2019 ANNUAL REPORTSTRONG FOUNDATIONon aWADDELL & REED FINANCIAL, INC. ANN-CORP-2019/44384 (02/20)waddell.comWADDELL & REED FINANCIAL, INC. 2019 ANNUAL REPORT2888_Cover.indd 12888_Cover.indd 12/14/20 11:40 PM2/14/20 11:40 PM WADDELL & REED FINANCIAL, INC.2201920182017Operating Income146222220Net Income115184141Net Income Per Diluted Share$1.57$2.28$1.69Adjusted Net Income Per Share1$1.87$2.23$1.691Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” in the Company's Annual Report on Form 10-K for a reconciliation to GAAP.FINANCIAL HIGHLIGHTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)OUR BUSINESS MODELOUR DIVERSIFIED FINANCIAL SERVICES COMPANY is built on a distinct business model with two differentiated brands, individually focused on skilled asset management and personalized wealth management services, both offering exceptional client support. At our foundation is a values-based, purpose-driven company culture focused on innovation and growth. Our brands include:• An active asset manager known for global investing strategies that help investors best meet their long-term goals.• Centered on a collaborative investment process that values deep fundamental research and risk management.• A comprehensive distribution team that supports advisors and our retail and institutional clients.ASSET MANAGER• National network of independent financial advisors.• Personalized, holistic financial planning services for individuals, families and businesses.• Comprehensive and diverse product offering, including advisory services, full-service brokerage, retirement plans and investment and insurance products. WEALTH MANAGERASSETS UNDER ADMINISTRATION $ IN BILLIONS$0$10$20$30$40$50$60$70$80$90Non-advisoryAdvisory201920182017$35$30$33$22$21$27ASSETS UNDER MANAGEMENT $ IN BILLIONS$0$10$20$30$40$50$60$70$80$90201920182017$81$66$702019 ANNUAL REPORTCORPORATE INFORMATIONAnnual Meeting of StockholdersApril 29, 2020, 10:00 a.m. Corporate HeadquartersWaddell & Reed Financial, Inc. 6300 Lamar Avenue Overland Park, KS 66202NYSE ListingClass A Common Stock Stock Symbol: WDRIndependent AuditorsKPMG LLP 1000 Walnut, Suite 1100 Kansas City, MO 64106Transfer 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.comMutual Fund InformationFor information regarding our mutual funds, please call 888.WADDELL or visit www.waddell.com or www.ivyinvestments.comInstitutional Marketing InformationFor information regarding institutional marketing, please call 877.887.0867 or visit www.institutional.ivyinvestments.comDividend ReinvestmentWaddell & Reed Financial, Inc. maintains a dividend reinvestment plan for all holders of its common stock. Under the plan, stockholders may reinvest all or part of their dividends in additional shares of common stock. Participation is entirely voluntary. More information on the plan can be obtained from our Transfer Agent.Stockholder InquiriesFor information regarding Waddell & Reed Financial, Inc. stock, please call the Investor Relations office at 800.532.2757 or visit www.ir.waddell.com 2888_Cover.indd 22888_Cover.indd 22/14/20 11:41 PM2/14/20 11:41 PM 2019 ANNUAL REPORT3TO OUR STOCKHOLDERSAS WE ENTER 2020, the financial industry arguably faces more change and disruption than it has seen in decades. From fee pressures, to firm consolidation with a focus on ever-increasing scale, to growing interest in corporate responsibility, rapid change is evident in all facets of our business. Amidst all the change, 2019 was an exceptional performance year for the financial markets broadly, as stocks around the world turned in one of the strongest years in the last decade. Together, stocks and bonds saw their largest simultaneous gains in more than two decades. Despite the strong market performance and solid economic fundamentals, investors remained somewhat cautious in the face of global growth fears and geopolitical uncertainty. Flows across the industry in 2019 were weighted toward fixed income products and passively-managed index funds at the expense of active equity products.Against this backdrop, for the full year 2019, adjusted net income was $137 million, or $1.87 per share, compared to adjusted net income of $179 million, or $2.23 per share, during the prior year. Despite the lower net income as we focus on the longer-term transition of our business model, we generated strong operating cash flow during 2019 and we have continued to demonstrate targeted expense control, having reduced controllable operating expenses another 5% compared to last year and 11% compared to 2017, excluding the non-cash asset impairment charges.CONTROLLABLE EXPENSES1 $ IN MILLIONS$100$200$300$400$500201920182017$469$440$41611% decrease$1321Controllable expenses defined as compensation, share-based compensation, general and administrative, occupancy, technology, and marketing and administration costs. 2Non-cash asset impairment.Assets under administration in our wealth management business ended the year at approximately $60 billion and increased 17% compared to the prior year. In the wealth management business, we continued to see momentum in advisory asset growth as net new advisory assets for the year grew compared to 2018 from strong client demand.Assets under management in our asset management business increased to approximately $70 billion, or 6%, compared to year-end 2018, driven by market appreciation. Despite the strong markets, asset flow headwinds proved challenging and can be attributed to several factors, which include our own investment performance and product mix, the evolution of our wealth manager and the industry dynamics that all active equity managers are facing. While we have opportunities for better execution in terms of our investment performance and distribution, the pace of net outflows has shown a multi-year improvement, although they were relatively consistent with the prior year. NET FLOWS $ IN BILLIONS$-40$-30$-20$-10$0$10$202019201820172016$-40$-30$-20$-10$0$10$20$-40$-30$-20$-10$0$10$20($18.2)$11.7$11.8$8.0($37.0)($23.2)$12.0($22.4)($25.3)($11.4)($10.4)($10.2)SalesRedemptionsNet Flows2888_Insert.indd 32888_Insert.indd 32/14/20 11:11 PM2/14/20 11:11 PM WADDELL & REED FINANCIAL, INC.4Throughout 2019, we began to actively transition from our work on fortifying our operational foundation toward pursuing progress on our new transformational growth strategy — all with the goal of best serving our clients, stockholders, employees, advisors and communities. Over the past two years, our foundational work centered on four pillars: (1) Strengthening our investment management resources and results; (2) Reinvigorating our product line and sales; (3) Evolving our wealth management business to be fully competitive, self-sustaining and profitable; and (4) Improving our operating efficiency. Let’s look at specific progress we made this year as we move toward our strategy for renewed growth.WEALTH MANAGER: WADDELL & REED FINANCIAL ADVISORS®WE CONTINUE TO BUILD on our value proposition to financial advisors through enhancements to technology, products and a leading service model. • We launched WaddellONE, our centralized advisor technology platform, to all financial advisors and associates. This new platform provides direct connectivity to several of the firm’s existing technology partners, as well as access to research. • We continued broadening our wealth management product offering, specifically fee-based advisory products. We now offer nine different advisory products, providing our financial advisors access to nearly 5,000 mutual funds from over 100 different fund families. This also includes a wide universe of ETFs and other general securities.• Our advisor network has largely stabilized, with more than 1,300 licensed advisors and associates at year end and increasing overall advisor productivity.• We boosted our recruiting efforts nationally and have an expanded national recruiting team in place with the goal of adding experienced financial advisors to Waddell & Reed’s national network.ASSET MANAGER: IVY INVESTMENTS®WE HAVE SEEN STEADY IMPROVEMENT in our longer-term performance, including steady improvement over the trailing three- and five-year periods, reflecting a payoff from the investments we have made in recent years.• We have enhanced our research staff with additional resources, continued a team-based approach to portfolio management, and continued to make additional investments in enhancing our technology and risk management capabilities.• We added the experience of Dan Hanson, CFA, as our Chief Investment Officer during the year. A versatile industry veteran and prominent environmental, social and governance (ESG) investor, Dan has already made an impact both internally and externally with key partners. • We expanded our analyst talent acquisition model with the introduction of an investment analyst internship program designed as a recruiting pipeline to our strong pool of fundamentally driven research investment teams. • We remain committed to expanding and diversifying our product offering as appropriate, including offering existing strategies in additional vehicles, such as model delivery, where we introduced seven strategies in 2019.2888_Insert.indd 42888_Insert.indd 42/14/20 11:11 PM2/14/20 11:11 PM 2019 ANNUAL REPORT5ENTERPRISE-WIDE INITIATIVESACROSS OUR ENTERPRISE, we continue to advance our position as a values-based and purpose-driven organization and continue to evolve our organizational structure to drive more agility. These overarching philosophies will help ensure we can quickly evolve and conduct business in a more effective and efficient manner as the marketplace continues to evolve. PhilanthropyDiversity & InclusionEmployee AppreciationWell-BeingStrategy & ValuesCULTURE CONNECTIONSIn 2019, we initiated a concept called “Culture Connections.” This is a purposeful and planned strategy to directly and authentically illustrate our commitment to advance our position as a values-based and purpose-driven organization. Culture Connections components include a focus on Diversity & Inclusion, Strategy & Values, Employee Appreciation, Philanthropy, and Well-Being:• I personally signed the CEO Action for Diversity & Inclusion Pledge, acknowledging that the organization will act to cultivate trust, diversity, flexibility and understanding. Employees across the company also signed the “I ACT ON” pledge to check our bias, speak up for others and show up for all. • We became the first organization in the Kansas City region to partner with Rock The Street, Wall Street (RTSWS), a national, non-profit organization offering a financial and investment literacy program designed to spark the interest of female high school students in careers in finance.• We reinvested in our employees through a number of events, including leadership development for all people leaders, dedicated employee appreciation events and a focus on physical, mental and financial well-being. • In early 2020, we signed a lease for a new corporate headquarters in the heart of downtown Kansas City, Missouri. We understand that people are our most important asset and this new facility will allow us to better attract and retain top talent across the enterprise to accelerate our strategic growth initiatives over time. It also will be a key enabler to driving a more agile, productive organization and to our continued focus on having a culture of belonging with intentional planning around collaborative, flexible workplace designs. In addition, the interior design is another example of us advancing our position as a purpose-driven organization as we are pursuing LEED and FitWel℠ certifications as part of the build.• We continue to act on organizational design opportunities to build a more efficient and agile organization. An example of this during 2019 was the outsourcing of the transactional processing operations of our internal transfer agency.2888_Insert.indd 52888_Insert.indd 52/14/20 11:11 PM2/14/20 11:11 PM WADDELL & REED FINANCIAL, INC.6Importantly, we have been able to accomplish all this and more over the past two years while maintaining an exceptionally strong balance sheet, continuing to strategically invest in growth drivers and returning significant capital to stockholders. In the past year alone we returned over $228 million to stockholders and reduced our shares outstanding by over 10%. ACTIVE CAPITAL RETURN PROGRAM $ IN BILLIONS$0$50$100$150$200$250201920182017$600$650$700$750$800$850DividendBuybackNet Cash & Investments¹1Cash and investments net of long-term debtWith much of the heavy lifting and many foundational improvements behind us, we are now in a better position to sharpen our focus on growth initiatives that support our longer-term vision.OUR RENEWED STRATEGIC GROWTH PLANOur business model has evolved and is somewhat unique in our industry, featuring both wealth management and asset management. With the transformation of our wealth manager, we are now in a position to grow and scale this aspect of our business for the first time in years. We believe this represents a real opportunity for our company. Over time, a thriving wealth manager, combined with an institutional-caliber asset manager, should result in a more stable operating model with better long-term growth prospects. As we move forward, we are focused on several key strategic enablers spanning wealth management, asset management and our overall enterprise, which we believe will be essential to our future success: KEY STRATEGIC ENABLERSGrowth culture and agile organizationCore processes and performanceCapital allocationProduct and PricingBrand awareness and perceptionTechnology and analyticsThese enablers are essential to our long-term success and will be the key components of our strategy to drive our company forward. We know our efforts to develop a growth culture will allow us to increase connectivity, collaboration and efficiency and enable achievement of our key strategic initiatives. We remain committed to progress, and to success, on behalf of our clients, stockholders, employees, affiliated advisors and communities.Thank you for your partnership, trust and shared commitment,Philip J. Sanders, CFA Chief Executive OfficerAdjusted net income and adjusted net income per share are non-GAAP financial measures. See "Non-GAAP Financial Measures" in the Company's Annual Report on Form 10-K for a reconciliation to GAAP.2888_Insert.indd 62888_Insert.indd 62/14/20 11:12 PM2/14/20 11:12 PM DIRECTORS
Thomas C. Godlasky
Chairman of the Board
Former CEO,
Aviva North America
Director (since 2010)3, 4
Dennis E. Logue
Retired Chairman,
Ledyard Financial Group
Director (since 2002)1,3
Alan W. Kosloff*
Chairman, Kosloff & Partners, LLC
Director (since 2003)2,3
Michael F. Morrissey
Former Partner,
Ernst and Young, LLP
Director (since 2010)1,2,3,4
Philip J. Sanders
Chief Executive Officer
of the Company
Director (since 2016) 4
Sharilyn S. Gasaway
Former EVP and CFO,
Alltel Corporation
Director (since 2010)1,3
James A. Jessee
Former Co-Head of Global
Distribution and President,
MFS Fund Distributors, Inc.
Director (since 2019)2,3
Constance K. Weaver
Co-Founder and CEO,
Tracker Group, LLC
Director (since 2020)3
Jerry W. Walton
Former CFO,
J.B. Hunt Transportation
Services, Inc.
Director (since 2000)1,2,3,4
Kathie J. Andrade
Former Senior EVP and CEO
of Retail Financial Services,
TIAA-CREF
Director (since 2019)2,3
Katherine M.A. (“Allie”) Kline
Former Chief Marketing and
Communications Officer,
Oath Inc. (now Verizon Media)
Director (since 2020)3
¹ Audit Committee ² Compensation Committee ³ Nominating and Corporate Governance Committee ⁴ Executive Committee * Retiring from the Board in April 2020
OFFICERS
Philip J. Sanders
Chief Executive Officer
and Director
Benjamin R. Clouse
Senior Vice President and
Chief Financial Officer
Christopher W. Rackers
Senior Vice President and
Chief Administrative Officer
Brent K. Bloss
President
Daniel P. Hanson
Senior Vice President and
Chief Investment Officer
Amy J. Scupham
Senior Vice President, Distribution
Mark P. Buyle
Senior Vice President,
Chief Legal Officer,
General Counsel and Secretary
Shawn M. Mihal
Senior Vice President,
Wealth Management
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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, 2019
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
Trading Symbol(s)
WDR
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 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 registrant’s common stock held by non-affiliates based on the closing sale price on June 30, 2019 was
$1.20 billion.
Shares outstanding of the registrant’s common stock as of February 7, 2020 Class A common stock, $.01 par value: 67,837,697
DOCUMENTS INCORPORATED BY REFERENCE
In Parts II and III of this Form 10-K, portions of the definitive proxy statement for the 2020 Annual Meeting of Stockholders to be held
April 29, 2020.
Index of Exhibits (Pages 52 through 53)
Total Number of Pages Included Are 91
WADDELL & REED FINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2019
Page
Part I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . .
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
10
25
25
25
25
25
28
29
47
49
49
49
51
51
51
51
51
51
52
54
55
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 and
assets under administration, 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 2018, we completed the merger of all Advisors Funds into Ivy
Funds with substantially similar objectives and strategies, and substantially completed the liquidation of the IGI Funds. In
September 2019, Ivy NextShares were liquidated. 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 wealth management 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 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”), the registered investment adviser for the former Advisors Funds.
WRIMCO merged into IICO in 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 and other mutual funds and as a distributor of variable annuities and other insurance
products issued by our business partners, and was the national distributor for the former Advisors Funds. IDI is the
distributor and underwriter for the Ivy Funds and Ivy VIP and was the distributor and underwriter for the former Ivy
NextShares.
Waddell & Reed Services Company (“WRSCO”) and/or its subagents provide 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. 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 the sharing
of information, analysis and ideas, 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.
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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 processes. 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 90 professionals, including 33 portfolio managers who average
24 years of industry experience and 17 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 80 registered mutual fund portfolios in the Funds, which includes 60 investment strategies. During 2018, the remaining
Advisors Funds merged into Ivy Funds with substantially similar objectives and strategies and 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 our wealth management 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 wealth management channel. The Funds’ AUM are included in either our unaffiliated
channel or our wealth management channel depending on which channel marketed the client account or is the broker of
record. We also offer our strategies in other structures, such as institutional separate accounts, collective investment trusts
and model-delivery separately managed accounts. As of December 31, 2019, we managed $70.0 billion in AUM.
Distribution Channels
One of our distinctive qualities is that we distribute our investment products through a balanced distribution
network. Our distribution channels cover retail sales channels, including our affiliated wealth manager, W&R, as well as
an institutional sales channel.
Unaffiliated Channel
The IDI focused distribution model centers on two sales channels, National Distribution and Professional Buyers
Distribution, to best diversify asset flow and the AUM profile of the Company. AUM in this channel were $26.3 billion
at the end of 2019.
National Distribution, inclusive of National Accounts and National Wholesale, drives sales throughout the
nationwide broker-dealer network. The National Accounts team focuses on firm home office interactions and the National
Wholesale team focuses 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 focuses 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.
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Wealth Management Channel
Throughout our history and continuing today, Advisors sell 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 wealth management platform technology and product offering,
while continuing to make investments that allow Advisors to simplify the way they conduct business with clients. In 2019,
we introduced a texting program for mobile and desktop use to all Advisors. This application allows Advisors to text
clients, manage, schedule and track messages and integrate messaging with their customer relationship management
system. Also in 2019, we expanded services and advanced planning support and introduced a custom coaching and
practice-building program. The program allows Advisors to review key aspects of their business, access direct coaching
from industry experts, and personalize a plan for practice growth and continued progress. We continue to work to
transform W&R into a fully competitive and profitable aspect of our business model. 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, 2019, there were 939 Advisors and 388 licensed advisor associates, for a total of 1,327
licensed individuals associated with W&R who operate out of offices located throughout the United States. Based on
industry data, W&R ranks among the largest independent broker-dealers. As of December 31, 2019, our wealth
management channel had AUM of $40.6 billion.
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 subadvisor for their branded products; they are typically domestic
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 also includes pension funds, Taft-Hartley plans and endowments. AUM in the
institutional channel were $3.1 billion at December 31, 2019.
Wealth Management 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, survivor needs, asset allocation, estate planning, business planning, income tax planning,
disability and long-term care. W&R offers a variety of products to clients including fee-based, asset allocation advisory
products, mutual funds, general securities, 529 college savings plans, retirement plans and insurance and annuities. In
2019, W&R launched WaddellONE, a centralized advisor technology platform available to all Advisors. Through
WaddellONE, Advisors have direct connectivity to several of the firm’s existing technology partners with the added benefit
of market data, research and news coverage.
W&R offers clients full-service brokerage services as well as a variety of fee-based asset allocation programs,
including Managed Allocation Portfolio (“MAP”), MAPChoice, MAPFlex, MAPSelect, MAPLatitude, MAPNavigator
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 (“ETFs”) and are part of the evolution of our fully
independent wealth management business model. During 2019, we launched Guided Investment Strategies and
MAPDirect. Guided Investment Strategies provides Advisors multiple options for outsourcing investment management to
institutional, third party investment managers. The program consists of four ETF options and one mutual fund option. The
ETF portfolios are managed by PMC, Wilshire Associates, BlackRock and State Street Global Advisors. The mutual fund
option consists of both affiliated and unaffiliated mutual fund options and is managed with discretion by Wilshire
Associates. MAPDirect is a new fee-based asset allocation program offering investment options from multiple mutual
fund managers, including access to more than 1,800 individual mutual funds and nearly 200 ETFs. As of December 31,
2019, clients had $26.9 billion invested in our fee-based asset allocation programs.
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Through W&R, we distribute various variable annuity products, some of which offer our affiliated Ivy VIP funds
as an investment vehicle. 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 includes both client assets invested in the Funds and in other companies’ products that are distributed
through W&R and held in brokerage accounts or within our fee-based asset allocation programs. As of December 31,
2019, we managed AUA of $60.1 billion.
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. During 2019, the Company
outsourced the transactional processing operations of its internal transfer agency, which provides some of these services.
Pursuant to accounting service agreements, we provide the Funds with accounting and administrative 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 2019 there were more than 9,400 open-end investment companies, more than 500
closed-end investment companies and more than 2,000 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. In recent years, there has been a trend of consolidation in the mutual fund industry
resulting in competitors with greater financial resources than us. 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 evolution and change
in recent years, which have intensified the competitive environment. Changes 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 and through mobile applications, 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.
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We believe we effectively compete across multiple dimensions of the asset management and wealth management
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 and wealth managers that are both larger and smaller than our firm, but we believe that
the breadth and depth of our products position us to compete in this environment. 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 experience,
diversity and inclusion and total rewards. For Advisors, we enhanced our compensation program and continue to build on
our value proposition through enhancements to technology, products and a leading service model. We also boosted our
recruiting efforts nationally and have an expanded national recruiting team in place whose focus is to attract, build
relationships with and, ultimately, add experienced financial advisors to W&R’s national network.
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 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. Two of our subsidiaries, W&R and IICO, 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.
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 2019 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.
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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, 2019 and 2018, 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 wealth management 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. 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 U.S. Court of Appeals for the Fifth Circuit
vacated the DOL Fiduciary Rule, the DOL is expected to re-propose these regulations and other regulators have enacted
or proposed other fiduciary standards. For example, in June 2019, the SEC adopted a package of rulemakings, including
Regulation Best Interest, Form CRS Relationship Summary (“Form CRS”), and interpretations, including an interpretation
of an investment adviser’s fiduciary standard of conduct and when broker-dealers are deemed to provide advice that is
“solely incidental” to brokerage services and thus not subject to the Advisers Act, which are intended to enhance the
quality and transparency of retail investors’ relationships with broker-dealers and investment advisers. In addition, certain
states have enacted or proposed fiduciary and best interest standards for broker-dealers.
Our businesses may be materially affected not only by regulations applicable to investment advisers, broker-
dealers or transfer agents, 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
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included in Item 1A—“Risk Factors” in this Annual Report.
Intellectual Property
We regard our names as material to our business and have registered certain service marks associated with our
business with the United States Patent and Trademark Office.
Employees
At December 31, 2019 we had 1,162 full-time employees, consisting of 1,073 home office employees and 89
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 Competition. The investment
management industry is highly competitive. We compete with investment management firms, wealth management
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, and have better brand recognition. See Item
1 – “Business – Competition.” 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.
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 offer these classes or
products. For example, the trend in recent years in the asset management business in favor of lower fee, passive investment
strategies, such as index and certain types of exchange-traded funds, 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 or are Volatile.
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,
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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 and
AUA. A decline in the securities markets may cause the value of our AUM and/or AUA to decline or cause investors to
redeem or sell 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 advisory 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. 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. A Fund’s
performance record is calculated over various trailing periods and, therefore, the Fund’s underperformance may continue
to be reflected in a particular trailing period long after the Fund’s performance has improved. Accordingly, the Fund may
experience delays in realizing, or may not realize, any increase in asset flows from improved performance. 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 and may 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 wealth management
channel may further reduce profits as sales of unaffiliated mutual funds are less profitable than sales of our Funds.
As of December 31, 2019, 39% 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.
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, 2019 were $26.3 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 best interest and 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.
Over half of our AUM, $40.6 billion, or 58%, as of December 31, 2019 are held in our wealth management
channel. The investment products distributed in our wealth management channel include our Funds and other products,
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as well as products issued by unaffiliated mutual fund companies. A significant portion of the sales in this channel are
sales of 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 wealth management 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 best interest and 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, AUA,
revenues and earnings may decline. See “Legal, Regulatory and Tax Risks below for the impact that changes to standards
of conduct applicable to broker-dealers and investment advisers and potential fiduciary standards may have on our
business, including our distribution activities”
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 Wealth Management Channel.
The percentage of our AUM in the unaffiliated
channel was 38% at December 31, 2019, and the percentage of our total sales represented by the unaffiliated channel was
60% for the year ended December 31, 2019. 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
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 21.7% and
24.9% for the years ended December 31, 2019 and 2018, the unaffiliated channel had redemption rates of 38.1% and
38.7% for the years ended December 31, 2019 and 2018, respectively. Redemption rates were 13.8% and 13.9% for our
wealth management channel in the same periods, reflecting the higher rate of transferability of investment assets in the
unaffiliated channel. However, the modernization of our wealth management platforms and products and the introduction
of additional unaffiliated investment products in our advisory programs, as well as changes resulting from the
implementation of new best interest and fiduciary standards, may result in a higher redemption rate in our wealth
management 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 wealth management 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 best interest and fiduciary standards could increase fee pressure as
financial advisors may have more fee sensitivity given their higher standard of conduct. 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. 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
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increase AUM. 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 agreements, and generally can terminate their employment with us at any time. Those employees who
are subject to employment agreements 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 execute its strategic objectives, 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 wealth management 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.
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 wealth
management channel may increase materially with the introduction of additional unaffiliated investment products in our
advisory programs. The implementation of new best interest and 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
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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. In addition, changes to the standards of conduct applicable to broker-dealers
and investment advisers could require modifications to our distribution activities and impact our ability to engage in certain
types of distribution or other business activities.
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.
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. 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 Ability 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, or if the
“soft dollars” we generate decrease because of reductions to our AUM or commission rates, our operating expenses could
increase. The Markets in Financial Instruments Directive II (“MiFID II”), which was effective in Europe in January 2018,
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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. Virtually all aspects of our business, including the activities of our parent company and our
investment advisory and wealth management 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:
•
•
In Washington, D.C., there has been an increased focus on the framework of the U.S. retirement system.
Although the DOL Fiduciary Rule was vacated, we already had implemented a number of business and
compliance initiatives in order to change our distribution methods and operations in response to the DOL
Fiduciary Rule. The DOL is expected to promulgate in the future a rule to replace the DOL Fiduciary Rule
that could impose materially different requirements on the Company and make 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 SEC’s Regulation Best Interest and standards
adopted by one or more states. 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 June 2019, the SEC adopted a package of rulemakings and interpretations, including Regulation Best
Interest and Form CRS, as well as the SEC’s interpretation of an investment adviser’s fiduciary standard of
conduct and when broker-dealers are deemed to provide advice that is “solely incidental” to brokerage
services and thus not subject to the Advisers Act, which are intended to enhance the quality and transparency
of retail investors’ relationships with broker-dealers and investment advisers. Regulation Best Interest
enhances the broker-dealer standard of conduct beyond existing suitability obligations and requires
compliance with disclosure, care, conflict of interest and compliance obligations. Form CRS requires
broker-dealers and registered investment advisers to provide a brief relationship summary to retail investors,
including (i) the types of client and customer relationships and services the firm offers, (ii) the fees, costs,
conflicts of interest and required standard of conduct associated with those relationships and services,
(iii) whether the firm and its financial professionals currently have reportable legal or disciplinary history;
and (iv) how to obtain additional information about the firm. The compliance date for Regulation Best
Interest and Form CRS is June 30, 2020. In addition, certain states have enacted or proposed fiduciary and
best interest standards for broker-dealers. The SEC and state requirements may have a material impact on
the provision of investment services to retail investors, including imposing additional compliance, reporting
and operational requirements, which could negatively affect our business, such as by requiring modifications
to our distribution activities and impacting our ability to engage in certain types of distribution or other
business activities. These changes could increase our distribution costs as a percentage of our revenues
generated. We could also experience lower sales, incur higher distribution costs, and/or experience pressure
on our pricing and market share, including, for example, if some of our competitors seek to increase market
share by reducing prices, third-party selling agreements are terminated, or there is a change in the terms of
those agreements.
There are no assurances that we will be able to successfully execute changes and enhancements to our
business model, operations, technology and compliance policies and procedures required by these new
regulations, which could materially and adversely affect our business. These regulations could necessitate
changes in our product structures, including product rationalization and reduction, as well as changes to our
fee structures and revenue sharing arrangements. In addition, it could reduce our opportunities to distribute
our products through our current network of business partners. New best interest and fiduciary standards, at
both the federal and state levels, could create additional liability exposure to regulatory enforcement activity,
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litigation and arbitration, which may result in awards, settlements, penalties, injunctions, reputational risk,
costs of defense regardless of outcome, or other adverse results.
•
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 require all non-government money market
funds to establish processes to review and implement liquidity fees and/or redemption limits or “gates” when
fund liquidity drops below established levels. Government and retail money market funds are permitted under
the amended rules to continue using the amortized cost method of valuation as long so long as the Board
believes that amortized cost continues to fairly reflect the market-based net asset value per share of the
Fund. 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 ongoing operational costs
and opportunity costs related to maintaining prescribed liquidity and shortened maturity levels.
• 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
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,
including the requirement to bucket every portfolio holding within one of four prescribed liquidity
buckets. This particular rule has resulted in an extensive allocation of resources in the form of both systems
and people to monitor the funds’ liquidity program and to file required regulatory reports. In addition, these
new and existing rules along with pending initiatives could further 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 2019, the SEC re-proposed a rule regulating the use of
derivatives by registered investment companies on its regulatory agenda. Among other requirements, the
rule, as proposed, would require our Funds to adopt a derivatives risk management program unless they
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qualify for certain exceptions and would limit the degree to which our Funds may invest in derivatives based
on certain “value at risk” metrics. The ultimate impact on our Funds, and thus the Company, is unclear if the
SEC adopts the 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, lower investment returns or
shareholder redemptions. Further, if adopted, the rule would cause our Funds to incur increased compliance
and administrative costs, which could negatively impact our financial performance.
• 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.
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.
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. 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.
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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 And Insurance Coverage May Not 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 Wealth Management 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.
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 and/or AUA
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.
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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 oversee 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.
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 wealth management 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
19
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 wealth management 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 wealth
management channel for long-term competitiveness. Additionally, new best interest and 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
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 are 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 interruptions. We also take precautions to password protect and/or encrypt our laptops and other mobile
electronic hardware; however, 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 against
us. While we collaborate with clients, vendors and other third parties to develop secure transmission capabilities and
otherwise protect against cyber-attacks, we cannot ensure that we or any third parties haves all appropriate controls in
place to protect the confidentiality and integrity of such information. Further, while we have in place a disaster recovery
plan to ensure we can recover from and continue our business upon the occurrence of 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 third party vendors for disaster contingency
support, and we cannot be assured that these vendors will always be able to perform in an adequate and timely manner.
The breach of our operational or information 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 other reputational loss, regulatory
actions, remediation costs to repair damage caused by the breach, additional security costs to mitigate against future
20
incidents, costs to provide notice to and credit monitoring for affected clients, and litigation costs resulting from the
incident. Although we seek to assess regularly and improve our existing disaster recovery 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.
We remain subject to various state and federal laws and regulations related to the privacy, integrity and security
of nonpublic personal information we create, collect and maintain in the conduct of our business concerning individuals,
including Fund trustees and shareholders, our directors and shareholders, our clients, Advisors’ clients and our employees
and independent contractors. For example, the State of California recently enacted the California Consumer Privacy Act
of 2018, which was effective January 1, 2020 and, among other things, creates detailed notice, opt-out/opt-in, access and
erasure rights for consumers vis-à-vis businesses that collect their personal information, and provides a new private cause
of action for data breaches. Other states have enacted or proposed, or in the future may enact, similar privacy and data
security legislation. Privacy and data security laws and regulations, particularly when enacted on a state by state basis
rather than at the federal level, could impose significant limitations, require changes to our business, restrict our collection,
use or storage of nonpublic personal information and subject us to legal liability or regulatory action, which may result in
increased compliance expenses, fines or penalties, the termination of client contracts, costly mitigation activities and harm
to our 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, Advisors, 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 interest 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,
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
21
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 best interest and 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 and 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 AUA, 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, 2019, our total assets were approximately $1.27 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
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
22
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 wealth
management 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 7, 2020, 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 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
23
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 On, Or Repurchase Shares Of, Our Class A
Common Stock, 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, and to authorize the
repurchase of shares of, our Class A common stock. However, the declaration and payment of dividends and the
repurchase of common stock is subject to the discretion of our Board of Directors. Any determination as to the payment
of dividends or repurchase of common stock, as well as the level of such dividends and stock repurchases, 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 and our ability to
repurchase shares of our common stock. We are a holding company and, as such, our ability to pay dividends and
repurchase shares of our common stock is subject to the ability of our subsidiaries to provide us with cash. There can be
no assurance that the current quarterly dividend level or the level of stock repurchases will be maintained or that we will
pay any dividends or repurchase shares of common stock in any future period. Any change in the level of our dividends
or stock repurchases or the suspension of the payment of dividends or stock repurchases 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.”
24
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 January 2020, we signed a fifteen-year lease, which
commences during early 2022, relating to the development of a new 260,000 square foot corporate headquarters in Kansas
City, Missouri. As a result, the buildings we own are in the process of being sold. See Part II, Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Corporate Headquarters Relocation.” In
addition, we lease office space utilized by Advisors and field office support staff in various locations throughout the United
States totaling approximately 253,000 square feet. We are continuing the transition of 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 2,189 holders of record of common stock as of
February 7, 2020. We believe that a substantially larger number of beneficial stockholders hold such shares in depository
or nominee form.
Dividends
The declaration of dividends is subject to the discretion of the Board of Directors. We intend, from time to time,
to pay cash dividends on our common stock as our Board of Directors deems appropriate, after consideration of our
operating results, financial condition, cash and capital requirements, compliance with covenants in the Credit Facility, note
purchase agreement and such other factors as the Board of Directors deems relevant. To the extent assets are used to meet
25
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, 2019, we repurchased 9,164,564 shares at an
aggregate cost, including commissions, of $154.2 million, including 548,132 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 $9.5
million. The purchase price paid by us for repurchases of our common stock from employees is the closing market price
on the vesting date.
The following table sets forth certain information about the shares of common stock we repurchased during the
fourth quarter of 2019:
Total Number of Maximum Number (or
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Shares
Purchased as
Part of Publicly
Announced
Program (1)
Approximate Dollar
Value) of Shares That
May Yet Be
Purchased Under The
Period
October 1 - October 31 . . . . . . . . . . . . . . . . . . . . . . . . . .
November 1 - November 30 . . . . . . . . . . . . . . . . . . . . . .
December 1 - December 31 . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,042,196 $
650,076
623,054
2,315,326 $
15.80
16.55
16.56
16.21
1,042,196
650,000
515,000
2,207,196
Program (1)
n/a
n/a
n/a
(1) In October 2012, 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.
During the fourth quarter of 2019, 108,130 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 completed the two-year initiative to repurchase $250 million
of our Class A common stock during the third quarter of 2019, which was inclusive of buybacks to offset dilution of
our equity awards. We continue to engage in an active share repurchase program.
26
Total Return Performance
Comparison of Cumulative Total Return (1)
Total Return Performance
200
Waddell & Reed Financial, Inc.
S&P 500 Index
150
SNL Asset Manager Index
e
u
l
a
V
x
e
d
n
I
100
50
0
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
The above graph compares the cumulative total stockholder return on the Company’s common stock from
December 31, 2014 through December 31, 2019 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, 2014 with all dividends being
reinvested. The closing price of the Company’s common stock on December 31, 2014 was $49.82 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
12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019
47.95
47.08
90.38 125.98
132.23 173.86
56.39
119.80
138.29
44.70
90.22
113.51
59.86
85.28
101.38
100.00
100.00
100.00
(1) Cumulative total return assumes an initial investment of $100 on December 31, 2014, with the reinvestment of all
dividends through December 31, 2019.
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.
2019
For the Year Ended December 31,
2017
(in thousands, except per share data and percentages)
2016
2018
2015
Revenues from:
Investment management fees. . . . . . . . . . . . . . $ 445,144
Underwriting and distribution fees . . . . . . . . .
531,836
93,335
Shareholder service fees . . . . . . . . . . . . . . . . .
1,070,315
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
Net income attributable to Waddell &
Reed Financial, Inc. . . . . . . . . . . . . . . . . . . . . . . . $ 114,992
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share from continuing
operations, basic and diluted . . . . . . . . . . . . . . . $
Dividends declared per common share . . . . . . . $
Shares outstanding at December 31, . . . . . . . . .
1.57
1.00
68,847
14 %
183,588
141,279
156,695
237,578
19 %
19 %
21 %
27 %
2.28
1.00
76,790
1.69
1.63
82,687
1.90
1.84
83,118
2.85
1.75
82,850
2019
2018
2017
2016
2015
As of December 31,
Assets under management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,958
65,809
(in millions)
81,082
80,521 104,399
148.6
158.1
1,406.3 1,555.2
189.4
708.7
846.5
189.6
551.6
844.0
Balance sheet data:
Goodwill and identifiable intangible assets . . . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Waddell & Reed stockholders’ equity . . . . . . . . . . . . . .
145.9
1,266.3
94.9
438.2
808.9
145.9
1,344.1
94.9
449.2
883.5
147.1
1,384.4
94.8
497.0
872.9
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
For the past couple of years, we have been focusing on the foundational changes and operational improvements
that were necessary for our company to improve the structural outlook for all aspects of our business. During this time,
we have added significant resources to our investment management and distribution operations, transformed our
proprietary broker-dealer into a fully competitive independent wealth manager, evolved our organizational structure to
ensure agility and clear lines of accountability, advanced our culture by further investing in our people through talent
management, leadership development and diversity and inclusion efforts, and continued streamlining our operations
resulting in meaningful cost savings. Importantly, we have been able to do this while maintaining an exceptionally strong
balance sheet and returning significant capital to shareholders by way of dividends and share repurchases. In 2019, we
returned over $228 million to shareholders and reduced our shares outstanding by over 10%.
During 2019, in our wealth management business, we continued to build on our value proposition to financial
advisors through enhancements to technology, products and a leading service model. Our advisor network has largely
stabilized, with over 1,300 licensed advisors and associates at year end. We have boosted our recruiting efforts nationally,
and have an expanded national recruiting team in place. Our recruiting teams are working closely with wealth management
field leaders and external recruiting firms to attract, build relationships with and, ultimately, add experienced financial
advisors to W&R’s national network. A core tenet of the transformation of the wealth management business is having a
comprehensive product offering, specifically within fee-based advisory products. We now offer nine different advisory
products, offering our financial advisors access to nearly 5,000 mutual funds from over 100 different fund families. This
also includes a wide universe of ETFs and other general securities. On the technology front, adoption of WaddellONE,
our centralized advisor technology platform available to all financial advisors and associates, continues to be strong. This
new platform provides direct connectivity to several of the firm’s existing technology partners. We’re also progressing on
the other key components of our Business Administration Program, including enhanced reporting, improved data analytics,
and a simplified business processing model. Specifically, last month we initiated a pilot launch of a new salesforce
integrated data repository, allowing seamless access to data and reports across the business.
Within our asset management business, we continued to add resources with a focus on improved investment
performance and processes. We were pleased to add the experience of Dan Hanson as Chief Investment Officer during
the year and Dan has already made a notable impact both internally and externally with key partners. We expanded our
analyst talent acquisition model with the introduction of an investment analyst internship program designed as a recruiting
pipeline to our strong pool of fundamentally driven research investment teams. We also worked to strengthen our
relationships with key industry consultants and believe we made meaningful progress during 2019. We remain committed
to our strategy of expanding and diversifying our product offerings as appropriate, including offering existing strategies
in additional vehicles that clients find appealing, such as model delivery, where we introduced seven strategies in 2019.
As pricing continues to narrow amid ongoing competition in our industry, we continue to review our pricing structure
across our product platform to ensure we are competitive. While currently 76% of our product fees by assets are either at
or below industry average, pricing is just one of the components of product competitiveness. We know we have more
opportunities in the future to build on our sales and servicing model and demonstrate our institutional-caliber investment
capabilities to win in the marketplace.
From a broader enterprise standpoint, we are creating an organizational structure that allows us to conduct
business in a more effective manner by focusing on our core competencies. To that end, efforts directed toward technology
and analytics, as well as culture, are essential to our long term success and remain an important area of emphasis for our
company. We believe continued investment in technology and leveraging the capabilities of data-driven insights will not
only improve, but also shorten decision-making time, allowing us to improve organizational agility and compete more
effectively in the marketplace. Similarly, we will continue to advance our culture by further investing in our people
through talent management, leadership development with a strong focus on diversity and inclusion initiatives. We know
these efforts are basic building blocks to developing a growth culture and will allow us to increase connectivity,
collaboration and efficiency, while we push forward on our key strategic initiatives.
With much of the heavy lifting and foundational improvements behind us, we are now in a better position to
sharpen our focus on growth initiatives that support our longer-term vision. Our business model has evolved and is
29
somewhat unique in our industry, with both an asset management and wealth management business. With the
transformation of our wealth manager, we are now in a position to grow that business for the first time in years. We
believe this represents a real opportunity for our company. Over time, a thriving wealth management business, combined
with an institutional-caliber asset manager should result in a more stable operating model with better long-term growth
prospects. As we move forward, we are focused on several key strategic enablers spanning both businesses, and our
overall enterprise, that we believe will be essential to our future success: competitive products and pricing; continued
focus on strong core processes and performance metrics; the ability to leverage technology and analytics as a strategic
asset across the organization; having a growth culture and a more agile organization; sharpening our brand awareness in
the marketplace; and finally, effectively allocating capital through internal investment initiatives, as well as taking
advantage of potential dislocations and acquisition opportunities in the asset management and wealth management
industries.
Corporate Headquarters Relocation
In June 2019, we announced a comprehensive review of our future real estate needs, including evaluating options
for a new corporate headquarters in the Kansas City metro area. Our goal is a workplace environment that meets the needs
of the workforce of tomorrow and enables us to attract and retain top talent to accelerate our growth strategy and continue
the evolution of our culture.
During January 2020, we signed a fifteen-year lease, which we expect to commence during 2022, relating to the
development of a new 260,000 square foot headquarters for an innovative, distinctive and sustainably-designed building
in the heart of downtown Kansas City, Missouri. In connection with the move, we expect to receive local property tax and
earnings tax abatements estimated at $29 million, which will be presented as a reduction in both the compensation and
benefits and general and administrative expense lines. In addition, we expect to receive state tax incentives estimated at
$62 million to be realized in both compensation and benefits and income taxes. These estimated tax savings will be realized
over various time periods and are subject to satisfaction of future obligations, including employment and compensation
targets. After accounting for the various incentives, new lease terms and the other impacts related to our move, we do not
expect a significant change in facility and related costs over the lease term as compared to our current headquarters
estimated run rate. There are also potential future savings compared to required ongoing investments in our current campus.
Operating Results (1)
We earned $1.1 billion in revenues in 2019, which decreased 8% as compared to 2018. Average AUM were $70.3
billion in 2019 compared to $78.3 billion in 2018. AUA increased 17% in 2019 to $60.1 billion, as compared to $51.3
billion in 2018.
Net income attributable to Waddell & Reed Financial, Inc. of $115.0 million decreased 37% compared to $183.6
million in 2018. Net income per diluted share was $1.57 for 2019 as compared to $2.28 for 2018. The year ended
December 31, 2019 included non-cash asset impairment charges of $12.8 million in connection with certain assets held
for sale, including real property related to our corporate headquarters move and the elimination of our internal aviation
operations, an $11.2 million non-cash charge related to the annual revaluation of the pension plan liability and $5.4 million
in severance expense related to the outsourcing of our transfer agency transactional processing operations. Excluding
these non-cash and severance expense charges, adjusted net income for 2019 was $137.4 million and adjusted net income
per diluted share was $1.87.
Operating expenses of $924.6 million decreased $13.6 million compared to the prior year. Excluding non-cash
asset impairment charges and severance described above, adjusted operating expenses decreased $21.6 million, or 2%,
compared to adjusted 2018 operating expenses. The operating margin for 2019 was 13.6% and the adjusted operating
margin was 15.3%, compared to 19.1% and 20.0% for 2018, respectively.
Our balance sheet remains strong, as we ended the year with cash and investments of $821.2 million, excluding
restricted cash and cash and investments of noncontrolling interests in consolidated sponsored funds. There were no
borrowings under the Credit Facility at December 31, 2019 or at any point during the year.
(1) Adjusted net income, adjusted net income per diluted share, adjusted operating expenses and adjusted operating
margin are non-GAAP financial measures. See Non-GAAP Financial Measures and Reconciliation of GAAP to non-
GAAP Financial Measures on pages 46 and 47.
30
Assets Under Management
AUM of $70.0 billion at December 31, 2019 increased $4.2 billion, or 6%, compared to $65.8 billion at
December 31, 2018. The increase in AUM is due to market appreciation of $14.3 billion, partially offset by net outflows
of $10.2 billion.
Change in Assets Under Management (1)
Unaffiliated (2) Institutional Management
Total
Wealth
(in millions)
2019
Beginning Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sales(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending Assets at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . $
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 . . . . . . . . . . . . . . . . . . . . . . . . $
24,977
4,737
(9,933)
1,192
(4,004)
5,291
26,264
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
3,655
276
(1,901)
25
(1,600)
1,041
3,096
6,289
873
(4,108)
511
(2,724)
90
3,655
7,904
356
(3,446)
6
(3,084)
1,469
6,289
37,177
2,948
(6,311)
(1,217)
(4,580)
8,001
40,598
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
65,809
7,961
(18,145)
—
(10,184)
14,333
69,958
81,082
11,995
(22,396)
—
(10,401)
(4,872)
65,809
80,521
11,820
(23,189)
—
(11,369)
11,930
81,082
(1) Includes all activity of the Funds, the IGI Funds (prior to their liquidation in 2018) 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), DCIO, RIA and Variable Annuity.
(3) Sales is primarily gross sales (net of sales commission). This amount also includes net reinvested dividends and capital
gains and investment income.
31
Average AUM, which are generally more indicative of trends in revenue from investment management services
than the change in ending AUM, decreased by 10% compared to 2018.
Average Assets Under Management
2019
Average
Percentage
of Total Average
2018
Percentage
of Total
2017
Percentage
of Total
Average
Distribution Channel:
Unaffiliated
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,026
5,177
Fixed income . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . .
99
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,302
Institutional
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fixed income . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Wealth Management
3,719
11
—
3,730
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,453
9,231
Fixed income . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . .
1,556
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,240
Total by Asset Class:
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,198
14,419
Fixed income . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . .
1,655
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,272
(in millions, except percentage data)
80 % 24,164
5,607
20 %
92
—
100 % 29,863
100 %
—
—
100 %
5,410
54
—
5,464
73 % 31,446
9,870
23 %
1,696
4 %
100 % 43,012
77 % 61,020
21 % 15,531
1,788
2 %
100 % 78,339
81 % 23,549
6,662
19 %
105
—
100 % 30,316
99 %
1 %
—
100 %
6,773
298
—
7,071
73 % 31,485
23 % 10,243
1,862
4 %
100 % 43,590
78 % 61,807
20 % 17,203
1,967
2 %
100 % 80,977
78 %
22 %
—
100 %
96 %
4 %
—
100 %
72 %
24 %
4 %
100 %
76 %
21 %
3 %
100 %
32
The following table summarizes our five largest mutual funds as of December 31, 2019 by ending AUM and
investment management fees, with the comparative positions in 2018 and 2017. 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 from 2017 to 2018 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
2019
Ending
Percentage
of Total
Ending
2018
Percentage
of Total
2017
Percentage
Ending
of Total
(in millions, except percentage data)
By AUM:
Ivy Science & Technology . . . . . . . . . . . $
Ivy Mid Cap Growth . . . . . . . . . . . . . . . .
Ivy Large Cap Growth . . . . . . . . . . . . . .
Ivy High Income . . . . . . . . . . . . . . . . . . .
Ivy Core Equity . . . . . . . . . . . . . . . . . . . .
8,143
5,063
4,762
4,722
4,268
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,958
By Management Fees:
Ivy Science & Technology . . . . . . . . . . . $ 59,182
Ivy International Core Equity . . . . . . . .
34,449
Ivy Mid Cap Growth . . . . . . . . . . . . . . . .
32,577
Ivy High Income . . . . . . . . . . . . . . . . . . .
25,914
Ivy Core Equity . . . . . . . . . . . . . . . . . . . .
25,751
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 177,873
Performance
6,345
12 %
3,983
7 %
3,873
7 %
4,857
7 %
6 %
3,862
39 % 22,920
4,116
10 %
2,377
6 %
1,898
6 %
4,180
7 %
6 %
4,742
35 % 17,313
(in thousands, except percentage data)
13 % 56,997
8 % 49,645
7 % 30,885
6 % 27,971
6 % 28,264
40 % 193,762
11 % 32,933
10 % 45,017
6 % 19,198
5 % 23,672
6 % 11,044
38 % 131,864
5 %
3 %
2 %
5 %
6 %
21 %
6 %
8 %
4 %
4 %
2 %
24 %
Investment performance during the fourth quarter was impacted by the market’s rotation into value, cyclical and
low-quality stocks which had an outsized impact on our shorter-term performance. However, the long-term trajectory
showed continued improvement in both the trailing three- and five-year performance on an equal weighted basis. Three-
and five-year performance was consistent as measured by the percentage of assets ranked in the top half of their respective
Morningstar universes.
The following table is a summary of Morningstar rankings and ratings as of December 31, 2019:
MorningStar Fund Rankings 1
Funds ranked in top half . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets ranked in top half . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 Year 3 Years 5 Years
43 %
52 %
42 %
62 %
33 %
41 %
MorningStar Ratings 1
Funds with 4/5 stars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets with 4/5 stars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overall 3 Years 5 Years
34 %
51 %
31 %
42 %
23 %
34 %
(1) Based on class I share, which reflects the largest concentration of sales and assets.
33
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 or within our fee-based asset allocation programs. AUA increased 17% as
compared to 2018, primarily due to strong market gains and growth in net new advisory assets, partially offset by ongoing
migration away from brokerage. Average productivity per Advisor for the year ended December 31, 2019 was $438
thousand, an increase of 16% as compared to 2018. The decrease in Advisors, along with an increase in productivity is
due to our efforts to transform W&R into a fully competitive and profitable aspect of our business model, with a focus on
higher producing Advisors.
2019
For the Year ended December 31,
2018
(in millions, except advisor data
and percentages)
2017
AUA
Advisory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,947
Non-advisory assets . . . . . . . . . . . . . . . . . . . . . . . . . .
33,148
Total assets under administration . . . . . . . . . . . . . . . $ 60,095
21,207
30,059
51,266
21,613
35,073
56,686
Net new advisory assets (1) . . . . . . . . . . . . . . . . . . . . . . $
970
Net new non-advisory assets (1), (2) . . . . . . . . . . . . . . . .
(3,333)
Total net new assets (1), (2) . . . . . . . . . . . . . . . . . . . . . . . $ (2,363)
575
(3,670)
(3,095)
471
(3,573)
(3,102)
Annualized advisory AUA growth (3) . . . . . . . . . . . . .
Annualized AUA growth (3) . . . . . . . . . . . . . . . . . . . . .
4.6 %
(4.6)%
2.7 %
(5.5) %
2.6 %
(5.9)%
Advisors and advisor associates . . . . . . . . . . . . . . . . . .
Average trailing 12-month production per Advisor (4)
(in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,327
1,403
1,632
438
378
256
(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 wealth management 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.
34
Results of Operations
Net Income
2019
For the Year ended
December 31,
Variance
2017
(in thousands, except per share and percentage data)
2018
2018
2019 vs.
2018 vs.
2017
Net income attributable to Waddell & Reed
Financial, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,992
Earnings per share, basic and diluted . . . . . . . . . . . . $
1.57
Operating Margin . . . . . . . . . . . . . . . . . . . . . . . . . . .
14 %
183,588
2.28
141,279
1.69
19 %
19 %
(37)%
(31)%
(5)%
30 %
35 %
—
Total Revenues
Total revenues decreased 8% in 2019 as compared to 2018 primarily due to lower average AUM, partially offset
by an increase in advisory fees due to higher AUA. While revenues were relatively consistent in 2018 compared to 2017,
this was a result of a decrease in investment management fees, offset by an increase in underwriting and distribution fees.
The decrease in investment management fees was primarily due to an increase in fee waivers due to fee reductions in
selected mutual funds that were implemented as of July 31, 2018. The increase in underwriting and distribution fees was
primarily due to an increase in advisory fees due to higher AUA and payments received from Advisors for services.
For the Year ended
December 31,
2019
2018
2017
Variance
2019 vs.
2018
2018 vs.
2017
Investment management fees . . . . . . . . . . . . . . . . $ 445,144
Underwriting and distribution fees . . . . . . . . . . . .
531,836
93,335
Shareholder service fees . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,070,315
(in thousands, except percentage data)
507,906
550,010
102,385
1,160,301
531,850
518,699
106,595
1,157,144
(12)%
(3)%
(9)%
(8)% —
(5)%
6 %
(4)%
35
Investment Management Fee Revenues
Investment management fee revenues decreased $62.8 million, or 12%, in 2019 and decreased $23.9 million, or
5%, in 2018. 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,
2019, 2018 and 2017.
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$80
$60
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$500
$400
$300
$200
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2019
2018
2017
Average Assets Under Management
Investment Management Fees
The following table summarizes investment management fee revenues, related average AUM, fee waivers and
investment management fee rates for the years ending December 31, 2019, 2018 and 2017. Fee waivers for the Funds are
recorded as an offset to investment management fees up to the amount of fees earned, with excess fee waivers recorded in
general and administrative expense.
For the Year ended
December 31,
Variance
Funds investment management fees (net) . . . . . . . . . . . $ 430,028
Funds average assets (in millions) . . . . . . . . . . . . . . . . .
66,543
Funds management fee rate (net) . . . . . . . . . . . . . . . . . .
0.6462 % 0.6671 % 0.6858 %
486,181
72,875
2018
2019 vs.
2018 vs.
2019
2017
2017
(in thousands, except for management fee rate, average assets and
percentage data)
506,868
73,906
(12)%
(9)%
2018
(4)%
(1)%
Total fee waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,284
17,696
7,648
65 %
131 %
Institutional investment management fees (net) . . . . . . $ 15,116
Institutional average assets (in millions) . . . . . . . . . . . .
3,730
Institutional management fee rate (net) . . . . . . . . . . . . .
21,725
5,464
0.4053 % 0.4057 % 0.3786 %
24,982
7,071
(30)%
(32)%
(13)%
(23)%
Revenues from investment management services provided to our retail mutual funds, which are distributed
through the unaffiliated and wealth management channels, decreased $56.2 million in 2019, or 12%, compared to 2018,
primarily due to a decrease in average assets and an increase in fee waivers due to fee reductions in selected mutual funds
36
that were implemented as of July 31, 2018. Revenues from investment management services provided to our mutual funds
decreased $20.7 million in 2018, or 4%, compared to 2017. Investment management fee revenues decreased 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.
Institutional account revenues in 2019 decreased $6.6 million, or 30%, compared to 2018 due to a decrease in
average AUM. Outflows in assets for 2019 in this channel were primarily due to carryover effects of prior year personnel
changes at the portfolio manager level. 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 were primarily due to personnel changes at the portfolio manager level.
Long-term redemption rates
(excludes money market redemptions)
for the year ended December 31,
2018
2017
2019
Unaffiliated channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Institutional channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth Management channel . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38.1 %
51.0 %
13.8 %
25.0 %
38.7 %
75.2 %
13.9 %
27.8 %
40.1 %
48.7 %
15.6 %
27.8 %
In 2019, as compared to 2018, the long-term redemption rate improved slightly for the unaffiliated channel. The
decreased long-term redemption rate in 2018 compared to 2017 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. We experienced a decreased long-term redemption rate for our institutional channel in
2019 compared to 2018, though we continued to see carryover effects of prior year portfolio manager turnover, which
resulted in larger client redemptions for 2018 as compared to 2017. In the wealth management channel, we continued to
experience a long-term redemption rate lower than that of the industry average. With the modernization of our wealth
management platform and the introduction of new fee-based products, such as the launch of the MAP Navigator product
in 2017 (which increased the availability of third-party products), we experienced pressure on the long-term redemption
rate in 2017 but saw a slight improvement in 2018 and 2019. The industry average redemption rate in 2019, based on data
provided by the ICI, was 21.7% versus our rate of 25.0%.
Underwriting and Distribution Fee Revenues
We offer a wide range of 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. These products utilize a variety of underlying investment options,
including mutual funds, stocks, bonds and ETFs. We earn asset-based fees on our asset allocation products.
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
(e.g., “front-end load,” “back-end load,” “level-load” and institutional).
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.
37
The following tables summarize the significant components of underwriting and distribution fee revenues
segregated by distribution channel for the years ended December 31, 2019, 2018 and 2017:
Underwriting and distribution fee revenues:
Fee-based asset allocation product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 284,188
128,424
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales commissions on front-end load mutual fund and variable annuity sales . . . . .
48,761
32,314
Sales commissions on other products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,149
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 531,836
269,069 240,089
148,979 167,163
56,791
56,781
31,286
36,131
39,050
23,370
550,010 518,699
2019
Total
2018
(in thousands)
2017
Underwriting and distribution fee revenues:
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sales commissions on front-end load mutual fund sales . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
65,227
1,730
290
67,247
78,041 91,313
1,498
1,886
1,182
568
80,495 93,993
Unaffiliated Channel
2019
2018
2017
(in thousands)
Wealth Management Channel
2019
2018
2017
Underwriting and distribution fee revenues:
Fee-based asset allocation product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 284,188
63,197
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales commissions on front-end load mutual fund and variable annuity sales . . . . .
48,471
32,314
Sales commissions on other products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,419
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 464,589
269,069 240,089
75,850
70,938
55,293
54,895
31,286
36,131
38,482
22,188
469,515 424,706
(in thousands)
A significant portion of underwriting and distribution fee revenues are received from asset-based fees earned on
our asset allocation products and commissions. Underwriting and distribution fee 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 fee revenues earned in 2019 decreased by $18.2 million, or 3%, compared to 2018.
A decrease of $20.6 million, or 14%, in Rule 12b-1 asset-based service and distribution fees across both channels, as
compared to 2018, was driven by a decrease in average mutual fund AUM for which we earn Rule 12b-1 revenue. Sales
commissions decreased $11.8 million, or 13%, due to lower commissionable sales. These decreases were partially offset
by a 6% increase in revenues from fee-based asset allocation products due to an increase in average advisory AUA of 7%,
slightly offset by a decrease in the average fee rate due to product mix. 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.
38
Underwriting and distribution fee 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 average advisory AUA 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. In 2018, the compensation structure for Advisors was 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.
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. Changes related to the outsourcing of our transfer agency transactional
processing operations will result in decreases to part of our shareholder service fee revenue starting in 2020, offset by a
decrease in operating expenses.
During 2019, shareholder service fees revenue decreased $9.1 million, or 9%, compared to 2018. Account-based
fees decreased $4.6 million compared to 2018 primarily due to a decrease in the number of accounts. Service fees based
on assets decreased $4.4 million, or 8%, compared to 2018, due to a decrease in assets as well as a decrease in fund
administrative and accounting services fees due to the 2018 fund mergers.
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.
Total Operating Expenses
Operating expenses for 2019, including $12.8 million of non-cash asset impairment charges and $5.4 million of
severance expense related to the outsourcing of our transactional processing operations of our transfer agency, were down
1% compared to 2018. Operating expenses were relatively flat in 2018 compared to 2017. In 2020, we expect
compensation and benefit costs to be relatively flat compared to 2019 excluding severance as annual merit increases and
hiring in key areas will be offset with transfer agency transactional processing operations outsourcing savings. We expect
increases in general and administrative expenses and decreases in technology, also partially driven by the transfer agency
transactional processing operations outsourcing. Occupancy is expected to decrease meaningfully as we continue to exit
field real estate offices through the end of 2020 and marketing and advertising is expected to be in-line with 2019.
Additionally, we expect depreciation costs to again decrease meaningfully for the full year as we continue to shift our
technologies towards software as a service arrangements.
39
Operating expenses for the years ended December 31, 2019, 2018 and 2017 are set forth in the following table:
For the Year ended
December 31,
Variance
2019
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 460,921
254,534
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . .
77,482
General and administrative . . . . . . . . . . . . . . . . . . . . . .
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,719
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,243
Marketing and advertising . . . . . . . . . . . . . . . . . . . . . .
8,964
19,829
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subadvisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,931
Intangible asset impairment . . . . . . . . . . . . . . . . . . . . .
—
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . $ 924,623
Distribution Expenses
2018
2017
2019 vs.
2018
(in thousands, except percentage data)
456,832
263,329
73,643
65,275
27,197
10,323
25,649
14,805
1,200
938,253
432,264
271,276
88,951
66,078
30,721
12,425
20,983
13,174
1,500
937,372
1 %
(3)%
5 %
(2)%
(11)%
(13)%
(23)%
1 %
(100)%
(1)%
2018 vs.
2017
6 %
(3)%
(17)%
(1)%
(11)%
(17)%
22 %
12 %
(20)%
—
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 for the years ended December 31, 2019, 2018, and 2017 are set forth in the following table:
For the Year ended
December 31,
Variance
2019 vs. 2018 vs.
Distribution - unaffiliated channel . . . . . . . . . . . . . . . . . $ 96,718
Distribution - wealth management channel . . . . . . . . . . .
364,203
Total distribution expenses . . . . . . . . . . . . . . . . . . . . . . $ 460,921
2019
2018
2018
2017
(in thousands, except percentage data)
130,079
112,562
302,185
344,270
432,264
456,832
(14)%
6 %
1 %
2017
(13)%
14 %
6 %
Distribution expenses in 2019 increased by $4.1 million, or 1%, compared to 2018. Expenses in the wealth
management channel increased $19.9 million compared to 2018, primarily due to an increase in Advisor payouts following
the additional enhancements to the Advisor compensation grid effective January 1, 2019. Expenses in the unaffiliated
channel decreased $15.8 million compared to 2018 primarily due to lower Rule 12b-1 asset-based service and distribution
expenses paid to third party distributors.
Distribution expenses in 2018 increased by $24.6 million, or 6%, compared to 2017. Expenses in the wealth
management channel increased $42.1 compared to 2017, due to an increase in average advisory assets and the changes
made to our Advisor pay structure starting in 2018. 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.
Compensation and Benefits
Compensation and benefits in 2019 decreased $8.8 million, or 3%, compared to 2018. The primary drivers of the
decrease were a decrease in share-based compensation of $5.0 million and a decrease in headcount, which were partially
offset by an increase in employer contributions to our 401(k) plan. The decrease in share-based compensation is primarily
due to higher forfeitures in 2018 which resulted in lower expense in 2019. The decrease in headcount resulted in a decrease
in salaries and wages and related taxes and benefits of $6.2 million. Partially offsetting these decreases was an increase
of $2.6 million in 401(k) plan costs due to a discretionary contribution for 2019.
40
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 401(k) 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 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.
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 increased $3.8 million for the year ended December 31, 2019, compared to
2018. A non-cash impairment charge of $12.8 million in connection with certain assets held for sale, including real
property related to our corporate headquarters move and the elimination of our internal aviation operations, was recorded
in 2019, which was partially offset by decreases in temporary office staff expense of $4.2 million, primarily due to reduced
consulting services for projects completed in 2018, and lower dealer services costs of $1.5 million due to decreases in
accounts and assets used to calculate the fees. There were also decreases in legal, audit and consulting costs and fund
expenses in 2019 compared to 2018.
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.
Technology
Technology expenses decreased $1.6 million for the year ended December 31, 2019, compared to 2018 as lower
shareholder servicing expense resulting from fewer accounts was partially offset by increased software costs for new
technologies. Technology expenses decreased $0.8 million in 2018 compared to 2017 as we continued decommissioning
older systems and replacing them with more cost-effective solutions.
Occupancy
Occupancy expenses include facilities costs for our home office, as well as rent expense for our leased home
office and field office space. Occupancy expenses decreased $3.0 million in 2019 compared to 2018 primarily due to lower
rent expense due to the closure of field offices. Occupancy expenses decreased $3.5 million in 2018 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.
Marketing and advertising
Marketing and advertising expense decreased in both comparative periods due to reduced fund-related marketing
expenses from 2018 fund mergers and focusing our marketing efforts on the highest impact markets and activities.
Depreciation
Depreciation expense decreased in 2019 compared to 2018 primarily due to certain fixed assets reaching the end
of their useful lives. The increase in 2018 compared to 2017 was due to an adjustment to the useful life of certain internally
developed software assets.
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.
41
Subadvisory expenses were relatively flat for the year ended December 31, 2019 compared to 2018 due to
relatively no change in subadvised average assets or average subadvisory fee rate. 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.
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 $3.8 million in 2019 compared to 2018. Losses related to the revaluation
of the Pension Plan liability in 2019 compared to gains in 2018 resulted in a decrease of $28.9 million. Offsetting this
decrease, unrealized and realized gains in 2019 on our corporate fixed income investments and seed investments, net of
losses generated by our economic hedging program that uses total return swap contracts to hedge market risk, caused an
increase of $19.0 million compared to net unrealized and realized losses in 2018. In addition, investment income
attributable to noncontrolling interests in sponsored funds where the Company held majority ownership increased $2.1
million compared to 2018. Interest and dividend income also increased $4.0 million compared to 2018 primarily due to
higher interest rates in our corporate fixed income portfolio.
Investment and other income decreased $14.4 million in 2018 compared to 2017. Unrealized 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 unrealized losses were offset by a $51.5 million increase in unrealized 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, investment income 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 corporate fixed income portfolio.
Interest Expense
Interest expense was $6.2 million, $6.5 million and $11.3 million in 2019, 2018 and 2017, respectively. The
majority of our interest expense in 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
annual interest expense savings from in 2019 and 2018 compared to 2017.
Income Taxes
Our effective income tax rate was 26.2%, 23.3% and 41.3% in 2019, 2018, and 2017, respectively. The higher
effective tax rate in 2019 compared to 2018 was primarily the result of $6.4 million uncertain tax expense that was reversed
in 2018 upon completion of a voluntary disclosure agreement with a state tax jurisdiction. State tax rates also increased
compared to the prior year. Offsetting these increases was the impact of share-based payments, which created a tax shortfall
in both 2019 and 2018 due to the reduction in value of restricted stock from issuance to vesting, but the impact was greater
in 2018. 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 primarily the result of the lower federal statutory
tax rate, which decreased in 2018 from 35% to 21%. Other decreases were caused by the 2018 reversal of uncertain tax
expense related to the completion of a voluntary disclosure agreement with a state tax jurisdiction, decrease in the tax
shortfall created by share-based payments in 2018 as compared to 2017, and absence in 2018 of the 2017 charge to revalue
the Company's net deferred tax assets for U.S. tax reform. These decreases were partially offset by the removal of a
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.
42
Liquidity and Capital Resources
Management believes its available cash, marketable securities and expected cash flow from operations will be
sufficient to fund the Company’s short-term operating and capital requirements. Expected short-term uses of cash include
dividend payments, repurchases of our Class A common stock, interest on indebtedness, income tax payments, seed money
for new products, ongoing technology enhancements, capital expenditures, and collateral funding for margin accounts
established to support derivative positions, and could include strategic acquisitions.
Expected long-term capital requirements include interest on indebtedness and maturities of outstanding debt in
January 2021, operating leases and purchase obligations. Other possible long-term discretionary uses of cash could include
capital expenditures for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, seed
money for new products and repurchases of our Class A common stock.
For the Year Ended
December 31,
2018
2019
Variance
2019 vs.
2018
2018 vs.
2017
2017
(in thousands, except percentage data)
Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 151,815
688,346
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,926
Cash Flow Data:
Cash flows from operating activities . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities . . . . . . . . . . . . . . . . . . . .
165,983
(6,851)
231,997
617,135
—
94,854
207,829
700,492
94,996
94,783
(35)%
12 %
—
—
12 %
(12)%
(100)%
—
357,015
10,343 (212,395) NM
50,851
(54)% 602 %
NM
(65)%
(224,547) (311,788) (188,710)
28 %
Our operations provide much of the cash necessary to fund our priorities, as follows:
• Pay dividends
• Repurchase our stock
• Finance growth objectives
Pay Dividends
We paid quarterly dividends on our Class A common stock that resulted in financing cash outflows of $74.3
million, $81.2 million and $154.0 million in 2019, 2018 and 2017, respectively. Dividends have decreased as a result of
a shift in our capital return strategy in recent years, which included a decrease in our dividend rate and increased share
repurchases.
The Board of Directors approved a quarterly dividend on our common stock of $0.25 per share that was paid on
February 3, 2020 to stockholders of record as of January 13, 2020.
Repurchase Our Stock
We repurchased 9.2 million shares of our Class A common stock in 2019 compared to 7.0 million and 1.8 million
shares in 2018 and 2017, respectively, resulting in share repurchases of $154.2 million, $135.9 million and $35.8 million,
respectively. These share repurchases included 548,132 shares, 729,882 shares and 402,337 shares tendered by employees
to cover their tax withholdings with respect to vesting of share-based awards during the years ended December 31, 2019,
2018 and 2017, respectively.
In connection with our existing capital return policy, we completed the two-year initiative to repurchase
$250 million of our Class A common stock during the third quarter of 2019, which was inclusive of buybacks to offset
dilution of our equity awards. We continue to engage in an active share repurchase plan as part of our ongoing capital
management plan.
43
Finance Growth Objectives
We use cash to fund growth in our distribution channels. We continue to invest in our wealth management channel
by offering home office resources, wholesaling efforts and enhanced technology tools, including the modernization of our
wealth management platforms. 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, 2019 and no borrowings at any point during the year. The covenants in the Credit
Facility include a required consolidated leverage ratio and a required 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 agreement requires
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, 2019, the Company’s consolidated leverage ratio was 0.4, and
consolidated interest coverage ratio was 36.6.
Cash Flows
Cash from operations is our primary source of funds. In 2019, cash from operations decreased primarily due to
decreased sales of trading securities held by consolidated sponsored funds, due to the liquidation of the IGI Funds in 2018,
and a decrease in net income as compared to 2018. 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 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 classified as
available for sale, purchases and maturities of investments held in our fixed income laddering program classified as
available for sale 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.
44
Contractual Obligations and Contingencies
Expected long-term capital requirements include interest on indebtedness and maturities of outstanding debt in
January 2021, operating leases and purchase obligations, and potential recognition of tax liabilities, summarized in the
following table as of December 31, 2019. 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.
5,463
Short-term and long-term debt obligations, including interest . . . $ 103,194
Non-cancelable operating lease commitments . . . . . . . . . . . . . .
37,402 11,660
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,728 61,093
Unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
2,005
2020
Total
2023-
2024
2021-
2022
(in thousands)
—
97,731
14,300
8,537
54,239 18,396
—
$ 276,329 78,231 166,270 26,933
—
Thereafter/
Indeterminate
—
2,905
—
1,990
4,895
We signed a lease in January 2020 for our new corporate headquarters, which we anticipate will be complete in
2022 and will create future lease commitments for 2022 and beyond.
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 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.
45
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.
Non-GAAP Financial Measures
“Adjusted net income attributable to Waddell & Reed Financial, Inc.,” “adjusted net income per share, basic and
diluted,” “adjusted operating expenses,” and “adjusted operating margin” are non-GAAP financial measures that are not
presented in accordance with U.S. generally accepted accounting principles (GAAP). We believe that these non-GAAP
financial measures provide meaningful supplemental information regarding our performance by excluding charges and
gains that are not indicative of our core operating results, and allow management and investors to better evaluate our
performance between periods and compared to other companies in our industry.
These non-GAAP financial measures should not be considered a substitute for financial measures presented in
accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance.
A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is included
in the table below.
46
Reconciliation of GAAP to non-GAAP Financial Measures
(in thousands, except for per share and percentage data)
Net income attributable to Waddell & Reed Financial, Inc. (GAAP) . . . . . . . . . . . . . $
Adjustments
Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension revaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted net income attributable to Waddell & Reed Financial, Inc. (non-GAAP). . $
5,401
12,841
—
11,217
(7,070)
137,381
Year Ended
December 31,
2019
2018
114,992
$
183,588
Weighted average share outstanding-basic and diluted . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted net income per share, basic and diluted (non-GAAP) . . . . . . . . . . . . . . . . . $
73,299
1.87
Operating expenses (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments
Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted operating expenses (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating income (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments
Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted operating income (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
924,623
5,401
12,841
—
906,381
145,692
5,401
12,841
—
163,934
9,066
—
1,200
(16,129)
1,407
179,132
80,468
2.23
938,253
9,066
—
1,200
927,987
222,048
9,066
—
1,200
232,314
$
$
$
$
$
$
$ 1,160,301
Operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,070,315
Adjusted operating margin (non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.3 %
20.0 %
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.
47
Interest Rate Sensitivity
Our interest sensitive assets and liabilities include the debt security holdings in our fixed income laddering
program, debt security holdings in our seed investment portfolio, 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,
debt security holdings in the seed investment portfolio 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, debt security
holdings in the seed investment portfolio 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,
2019 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, equity securities and debt securities. We have a hedging program that uses total
return swaps to hedge our exposure to fluctuations in the value of our seed investment portfolio classified as trading debt
securities and equity securities measured at fair value 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 seed
investment portfolio may be offset due to the hedging program. A portion of debt securities in the fixed income laddering
program 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.
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, 2019:
Investment Securities
Fair Value
Assuming a 10% Assuming a 10%
Fair Value
Fair Value
Increase
(in thousands)
Decrease
1,977
254,291
Available for sale:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Securities:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored privately offered funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Method:
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,187
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 688,346
1,977
84,920
5,979
4
44,268
43,567
34,945
178,386
845
2,175
279,720
1,779
228,862
2,175
93,412
6,577
4
48,695
47,924
38,440
196,225
930
40,906
757,183
1,779
76,428
5,381
4
39,841
39,210
31,451
160,547
761
33,468
619,511
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
48
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.
Credit Risk
Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its
financial obligations under contractual or agreed upon terms. Credit risk includes the risk that collateral posted with the
Company by counterparties to support derivative trading is insufficient to meet contractual obligations to the Company.
ITEM 8. Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements referred to in the Index on page 56 setting forth our
consolidated financial statements, together with the report of KPMG LLP dated February 21, 2020 on pages 57 and 58.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
(a)
(b)
Evaluation of Disclosure Controls and Procedures. The Company maintains a system of disclosure controls and
procedures that is designed to ensure that information required to be disclosed by the Company in the reports that
it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A
control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. The Company’s Chief Executive Officer and Chief Financial
Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2019, have concluded that the
Company’s disclosure controls and procedures were effective as of December 31, 2019.
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, 2019 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, 2019, 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, 2019, as stated in their attestation report which follows.
49
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, 2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and the related notes (collectively, the consolidated financial statements),
and our report dated February 21, 2020 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 21, 2020
50
(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, 2019 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
ITEM 9B. Other Information
Executive Incentive Plan Amendment
On February 18, 2020, the Compensation Committee of our Board of Directors approved the Company’s
Executive Incentive Plan, as amended and restated (the “Executive Incentive Plan”), which increased the limit on the
portion of an incentive award paid in Company stock with respect to any fiscal year from 200,000 shares to 300,000 shares.
A copy of the Executive Incentive Plan is included with this Form 10-K as Exhibit 10.6 and is incorporated herein by
reference, and the foregoing summary is qualified in its entirety by reference to the terms and provisions of the Executive
Incentive Plan.
Bylaw Amendment
On February 19, 2020, our Board of Directors amended the Company’s Bylaws to indicate that each of the Audit
Committee, Compensation Committee and Nominating and Corporate Governance Committee shall consist of not less
than three independent directors.
A copy of the Amended and Restated Bylaws is included with the Form 10-K as Exhibit 3.2 and is incorporated
herein by reference, and the foregoing summary is qualified in its entirety by reference to the terms and provisions of the
Amended and Restated Bylaws.
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
2020 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
2020 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 2020 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
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
2020 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
2020 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
51
ITEM 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements.
PART IV
Reference is made to the Index to Consolidated Financial Statements on page 56 for a list of all
financial statements filed as part of this Report.
(a)(2) Financial Statement Schedules.
None.
(b) Exhibits.
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.
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.
Description of Securities.
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.
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.
Investment Management Agreement, dated July 29, 2016, by and between Ivy Variable Insurance
Portfolios and Ivy Investment Management Company. Filed as Exhibit 10.5 to the Company’s Annual
Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2018 and incorporated herein
by reference.
Investment Management Agreement, dated July 29, 2016, by and between Ivy Variable Insurance
Portfolios and Ivy Investment Management Company. Filed as Exhibit 10.6 to the Company’s Annual
Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2018 and incorporated herein
by reference.
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
52
Exhibit
No.
10.5
10.6
10.7
10.8
10.9
10.10
Exhibit Description
Investment Management Agreement, dated November 13, 2008, by and between Ivy Funds and Ivy
Investment Management Company. 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, 2018 and incorporated herein by reference.
Waddell &
Reed
Financial, Inc.
and
restated.*exhibit:http://www.sec.gov/Archives/edgar/data/1052100/000104746912001801/a2207435zex-
10_28.htm
-
Exhibit:http://www.sec.gov/Archives/edgar/data/1052100/000104746912001801/a2207435zex-
10_28.htm
Executive
Incentive
amended
Plan,
as
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K, File No. 001-13913, filed April 14, 2016 and incorporated
herein by reference.*
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. Filed as Exhibit 10.11 to the Company’s Annual
Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2018 and incorporated herein
by reference.*
10.11
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed Financial, Inc.
1998 Stock Incentive Plan, as amended and restated.*
10.12
10.13
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.*
10.14
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.*
10.15
Waddell & Reed Financial, Inc. Cash Settled RSU Plan.*
10.16
10.17
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. Filed as Exhibit 10.17 to the Company’s Annual Report on Form 10-K, File
No. 001-13913, for the year ended December 31, 2018 and incorporated herein by reference.*
10.18
Form of Restricted Stock Unit Award Agreement for awards pursuant to the Waddell & Reed Financial,
Inc. Cash Settled RSU Plan.*
53
Exhibit
No.
10.19
21
23
24
31.1
31.2
32.1
32.2
101
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.*
Exhibit Description
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
Materials from the Waddell & Reed Financial, Inc. Annual Report on Form 10-K for the year ended
December 31, 2019, formatted
in Inline Extensible Business Reporting Language (iXBRL):
(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.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Indicates management contract or compensatory plan, contract or arrangement.
ITEM 16. Form 10-K Summary
Not applicable.
54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Overland Park, State of Kansas, on February 21, 2020.
SIGNATURES
WADDELL & REED FINANCIAL, INC.
By:/s/ PHILIP J. SANDERS
Philip J. Sanders
Chief Executive 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
Chief Executive Officer and Director
February 21, 2020
(Principal Executive Officer)
Senior Vice President and Chief Financial
February 21, 2020
Officer (Principal Financial Officer)
Vice President, Chief Accounting Officer,
February 21, 2020
/s/ PHILIP J. SANDERS
Philip J. Sanders
/s/ BENJAMIN R. CLOUSE
Benjamin R. Clouse
/s/ MICHAEL J. DALEY
Michael J. Daley
/s/ THOMAS C. GODLASKY*
Thomas C. Godlasky
/s/ KATHIE J. ANDRADE*
Kathie J. Andrade
/s/SHARILYN S. GASAWAY*
Sharilyn S. Gasaway
/s/ JAMES A. JESSEE*
James A. Jessee
/s/ ALAN W. KOSLOFF*
Alan W. Kosloff
/s/ DENNIS E. LOGUE*
Dennis E. Logue
Investor Relations and Treasurer
(Principal Accounting Officer)
Chairman of the Board and Director
Director
Director
Director
Director
Director
/s/ MICHAEL F. MORRISSEY*
Michael F. Morrissey
Director
/s/ JERRY W. WALTON*
Jerry W. Walton
Director
/s/ JEFFREY P. BENNETT
Jeffrey P. Bennett
Attorney-in-fact
* By: Attorney-in-fact
55
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
WADDELL & REED FINANCIAL, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at December 31, 2019 and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2019 . . . . .
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended
Page
57
59
60
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2019 .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61
62
63
64
56
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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the
results of its operations and its cash flows for each of the years in the three year period ended December 31, 2019, 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, 2019, 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 21, 2020 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts
or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging,
subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on
the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of assets under management data used in the calculation of revenue
As discussed in Notes 1 and 3 to the consolidated financial statements, the Company’s investment management
fees, which are comprised of investment management and advisory services, and certain underwriting,
distribution, and shareholder service fees are based on the level of assets under management (AUM). The
Company recognized $445 million, $531.8 million, and $93.3 million in investment management, underwriting
and distribution, and shareholder service fees, respectively, for providing services to its mutual fund complex
(Funds) and institutional accounts during the year ended December 31, 2019. The Funds and institutional
accounts have various fee structures which are calculated based on a percentage of AUM.
We identified the evaluation of AUM as a critical audit matter given the importance of this input into the
calculation of investment management and advisory fees, and certain underwriting, distribution, and shareholder
services fees which is heavily dependent on information technology (IT) systems. There is a high degree of effort
57
involved in performing and evaluating procedures to test AUM which are dependent on specialized skills required
to evaluate multiple IT systems.
The primary procedures we performed to address this critical audit matter included the following. We tested
certain internal controls over the Company’s revenue processes including controls related to reconciling AUM
between IT systems. We involved IT professionals with specialized skills and knowledge in the testing of general
information technology controls and the interface of data between multiple IT systems used to determine AUM.
We detail tested investment management, underwriting, distribution, and shareholder service fees, reconciling
AUM used in the recalculation of these fees to the source IT systems.
/s/ KPMG LLP
We have served as the Company’s auditor since 1981.
Kansas City, Missouri
February 21, 2020
58
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2019 and 2018
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash and cash equivalents - restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables:
151,815
74,325
688,346
231,997
59,558
617,135
Funds and separate accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customers and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,167
80,089
31,655
18,112
151,515
27,164
1,041,397 1,105,481
2019
2018
(in thousands)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,429
145,869
12,321
16,979
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,266,328 1,344,079
34,726
145,869
14,418
29,918
Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Payable to investment companies for securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to third party brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,123
36,883
17,123
84,558
79,507
71,001
309,195
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued pension and postretirement costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94,926
3,145
30,960
438,226
26,253
100,085
19,891
86,184
54,129
51,580
338,122
94,854
798
15,392
449,166
Redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,205
11,463
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; 68,847 shares outstanding (76,790 at December 31, 2018) . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of 30,854 common shares in treasury (22,911 at December 31, 2018) . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
997
312,693
997
311,264
1,241,598 1,198,445
(627,587)
(749,625)
331
3,234
883,450
808,897
Total liabilities, redeemable noncontrolling interests and stockholders’ equity . . . . . . . . $ 1,266,328 1,344,079
See accompanying notes to consolidated financial statements.
59
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2019, 2018 and 2017
2019
2018
(in thousands, except per share data)
2017
Revenues:
Investment management fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Underwriting and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
445,144
531,836
93,335
1,070,315
507,906
550,010
102,385
1,160,301
531,850
518,699
106,595
1,157,144
Operating expenses:
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and benefits (including share-based compensation of
$46,613, $51,565 and $57,716, respectively) . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subadvisory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to redeemable noncontrolling interests . . . . .
Net income attributable to Waddell & Reed Financial, Inc. . . . . . . . . . . $
460,921
456,832
432,264
254,534
77,482
63,719
24,243
8,964
19,829
14,931
—
924,623
145,692
18,886
(6,195)
158,383
41,418
116,965
1,973
114,992
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
Net income per share attributable to Waddell and Reed Financial, Inc.
common shareholders, basic and diluted: . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.57
2.28
1.69
Weighted average shares outstanding, basic and diluted: . . . . . . . . . . . . . . . .
73,299
80,468
83,573
See accompanying notes to consolidated financial statements.
60
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2019, 2018 and 2017
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,965 182,812 144,209
2019
2018
(in thousands)
2017
Other comprehensive income:
Unrealized gain on available for sale investment securities during the period,
net of income tax expense (benefit) of $1,038, $2 and $(956) respectively . . . . . . .
3,318
13
7,505
Postretirement benefit, net of income tax (benefit) expense of $(127), $202
and $(99), respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(415)
642
(224)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss) attributable to redeemable noncontrolling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,973
Comprehensive income attributable to Waddell & Reed Financial, Inc. . . . . . . . . . . $ 117,895
(776)
184,243
2,930
148,560
119,868 183,467 151,490
See accompanying notes to consolidated financial statements.
61
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2019, 2018 and 2017
(in thousands)
Additional
Accumulated
Other
Total
Redeemable
Non
Common Stock
Paid-In Retained Treasury Comprehensive Stockholders’ Controlling
Shares Amount Capital Earnings Stock
291,908
1,089,122
99,701 $
997
(531,268)
Income (Loss)
(6,757)
Equity
844,002
interest
10,653
Balance at December 31, 2016 . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net subscription 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, 2019 . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
99,701
—
—
—
—
—
—
—
—
997
3,504
—
(2,200)
141,279
—
—
—
—
1,304
141,279
—
50,593
(44,595)
—
—
—
301,410
—
690
—
(136,497)
—
—
1,092,394
—
—
44,595
—
(35,768)
—
(522,441)
—
—
—
—
—
7,281
524
—
51,283
—
(136,497)
(35,768)
7,281
872,884
—
2,930
926
—
—
—
—
—
14,509
—
—
—
812
—
(812)
—
—
—
—
—
—
—
—
—
—
99,701 $
—
—
—
—
—
—
—
99,701 $
—
—
—
—
—
—
—
—
997
—
—
—
—
—
—
—
997
—
—
36
183,588
—
—
—
40,598
(30,744)
—
—
—
311,264
—
—
1,383
—
(79,768)
—
—
1,198,445
114,992
—
—
30,744
—
(135,890)
—
(627,587)
—
—
33,610
(32,181)
—
—
—
312,693
—
423
(72,262)
—
—
1,241,598
—
—
32,181
—
(154,219)
—
(749,625)
(36)
—
—
—
—
—
—
655
331
—
—
—
—
—
—
2,903
3,234
—
183,588
—
41,981
—
(79,768)
(135,890)
655
883,450
114,992
—
34,033
—
(72,262)
(154,219)
2,903
808,897
—
(776)
(2,270)
—
—
—
—
—
11,463
1,973
5,769
—
—
—
—
—
19,205
See accompanying notes to consolidated financial statements.
62
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2019, 2018 and 2017
2019
2018
(in thousands)
2017
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,965
182,812
144,209
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 (gain) loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net purchases, maturities, and sales 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:
19,970
12,841
1,892
46,613
(35,466)
(21,550)
(3,009)
10,675
28,278
1,538
3,348
51,565
26,449
(30,237)
783
(15,380)
20,983
1,500
4,855
57,716
(17,104)
(43,714)
20,481
(17,714)
14,399
1,786
81,119
1,158
(101,457)
3,276
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,418
(64,828)
2,945
20,020
(9,299)
(3,389)
165,983
(20,407)
76,017
7,552
2,194
(18,007)
(21,767)
357,015
(3,013)
(26,357)
1,517
10,134
4,395
(8,856)
50,851
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 (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
(162,378)
19,667
141,613
(5,753)
(6,851)
(365,770)
(113,975)
160,158
1,157
—
125,727
(2,566)
(6,783)
10,343 (212,395)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(74,291)
(155,807) (133,378)
(94,925)
(81,215) (154,042)
(35,768)
—
—
5,769
(218)
926
174
(224,547) (311,788) (188,710)
(2,270)
—
(65,415)
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents, and restricted cash at beginning of period . . . . . . . . . . . . . .
291,555
Cash, cash equivalents, and restricted cash at end of period . . . . . . . . . . . . . . . . . . . $ 226,140
Cash paid for:
55,570 (350,254)
586,239
235,985
235,985
291,555
Income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,022
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,503
59,147
7,948
85,299
10,299
See accompanying notes to consolidated financial statements.
63
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018 and 2017
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. Intercompany accounts and transactions have been eliminated in consolidation. Amounts in the
accompanying financial statements and notes are rounded to the nearest thousand unless otherwise stated. Certain amounts
in the prior years’ financial statements have been reclassified for consistent presentation.
The Company operates in one business segment as the Company’s management utilizes a consolidated approach
to assess performance and allocate resources.
Consolidation
In the normal course of our business, we sponsor and manage various types of investment products. These
investment products include open-end mutual funds, a closed-end mutual fund and privately offered funds and, prior to
their liquidations in 2019, 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 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
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 that 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).
64
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 prior to their liquidation in 2018,
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. 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.
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.
65
Property and Equipment
Property and equipment held and used 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 15 years for other equipment; and up to
15 years for leasehold improvements, determined by the lesser of the lease term or expected life. Property and equipment
held for sale are carried at the lower of cost or fair value less cost to sell. No depreciation is recorded on assets held for
sale.
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 $3.5 million and $6.4 million as of December 31, 2019
and 2018, 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 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
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
in accordance with contractual expense limitations, and these waivers are reflected as a reduction to investment
management fees on the consolidated statements of income. Waivers are recognized over the period in which related
management and advisory services are provided.
Our investment management 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 management 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.
66
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, which is recognized at the time of the transaction. 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.
Advertising and Promotion
We expense all advertising and promotion costs as the advertising or event takes place. Advertising expense was
$7.9 million, $8.1 million and $9.7 million for the years ended December 31, 2019, 2018 and 2017, respectively, and is
classified in marketing and advertising expense in the consolidated statements of income.
Leases
On January 1, 2019, the Company adopted ASU 2016-02, Leases, and related ASUs (“ASU 2016-02”), which
increases transparency and comparability among organizations by establishing a right-of-use (“ROU”) model that requires
a lessee to record a ROU asset and a lease liability on the balance sheet with additional disclosures of key information
about leasing arrangements. The Company applied the required modified retrospective transition approach, applying the
new standard to all leases existing at the date of initial application, and elected the effective date of the ASU as its initial
date of application. The new standard provides a number of optional practical expedients for transition and practical
expedients for an entity’s ongoing accounting, which the Company has elected. In addition, we have elected the short-
term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize
ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term
67
leases of those assets. The implementation of the new standard included recognition of new ROU assets and lease liabilities
on our balance sheet as of January 1, 2019.
The Company has operating and finance leases for corporate office space and equipment. Our leases have
remaining lease terms of less than one year to six years, some of which include options to extend leases for up to 20 years,
and some of which include options to terminate the leases within one year. Certain leases include variable lease payments
in future periods based on a market index or rate. We determine if an arrangement is a lease at inception (or the effective
date of ASU 2016-02). Operating lease assets and liabilities are included in other non-current assets, other current
liabilities, and other non-current liabilities in our consolidated balance sheet at December 31, 2019. Finance leases are
included in property and equipment, net, other current liabilities, and other non-current liabilities in our consolidated
balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our
obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at
inception (or the effective date of ASU 2016-02) based on the present value of lease payments over the lease term. The
Company uses an incremental borrowing rate based on the information available at inception (or the effective date of ASU
2016-02) in determining the present value of lease payments. The operating lease ROU assets also include any lease
payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when
it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease
term. We have lease agreements with lease and non-lease components, which we have elected not to separate.
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’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. Once vested, RSU holders receive a lump sum cash payment equal to the fair market
value on the vesting date 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.
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2. New Accounting Guidance
Accounting Guidance Adopted During Fiscal Year 2019
On January 1, 2019, the Company adopted ASU 2016-02, which increases transparency and comparability among
organizations by establishing a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability
on the balance sheet with additional disclosures of key information about leasing arrangements. The effect of adoption
was the recognition of new ROU assets and lease liabilities of $36.8 million on our balance sheet for our real estate and
equipment leases as of January 1, 2019. See Note 1 – Summary of Significant Accounting Policies and Note 15 – Leases,
for additional accounting policy information and the additional disclosures required by this ASU.
On January 1, 2019, the Company adopted 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. Upon adoption
of this ASU, the Company no longer revalues certain outstanding share-based awards for nonemployees, which are
immaterial to our consolidated financial statements and related disclosures.
During the second quarter of 2019, the Company early adopted 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. See Note 4 – Investment Securities, for the disclosures required by this ASU.
New Accounting Guidance Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The
ASU changes the impairment model for most financial assets, and will require the use of an “expected loss” model for
instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit
loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net
presentation of the amount expected to be collected on the financial asset. ASU 2016-13 is effective for fiscal years, and
for interim periods within those fiscal years, beginning after December 15, 2019. The Company expects to adopt the
provisions of this guidance on January 1, 2020. 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 2018-15, 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, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.
The Company expects to adopt the provisions of this guidance on January 1, 2020 and use the prospective adoption
approach, which does not require the restatement of prior years. While we continue to assess all of the effects of adoption,
we currently believe the adoption of this ASU will not have a material impact on our operating income or net income as
requirements under the standard are generally consistent with our current accounting for cloud computing arrangements,
with the primary difference being the classification of certain information in our consolidated financial statements and
related disclosures.
In December 2019, FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes, which simplifies and improves the consistent application of the accounting for income taxes by removing
certain exceptions to general principles and by clarifying and amending existing guidance. This ASU is effective for fiscal
years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.
We are evaluating the impact the adoption of this ASU will have on our consolidated financial statements and related
disclosures.
69
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:
For the Year ended December 31,
2018
2019
(in thousands)
2017
Investment management fees:
Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Institutional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
430,028
15,116
445,144
486,181
21,725
507,906
506,868
24,982
531,850
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wealth Management
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 wealth management distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65,227
1,730
290
67,247
284,188
63,197
48,471
32,314
36,419
464,589
531,836
78,041
1,886
568
80,495
269,069
70,938
54,895
36,131
38,482
469,515
550,010
91,313
1,498
1,182
93,993
240,089
75,850
55,293
31,286
22,188
424,706
518,699
Shareholder service fees:
Total shareholder service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,335
102,385
106,595
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,070,315 1,160,301
1,157,144
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4. Investment Securities
Investment securities at December 31, 2019 and 2018 are as follows:
December 31, December 31,
2019
2018
(in thousands)
Available for sale securities:
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
1,977
254,291
—
256,268
Trading debt securities:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored privately offered funds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity method securities:
1,977
84,920
5,979
4
44,268
43,567
180,715
34,945
178,386
845
—
214,176
5,001
7,970
218,121
19,672
250,764
1,993
77,250
5,884
7
—
33,088
118,222
21,204
153,548
678
24,879
200,309
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,187
Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 688,346
47,840
617,135
Commercial paper and corporate bonds accounted for as available for sale and held as of December 31, 2019
mature as follows:
Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
After one year but within five years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,072
174,886
$ 252,958
78,326
177,942
256,268
Amortized
cost
Fair value
(in thousands)
Commercial paper, corporate bonds, U.S. Treasury bills, mortgage-backed securities and term loans accounted
for as trading and held as of December 31, 2019 mature as follows:
Fair value
Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
After one year but within five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After five years but within 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
30,749
78,367
28,032
137,148
$
71
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for
sale at December 31, 2019:
Amortized Unrealized Unrealized
cost
gains
(in thousands)
losses
Fair value
Available for sale securities:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . $
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . .
1,976
250,982
$ 252,958
1
3,314
3,315
—
1,977
(5) 254,291
(5) 256,268
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 . . . . . . . . . . . . . . . . . . . . . $
Commercial paper . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . .
5,000
7,902
219,236
19,672
$ 251,810
1
68
254
—
323
—
—
5,001
7,970
(1,369) 218,121
19,672
(1,369) 250,764
—
(in thousands)
Net realized losses of less than $0.1 million and net realized gains of $0.9 million were recognized from the sale
of $19.7 million and $86.9 million in available for sale securities during 2019 and 2017, respectively. No available for
sale securities were sold during 2018.
A summary of available for sale debt securities with fair values below carrying values at December 31, 2019 is
as follows:
Corporate bonds . . . . . . . . . . . . . . . . $
4,538
—
8,056
(5)
12,594
(5)
Less than 12 months
12 months or longer
Total
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
(in thousands)
A summary of available for sale debt securities with fair values below carrying values at December 31, 2018 is
as follows:
Less than 12 months
12 months or longer
Total
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)
The Company’s investment portfolio included three securities which were in an unrealized loss position at
December 31, 2019.
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 in the consolidated statement of operations for 2018 and 2017.
The Company evaluated all available for sale securities in an unrealized loss position at December 31, 2019 and
concluded no other-than-temporary impairment existed at December 31, 2019. The unrealized losses in the Company’s
investment portfolio at December 31, 2019 were primarily caused by changes in interest rates. At this time, the Company
72
does not intend to sell, and does not believe it will be required to sell these securities before recovery of their amortized
cost.
For trading debt securities held at the end of each year, net unrealized gains of $0.4 million and net unrealized
losses of $0.1 million and $0.3 million were recognized for the years ended December 31, 2019, 2018 and 2017,
respectively. For equity securities held at the end of each year, net unrealized gains of $25.0 million, net unrealized losses
of $22.8 million and net unrealized gains of $2.2 million were recognized for the years ended December 31, 2019, 2018
and 2017, respectively.
Sponsored Privately Offered Funds
The Company holds a voting interest in a sponsored privately offered fund that is structured as an investment
company in the legal form of a limited liability company. The Company held an investment in this fund totaling $0.8
million and $0.7 million as of December 31, 2019 and 2018, respectively, which is the maximum loss exposure.
Consolidated Sponsored Funds
The following table details the balances related to consolidated sponsored funds at December 31, 2019 and 2018,
as well as the Company’s net interest in these funds:
December 31, December 31,
2019
2018
(in thousands)
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . .
Net interest in consolidated sponsored funds . . . . . . . . . . . . . . . . . $
1,530
43,567
483
—
(19,205)
26,375
4,285
57,967
872
(79)
(11,463)
51,582
During the year ended December 31, 2019, we consolidated one Ivy Fund, 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 2019, we redeemed
our remaining investment in IGI Funds and liquidated and redeemed our investment in Ivy NextShares, which resulted in
a decrease in investments in the consolidated sponsored funds. One Ivy Fund remains consolidated as of
December 31, 2019. There was no impact to the consolidated statement of income as a result of the IGI Funds and Ivy
NextShares liquidation and redemptions, 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.
• 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
73
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. Term loans are valued using a price or composite price from one or
more brokers or dealers as obtained from an independent pricing service. The fair value of loans is estimated using recently
executed transactions, market price quotations, credit/market events, and cross-asset pricing. Inputs are generally
observable market inputs obtained from independent sources. Term loans are generally categorized in Level 2 of the fair
value hierarchy, unless key inputs are unobservable in which case they would be categorized as Level 3. 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, 2019 and 2018 that are recognized
in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.
December 31, 2019
Cash equivalents: (1)
Level 1
Level 2
Other Assets
Held at Net
Asset Value
Level 3
(in thousands)
Total
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,203
—
4,203
—
38,143
38,143
Available for sale securities:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
1,977
254,291
—
—
—
—
—
Trading debt securities:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . .
Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sponsored funds . . . . . . . . . . . . . . . . . . . . .
Equity securities:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sponsored privately offered funds measured at net
asset value (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity method securities: (3)
—
—
—
—
—
—
1,977
84,920
5,979
4
40,368
43,567
—
—
—
—
3,900
—
34,942
178,386
—
—
3
—
—
—
34,945
178,386
—
—
—
845
845
Sponsored funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,187
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,515
—
433,083
—
3,903
—
845
37,187
688,346
74
—
—
—
4,203
38,143
42,346
—
—
1,977
254,291
—
—
—
—
—
1,977
84,920
5,979
4
44,268
43,567
December 31, 2018
Level 1
Level 2
Other Assets
Held at Net
Asset Value
Level 3
(in thousands)
—
—
—
—
Cash equivalents: (1)
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121,759
U.S. government sponsored enterprise note . . . . . . . . . . .
—
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121,759
Available for sale securities:
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading debt securities:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,840
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . $ 247,459
—
—
—
—
—
21,192
153,548
—
24,879
—
895
74,277
75,172
5,001
7,970
218,121
19,672
1,993
77,250
5,884
7
33,088
—
—
—
—
—
368,986
—
—
—
—
—
—
—
—
—
—
—
—
—
12
—
—
—
—
12
Total
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
(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 net asset value 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) 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, 2019:
For the year ended
December 31, 2019
(in thousands)
Level 3 assets at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in to level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers out of level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses in Investment and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions and paydowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Level 3 assets at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12
2,607
3,241
(1,142)
(48)
(767)
3,903
Change in unrealized losses for Level 3 assets held at December 31, 2019 . . $
(13)
75
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.
The Company was party to 14 total return swap contracts with a combined notional value of $228.2 million and
five total return swap contracts with a combined notional value of $194.4 million as of December 31, 2019 and 2018,
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
statements of income.
The Company posted $3.7 million and $5.2 million in cash collateral with the counterparties of the total return
swap contracts as of December 31, 2019 and 2018, respectively. The cash collateral is included in customers and other
receivables on the Company’s consolidated balance sheets. 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, 2019 and 2018 calculated based on Level 2
inputs:
Total return swap contracts . . . . . . . . . . . . . . . Prepaid expenses and other current assets
Total return swap contracts . . . . . . . . . . . . . . . Other current liabilities
Net total return swap (liability) asset . . . . .
Balance sheet
location
December 31, December 31,
2019
2018
Fair value
Fair value
(in thousands)
—
3,990
(3,990)
4,968
—
4,968
$
$
The following is a summary of net (losses) gains recognized in income for the years ended December 31, 2019
and 2018:
Total return swap contracts . . . . . . . . . . . . . . Investment and other income
$
(38,240)
15,163
Income statement
location
Year ended
December 31,
2019
2018
(in thousands)
76
6. Property and Equipment
A summary of property and equipment at December 31, 2019 and 2018 is as follows:
2019
2018
(in thousands)
Estimated
useful lives
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
20,414
23,872
12,561
92,033
16,726
7,490
1,864
174,960
(140,234)
34,726
21,790 1 - 15 years
28,482 3 - 10 years
20,248 2 - 15 years
100,507 1 - 10 years
17,056
1 - 5 years
11,772 1 - 30 years
2,843
202,698
(139,269)
63,429
Depreciation expense was $19.8 million, $25.6 million and $21.0 million during the years ended December 31,
2019, 2018 and 2017, respectively.
The fourth quarter of 2019 included asset impairment charges of $12.8 million in connection with certain assets
held for sale, including real property related to our corporate headquarters move and aviation equipment. These
impairment charges are recorded in general and administrative expense in our consolidated statements of income. Assets
held for sale as of December 31, 2019 consist of $3.1 million of equipment, $3.8 million of buildings and $1.9 million of
land. The Company intends to actively pursue sale of these assets at market prices as soon as reasonably possible.
7. Goodwill and Identifiable Intangible Assets
Goodwill and identifiable intangible assets (all considered indefinite-lived) at December 31, 2019 and 2018 are
as follows:
December 31, December 31,
2019
2018
(in thousands)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,970
106,970
Mutual fund management advisory contracts . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
38,699
200
38,899
38,699
200
38,899
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 145,869
145,869
8. Indebtedness
On August 31, 2010, the Company entered into a note purchase agreement to complete a $190.0 million private
placement of 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, 2019, the Company’s consolidated
leverage ratio was 0.4 to 1.0, and the consolidated interest coverage ratio was 36.6 to 1.0.
77
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, 2019 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, 2019 and
2018, 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 including a required consolidated leverage ratio and a required consolidated interest
coverage ratio, consistent with those outlined above for the Senior Notes.
9. Income Taxes
The provision for income taxes from continuing operations for the years ended December 31, 2019, 2018 and
2017 consists of the following:
2019
2018
(in thousands)
2017
Current taxes:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,283
7,144
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
44,427
(3,009)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 41,418
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,071
625
1
54,697
783
55,480
73,167
7,720
—
80,887
20,481
101,368
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, 2019, 2018 and 2017:
2019
2017
2018
21.0 % 21.0 % 35.0 %
2.4
3.4
1.8
1.4
—
(0.4)
(2.2)
(0.2)
—
—
0.7
0.6
26.2 % 23.3 % 41.3 %
2.2
3.4
2.2
(0.2)
(1.0)
(0.3)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
The tax effect of temporary differences that give rise to significant portions of deferred tax assets and deferred
tax liabilities at December 31, 2019 and 2018 are as follows:
2019
2018
(in thousands)
Deferred tax assets:
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
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 . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
2,194
787
11,779
2,780
—
9,215
2,341
7,082
6,042
1,061
43,281
—
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
Benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,301)
Unrealized gains on investments securities and partnerships . . . . . . .
(3,469)
(2,283)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,630)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(308)
Total gross deferred liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(20,991)
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,872)
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,418
—
—
5,868
3,861
6,272
10,300
2,618
7,266
—
1,171
37,356
(3,700)
(1,872)
(9,206)
—
(2,478)
—
(513)
(17,769)
(7,266)
12,321
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, 2019 and 2018 is approximately $7.1 million and $7.3 million, respectively. The carryforwards, if not
utilized, will expire between 2020 and 2039. Management does not believe it is 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 $7.1 million and $7.3 million has been recorded at December 31,
2019 and 2018, respectively.
The Company has state tax credit carryforwards of $2.3 million and $2.6 million as of December 31, 2019 and
2018, respectively. Of these state tax credit carryforwards, $2.1 million will expire between 2024 and 2034 if not utilized,
$0.2 million will expire in 2026 if not utilized, and less than $0.1 million can be carried forward indefinitely. During 2019,
management determined that it is not more likely than not that it will fully utilize some of these state tax credits before
they expire and, accordingly, a valuation allowance in the amount of $0.8 million was recorded as of December 31, 2019.
In the accompanying consolidated balance sheets, 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, 2019 and December 31, 2018, the Company’s consolidated balance sheet included
unrecognized tax benefits, including penalties and interest, of $2.0 million ($1.7 million net of federal benefit) and $2.7
million ($2.4 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax
rate.
79
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, 2019, and December 31, 2018, the total amount of accrued
interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $0.4 million
($0.3 million net of federal benefit) and $0.7 million ($0.6 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, 2019 was a benefit of $0.2 million.
The following table summarizes the Company's reconciliation of unrecognized tax benefits, excluding penalties
and interest, for the years ended December 31, 2019, 2018 and 2017:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,070
Increases during the year:
2019
2017
2018
(in thousands)
6,843
7,734
Gross increases - tax positions in prior period . . . . . . . . . . . . .
Gross increases - current-period tax positions . . . . . . . . . . . . .
345
44
712
331
244
97
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 . . . . . . . . . . . .
(135)
(348)
(358)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,618
(4,219)
(1,385)
(212)
2,070
(56)
(178)
(998)
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 does not expect the resolution or settlement of any open audits, federal or state, to materially impact the
consolidated financial statements.
Our 2016-2019 federal income tax returns are open tax years that remain subject to potential future audit. Our
state income tax returns for all years after 2015 and, in certain states, income tax returns for 2015, are subject to potential
future audit by tax authorities in the Company’s major state tax jurisdictions.
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 (“Compensation
Committee”) approved an amendment to freeze the Pension Plan effective September 30, 2017. After September 30, 2017,
participants in the Pension Plan ceased accruing 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. The Compensation Committee approved the termination of the
Pension Plan, effective June 1, 2019, and the Company intends to terminate the Pension Plan in a standard termination, as
defined by the Pension Benefit Guaranty Corporation. The Company is currently performing the administrative actions
required to carry out the termination, with an expected completion date in 2020.
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.
80
A reconciliation of the funded status of these plans and the assumptions related to the obligations at December 31,
2019, 2018 and 2017 are as follows:
Pension Benefits
2018
2019
Other
Postretirement Benefits
2017
2019
2018
2017
(in thousands)
Change in projected benefit obligation:
Net benefit obligation at beginning of year . . . . . . . . . $ 154,528
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,146
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,221)
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,027
—
Retiree contributions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Net benefit obligation at end of year . . . . . . . . . . . . . . . $ 186,480
184,245
—
5,986
(13,690)
(22,013)
—
—
154,528
180,921 1,048 2,195 2,446
—
—
—
54
58
33
(602)
(954)
(677)
(965)
139
47
506
366
275
—
—
—
726 1,048 2,195
8,367
6,248
(8,511)
28,841
—
(31,621)
184,245
Pension Benefits
2018
2019
2017
Other
Postretirement Benefits
2017
2019 2018
(in thousands)
Change in plan assets:
Fair value of plan assets at beginning of year . . . . . . . $ 162,999
34,125
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . .
—
Retiree contributions . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,221)
Fair value of plan assets at end of year. . . . . . . . . . . . $ 183,903
Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . . $ (2,577)
170,881 144,529
24,863
10,000
—
1,808
4,000
—
(13,690)
162,999 170,881
—
—
448
506
(954)
—
8,471 (13,364) (726) (1,048) (2,195)
—
—
402
275
(8,511) (677)
—
—
—
236
366
(602)
—
Pension Benefits
2018
2017
2019
Other
Postretirement Benefits
2018
2017
2019
(in thousands, except percentage data)
Amounts recognized in the statement of
financial position:
—
Noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . $
—
Current liabilities . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . .
(2,577)
Net amount recognized at end of year . . . . . . $ (2,577)
8,471
—
—
8,471
—
—
(13,364)
(13,364)
—
(158)
(568)
(726)
—
(250)
(798)
(1,048)
—
(422)
(1,773)
(2,195)
Weighted average assumptions used to
determine benefit obligation at December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.32 % 4.45 %
3.76 % 2.87 %
4.08 %
3.28 %
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.
81
Our Pension Plan asset allocation at December 31, 2019 and 2018 is as follows:
Percentage of
Plan Assets at
Percentage of
Plan Assets at
Plan assets by category
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019 December 31, 2018
51 %
49 %
100 %
2 %
98 %
100 %
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. In 2019, the Company
further shifted plan assets towards cash.
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, 2019 and 2018.
2019
Level 1 Level 2
Level 3
Total
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ —
Fixed income securities:
(in thousands)
—
91,989
91,989
U.S. Treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bond . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
19,311
62,313
8,913
182,526
19,311
—
62,313
—
8,913
—
— 182,526
1,377
$ 183,903
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
46,415
91,521
21,870
160,275
46,415
—
91,521
—
21,870
—
— 160,275
2,724
$ 162,999
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 2018, we accelerated the de-risking strategy and as such, further reduced the
long-term rate of return in 2019 to 4.00%.
82
The components of net periodic pension and other postretirement costs consisted of the following for the years
ended December 31, 2019, 2018 and 2017:
Pension Benefits
2018
2019
2017
Other
Postretirement Benefits
2019 2018 2017
(in thousands)
Components of net periodic benefit cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,146
(6,315)
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,217
Actuarial gain amortization . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Prior service cost amortization . . . . . . . . . . . . . . . . . . . . .
Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,048
—
5,986
(8,320)
(15,501)
—
—
—
(17,835)
8,367
6,248
(10,113)
14,091
—
—
(31,621)
(13,028)
—
33
—
—
(495)
—
—
(462)
—
54
—
—
(120)
(2)
—
(68)
—
58
—
—
(180)
(4)
—
(126)
The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31,
2019, 2018 and 2017 are as follows:
Discount rate . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . .
Rate of compensation increase . . . . . . . . . Not applicable
4.45 %
4.00 %
2019
Pension Benefits
2017
2018
3.76 % 4.39% / 3.96 1%
5.00 % 7.00% / 6.00 1%
5.12 %
2019
4.08 %
Other
Postretirement Benefits
2018
3.28 %
Not applicable
Not applicable
2017
3.46 %
(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. For the Pension Plan, the
timing of benefit payments does not include anticipated acceleration of payments for the plan termination, as the payment
timing is based on the same assumptions used to measure the benefit obligation as of December 31, 2019, which does not
reflect plan termination.
Other
Pension
Benefits
Postretirement
Benefits
(in thousands)
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 through 2029 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,947
9,491
9,164
9,469
9,770
50,283
$ 97,124
158
116
99
66
66
143
648
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.
No contributions were made to the Pension Plan for 2019 and all contributions for 2018 and 2017 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 2020 expected contribution with cash generated
from operations. Participants also made contributions to the postretirement plan for the years ended December 31, 2019,
2018 and 2017.
83
For measurement purposes, the initial health care cost trend rate was 7.60% (prior to age 65) and 8.70%
(subsequent to age 65) for 2019, 8.05% (prior to age 65) and 9.30% (subsequent to age 65) for 2018 and 7.02% (prior to
age 65) and 8.47% (subsequent to age 65) for 2017. The health care cost trend rate reflects anticipated increases in health
care costs. The initial growth rates for 2019 are assumed to gradually decline over the next 8 years to a rate of 4.5%.
At December 31, 2019, the accrued pension and postretirement liability recorded in the consolidated balance
sheet was comprised of a pension liability of $2.6 million and a liability for postretirement benefits in the amount of $0.6
million. The current portion of postretirement liability of $0.1 million is included in other current liabilities on the
consolidated balance sheet. 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. The current portion of postretirement liability of $0.3 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, 2019, 2018
and 2017 were $6.0 million, $6.8 million and $6.0 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 2019 plan year, the Company approved a
discretionary nonelective contribution in an amount equal to 2% of participant’s eligible compensation. These
contributions, which were expensed during 2019, totaled $2.6 million and will be funded and allocated to participant
accounts during the first quarter of 2020. 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, 2019, 2018 and 2017, earnings per share were computed as follows:
2019
2018
2017
Net income attributable to Waddell & Reed Financial, Inc. . . . . . . . . . . . . . . . . . $
(in thousands, except for per share amounts)
141,279
183,588
114,992
Weighted average shares outstanding, basic and diluted . . . . . . . . . . . . . . . . . . . .
73,299
80,468
83,573
Earnings per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.57
2.28
1.69
Dividends
The Board of Directors declared dividends on our Class A common stock of $1.00 per share, $1.00 per share and
$1.63 per share for the years ended December 31, 2019, 2018 and 2017, respectively. During the fourth quarter of 2019,
the Board of Directors declared a quarterly dividend on our Class A common stock of $0.25 per share payable on
February 3, 2020 to stockholders of record as of January 13, 2020. As of December 31, 2019 and 2018, other current
liabilities included $17.2 million and $19.2 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 issuing shares to employees in our
share-based compensation programs. There were 9,164,564 shares, 6,963,269 shares and 1,842,337 shares repurchased in
84
the open market or privately during the years ended December 31, 2019, 2018 and 2017, respectively. The repurchased
shares include 548,132 shares, 729,882 shares and 402,337 shares repurchased from employees who tendered shares to
cover their income tax withholdings with respect to vesting of stock awards during the years ended December 31, 2019,
2018 and 2017, respectively.
Accumulated Other Comprehensive Loss
The following tables summarize other comprehensive income (loss) activity for the years ended December 31,
2019 and 2018.
Year ended December 31, 2019
securities
Unrealized
gains (losses) on
AFS investment
Postretirement
benefits
unrealized
gains (losses)
(in thousands)
Total
accumulated
other
comprehensive
income (loss)
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss) before reclassification . . . . . . . . . .
Amount reclassified from accumulated other comprehensive income .
Net current period other comprehensive income (loss) . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(797)
3,496
(178)
3,318
2,521
1,128
(36)
(379)
(415)
713
331
3,460
(557)
2,903
3,234
Year ended December 31, 2018
securities
Unrealized
gains (losses) on
AFS investment
Postretirement
benefits
unrealized
gains (losses)
(in thousands)
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
Total
accumulated
other
comprehensive
income (loss)
524
(848)
376
279
(193)
331
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, 2019
Tax
Pre-tax
expense Net of tax
Statement of income line item
(in thousands)
Reclassifications included in net income:
Gains on available for sale debt securities . . . . . $
Amortization of postretirement benefits . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
234
495
729
(56)
(116)
(172)
178 Investment and other income
379 Compensation and benefits
557
85
For the year ended December 31, 2018
Tax
(expense)
Pre-tax
benefit
(in thousands)
Net of 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 . . . . . . . . . $ 1,295
(489)
Losses on available for sale debt securities . .
(340)
116
955 Retained earnings
(373) Investment and other income (loss)
Amortization of postretirement benefits . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
122
928
(135)
(359)
(13)
569
Compensation and benefits and
retained earnings
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, 2019, 1,448,959 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 beginning 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.
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.
86
A summary of nonvested share activity and related fair value for the year ended December 31, 2019 follows:
Weighted
Average
Grant Date
Stock Shares Fair Value
4,093,760 $ 22.79
Nonvested at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.65
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,433,673
25.52
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,672,676)
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.27
(212,772)
3,641,985 $ 19.60
Nonvested at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested
A summary of nonvested RSU activity for the year ended December 31, 2019 follows:
Nonvested at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash-Settled Units
1,762,060
1,228,904
(497,092)
(118,272)
2,375,600
Nonvested
For the years ended December 31, 2019, 2018 and 2017, compensation expense related to nonvested shares and
nonvested RSUs totaled $46.6 million, $51.6 million and $57.7 million, respectively.
The deferred income tax benefit from the compensation expense related to nonvested stock and nonvested RSUs
was $11.1 million, $11.9 million and $13.6 million for the years ended December 31, 2019, 2018 and 2017, 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, 2019, the remaining unamortized expense related to nonvested stock of $46.5
million is expected to be recognized over a weighted average period of 2.1 years.
The total fair value of shares vested (at vest date) during the years ended December 31, 2019, 2018 and 2017,
was $29.1 million, $41.0 million and $20.8 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, 2019 or 2018.
87
Net capital and aggregated indebtedness information for our broker-dealer subsidiaries is presented in the
following table as of December 31, 2019 and 2018:
2019
2018
Net capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Required capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess of required capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Ratio of aggregate indebtedness to net capital . . . . . . . . . .
60,758
250
60,508
Not
applicable
W&R
15. Leases
W&R
(in thousands)
IDI
20,217
1,909
18,308
57,109
250
56,859
Not
applicable
1.42 to 1.0
IDI
25,688
1,336
24,352
0.78 to 1.0
The Company has operating and finance leases for corporate office space and equipment.
The components of lease expense were as follows:
For the Year Ended
December 31, 2019
(in thousands)
Operating Lease Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,574
Finance Lease Cost:
Amortization of ROU assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest on lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
283
27
310
Supplemental cash flow information related to leases was as follows:
For the Year Ended
December 31, 2019
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating cash flows from finance leases . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing cash flows from finance leases . . . . . . . . . . . . . . . . . . . . . . . . . .
ROU assets obtained in exchange for lease obligations:
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,520
27
290
39,580
40
88
Supplemental balance sheet information related to leases was as follows:
December 31, 2019
(in thousands,
except lease term
and discount rate)
Operating Leases:
Operating lease ROU assets (Other non-current assets) . . . . . . . . . . . . . . $
23,457
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
10,479
14,694
25,173
Finance Leases:
Property and equipment, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total finance lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average remaining lease term:
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average discount rate:
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities of lease liabilities are as follows:
985
(737)
248
203
55
258
4 years
1 year
4.32%
6.00%
Operating
Leases
Finance
Leases
(in thousands)
Year ended December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
11,346
6,691
2,178
2,090
2,090
2,613
27,008
(1,835)
25,173
208
47
9
—
—
—
264
(6)
258
89
The adoption of ASU-2016-02 using the effective date as the date of initial application requires the inclusion of
the disclosures for periods prior to adoption, which are included below.
Minimum future rental commitments as of December 31, 2018 for all non-cancelable operating leases were 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
$
Rent expense was $22.7 million and $24.5 million for the years ended December 31, 2018 and 2017, respectively.
As of 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.
16. Related Party Transactions
We earn investment management fee revenues from the Funds and IGI Funds (prior to their liquidation in 2018)
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, 2019,
2018 and 2017 are as follows:
Investment management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Rule 12b-1 service and distribution fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019
430,028
121,603
93,335
644,966
2018
(in thousands)
486,581
141,220
102,385
730,186
2017
508,035
159,873
106,595
774,503
Included in Funds and separate accounts receivable at December 31, 2019 and 2018 are receivables due from the
Funds of $12.8 and $14.6 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.” These amounts are not reduced by amounts that may be recovered under insurance or claims against
90
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 should be disclosed. Management’s
judgment is required related to contingent liabilities because the outcomes are difficult to predict.
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 other corporate investments 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)
Quarter
First
Second
Third
Fourth
(in thousands)
2019
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 259,410
Net income attributable to Waddell & Reed Financial, Inc. . . . . . . . $ 32,053
0.42
Net income per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . $
270,154
33,948
0.45
270,680
33,054
0.46
270,071
15,936
0.23
2018
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 297,615
Net income attributable to Waddell & Reed Financial, Inc. . . . . . . . $ 46,337
0.56
Net income per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . $
295,338
44,478
0.55
295,118
46,305
0.58
272,230
46,468
0.60
Quarter
First
Second
Third
Fourth
(in thousands)
91
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WADDELL & REED FINANCIAL, INC.2201920182017Operating Income146222220Net Income115184141Net Income Per Diluted Share$1.57$2.28$1.69Adjusted Net Income Per Share1$1.87$2.23$1.691Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” in the Company's Annual Report on Form 10-K for a reconciliation to GAAP.FINANCIAL HIGHLIGHTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)OUR BUSINESS MODELOUR DIVERSIFIED FINANCIAL SERVICES COMPANY is built on a distinct business model with two differentiated brands, individually focused on skilled asset management and personalized wealth management services, both offering exceptional client support. At our foundation is a values-based, purpose-driven company culture focused on innovation and growth. Our brands include:• An active asset manager known for global investing strategies that help investors best meet their long-term goals.• Centered on a collaborative investment process that values deep fundamental research and risk management.• A comprehensive distribution team that supports advisors and our retail and institutional clients.ASSET MANAGER• National network of independent financial advisors.• Personalized, holistic financial planning services for individuals, families and businesses.• Comprehensive and diverse product offering, including advisory services, full-service brokerage, retirement plans and investment and insurance products. WEALTH MANAGERASSETS UNDER ADMINISTRATION $ IN BILLIONS$0$10$20$30$40$50$60$70$80$90Non-advisoryAdvisory201920182017$35$30$33$22$21$27ASSETS UNDER MANAGEMENT $ IN BILLIONS$0$10$20$30$40$50$60$70$80$90201920182017$81$66$702019 ANNUAL REPORTCORPORATE INFORMATIONAnnual Meeting of StockholdersApril 29, 2020, 10:00 a.m. Corporate HeadquartersWaddell & Reed Financial, Inc. 6300 Lamar Avenue Overland Park, KS 66202NYSE ListingClass A Common Stock Stock Symbol: WDRIndependent AuditorsKPMG LLP 1000 Walnut, Suite 1100 Kansas City, MO 64106Transfer 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.comMutual Fund InformationFor information regarding our mutual funds, please call 888.WADDELL or visit www.waddell.com or www.ivyinvestments.comInstitutional Marketing InformationFor information regarding institutional marketing, please call 877.887.0867 or visit www.institutional.ivyinvestments.comDividend ReinvestmentWaddell & Reed Financial, Inc. maintains a dividend reinvestment plan for all holders of its common stock. Under the plan, stockholders may reinvest all or part of their dividends in additional shares of common stock. Participation is entirely voluntary. More information on the plan can be obtained from our Transfer Agent.Stockholder InquiriesFor information regarding Waddell & Reed Financial, Inc. stock, please call the Investor Relations office at 800.532.2757 or visit www.ir.waddell.com 2888_Cover.indd 22888_Cover.indd 22/14/20 11:41 PM2/14/20 11:41 PM 2019 ANNUAL REPORTSTRONG FOUNDATIONon aWADDELL & REED FINANCIAL, INC. ANN-CORP-2019/44384 (02/20)waddell.comWADDELL & REED FINANCIAL, INC. 2019 ANNUAL REPORT2888_Cover.indd 12888_Cover.indd 12/14/20 11:40 PM2/14/20 11:40 PM