
603
(6,757)
(in thousands)
reclassification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,039
3,743
(106)
7,676
Amount reclassified from accumulated other
comprehensive income (loss) . . . . . . . . . . . . . . . . . . .
78
(355)
(118)
(395)
Net current period other comprehensive income
(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . $
4,117
145
3,388
—
(224)
379
7,281
524
Reclassifications from accumulated other comprehensive income (loss) and included in net income are
summarized in the tables that follow:
For the year ended December 31, 2018
Tax
(expense)
benefit
(in thousands)
Net of tax
Pre-tax
Statement of income
line item or retained earnings
Reclassifications included in net income or
retained earnings for ASUs adopted in
2018:
Sponsored funds investment gains . . . . . . $
Losses on available for sale debt
1,295
(340)
955 Retained earnings
securities . . . . . . . . . . . . . . . . . . . . . . . . . $
(489)
116
(373) Investment and other income (loss)
Amortization of postretirement benefits . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
122
928
(135)
(359)
(13)
569
Compensation and benefits and
retained earnings
For the year ended December 31, 2017
Tax
benefit
Pre-tax
(expense) Net of tax
(in thousands)
Statement of income line item
Reclassifications included in net income:
Sponsored funds investment losses . . . . . . $
Valuation allowance . . . . . . . . . . . . . . . . . .
Amortization of postretirement benefits . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(124)
—
184
60
46
355
(66)
335
(78) Investment and other income (loss)
355 Provision for income taxes
118 Compensation and benefits
395
82
13. Share-Based Compensation
The Company’s 1998 Stock Incentive Plan, as amended and restated (the “SI Plan”) allows us to grant equity
compensation awards, including 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. A maximum of 35.6 million shares of common stock are authorized for issuance under the SI Plan and
as of December 31, 2018, 2,121,728 shares of common stock were available for issuance under the SI Plan. In addition,
we may make incentive payments under the Company Executive Incentive Plan, as amended and restated (the “EIP”) in
the form of cash, nonvested stock or a combination thereof. Incentive awards paid under the EIP in the form of nonvested
stock are issued out of shares reserved for issuance under the SI Plan. Generally, shares of common stock subject to an
award that expires or is cancelled, forfeited, exchanged, settled in cash or is terminated will again be available for awards
under the SI Plan.
Nonvested stock awards are valued on the date of grant and have no purchase price. These awards have
historically vested over four years in 33 1/3% increments on the second, third and fourth anniversaries of the grant date;
however, awards granted on or after December 31, 2016 vest in 25% increments on the first anniversary of the grant date.
The Company has issued nonvested stock awards to non-employee directors. These awards generally have the same terms
as awards issued to employees, except awards granted on or after January 2, 2017 fully vest on the first anniversary of the
grant date and changes in the Company’s share price result in variable compensation expense over the vesting period.
Beginning in 2017, the Company established a Cash Settled RSU Plan (the “RSU Plan”), which allows the
Company to grant cash-settled restricted stock units (“RSU”) to attract and retain key personnel and enable them to
participate in the long-term growth of the Company. Unvested RSUs have no purchase price and vest in 25% increments
over four years, beginning on the first anniversary of the grant date. On the vesting date, RSU holders receive a lump sum
cash payment equal to the fair market value of one share of the Company’s common stock, par value $0.01, for each RSU
that has vested, subject to applicable tax withholdings. We treat RSUs as liability-classified awards and, therefore, account
for them at fair value based on the closing price of our common stock on the reporting date, which results in variable
compensation expense over the vesting period.
Nonvested shares and nonvested RSU’s 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 shares, holders of nonvested shares have full stockholders’ rights
during the term of restriction, including voting rights and the rights to receive cash dividends. Since nonvested RSUs are
not shares of Company stock, holders of nonvested RSUs are not entitled to voting rights, but are entitled to dividend
equivalent payments for each RSU equal to the dividend paid on one share of our common stock.
A summary of nonvested share activity and related fair value for the year ended December 31, 2018 follows:
Weighted
Average
Grant Date
Stock Shares Fair Value
5,088,640 $ 27.26
Nonvested at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.87
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,561,155
32.02
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,061,297)
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24.23
(494,738)
4,093,760 $ 22.79
Nonvested at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested
A summary of nonvested RSU activity for the year ended December 31, 2018 follows:
Nonvested at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash-Settled Units
1,213,029
1,105,087
(343,711)
(212,345)
1,762,060
Nonvested
83
For the years ended December 31, 2018, 2017 and 2016 compensation expense related to nonvested shares totaled
$51.6 million, $57.7 million and $51.5 million, respectively.
The deferred income tax benefit from the compensation expense related to nonvested stock was $10.0 million,
$12.2 million and $19.2 million for the years ended December 31, 2018, 2017 and 2016, 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, 2018, the remaining unamortized expense of $60.6 million is expected to be recognized over a
weighted average period of 2.2 years.
The total fair value of shares vested (at vest date) during the years ended December 31, 2018, 2017 and 2016,
was $41.0 million, $20.8 million and $26.7 million, respectively. The Company withholds a portion of each employee’s
vested shares to satisfy income 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 FINRA. 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, 2018 or 2017.
Net capital and aggregated indebtedness information for our broker-dealer subsidiaries is presented in the
following table as of December 31, 2018 and 2017:
2018
2017
(in thousands)
Net capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Required capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess of required capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Ratio of aggregate indebtedness to net capital . . . . . . . . . . . . . .
W&R
57,109
250
56,859
IDI
25,688
1,336
24,352
W&R
28,024
250
27,774
Not
IDI
21,167
1,757
19,410
0.78 to 1.0 applicable
1.25 to 1.0
Not
applicable
15. Rental Expense and Lease Commitments
We lease certain home office buildings, certain sales and other office space and equipment under operating leases.
Rent expense was $22.7 million, $24.5 million and $24.3 million, for the years ended December 31, 2018, 2017 and 2016,
respectively. Future minimum rental commitments under non-cancelable operating leases are as follows:
Year
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments
(in thousands)
16,488
9,797
5,757
2,913
2,320
5,161
42,436
$
84
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 ICA for 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, 2018,
2017 and 2016 are as follows:
Investment management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
(in thousands)
2016
486,581
141,220
102,385
730,186
508,035
159,873
106,595
774,503
523,304
208,901
120,241
852,446
Included in Funds and separate accounts receivable at December 31, 2018 and 2017 are receivables due from the
Funds of $14.6 and $20.6 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
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 must be disclosed.
Management’s judgment is required related to contingent liabilities because the outcomes are difficult to predict.
Shareholder Derivative Litigation
In an action filed on April 18, 2016 in the District Court of Johnson County, Kansas, Hieu Phan v. Ivy Investment
Management Company, et al. (Case No. I6CV02338 Div. 4), plaintiff filed a putative derivative action on behalf of the
nominal defendant, a mutual fund trust affiliated with the Company, alleging breach of fiduciary duty and breach of
contract claims relating to an investment held in the affiliated mutual fund by the Company's registered investment adviser
subsidiary. On behalf of the nominal defendant trust, plaintiff filed claims against the Company’s registered investment
adviser subsidiary and current and retired trustees of the trust seeking monetary damages and demanding a jury trial. While
the Company denies that any of its subsidiaries breached their fiduciary duties to, or committed a breach of the investment
management agreement with, the nominal defendant trust, the parties to the litigation reached a settlement. The February
14, 2018 settlement agreement provided a full release for the benefit of defendants and for the payment of $19.9 million
(less $6.1 million for attorney’s fees plus nominal costs associated with notice to shareholders), recoverable to the
Company through insurance, to the affiliated mutual fund for the benefit of its shareholders. On July 30, 2018, the court
entered an order granting final approval of the settlement. The settlement amount has been funded by insurance, and the
affiliated mutual fund has received the net settlement amount after deduction for attorney’s fees and nominal costs
described above.
85
401(k) Plan Class Action Litigation
In an action filed on June 23, 2017 and amended on June 26, 2017 in the U.S. District Court for the District of
Kansas, Schapker v. Waddell & Reed Financial, Inc., et al, (Case No. 17-2365 D. Kan.), Stacy Schapker, a participant in
the Company’s 401(k) and Thrift Plan, as amended and restated (the “401(k) Plan”), filed a lawsuit against the Company,
the Company’s Board of Directors, the Administrative Committee of the 401(k) Plan, and unnamed Jane and John Doe
Defendants 1-25. On August 7, 2017, plaintiff filed a second amended complaint on behalf of the 401(k) Plan and a
proposed class of 401(k) Plan participants, alleging claims for breach of fiduciary duty and prohibited transactions under
the Employee Retirement Income Security Act of 1974, as amended, based on the 401(k) Plan’s offering of investments
managed by the Company or its affiliates during a proposed class period of June 23, 2011 to present. The second amended
complaint dismissed the Company’s Board of Directors as a defendant and named as defendants the Company, the
Compensation Committee of the Company’s Board of Directors, the Administrative Committee of the 401(k) Plan, and
the individuals who served on those committees during the proposed class period. While the Company and all other
defendants deny any and all liability with respect to the claims, the parties to the litigation reached a settlement. The
November 19, 2018 settlement agreement contemplates a full release for the benefit of the Company and all other
defendants and the payment of $4.875 million (less attorney’s fees and costs, class representative compensation, and
administrative expenses) to eligible settlement class members, their beneficiaries or alternate payees. On November 28,
2018, the court entered an order granting preliminary approval of the settlement, including preliminary certification of a
class for settlement purposes only, to include 401(k) Plan participants at any time during the approved class period of June
23, 2011 to November 28, 2018. A fairness hearing is scheduled for April 8, 2019, at which the court will consider granting
final approval to the settlement. The settlement is subject to final court approval. The payments contemplated by the
proposed settlement are recoverable to the Company through insurance. The Company has recorded a liability and
offsetting receivable from insurance, as reflected in the Company's consolidated balance sheets.
18. Concentrations of 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.
Our investments in sponsored funds and investments held as trading expose us to market risk. The underlying
holdings of our AUM are also subject to market risk, which may arise from changes in equity prices, credit ratings, foreign
currency exchange rates, and interest rates.
19. Selected Quarterly Information (Unaudited)
2018
Quarter
First
Second
Third
Fourth
(in thousands)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 297,615 295,338 295,118 272,230
46,468
Net income attributable to Waddell & Reed Financial, Inc. . . . . . . $ 46,337
0.60
0.56
Net income per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . $
44,478
0.55
46,305
0.58
2017
Quarter
First
Second
Third
Fourth
(in thousands)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 286,564 286,657 289,447 294,476
29,765
Net income attributable to Waddell & Reed Financial, Inc. . . . . . . $ 33,871
0.36
0.40
Net income per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . $
24,061
0.29
53,582
0.64
86
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
OUR BUSINESS MODEL
CORPORA TE INFORMA TION
OUR M ISSION is to consistently work to bring individual skills and innovative ideas together to help investors
realize their long-term financial goals. Our distinct business model is built upon a unique combination of
skilled asset management, balanced distribution and exceptional client service. Our brands include:
ASSET MANA GER
BROKER-DEALER
Skilled and pr oven investment
management capabilities
Targeted distribution of in vestment
Nationally based indep endent financial ad visors
Breadth of products offered, including full service
brokerage, advisory services, and mutual funds
products to retail and institu tional clients
from affiliated and unaffiliated asset mana gers
2018
222
184
$2.28
20 17
220
141
$1.69
2016
259
157
$1.90
FINAN CIAL H IGHLIGHTS
(DOLLARS IN MILLIONS, E XCEPT PER SHARE DATA)
Operating Income
Net Income
Earnings Per Diluted Share
See accompanying Form 10-K.
ASSET S UN DER MANA GEMENT
$ IN BILLIONS
Annual Meeting of Stockholders
April 23, 2019, 10:00 a.m.
Corporate Headquarters
Waddell & Reed Financial, Inc.
6300 Lamar Avenue
Overland Park, KS 66202
NYSE Listing
Class A Common Stock
Stock Symbol: WDR
Independent Auditors
KPMG LLP
1000 Walnut, Suite 1100
Kansas City, MO 64106
Transfer Agent and Registrar
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, KY 40233-5000
Toll Free Number: 877.498.8861
Hearing Impaired: 800.952.9245
www.computershare.com
Mutual Fund Information
For information regarding our mutual
funds, please call 888.WADDELL or visit
www.waddell.com or www.ivyinvestments.com
Institutional Marketing Information
For information regarding institutional
marketing, please call 877.887.0867 or visit
www.institutional.ivyinvestments.com
Dividend Reinvestment
Waddell & 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 Inquiries
For information regarding Waddell & Reed Financial, Inc.
stock, please call the Investor Relations office at
800.532.2757 or visit www.ir.waddell.com
$140
$120
$100
$80
$60
$40
$20
$0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Institutional
Broker-Dealer
Retail-unafilliated
2
W A D D E L L & RE
E D
1331_Cover.indd 2
2/22/19 10:03 PM
W A D D EL
L & REE
D
CHANGING
LANDSCAPE,
NEW HORIZONS
2018 ANNU AL REPOR T
W
A
D
D
E
L
L
&
R
E
E
D
F
I
N
A
N
C
I
A
L
,
I
N
C
.
2
0
1
8
A
N
N
U
A
L
R
E
P
O
R
T
waddell.com
WADDELL & REED FINANCIAL, INC. ANN-CORP-2018/41520 (02/19)
1331_Cover.indd 1
2/15/19 8:32 PM