The ~~following table summarizes our five largest mutual funds as~~2020 incentive compensation awards reflect the Compensation Committee’s determination to (1) award incentive compensation based on execution of ~~December 31, 2019 by ending AUM~~strategic initiatives in light of the Company’s 2020 financial and ~~investment management fees,~~operational performance in a challenging operating environment due to COVID-19, balanced with the ~~comparative positions in 2018 and 2017. The AUM and management fees of these mutual funds are presented as a percentage of our~~need to provide total ~~AUM and total management fees. The increase in AUM~~direct compensation that remains competitive in the ~~Ivy Science & Technology, Ivy Mid Cap Growth~~marketplace and ~~Ivy Large Cap Growth Funds from 2017 to 2018 is primarily~~(2) reflect, as appropriate, differences in each named executive officer’s scope of authority and responsibilities, the assumption of additional responsibilities, and an appropriate balance of total direct compensation between cash and equity with an emphasis on cash due to the ~~Advisors Fund mergers~~pending merger between the Company and Macquarie and the requirement in the Merger Agreement to limit equity-based awards to the target amounts.

The table below sets forth the components of total direct compensation for each named executive officer attributable to 2020, as well as total direct compensation attributable to 2019, in each case regardless of the timing of incentive compensation payments or grants. Total direct compensation for 2019 and 2020 set forth below is different than total direct compensation set forth in the Summary Compensation Table because equity-based incentive awards based on 2019 and 2020 performance were not granted until March 2020 and March 2021, respectively, and, therefore, are not reflected in the Summary Compensation Table or the Grants of Plan-Based Award Table for the respective years.

Base
Salary Cash
Incentive Equity-
Based Incentive 2020
Total Direct
Compensation 2019
Total Direct
Compensation
Philip J. Sanders $ 725,000 $ 2,030,000 $ 2,718,500 $ 5,473,500 $ 4,325,000
Benjamin R. Clouse $ 420,000 $ 1,338,750 $ 420,000 $ 2,178,750 $ 1,525,000
Brent K. Bloss $ 525,000 $ 1,748,250 $ 1,575,000 $ 3,848,250 $ 2,650,000
Daniel P. Hanson $ 525,000 $ 1,575,000 $ 1,575,000 $ 3,675,000 $ 2,332,692
Shawn M. Mihal $ 400,000 $ 1,225,000 $ 400,000 $ 2,025,000 $ 1,375,000
2020 Stockholder Vote on Named Executive Officer Compensation
In April 2020, the compensation paid to our named executive officers in 2019 was approved by 88% of the votes cast by our stockholders on the proposal. The Compensation Committee considered the results of the advisory vote in assessing our executive compensation program, noting the high level of stockholder support. The Compensation Committee elected to continue the same general principles in determining the types and amounts of compensation paid to our executive officers in 2020.
Compensation Program Objectives
The Company’s executive compensation program is intended to attract and retain highly qualified executive talent, provide rewards for the prior year’s performance, and provide incentives for future performance to drive the creation of stockholder value. More specifically, our executive compensation program objectives are to:
12
· Attract, motivate and retain a high-performing executive team with the appropriate expertise and leadership to build and sustain long-term stockholder value;
· Incentivize and reward short-term and long-term financial, operational, strategic and individual performance that results in increased value for our stockholders; and
· Align our executives’ interests with those of our stockholders.
The asset management and wealth management industries are extremely competitive, and experienced professionals have significant career mobility. Our intellectual capital is our greatest asset. Our success, and that of our stakeholders, depends on our ability to successfully engage a highly skilled and experienced executive team through a combination of career opportunities, a challenging work environment, and competitive compensation, particularly during the ~~first quarter~~challenging operating environment for active asset managers and the dynamic operating environment for wealth managers during recent years. Our executive officers have developed as a cohesive and complementary executive team and are considered an invaluable resource. Historically, we have sought to groom internal personnel for executive positions or recruited external candidates with a high degree of ~~2018.~~experience and knowledge of our industry, believing that executives with industry knowledge are more likely to excel. However, this limits the recruiting pool and makes retention a key focus of our compensation program.
~~Five Largest Mutual Funds by Ending Assets Under Management~~
Considering these objectives and ~~Investment Management Fees~~

2019

2018

2017

Percentage

Percentage

Percentage

Ending

of Total

Ending

of Total

Ending

of Total

(in millions, except percentage data)

By AUM:












Ivy Science & Technology

$
8,143

12
%

6,345

10
%

4,116

5
%
Ivy Mid Cap Growth

5,063

7
%

3,983

6
%

2,377

3
%
Ivy Large Cap Growth

4,762

7
%

3,873

6
%

1,898

2
%
Ivy High Income

4,722

7
%

4,857

7
%

4,180

5
%
Ivy Core Equity

4,268

6
%

3,862

6
%

4,742

6
%
Total

$
26,958

39
%

22,920

35
%

17,313

21
%

(in thousands, except percentage data)

By Management Fees:

Ivy Science & Technology

$
59,182

13
%

56,997

11
%

32,933

6
%
Ivy International Core Equity

34,449

8
%

49,645

10
%

45,017

8
%
Ivy Mid Cap Growth

32,577

7
%

30,885

6
%

19,198

4
%
Ivy High Income

25,914

6
%

27,971

5
%

23,672

4
%
Ivy Core Equity

25,751

6
%

28,264

6
%

11,044

2
%
Total

$
177,873

40
%

193,762

38
%

131,864

24
%
factors, the Compensation Committee has developed an executive compensation program that continues to be based on the following principles:
~~Performance~~
· Compensation levels should be sufficiently competitive to attract, motivate and retain high caliber executives.
· Appropriate levels of reward for performance should be tied to and vary with the Company’s financial and operational performance, as well as progress on strategic objectives and individual performance.
· A majority of total compensation should be “at risk” in the form of cash and equity-based incentive awards.
· Equity-based awards should constitute a significant portion of incentive awards to encourage executives to focus on the Company’s long-term growth and prospects.

~~Investment performance during~~Retirement benefits no longer comprise a significant element of executive compensation. Effective September 30, 2017, the ~~fourth quarter was impacted by the market’s rotation into value, cyclical and low-quality stocks which~~Compensation Committee froze future benefit accruals under Company’s Retirement Income Plan (the “Pension Plan”). Although each named executive officer except Mr. Hanson 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 rankedaccrued a vested pension benefit in the ~~top half~~Pension Plan, they stopped earning additional benefits based on service or compensation after September 30, 2017. The Compensation Committee approved the termination of the Pension Plan, effective June 1, 2019, and the participating named executive officers received lump sum distributions of their ~~respective Morningstar universes.~~vested pension benefit in July 2020. See “Executive Compensation – Pension Benefits” for additional information regarding the Pension Plan. The Company maintains a 401(k) Plan and matches employee contributions up to 4% of eligible compensation and has the discretion to make additional contributions to eligible participants, subject to applicable non-discrimination requirements. For the 2020 plan year, the Company made a discretionary contribution to the 401(k) account of eligible participants in an amount equal to 2% of eligible 2020 compensation.

~~The~~Elements of Our Compensation Program
Each element of compensation paid to the Company’s executive officers is designed to support one or more of the objectives described above. Total compensation for the executive officers consists of one or more of the following ~~table is a summary of Morningstar rankings and ratings as of December 31, 2019:~~components:

MorningStar Fund Rankings ¹

1 Year

3 Years

5 Years

Funds ranked in top half

43
%
42
%
33
%
Assets ranked in top half

52
%
62
%
41
%
· Base salary;
· Annual performance-based incentive awards, including a cash award and an equity-based award;
· Retirement benefits; and
· Personal benefits and other perquisites.

MorningStar Ratings ¹

Overall

3 Years

5 Years

Funds with 4/5 stars

34
%
31
%
23
%
Assets with 4/5 stars

51
%
42
%
34
%
~~(1) Based on class I share, which reflects the largest concentration of sales and assets.~~
13
33

~~Table of Contents~~

~~Assets Under Administration~~How We Determine Compensation

~~AUA includes both client assets invested~~

The Compensation Committee makes compensation decisions using an approach that considers total direct compensation (i.e., base salary, cash incentive awards and equity-based incentive awards). Base salary is generally the smallest component of total direct compensation, which results in a significant portion of our executive officers’ compensation being paid in “at risk” incentive compensation. At the beginning of each year, the Compensation Committee designates the executive officers that will participate in our Executive Incentive Plan. All executive officers participated 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~~Executive Incentive Plan during 2020.

For 2020, the Compensation Committee continued 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~~utilize one incentive pool under the ~~year ended December 31, 2019 was $438 thousand, an increase of 16% as compared to 2018. The decrease in Advisors, along~~Executive Incentive Plan, funded 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.~~

For the Year ended December 31,

2019

2018

2017

(in millions, except advisor data

and percentages)

AUA

Advisory assets

$
26,947

21,207

21,613

Non-advisory assets

33,148

30,059

35,073

Total assets under administration

$
60,095

51,266

56,686

Net new advisory assets ⁽¹⁾

$
970

575

471

Net new non-advisory assets ^{(1), (2)}

(3,333)

(3,670)

(3,573)

Total net new assets ^{(1), (2)}

$
(2,363)

(3,095)

(3,102)

Annualized advisory AUA growth ⁽³⁾

4.6
%

2.7
%

2.6
%
Annualized AUA growth ⁽³⁾

(4.6)
%

(5.5)
%

(5.9)
%

Advisors and advisor associates

1,327

1,403

1,632

Average trailing 12-month production per Advisor ⁽⁴⁾ (in thousands)

$
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~~adjusted operating income for cash and equity-based awards to be determined at the discretion of the Compensation Committee. Utilizing one pool for cash and equity-based incentive compensation is ~~calculated~~consistent with the approach used by several companies in the Company’s peer group and provides the Compensation Committee the flexibility to award cash and equity-based incentive compensation in the proportions that it determines are most appropriate for each executive officer. The aggregate of all executive officer incentive awards under the Executive Incentive Plan is not limited to the funding pool described above, 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.~~

~~Table of Contents~~

~~Results of Operations~~Compensation Committee has discretion to reward extraordinary performance.

~~Net Income~~

For the Year ended

December 31,

Variance








2019 vs.

2018 vs.

2019

2018

2017

2018

2017

(in thousands, except per share and percentage data)

Net income attributable to Waddell & Reed Financial, Inc.

$
114,992

183,588

141,279

(37)
%
30
%
Earnings per share, basic and diluted

$
1.57

2.28

1.69

(31)
%
35
%
Operating Margin

14
%
19
%
19
%
(5)
%
—

~~Total Revenues~~
~~Total revenues decreased 8%~~The Compensation Committee continued to utilize the incentive plan design that was implemented in 2019, as described below.
· A more structured discretionary approach to better align incentive awards with performance. Under this approach, the Compensation Committee, with the input of the executive officers, established strategic objectives, as well as certain financial and operating goals, at the beginning of the year.
· Target cash and equity-based incentive opportunities as a percentage of base salary.
Although the Compensation Committee utilizes financial and operating metrics to monitor the Company’s performance in light of the strategic objectives and goals established at the beginning of the year, it does not utilize any weightings or formulas to determine incentive compensation based on achievement of those strategic objectives and goals. Rather, the strategic objectives, goals and financial and operating metrics are components of the framework the Compensation Committee uses to evaluate the performance of each executive. The Compensation Committee establishes cash and equity-based incentive targets for executive officers in February of each year; however, such targets are only meant to be a guide for the Compensation Committee in determining incentive compensation. The Compensation Committee may exercise its discretion, consistent with industry practice, to determine actual incentive compensation awards, which can be greater than or less than target based on Company and individual performance. In determining total direct compensation, the Compensation Committee reviews and considers one or more of the following:
· The Company’s financial and operational performance;
· Progress on strategic initiatives;
· Market survey information for comparable public and private asset managers;
· Recommendations of the Company’s Chief Executive Officer, based on individual performance and contributions and internal pay equity;
· The previous year’s compensation levels for each executive officer; and
· Overall effectiveness of the executive compensation program.
The Compensation Committee may also consider, as applicable, levels of sustained past performance, performance potential, retention risk and the value of the particular compensation element needed to keep an executive’s level of total direct compensation competitive and consistent with our executive compensation program’s objectives. Although there is no formal policy regarding the relationship of compensation among the executive officers, the Compensation Committee also considers the appropriateness of each executive officer’s compensation relative to the other executive officers to reflect differences in the scope of authority and responsibilities among executive officers. The actual cash and equity-based incentive awards paid to each executive officer are determined in the Compensation Committee’s subjective judgment and discretion, based upon the above factors, and its assessment of such compensation’s fairness and adequacy in achieving the objectives of our executive compensation program. This approach enables the Compensation Committee to be responsive to the dynamics of the labor market, including the need to retain and motivate a particular executive, and provides the Compensation Committee with flexibility to compensate our executive officers in a way that reflects the influence and contributions of each executive individually to overall corporate performance and reinforces our pay-for-performance culture.
14
The table below sets forth the percentage each component of total direct compensation bears to total direct compensation based on 2020 target incentive compensation, as well as total direct compensation attributable to 2019 and 2020, regardless of the timing of payments or grants.

2020
Target

2020
Actual

2019
Actual

Base
Salary
%

Cash
Incentive
%

Equity-
Based
Incentive
%

Base
Salary
%

Cash
Incentive
%

Equity-
Based
Incentive
%

Base
Salary
%

Cash
Incentive
%

Equity-
Based
Incentive
%

Philip J. Sanders 15 % 27 % 58 % 13 % 37 % 50 % 17 % 22 % 61 %
Benjamin R. Clouse 31 % 38 % 31 % 19 % 62 % 19 % 26 % 38 % 36 %
Brent K. Bloss 18 % 27 % 55 % 14 % 45 % 41 % 18 % 27 % 55 %
Daniel P. Hanson 18 % 27 % 55 % 14 % 43 % 43 % 12 % 20 % 68 %
Shawn M. Mihal 31 % 38 % 31 % 20 % 60 % 20 % 27 % 35 % 38 %
Compensation Consultant
The Compensation Committee has the authority to engage independent advisors to assist it in carrying out its responsibilities. For 2020, the Compensation Committee engaged Frederic W. Cook & Co., Inc. (“FW Cook”), the Compensation Committee’s independent compensation consultant, to (1) review and assess competitive compensation information regarding total direct compensation and individual pay components for the Company’s executive officers compared to ~~2018 primarily~~the Company’s peer group, (2) review and assess competitive compensation information for directors who are not officers or employees of the Company or its subsidiaries (the “Outside Directors”) and (3) review and assess proposed compensation for executive officers in connection with the proposed merger between the Company and Macquarie. FW Cook did not provide any other additional services to the Company or management, meet with any members of management individually, or receive any payments from the Company, other than in its capacity as a consultant to the Compensation Committee in 2020. FW Cook has served as the Compensation Committee’s compensation consultant since 2004. At the Compensation Committee’s request, FW Cook provided the Compensation Committee with information regarding its independence pursuant to SEC and NYSE disclosure requirements regarding the independence of compensation consultants. This information, which addressed each of the six independence factors, affirmed the independence of FW Cook and the partners, consultants and employees who service the Compensation Committee on executive compensation issues.
In connection with the proposed merger between the Company and Macquarie, the Company engaged a compensation consultant (the “Non-executive Compensation Consultant”) to provide recommendations, based on market practice, with respect to employee, including executive officer, compensation arrangements in light of the proposed merger. The Compensation Committee asked FW Cook to review the executive officer compensation information included in the Non-executive Compensation Consultant’s recommendations. Based on its review, FW Cook informed the Compensation Committee that the proposed compensation arrangements for executive officers were reasonable. See “Executive Compensation - Potential Payments Upon Termination or Change in Control” for a description of the terms of the Change of Control Retention and Severance Agreements entered into by the Company with each executive officer in connection with the proposed merger between the Company and Macquarie.
15
Peer Group Analysis
In making executive compensation decisions, the Compensation Committee evaluates its executive compensation program against a broad group of companies in the investment management and financial services industries representative of companies against which the Company competes for executive talent. The Compensation Committee, with the assistance of FW Cook, determined that no changes were necessary to the Company's compensation peer group in connection with decisions related to 2020 executive compensation. With the assistance of FW Cook, the Compensation Committee compared the Company's executive compensation program in 2020 against this peer group, which consists of:
·AllianceBernstein Holding L.P. ·GAMCO Investors, Inc.
·Artisan Partners Asset Management Inc. ·Legg Mason, Inc.
·BrightSphere Investment Group plc ·Victory Capital Holdings, Inc.
·Cohen & Steers, Inc. ·Virtus Investment Partners, Inc.
·Federated Investors, Inc. ·WisdomTree Investments, Inc.
The Compensation Committee believes that the Company competes for market share, shelf space, mutual fund shareholders and institutional clients, executive talent and employees with each of these 10 publicly traded asset managers. Additionally, this peer group comprises nine of the 40 companies in the SNL Asset Manager Index, a composite of publicly traded asset management companies used by SNL Financial for comparison purposes in preparing the Company’s stock performance graph. Legg Mason, Inc. was not included in the SNL Asset Manager Index for 2020 due to ~~lower average AUM, partially offset~~its acquisition by ~~an increase~~Franklin Resources Inc. in ~~advisory fees~~July 2020. However, Legg Mason remained in the peer group used by the Compensation Committee for year-over-year continuity. The peer group does not include the 29 additional companies comprising the SNL Asset Manager Index due to ~~higher AUA. While revenues were relatively consistent in 2018~~their size, business orientation and/or status as a foreign corporation.
The Compensation Committee reviews compensation information of the peer group compared to ~~2017, this~~that of the Company based on both the 1^st through 5^th most highly paid officer positions, and information comparing titled officer positions, if available. In evaluating competitive compensation information of the peer group, the Compensation Committee does not target our executives’ compensation to be paid at a specific percentile or limit its overall evaluation of competitive compensation to a particular percentile, but does take into consideration, on a non-formulaic basis, various differences between the Company and the comparison companies, including measures such as market capitalization, number of employees, assets under management, revenues, income and profitability.
The Compensation Committee also reviews competitive compensation information obtained from the McLagan Survey, which provides detailed analyses of compensation for a greater depth of investment management employees than is available for our public peers and is specifically focused on the asset management industry. Confidentiality obligations to McLagan Partners and to its survey participants prevent us from disclosing the firms included in the McLagan Survey. In addition, the McLagan Survey maintains the confidentiality of individual company pay practices from other participants. The Company did not purchase the McLagan Survey in 2020. However, FW Cook carried forward 2019 McLagan Survey results with cash aged 2.5%, which is consistent with current merit increase expectations. The Compensation Committee reviewed the results of the McLagan Survey information to account for differences in the scale and scope of operations of participant companies, to evaluate the overall competitive position of the Company, as well as its position by business unit and by officer title, and to make comparisons on an officer by officer basis, where sufficient market data was available and an appropriate match of position and responsibilities could be made.
The Compensation Committee considers the compensation information derived from the peer group and the McLagan Survey equally relevant and important, with neither source of information being a predominant determining factor in setting executive compensation levels.
Management’s Role in the Compensation Setting Process and Other Considerations
Our Chief Executive Officer regularly attends Compensation Committee meetings and advises the Compensation Committee regarding, among other things, the design and effectiveness of the Company’s performance measures, the general competitiveness of our compensation program, information on the Company’s business strategies and objectives, financial and operational performance, including progress regarding key metrics and strategic initiatives. The Compensation Committee also requests that the Chief Executive Officer evaluate the performance of the executive officers and to make recommendations to the Compensation Committee regarding their base salary levels and the form and amount of their annual cash incentive award and equity-based incentive award. For 2020, Mr. Sanders evaluated the performance of the other executive officers. Mr. Sanders did not make a recommendation with respect to his own base salary or his performance-based incentive awards.
16
Mr. Sanders’ recommendations are based on his subjective evaluations regarding the individual performance and contributions of each of the other executive officers in furthering the Company’s success, creating stockholder value and executing individual responsibilities, which may include:
· Internal working and reporting relationships that promote collaboration and teamwork;
· Leadership, including the ability to develop and motivate employees and personal development; and
· Individual expertise, skills and knowledge relevant to each executive’s position and responsibilities, the potential to assume increased responsibilities, and long-term value to the Company.
With respect to Mr. Sanders’ position and responsibilities, the Compensation Committee considers his company-wide oversight and management, execution and success of the Company’s business and strategic initiatives, the Company’s financial and operating results, the creation of stockholder value, the size and complexity of the Company’s business, and effective leadership of the Company’s management team.
The Compensation Committee does not assign individual weight or particular emphasis to any of the above factors; the emphasis placed on any specific factor or individual contribution may vary by executive officer.
Our Chief Financial Officer regularly attends Compensation Committee meetings and advises the Compensation Committee as necessary regarding the Company’s financial and operating results, progress on strategic initiatives, accounting rules that are relevant to incentive compensation or other matters that come before the Compensation Committee and provides the Compensation Committee with historical and prospective compensation information relevant to their determinations. Additionally, our Chief Legal Officer, General Counsel and Secretary regularly attends Compensation Committee meetings and provides advice regarding legal and corporate governance matters, details regarding our stock award and incentive compensation plans, and other requested information related to Compensation Committee discussions.
Analysis of 2020 Compensation
The Compensation Committee’s focus is to set competitive pay levels on an annual basis, and to ensure a significant portion of compensation is performance-based. Consistent with the philosophy that a majority of total direct compensation should be “at risk,” the named executive officers received, on average, approximately 16% of their total direct compensation for 2020 in base salary and approximately 84% in incentive compensation.
2020 Operating Environment
The market volatility that began in March 2020, as a result of ~~a decrease in investment management fees, offset by an increase in underwriting~~the reaction to COVID-19 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,

Variance








2019 vs.

2018 vs.


2019

2018

2017

2018

2017

(in thousands, except percentage data)

Investment management fees

$
445,144

507,906

531,850

(12)
%
(5)
%
Underwriting and distribution fees

531,836

550,010

518,699

(3)
%
6
%
Shareholder service fees

93,335

102,385

106,595

(9)
%
(4)
%
Total revenues

$
1,070,315

1,160,301

1,157,144

(8)
%
—

~~Table of Contents~~

~~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~~its impact on the ~~level~~global economy and financial markets, resulted in significant depreciation in the stock markets and major disruption in the fixed income environment. Despite the impact of ~~average client AUM and are affected by sales, financial market conditions, redemptions~~the global pandemic 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.~~

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








2019 vs.

2018 vs.

2019

2018

2017

2018

2017

(in thousands, except for management fee rate, average assets and

percentage data)

Funds investment management fees (net)

$
430,028

486,181

506,868

(12)
%
(4)
%
Funds average assets (in millions)

66,543

72,875

73,906

(9)
%
(1)
%
Funds management fee rate (net)

0.6462
%

0.6671
%

0.6858
%

Total fee waivers

$
29,284

17,696

7,648

65
%
131
%

Institutional investment management fees (net)

$
15,116

21,725

24,982

(30)
%
(13)
%
Institutional average assets (in millions)

3,730

5,464

7,071

(32)
%
(23)
%
Institutional management fee rate (net)

0.4053
%

0.4057
%

0.3786
%

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

~~Table of Contents~~

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,


2019

2018

2017

Unaffiliated channel

38.1
%
38.7
%
40.1
%
Institutional channel

51.0
%
75.2
%
48.7
%
Wealth Management channel

13.8
%
13.9
%
15.6
%
Total

25.0
%
27.8
%
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.

~~Table of Contents~~

~~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:~~

Total


2019

2018

2017

(in thousands)

Underwriting and distribution fee revenues:





Fee-based asset allocation product revenues

$
284,188

269,069

240,089

Rule 12b-1 service and distribution fees

128,424

148,979

167,163

Sales commissions on front-end load mutual fund and variable annuity sales

48,761

56,781

56,791

Sales commissions on other products

32,314

36,131

31,286

Other revenues

38,149

39,050

23,370

Total

$
531,836

550,010

518,699

Unaffiliated Channel


2019

2018

2017

(in thousands)

Underwriting and distribution fee revenues:





Rule 12b-1 service and distribution fees

$
65,227

78,041

91,313

Sales commissions on front-end load mutual fund sales

1,730

1,886

1,498

Other revenues

290

568

1,182

Total

$
67,247

80,495

93,993

Wealth Management Channel


2019

2018

2017

(in thousands)

Underwriting and distribution fee revenues:

Fee-based asset allocation product revenues

$
284,188

269,069

240,089

Rule 12b-1 service and distribution fees

63,197

70,938

75,850

Sales commissions on front-end load mutual fund and variable annuity sales

48,471

54,895

55,293

Sales commissions on other products

32,314

36,131

31,286

Other revenues

36,419

38,482

22,188

Total

$
464,589

469,515

424,706

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.

~~Table of Contents~~

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. Changesuncertainty related to the ~~outsourcing~~U.S. presidential election, the equity markets rebounded during the second through fourth quarters of 2020 to close the year with solid gains and a return to some stability in fixed income markets.

We transitioned most 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~~workforce and Advisors to a ~~decrease~~work from home environment early 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 officesMarch 2020. The remote work environment has continued through the end of 2020 and ~~marketing~~into 2021. Our steady and ~~advertising is expected~~proactive response has allowed our asset management and wealth management businesses to ~~be in-line with 2019. Additionally, we expect depreciation costs to again decrease meaningfully for the~~maintain full ~~year as we continue to shift our technologies towards software as a service arrangements.~~

~~Table~~continuity of ~~Contents~~

~~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 vs.

2018 vs.

2019

2018

2017

2018

2017

(in thousands, except percentage data)

Distribution

$
460,921

456,832

432,264

1
%
6
%
Compensation and benefits

254,534

263,329

271,276

(3)
%
(3)
%
General and administrative

77,482

73,643

88,951

5
%
(17)
%
Technology

63,719

65,275

66,078

(2)
%
(1)
%
Occupancy

24,243

27,197

30,721

(11)
%
(11)
%
Marketing and advertising

8,964

10,323

12,425

(13)
%
(17)
%
Depreciation

19,829

25,649

20,983

(23)
%
22
%
Subadvisory fees

14,931

14,805

13,174

1
%
12
%
Intangible asset impairment

—

1,200

1,500

(100)
%
(20)
%
Total operating expenses

$
924,623

938,253

937,372

(1)
%
—

~~Distribution Expenses~~
Distribution costs fluctuate with sales volume, such as Advisor commissions and commissions paid to field management, Advisor incentive compensation, commissions paid to third parties and to our own wholesalers, and related management commissions in our unaffiliated channel. Direct selling costs also fluctuate with AUM, such as Rule 12b-1 service and ~~distribution fees paid to third parties.~~
~~Distribution expenses for~~ the ~~years ended December 31, 2019, 2018,~~access that our clients need and ~~2017 are set forth in the following table:~~

For the Year ended

December 31,

Variance








2019 vs.

2018 vs.

2019

2018

2017

2018

2017

(in thousands, except percentage data)

Distribution - unaffiliated channel

$
96,718

112,562

130,079

(14)
%
(13)
%
Distribution - wealth management channel

364,203

344,270

302,185

6
%
14
%
Total distribution expenses

$
460,921

456,832

432,264

1
%
6
%
expect.
~~Distribution expenses in 2019 increased by $4.1 million, or 1%, compared to 2018. Expenses in~~
Despite 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 servicechallenging operating environment 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.

~~Table of Contents~~

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.

~~Table of Contents~~

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~~challenges related to the ~~revaluation~~trend toward passive strategies, fee pressure and regulatory changes, 2020 marked a year of ~~the Pension Plan liability~~significant progress in ~~2019 compared to gains in 2018 resulted in~~transforming our firm into a ~~decrease~~more diversified and growth-oriented financial services enterprise, with meaningful progress across both of ~~$28.9 million. Offsetting this decrease, unrealized and realized gains in 2019~~our businesses while successfully navigating during a global pandemic. Following is a summary of progress we made 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.strategic initiatives during 2020.

Asset Manager: Ivy InvestmentsInvestment 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.

~~Table of Contents~~

~~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

Variance

December 31,

2019 vs.

2018 vs.


2019

2018

2017

2018

2017

(in thousands, except percentage data)

Balance Sheet Data:

Cash and cash equivalents

$
151,815

231,997

207,829

(35)
%
12
%
Investment securities

688,346

617,135

700,492

12
%
(12)
%
Short-term debt

—

—

94,996

—

(100)
%
Long-term debt

94,926

94,854

94,783

—

—

Cash Flow Data:

Cash flows from operating activities

165,983

357,015

50,851

(54)
%
602
%
Cash flows from investing activities

(6,851)

10,343

(212,395)

NM

NM

Cash flows from financing activities

(224,547)

(311,788)

(188,710)

28
%
(65)
%

~~Our operations provide much of the cash necessary to fund our priorities, as follows:~~
●· Fortified existing product offerings, including the introduction of two additional strategies in a model-delivery format, bringing the total model-deliver offerings to nine strategies
~~Pay~~· Continued proactive, strategic approach to pricing – 79% of AUM at or better than competitor median fees
17
· Investment performance improved across the complex as measured by the percentage of funds ranked in the top half of their respective Morningstar universes, resulting in an increase from the prior year in trailing one-, three- and five-year performance
· Gross sales and overall redemption rate improved, with unaffiliated sales notably improving
· Continued to enhance investment culture – commitment to environmental, social and governance matters, including signatory and member of various stewardship and active ownership organizations and launching efforts to bolster an authentic environmental, social and governance credibility and a stewardship culture
· Continued progress to transition to an institutional sales and servicing model toward advancing institutional credibility
· Enhanced partnership between Investment Management and Distribution to ensure strategic and operational alignment
· Deepened the collaborative relationship with distribution, to continue to enhance the sales approach
· Successfully outsourced our transfer agency transactional processing operations to a third-party service provider
Wealth Manager: Waddell & Reed Financial Advisors^®
· Execution and delivery of Advisory Roadmap (fee-based accounts) to have a fully competitive and comprehensive product offering that covers all client segments – introduced a High Net Worth suite of products and services as well as a new Separately Managed Account Strategies product offering
· Expanded the WaddellONE centralized digital platform with the launch of ONESource, a consolidated digital repository, which seamlessly connects data across platforms for Advisors, and ONEService, a web-based repository of processes and other information available to all Advisors
· Advisor recruiting – 51 new Advisors affiliated with W&R during 2020 with combined prior firm AUA totaling over $2.8 billion, reinvigorating advisor recruiting efforts; developed significant pipeline of candidates; stabilized advisor count with underlying growth trends and reversing the multi-year decline
· Increased Advisor productivity – average trailing 12-month revenue per Advisor of $487,000, with over 11% growth from 2019
· Continued growth in Advisory AUA on the strength of positive net new Advisory AUA for the 8th consecutive quarter and positive net new AUA for the last quarter of 2020, reversing a multi-year decline, ending the last quarter of 2020 with positive net AUA flows and positive net advisor growth
· Advisor net promoter score – continued significant improvement in advisor net promoter score throughout 2020
· Hired industry veteran to develop and lead strategies in support of best-in-class client and advisor experience, processes and procedures
· Completed our multi-year real estate transition for advisors successfully with minimal advisor attrition impacts
Enterprise Wide
· Transition of our workforce to a work from home environment, including deployment of incremental technology resources and modified processes to ensure full continuity of operations for clients, advisors and employees
· Returned $180.2 million of capital to stockholders through dividends and share repurchases
· Balance sheet remains strong with $760.5 million in unrestricted cash and investments at December 31, 2020
· Prior to the proposed merger with Macquarie, proactively pursued acquisitions for the asset management and wealth management businesses
○Hired VP of Acquisition Strategy and Integration
○Refined process to evaluate opportunities
○Built a pipeline of opportunities through strategic targeting and relationships with investment bankers
○Significant effort to advance discussions with several potential targets through management meetings and diligence
18
· Continued to advance the enterprise project management organization, which is responsible for driving targeted allocation and efficient utilization of corporate resources to accomplish the Company’s strategic initiatives
· Hired an executive to lead the technology teams dedicated to leveraging technology as a strategic asset across the organization, including establishment of strategic direction for the technology function across asset management, wealth management and support services
· Hired an executive to lead the data analytics teams dedicated to leveraging data analytics capabilities across the organization, with completion of an initial distribution support effort through building of an initial data warehouse
· Initiated brand positioning and strategy review, completing initial work towards new strategies for brand articulation, positioning and standards
· Drove enhanced employee engagement and focus with improvement in employee net promoter scores through 2020
· Continued to advance new headquarters construction and transition of real estate strategy
· Continued focus on growth culture and agile organization
○ Implemented mentor program available to all employees
○ Expanded partnership with Rock The Street Wall Street, 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
○ Announced partnerships with non-profit organizations focused on connecting and increasing women in the workplace
●· ~~Repurchase our stock~~Continued to enhance diversity and inclusion efforts, including holding Racial Diversity Days of Understanding for employees to continue the tough and important conversations around racial injustice, as well as advanced recruiting strategies to focus on diversity
● ~~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~~work hard to ensure our firm’s ability to compete, succeed and – most importantly – serve stakeholders well across the many different market cycles and business challenges that companies in ~~an active share repurchase plan as part~~our business inevitably face.
Base Salary
The Compensation Committee reviewed the base salary of the named executive officers and, based on Mr. Sanders’ recommendations in December 2019, Messrs. Clouse, Bloss and Mihal received a base salary increase for 2020 in recognition of their expanded roles and internal pay equities among the executive officers. Messrs. Sanders and Hanson did not receive base salary adjustments for 2020. Mr. Hanson’s base salary was established in connection with his hiring in June 2019 and was based on market data, his responsibilities and experience and internal pay equity among the executive officers. On average, base salary comprises approximately 16% of our ~~ongoing capital management plan.~~named executive officer’s total direct compensation for 2020.

43Performance-Based Incentive Awards

~~Table~~

Executive officers are eligible to receive annual performance-based incentive awards pursuant to the Executive Incentive Plan. These incentive awards, granted in cash and equity-based awards, provide an incentive for annual performance, align our executives’ interests with that of ~~Contents~~

~~Finance Growth Objectives~~

~~We use cash~~our stockholders, and encourage retention and a long-term commitment to the Company, all of which are reinforced by the vesting provisions of our equity-based incentive awards. The size of the incentive pool to fund ~~growth in our distribution channels. We continue to invest in our wealth management channel~~executive officer incentive compensation is determined upon the achievement of a pre-established performance goal that is set 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 areaCompensation Committee in the ~~near term.~~

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 Julyfirst quarter of each year. However, the Compensation Committee has discretion under the Executive Incentive Plan to award incentive compensation in an aggregate amount that exceeds the incentive pool.

The ~~agreement requires~~Compensation Committee designates the executive officers of the Company that are eligible to ~~maintain~~receive annual incentive awards. For 2020, all executive officers participated in the Executive Incentive Plan. In February 2020, the Compensation Committee established target percentages for cash and equity-based incentive awards based on the base salary of each executive officer. The following table sets forth the cash and equity-based incentive compensation targets, expressed as a ~~consolidated leverage ratio not~~percentage of base salary and in dollars, for the named executive officers.

Base
Salary

Cash
Target
%

Cash
Target
$

Equity-Based
Target
%

Equity-Based
Target
$

Philip J. Sanders $ 725,000 175 % $ 1,268,750 375 % $ 2,718,750
Benjamin R. Clouse $ 420,000 125 % $ 525,000 100 % $ 420,000
Brent K. Bloss $ 525,000 150 % $ 787,500 300 % $ 1,575,000
Daniel P. Hanson $ 525,000 150 % $ 787,500 300 % $ 1,575,000
Shawn M. Mihal $ 400,000 125 % $ 500,000 100 % $ 400,000
Determination of Incentive Compensation Pool. For 2020, the Compensation Committee elected to ~~exceed 3.0~~continue to utilize a single incentive pool funded with a percentage of adjusted operating income. In February 2020, the Compensation Committee determined that the size of the incentive pool would be based upon 10% of the Compensation Company’s 2020 “adjusted operating income,” defined as net income (1) increased by interest expense; federal, state and local income taxes; executive cash incentive awards; extraordinary or non-recurring losses ($33.8 million merger-related charges); and losses from publicly-disclosed acquisitions in 2020 (of which there were none) and (2) decreased by extraordinary or non-recurring gains (of which there were none) and gains from publicly-disclosed acquisitions (of which there were none), for ~~four consecutive quarters~~a total of $15.2 million.
Operating income is used by the Company and stockholders as a ~~consolidated interest coverage ratio~~measure 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,~~underlying profitability 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 tofluctuates with the Company’s ~~liquidity and operations for the variances~~performance, which 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.

~~Table of Contents~~

~~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 amountsturn creates an incentive pool that ~~will be due for the purchase of goods and services to be used in our operations under long-term commitments or contracts.~~

2021-

2023-

Thereafter/

Total

2020

2022

2024

Indeterminate

(in thousands)

Short-term and long-term debt obligations, including interest

$
103,194

5,463

97,731

—

—

Non-cancelable operating lease commitments

37,402

11,660

14,300

8,537

2,905

Purchase obligations

133,728

61,093

54,239

18,396

—

Unrecognized tax benefits

2,005

15

—

—

1,990

$
276,329

78,231

166,270

26,933

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~~moves with the ~~initial purchase price allocation,~~Company’s performance. It is adjusted in order to provide a measure of performance that reflects the influence and ~~(ii)~~contributions of each participating executive on a relatively equal basis and excludes items that, for example, may be disproportionately influenced by the ~~ongoing evaluation~~business decisions 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 ratesone executive more than others, 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.

~~Table of Contents~~

~~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~~business and economic trends. This results in a measure of our executive officers’ management of the Company’s operating business as a whole. In setting the 10% threshold, the Compensation Committee considered industry practice, recommendations of FW Cook regarding the performance measure, the number of executive officers participating in the Executive Incentive Plan, projected operating results, the need to have the ability to reward extraordinary performance, when and ~~allow~~if achieved, and incentive awards granted in prior years.

Use of Discretion. Pursuant to the Executive Incentive Plan, and consistent with industry practice, the Compensation Committee may exercise its discretion to determine incentive compensation. Although the Compensation Committee has implemented a more structured discretionary approach to determine incentive compensation, the Compensation Committee did not assign any formula or metrics to financial and operational goals and used its discretion to determine executive officer incentive compensation after considering the significant progress made on the Company’s strategic initiatives and individual performance. The Compensation Committee believes that this incentive compensation structure is in the best interests of stockholders because it enables the Compensation Committee to pay amounts it determines are necessary to appropriately compensate executives in light of the Company’s industry, which is highly dependent on market performance.

2020 Cash and Equity-Based Incentive Awards. In determining 2020 cash and equity-based incentive awards, the Compensation Committee considered (i) the cash and equity-based incentive targets for the executive officers, (ii) execution of the strategic initiatives, (iii) the Company’s financial and operating performance compared to the goals established at the beginning of 2020 in light of the challenging operating environment due to COVID-19 and (iv) Mr. Sanders’ recommendations based on his assessment of the other named executive officers’ individual performance and contributions. FW Cook informed the Compensation Committee that it is market practice for companies to award incentive compensation for a completed performance year while a merger transaction is pending. Therefore, the Compensation Committee determined and awarded incentive compensation for 2020 performance notwithstanding the pending merger between the Company and Macquarie.

Although the Company experienced a challenging operating environment during 2020, the senior management team made significant progress on the Company’s strategic initiatives. The Compensation Committee used financial and ~~investors~~operating goals, including adjusted operating income, net consolidated AUM flows and net AUA flows, to monitor performance throughout the year and at year-end; however, achievement of all financial and operating goals was not required for payment of incentive compensation. This is particularly important because some of the strategic initiatives (e.g., fee reductions for certain mutual funds) drive change that challenges short-term financial and operating metrics in order to better ~~evaluate~~position the Company for long-term success. The Compensation Committee placed significant emphasis on the senior management team’s achievements with respect to executing on strategic initiatives. See “Analysis of 2020 Compensation – 2020 Operating Environment” for a summary of progress we made on our strategic initiatives during 2020.

The table below sets forth the cash and equity-based incentive compensation targets for each named executive officer, along with actual cash and equity-based incentive awards for 2020, which includes the March 2021 RSU grants. The form of equity-based awards changed from shares of restricted stock in the prior year to RSUs due to restrictions in the Merger Agreement on the Company’s ability to issue restricted stock while the merger is pending. The RSUs granted in March 2021 were different than the CSRSUs issued in prior years to non-executive officers because the RSUs can be settled in cash or Shares at the sole discretion of the Company; provided, that in the event of a change of control of the Company, each RSU shall be settled in cash.

Cash
Target

Cash
Award

Equity-Based
Target

Equity-Based
Award

Philip J. Sanders $ 1,268,750 $ 2,030,000 $ 2,718,750 $ 2,718,750
Benjamin R. Clouse $ 525,000 $ 1,338,750 $ 420,000 $ 420,000
Brent K. Bloss $ 787,500 $ 1,748,250 $ 1,575,000 $ 1,575,000
Daniel P. Hanson $ 787,500 $ 1,575,000 $ 1,575,000 $ 1,575,000
Shawn M. Mihal $ 500,000 $ 1,225,000 $ 400,000 $ 400,000
The Compensation Committee accepted Mr. Sanders’ recommendations with respect to total incentive compensation for the other named executive officers based on 2020 performance and the desire to reward them for their extraordinary performance in executing on the Company’s strategic initiatives during a challenging operating environment. The Compensation Committee placed an emphasis on cash due to the pending merger with Macquarie and the requirement in the Merger Agreement to limit equity-based awards to the target amounts. Therefore, the cash incentive awards exceeded target for each named executive officer and was greater than the cash portion of incentive compensation in the prior year. Consistent with the cash incentive awards for the other named executive officers, Mr. Sanders’ cash incentive award exceeded target in order to reward him for his extraordinary performance in 2020. These cash incentive awards represented between ~~periods and~~43-76% of each named executive officers’ total incentive compensation for 2020. Mr. Hanson’s cash award increased by the greatest percentage as compared to the prior year because his 2019 cash incentive award was pro-rated due to his June 2019 hire date.

2019 Cash
Award

2020 Cash
Award

Change
$

Change
%

Philip J. Sanders $ 950,000 $ 2,030,000 $ 1,080,000 114 %
Benjamin R. Clouse $ 575,000 $ 1,338,750 $ 763,750 133 %
Brent K. Bloss $ 725,000 $ 1,748,250 $ 1,023,250 141 %
Daniel P. Hanson $ 475,000 $ 1,575,000 $ 1,100,000 232 %
Shawn M. Mihal $ 475,000 $ 1,225,000 $ 750,000 158 %
The Compensation Committee accepted Mr. Sanders’ recommendations to grant equity-based incentive awards at target for the other ~~companies~~named executive officers based on 2020 performance. Consistent with the equity-based incentive awards for the other named executive officers, Mr. Sanders’ equity-based incentive award was granted at target. These equity incentive awards represented between 24-57% of each named executive officer’s total incentive compensation for 2020. The number of RSUs granted to each named executive officer was determined by dividing the dollar value of the award by the closing market price of a Share on the grant date and rounding the RSUs up to the nearest whole unit. Equity-based incentive awards for 2020 were granted on March 10, 2021 and vest in ~~our industry.~~25% increments annually, beginning on the first anniversary of the grant date. However, these awards, like the Company’s other outstanding equity-based awards, will accelerate upon a change in control of the Company.
21

2019 Equity
Award

2020 Equity
Award

Change
$

Change
%

Philip J. Sanders $ 2,650,000 $ 2,718,750 $ 68,750 3 %
Benjamin R. Clouse $ 550,000 $ 420,000 $ (130,000 ) (24 )%
Brent K. Bloss $ 1,450,000 $ 1,575,000 $ 125,000 9 %
Daniel P. Hanson $ 1,575,000 $ 1,575,000 - -
Shawn M. Mihal $ 525,000 $ 400,000 $ (125,000 ) (24 )%
Mr. Sanders continued to guide the execution of the Company’s strategic initiatives. Like the other named executive officers, his total incentive compensation increased, and most of the increase was reflected in additional cash incentive compensation due to the desire to limit equity-based compensation to the target amount due to the pending merger between the Company and Macquarie. The level of incentive compensation for each other named executive officer was based primarily on their individual performance and contribution to the financial and operational performance of the Company and progress on strategic initiatives, as described below, along with internal pay equity among the named executive officers.
The 2020 annual incentive compensation awards reflect the Compensation Committee’s determination to (1) award incentive compensation based on execution of strategic initiatives in light of the Company’s 2020 financial and operational performance in a challenging operating environment due to COVID-19, balanced with the need to provide total direct compensation that remains competitive in the marketplace and (2) reflect, as appropriate, differences in each named executive officer’s scope of authority and responsibilities, the assumption of additional responsibilities, and an appropriate balance of total direct compensation between cash and equity with an emphasis on cash due to the pending merger with Macquarie and the requirement in the Merger Agreement to limit equity-based awards to the target amounts. The 2020 incentive awards were based solely on performance in 2020, as each named executive officer is party to a Change of Control Retention and Severance Agreement, which provides compensation opportunities, along with accelerated vesting of outstanding equity-based awards, in conjunction with the proposed merger between the Company and Macquarie.
Mr. Sanders discussed with the Compensation Committee the following individual performance considerations that impacted his incentive award recommendations for 2020:
· Mr. Clouse: Mr. Clouse directs the finance organization and oversees accounting, data analytics, financial planning and analysis, investor relations, mutual fund accounting, procurement, strategic acquisitions, tax and treasury. Mr. Clouse was instrumental in execution of our corporate strategic objectives, including identifying and pursuing strategic acquisition opportunities prior to the proposed merger with Macquarie. Mr. Clouse was influential in continuing to advance the enterprise project management organization, which is responsible for driving targeted allocation and efficient utilization of corporate resources to accomplish the Company’s strategic initiatives. Mr. Clouse also began the building of a data analytics function by onboarding a new leader and formulating the strategic plan for leveraging data analytics across the organization with an initial focus on distribution enablement strategies. Mr. Clouse was also instrumental in maintaining the strength of our balance sheet during the global pandemic to allow us to further invest in the Company and our people, while pursuing strategic acquisition opportunities prior to the proposed merger with Macquarie. In addition, he administered the Company’s capital management initiatives during the year, including the return of $180.2 million to stockholders through a combination of stock repurchases and regular dividends, and the termination of the Pension Plan and resulting transfer of the remaining liability to the selected annuity provider to further de-risk the balance sheet.
· Mr. Bloss: Mr. Bloss has oversight responsibilities for all operations of the Company and directly leads multiple functions, including the wealth management business, transfer agency, technology, legal/compliance, investment risk management, investment operations and trading, corporate administration and strategic acquisitions. Mr. Bloss was instrumental in execution of our corporate strategic objectives, including identifying and pursuing strategic acquisition opportunities prior to the proposed merger with Macquarie and the outsourcing of our transfer agency transactional processing operations. He has been influential in the continued development of the Company’s information technology group, including the hiring of our Chief Technology Officer and setting strategic direction for the technology function across asset management, wealth management and support services. As a director of the Company’s wealth management subsidiary, he played a key role in the continued evolution of the wealth management business and the advances in technology, processes, recruiting and the business model. Mr. Bloss was instrumental in the transition of our workforce to a work from home environment during the global pandemic, including deployment of incremental technology resources and modified processes to ensure full continuity of operations for clients, advisors and employees. Mr. Bloss oversaw the continued advancement of our transition to a new corporate headquarters and the related changes in our real estate strategies. He has also continued to advance our position as a values-based and purpose driven organization.
22~~These non-GAAP~~
· Mr. Hanson: Mr. Hanson is responsible for leading the company’s investment management division. Mr. Hanson has day-to-day management and oversight responsibility over our investment management division, including the development of strong investment professionals and the direction of investment processes and organizational capabilities to support our long-term investment strategies. Under his direction and guidance as Chief Investment Officer, our team of portfolio managers, analysts and traders employs a collaborative, research-based investment process that provides a strong foundation for our success. Mr. Hanson was instrumental in execution of our corporate strategic objectives, in particular those related to the asset management business including deepening the collaborative relationship with distribution, advancing institutional credibility and launching efforts to bolster authentic environmental, social and governance credibility and a stewardship culture.
· Mr. Mihal: Mr. Mihal leads the Company’s wealth management business and oversees wealth management markets, sales, advisor recruiting, operations, product and planning, administration and supervision. Mr. Mihal was instrumental in execution of our corporate strategic objectives, in particular those related to the wealth management business. Key among these was the completion of our real estate transition for advisors, reinvigoration of advisor recruiting efforts with reversal of a multi-year decline, and significant progress in reversing a multi-year AUA decline ending the last quarter of 2020 with positive net AUA flows and positive net advisor growth. In addition, Mr. Mihal was influential in the continued evolution of advisor and client facing technology enhancements with significant progress toward our technology strategy achieved in 2020.
Retirement Benefits
Effective September 30, 2017, the Compensation Committee froze future benefit accruals under the Pension Plan. Participants stopped earning additional benefits based on service or compensation after September 30, 2017. The Compensation Committee approved the termination of the Pension Plan, effective June 1, 2019, and participants were eligible to receive a lump sum distribution of their vested pension benefit in July 2020 or to have their vested benefit transferred to the selected annuity provider for future distribution pursuant to the terms of the Pension Plan. See “Executive Compensation – Pension Benefits” for additional information regarding the Pension Plan.
The Company maintains a 401(k) Plan and matches employee contributions up to 4% of eligible compensation and has the discretion to make additional contributions to eligible participants, subject to applicable non-discrimination requirements. For the 2020 plan year, the Company made a discretionary contribution to the 401(k) account of eligible participants in an amount equal to 2% of eligible 2020 compensation.
Personal Benefits and Other Perquisites
The Company’s employees are eligible to participate in the Company’s active employee flexible benefits plans, which include medical, vision, life insurance and long-term disability coverage and are generally available to all Company employees. Additionally, all of the Company’s employees are entitled to vacation, sick leave and paid holidays, and may be eligible for severance payments under the Severance Plan described below. The Compensation Committee believes that the Company’s commitment to provide the employee benefits summarized above recognizes that the health and well-being of the Company’s employees contribute directly to a productive and successful work life that enhances results for the Company and its stockholders.
The Company provides all full-time employees with (1) life insurance and accidental death and disability coverage, in each case equal to two times the sum of the employee’s current base salary plus the prior year’s W-2 incentive pay (bonus/commissions), up to a maximum of $1 million in coverage, and (2) long-term disability coverage equal to 60% of the employee’s current base salary plus the prior year’s W-2 incentive pay (bonus/commissions), up to a maximum annual benefit of $90,000 ($240,000 for designated senior executives based on position).
23
Pursuant to the Company’s Aircraft Policy, the executive officers and other management employees were provided use of the Company aircraft for business purposes. During 2020, the named executive officers did not use Company aircraft for personal use.
Perquisites represent a relatively insignificant portion of the named executive officers’ total compensation and did not materially influence the Compensation Committee’s decision in determining such officers’ total compensation.
Incentive Compensation Program in General
The incentive program for non-executive officers is structured similarly to the incentive program for executive officers. See “How We Determine Compensation” for additional information regarding the Company’s structured discretionary incentive compensation program.
The Company maintains an incentive compensation program for key employees in order to attract and retain employees who contribute to the Company’s success, to provide incentives that enhance job performance, and to enable those persons to participate in the long-term success of the Company. Beginning in 2017, equity compensation awards granted to non-executive officers have been comprised of a mix of restricted stock and CSRSUs, which are economically equivalent to restricted stock from the recipient’s perspective. On the vesting date, the recipient of a CSRSU receives cash equal to the closing price of a Share on the vesting date for each CSRSU, subject to applicable taxes withholding. Recipients of CSRSUs are not entitled to voting rights or to receive dividends. However, recipients of CSRSUs receive dividend equivalent rights, which are economically equivalent to, and paid concurrently with, dividend payments on the Shares. Restricted stock and CSRSU awards vest in 25% increments beginning on the first anniversary of the grant date. Similar to equity-based awards for named executive officers, non-executive officers received RSUs instead of restricted stock based on 2020 performance.
In connection with the implementation of the new structured discretionary incentive compensation program in 2019, equity awards are granted in March of the year following the performance period. In 2020, the Company began making pro-rata equity grants during the second, third and fourth quarters to new hires so that newly hired employees do not have to wait until the next annual grant in the March following their hire date to begin participating in the plan.
The Compensation Committee has approved, and will continue to approve, all grants of equity compensation. Although Company management, including the Chief Executive Officer, makes recommendations to the Compensation Committee from time to time on the form and amount of equity-based incentive awards to be granted to Company employees, such awards are approved by the Compensation Committee.
The Company does not have a formal policy on timing equity-based incentive awards in connection with the release of material non-public information to affect the value of compensation. In the event that material non-public information becomes known to the Compensation Committee prior to granting equity-based incentive awards, the Compensation Committee will take the existence of such information under advisement and make an assessment in its business judgment whether to delay the grant of the award in order to avoid any impropriety.
Tax Considerations
Section 162(m) of the Internal Revenue Code (“IRC Section 162(m)”) places a limit of $1 million on the amount of compensation the Company may deduct for federal income tax purposes in any one year with respect to certain covered officers that were employed by the Company on the last day of the fiscal year.
In connection with 2020 executive compensation decisions, the Compensation Committee considered the anticipated tax treatment to the Company and to the executive officers of various payments and benefits, including deductibility under IRC Section 162(m). The deductibility of certain compensation payments depends upon the timing of an executive’s vesting of previously granted awards, as well as interpretations and changes in the tax laws and other factors beyond the Compensation Committee’s control. For these and other reasons, including to maintain flexibility in compensating the executive officers in a manner designed to promote varying corporate goals, the Compensation Committee has not historically limited executive compensation to that which is deductible under IRC Section 162(m) and has not adopted a policy requiring all compensation to be deductible. In light of the repeal of the “performance-based” compensation exception to IRC Section 162(m) in December 2017, the Compensation Committee expects to approve compensation that is not deductible for income tax purposes.
24
Clawback Policy
The Board adopted a Clawback Policy in November 2016. The Clawback Policy provides that in the event a material restatement of the Company’s financial ~~measures should~~results is necessary within three years of the original reporting, the Board will review the facts and circumstances that led to the requirement for the restatement and will consider whether any executive officer received incentive compensation based on the original financial statements that in fact was not warranted based on the restated financial statements. The Board will also consider the accountability of any executive officer whose acts or omissions were responsible in whole or in part for the events that led to the restatement.
The actions the Board may elect to take against a particular executive officer, depending on all facts and circumstances as determined during its review, include: (1) the recoupment of all or part of any incentive compensation paid to the executive officer, including recoupment in whole or in part of vested and/or unvested equity awards; (2) the reduction of future incentive compensation to be ~~considered~~paid to the executive officer; (3) disciplinary actions, up to and including termination; and/or (4) the pursuit of other available remedies, at the Board’s discretion.
The Clawback Policy applies to “executive officers” of the Company as defined under the Exchange Act and such other senior executives as may be determined by the Board.
Prohibition on Hedging and Pledging of Company Securities
Our Insider Trading Policy prohibits all directors and “officers” of the Company for purposes of Section 16 of the Exchange Act, including the named executive officers, from transacting in put and call options on any Company securities. The policy also prohibits these individuals from engaging in any hedging or monetization transactions or similar arrangements with respect to any Company securities. Additionally, the policy prohibits these individuals from holding Company securities in a ~~substitute~~margin account or pledging Company securities as collateral for any indebtedness.
Stock Ownership Guidelines
To reinforce the importance of aligning the financial ~~measures presented~~interests of the Company’s directors and executive officers with stockholders, the Board has approved minimum stock ownership guidelines for the directors and executive officers. Directors are required to maintain stock ownership equal in ~~accordance~~value to five times such director’s annual cash retainer. The Chief Executive Officer is required to maintain stock ownership equal in value to five times his base salary and the other executive officers are required to maintain stock ownership equal in value to three times their base salary. The value of minimum stock ownership that must be maintained is based upon the respective director’s annual cash retainer or the executive officer’s annual base salary for the most recently completed year. Directors and executive officers are expected to be in compliance with ~~GAAP and you should not rely on non-GAAP financial measures alone as measures~~the applicable ownership level within five years of becoming subject to the ownership guidelines. Stock ownership includes Shares over which a director or executive officer has direct or indirect ownership or control, including restricted stock. As of April 15, 2021, all of our ~~performance.~~

~~A reconciliation of these non-GAAP financial measures~~directors, except for those directors appointed to the ~~comparable GAAP financial measures~~Board in 2019 and 2020, and all of our executive officers have satisfied their respective stock ownership requirement.
25
EXECUTIVE COMPENSATION
Summary Compensation
The following table summarizes total compensation awarded, paid or earned by our named executive officers who served in such capacities during 2018, 2019 and 2020.
SUMMARY COMPENSATION TABLE
Name and
Principal Position

Year

Salary
($)

Bonus
($)

Equity-Based
Awards
($)(1)

Non-Equity
Incentive
Plan
Compensation
($)(2)

Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)(3)

All Other
Compensation
($)(4)

Total
($)

(a) (b) (c) (d) (e) (f) (g) (h) (i)
Philip J. Sanders 2020 725,000 2,650,009 2,030,000 (1,119,206 ) 17,000 4,302,803
Chief Executive 2019 725,000 - - 950,000 221,238 30,572 1,926,810
Officer 2018 725,000 - 2,975,010 750,000 - 18,478 4,468,488

Benjamin R. Clouse 2020 420,000 - 550,001 1,338,750 (55,427 ) 17,000 2,270,324
SVP and Chief 2019 400,000 - 575,000 17,169 16,800 1,008,969
Financial Officer 2018 350,000 - 700,003 375,000 - 12,060 1,437,063

Brent. K. Bloss 2020 525,000 1,450,008 1,748,250 (672,099 ) 17,000 3,068,159
President 2019 475,000 - - 725,000 184,031 31,960 1,415,991
2018 475,000 - 1,500,007 600,000 - 18,934 2,593,941

Daniel P. Hanson 2020 525,000 1,575,006 1,575,000 - 17,000 3,692,006
SVP and Chief 2019 282,692 - 2,500,002 475,000 - 34,389 3,292,083
Investment Officer (5)

Shawn M. Mihal 2020 400,000 525,002 1,225,000 (83,059 ) 17,922 2,084,865
SVP – Wealth 2019 375,000 - - 475,000 26,707 38,359 915,066
Management 2018 350,000 375,000 900,023 250,011 - 35,344 1,910,378
(1) Represents the grant date fair value computed in accordance with ASC 718, disregarding any forfeiture assumptions. All awards are valued based on the closing market price of a Share on the date of grant, or the last business day immediately preceding the grant date if the grant date is not a business day. Equity-based awards are subject to accelerated vesting upon a change of control, death or disability.
Prior to 2019, equity-based awards were granted on December 31 of each year and reported in the Summary Compensation Table in the year they were earned and granted. Equity-based awards based on 2020 performance were granted on March 10, 2021 and, therefore, such awards are not reported in the Summary Compensation Table. Equity-based awards based on 2019 performance were granted on March 10, 2020 and, therefore, are reported as 2020 compensation in the Summary Compensation Table. The table below sets forth 2020 compensation for each named executive officer, including equity-based awards granted on March 10, 2021 based on 2020 performance, which are not included in the Summary Compensation Table.
26

Salary
Equity-Based Awards

Non-Equity Incentive

Change in Pension

All Other Compensation

Total

Philip J. Sanders $ 725,000 $ 2,718,764 $ 2,030,000 $ (1,119,206 ) $ 17,000 $ 4,354,558
Benjamin R. Clouse $ 420,000 $ 420,021 $ 1,338,750 $ (55,247 ) $ 17,000 $ 2,123,344
Brent K. Bloss $ 525,000 $ 1,575,016 $ 1,748,250 $ (672,099 ) $ 17,000 $ 3,176,167
Daniel P. Hanson $ 525,000 $ 1,575,016 $ 1,575,000 n/a $ 17,000 $ 3,675,016
Shawn M. Mihal $ 400,000 $ 400,019 $ 1,225,000 $ (83,059 ) $ 17,922 $ 1,941,960
(2) For 2020, represents the cash incentive awards made under the Executive Incentive Plan based on 2020 performance, which is discussed in further detail under “Analysis of 2020 Compensation” set forth above in the “Compensation Discussion & Analysis.”
(3) For 2020, the present value of benefits under the Pension Plan decreased for the named executive officers that were participants in the Pension Plan by the present value of benefits reported in the Pension Benefits Table in the proxy statement for the 2020 Annual Meeting of Stockholders. In connection with the termination of the Pension Plan, payments were made in July 2020 to participants that elected to receive a lump sum distribution. See the Pension Benefits Table for the lump sum distribution amounts made to the named executive officers that were participants in the Pension Plan.
(4) For 2020, represents the following:
(a) Company matching contributions to the 401(k) Plan of $11,400 and a $5,600 discretionary 401(k) Plan contribution for each of the named executive officers. The Company made a discretionary contribution in the first quarter of 2021 to the account of eligible 401(k) participants in an amount equal to 2% of eligible 2020 compensation.
(b) Incremental cost to the Company of convention allowance and gross-up related to an advisor conference for Mr. Mihal. The direct costs of the convention allowance were imputed to Mr. Mihal and included as taxable income on his Form W-2.
(5) Mr. Hanson was not a named executive officer in 2018; therefore, compensation information is not presented for that year.
27
Grants of Plan-Based Awards
The following table reflects information regarding non-equity and equity-based incentive plan awards during 2020. Cash and equity-based incentive awards are granted to participants pursuant to the Executive Incentive Plan. Cash incentive awards based on 2020 performance were paid in December 2020 and equity-based incentive awards based on 2019 performance were granted on March 10, 2020. Equity-based incentive awards based on 2020 performance were granted on March 10, 2021 and are not included in the table ~~below.~~below or the Summary Compensation Table. See footnote 1 to the Summary Compensation Table for information regarding the 2020 equity-based incentive awards granted in March 2021.
For more detailed information regarding awards earned by the named executive officers, please refer to “Analysis of 2020 Compensation” set forth in the “Compensation Discussion & Analysis”.
GRANTS OF PLAN-BASED AWARDS TABLE
Estimated Possible Payouts
Under Non-Equity Incentive
Plan Awards All Other
Stock Awards:
Number
of Shares of Grant
Date Fair
Value of
Name Grant
Date Date of Committee
Action Thres-
hold
($) Target
($)(1) Maximum
($) Stock or
Units
(#) (2) Stock and Unit
Awards
($) (3)
(a) (b) (c) (d) (e) (f) (g) (h)
Philip J. - - - 1,268,750 - - -
Sanders 03/10/2020 01/27/2020 206,387 2,650,009

Benjamin R. - - - 525,000 - - -
Clouse 03/10/2020 01/27/2020 42,835 550,001

Brent K. - - - 787,500 - - -
Bloss 03/10/2020 01/27/2020 112,929 1,450,008

Daniel P - - - 787,500 - - -
Hanson 03/10/2020 01/27/2020 122,664 1,575,006

Shawn M. - - - 500,000 - - -
Mihal 03/10/2020 01/27/2020 40,888 525,002
(1) Represents the 2020 cash incentive target for each named executive officer established by the Compensation Committee in February 2020. There was no threshold or maximum amount established by the Compensation Committee for cash incentive awards under the Executive Incentive Plan. Actual awards are reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.
(2) Represents the number of shares of restricted stock granted in 2020 pursuant to the Company’s Stock Incentive Plan.
(3) Represents the grant date fair value computed in accordance with ASC 718, disregarding any forfeiture assumptions and based on the number of shares of restricted stock granted and the closing market price of the Shares on the March 10, 2020 grant date, which was $12.84. The number of shares of restricted stock granted was determined by dividing the dollar amount of the award by such closing market price of a Share and rounding up to the nearest whole share. The awards vest in 25% increments annually beginning on the first anniversary of the grant date and are subject to accelerated vesting upon a change of control, death or disability. Dividends are paid on awards of restricted stock at the same rate as is paid to all stockholders generally. Pursuant to ASC 718, the right to receive dividends is included in the calculation of the grant date fair value of the restricted stock awards. The restricted stock awards are reported in the “Equity-Based Awards” column of the Summary Compensation Table.
28
46

~~Table of Contents~~

~~Reconciliation of GAAP to non-GAAP Financial Measures~~Outstanding Equity Awards at Fiscal Year-End

~~(in thousands, except for per share and percentage data)~~

Year Ended


December 31,


2019

2018

Net income attributable to Waddell & Reed Financial, Inc. (GAAP)

$
114,992

$
183,588

Adjustments

Severance

5,401

9,066

Non-cash asset impairments

12,841

—

Intangible impairment

—

1,200

Pension revaluation

11,217

(16,129)

Tax effect of adjustments

(7,070)

1,407

Adjusted net income attributable to Waddell & Reed Financial, Inc. (non-GAAP)

$
137,381

$
179,132

Weighted average share outstanding-basic and diluted

73,299

80,468

Adjusted net income per share, basic and diluted (non-GAAP)

$
1.87

$
2.23

Operating expenses (GAAP)

$
924,623

$
938,253

Adjustments

Severance

5,401

9,066

Non-cash asset impairments

12,841

—

Intangible impairment

—

1,200

Adjusted operating expenses (non-GAAP)

$
906,381

$
927,987

Operating income (GAAP)

$
145,692

$
222,048

Adjustments

Severance

5,401

9,066

Non-cash asset impairments

12,841

—

Intangible impairment

—

1,200

Adjusted operating income (non-GAAP)

$
163,934

$
232,314

Operating revenue

$
1,070,315

$
1,160,301

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~~table reflects outstanding shares of ~~Management’s Discussion~~restricted stock and ~~Analysis~~CSRSUs held by the named executive officers as 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.~~

~~Table of Contents~~

~~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 in2020, 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 impactwhich was determined based on the ~~fair value~~number of ~~our investment portfolio. Conversely, declines in interest rates~~shares of restricted stock or CSRSUs granted and the $25.47 closing market price of a ~~sizeable rise in the United States stock market could have a significant positive impact~~Share on ~~our investment portfolio. The results of fluctuations in interest rates~~December 31, 2020.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

Stock Awards
Name

Grant Date

Number
of Shares
or
Units of
Stock That
Have Not
Vested
(#)

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)

(a) (b) (c)
Philip J. Sanders 12/31/17 34,971 (1) 890,711
12/31/18 82,273 (2) 2,095,493
03/10/20 206,387 (3) 5,256,677

Benjamin R. Clouse 12/31/17 5,595 (1) 142,505
12/31/18 19,358 (2) 493,048
03/10/20 42,835 (3) 1,091,007

Brent K. Bloss 12/31/17 18,464 (1) 470,278
12/31/18 41,482 (2) 1,056,547
03/10/20 112,929 (3) 2,876,302

Daniel P. Hanson 06/10/19 112,007 (4) 2,852,818
03/10/20 122,664 (3) 3,124,252

Shawn M. Mihal 01/10/17 1,622 (5) 41,312
01/10/17 1,622 (5) 41,312
01/10/18 5,638 (6) 143,600
01/10/18 5,638 (6) 143,600
12/31/18 17,976 (2) 457,849
03/10/20 40,888 (3) 1,041,417
(1) These shares will vest on December 31, 2021.
(2) These shares will vest in 50% increments on December 31, 2021 and 2022.
(3) These shares will vest in 25% increments on March 10, 2021, 2022, 2023 and 2024.
(4) These shares will vest in 33¹/₃% increments on June 10, 2021, 2022 and 2023.
(5) These shares will vest on January 10, 2021.
(6) These awards will vest in 50% increments on January 10, 2021 and 2022.
29
Option Exercises 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.Stock Vested
The following table reflects shares of restricted stock and CSRSUs held by the named executive officers that vested during 2020.
OPTION EXERCISES AND STOCK VESTED TABLE
Stock Awards
Name

Number of Shares
Acquired on Vesting(#)(1)

Value Realized
on
Vesting ($)(2)

(a) (b) (c)
Philip J. Sanders 111,983 2,852,207
Benjamin R. Clouse 19,118 486,935
Brent K. Bloss 58,106 1,479,960
Daniel P. Hanson 37,336 582,068
Shawn M. Mihal 20,491 405,638
(1) The number of shares acquired on vesting for Mr. Mihal includes 4,442 CSRSUs, the value of which is based on the closing price of a Share on the vesting date, or the last business day immediately preceding the vesting date if the vesting date is not a business day. The number of Shares received by each named executive officer upon vesting of these awards, net of shares withheld by the Company to cover associated tax liabilities, was as follows: Messrs. Sanders (61,200), Clouse (10,641), Bloss (32,337), Hanson (24,816) and Mihal (9,757).
(2) The value realized on vesting is based on the closing market price of a Share on the vesting date, or the last business day immediately preceding the vesting date if the vesting date is not a business day.
Pension Benefits
The Pension Plan was a tax-qualified, non-contributory pension plan that covered all eligible employees of the Company who were 21 years of age or older and had one or more years of credited service. Benefits payable were generally based on a participant’s years of credited service and their highest average earnings in any five consecutive years during the last ten years of service prior to retirement, or their “5-year average earnings.” The retirement benefit amount payable upon normal retirement was calculated as (1) 2% of a participant’s 5-year average earnings for each year of credited service (up to a maximum of 30 years), plus (2) 1% of a participant’s 5-year average earnings for each additional year of credited service in excess of 30 years (up to a maximum of ten years); this amount is then reduced by a social security offset.
Due to the Pension Plan freeze, effective September 30, 2017, participants no longer accrued future benefits based on years of service and compensation after the freeze date. The Pension Plan was terminated, effective June 1, 2019, and all participants in the Pension Plan were fully vested in their accrued benefit. In connection with the termination of the Pension Plan, in July 2020, payments were made to participants, beneficiaries and alternate payees that elected to receive a lump sum distribution and to the selected annuity provider that assumed the remaining liabilities of the Pension Plan.
The actuarial present value of accumulated benefits payable to each of the named executive officers under the Pension Plan is zero, as each named executive officer elected to receive a lump sum distribution of their accumulated benefit in July 2020. The lump sum distribution amounts were determined assuming a payment date of July 1, 2020, using the Internal Revenue Code Section 417(e) prescribed 2020 mortality rates and the three segment rates of 2.04%/3.09%/3.68%.
30
PENSION BENEFITS TABLE
Name Plan Name Number of Years
Credited Service (#) Present Value of
Accumulated Benefit ($) Payments During
Last
Fiscal Year ($)(1)
(a) (b) (c) (d) (e)
Philip J. Sanders Pension Plan 19 - 1,095,595
Benjamin R. Clouse Pension Plan 1.98 - 48,507
Brent K. Bloss Pension Plan 15.75 - 615,277
Daniel P. Hanson (2) Pension Plan - - -
Shawn M. Mihal Pension Plan 2.52 - 71,354
(1) Amounts represent lump sum distributions made in July 2020 in connection with termination of the Pension Plan.
(2) Mr. Hanson is not a participant in the Pension Plan.
Nonqualified Deferred Compensation Plans
The Company does not provide any deferred compensation arrangements for its named executive officers.
Potential Payments Upon Termination or Change in Control
Severance Plan
The named executive officers are eligible to receive certain severance benefits under the Company’s Severance Pay Plan (the “Severance Plan”) if they are involuntarily terminated due to a corporate realignment, downsizing or other event that the Company, in its sole discretion, determines is a ~~summary~~qualifying event for purposes of the Severance Plan. Participants in the Severance Plan who receive severance are entitled to periodic payment of their base pay and health care severance pay for no fewer than 12 weeks and no more than 52 weeks (subject to the six month delay on certain termination payments imposed by the Internal Revenue Code) with the number of weeks of severance determined by multiplying the participant’s years of service by two weeks. The amount of the health care severance pay will be determined by the Company in its discretion. In addition, the Company may provide, in its discretion, career transition services.
Change of Control Retention and Severance Agreements
In connection with the proposed merger between the Company and Macquarie, each of the Company’s executive officers, including the named executive officers, entered into a Change of Control Retention and Severance Agreement effective December 2, 2020 (the “Change of Control Agreements”). The Change of Control Agreements provide for the following retention and severance payments to the executives:
· A cash retention bonus (the “Retention Bonus”), calculated as described below, that is payable to the executive in a single lump sum immediately prior to the Effective Time if (i) the executive remains continuously employed until the Closing Date or (ii) the executive’s employment terminates before the Closing Date due to his or her death or disability.
· A cash payment equal to the executive’s target annual cash incentive opportunity for the 2021 calendar year, prorated through the date of a qualifying termination (as defined below) (the “Prorated 2021 Target STI Payment”). An executive’s Prorated 2021 Target STI Payment is payable to the executive in a single lump sum on or before March 15, 2022, provided the executive remains continuously employed until the Closing Date or his or her employment terminates before the Closing Date due to his or her death or disability.
· A cash severance payment (the “Severance Payment”) payable to the executive in a single lump sum if the executive incurs a qualifying termination (as defined below) of employment within 24 months following the Effective Time. An executive’s Severance Payment is equal to his or her highest annual base salary during the period that begins on December 2, 2020, and ends on the date of his or her qualifying termination. For this purpose, a “qualifying termination” means the executive’s employment is terminated (i) by the Company (or its successor) other than for “cause,” (ii) by the executive for “good reason,” or (iii) due to the executive’s death or disability. The Change of Control Agreement conditions receipt of the Severance Payment on the executive entering into a release of claims in favor of the Company.
The amount of an executive’s Retention Bonus is the amount equal to the sum of his or her “fixed retention bonus,” “at-risk retention bonus,” and “at-risk additional bonus,” each as calculated as follows: an executive’s “fixed retention bonus” is the amount equal to the sum of his or her (a) annual base salary in effect on December 2, 2020, (b) target annual cash incentive opportunity for the 2020 calendar year (“2020 Target Cash Bonus Opportunity”), (c) target annual long-term incentive opportunity for the 2021 calendar year, prorated through the Closing Date (the “Prorated 2021 Target LTI Payment”), and (d) $50,000.
31
An executive’s “at-risk retention bonus” is a performance-based bonus in the target amount (which is also the maximum amount) equal to the sum of the executive’s annual base salary in effect on December 2, 2020, and his or her 2020 Target Cash Bonus Opportunity. Seventy-five percent (75%) of the executive’s at-risk retention bonus will be determined based on the amount by which the Client Consent Percentage and the Company Advisor Percentage, each as determined pursuant to the Merger Agreement, exceed 65% and 40%, respectively. The remaining twenty-five percent (25%) of the executive’s target at-risk retention bonus will be determined based on the executive’s individual performance during the period that begins on December 2, 2020, and ends three days before the Closing Date (or, if earlier, the executive’s termination due to his or her death or disability), as determined by the Company’s Chief Executive Officer and Macquarie in their good faith discretion.
An executive’s “at-risk additional bonus” is a ~~10% increase~~performance-based bonus in a target amount (which is also the maximum amount) equal to a specified amount of the aggregate $5 million bonus pool amount, which individual target amounts were approved by the Board in connection with its approval of the Change of Control Agreement. Seventy-five percent (75%) of each executive’s at-risk additional bonus will be determined based on the amount by which the Client Consent Percentage and the Company Advisor Percentage, each as determined pursuant to the Merger Agreement, exceed 65% and 40%, respectively. The remaining twenty-five percent (25%) of the executive’s at-risk additional bonus will be determined based on the executive’s individual performance during the period that begins on December 2, 2020, and ends three days before the Closing Date (or, if earlier, the executive’s termination due to his or ~~decrease~~her death or disability), as determined by the Company’s Chief Executive Officer and Macquarie in ~~equity~~their good faith discretion.
The Change of Control Agreement also includes a provision providing that if any payments to be made to the executive, whether under the agreement or ~~fixed income prices~~otherwise, would ~~have~~subject the executive to the excise tax on ~~our investment portfolio~~so-called “golden parachute payments” in accordance with Sections 280G or 4999 of the Internal Revenue Code, then the payments will be reduced to the extent necessary to avoid the excise tax. Similarly, if any of the payments payable to the executive after the Effective Time, whether under the agreement or otherwise, which are subject to ~~equity or fixed income price fluctuations at December 31, 2019:~~Part 2D.2 of the Australian Corporations Act of 211 (Cth) (the “Corporations Act”) exceed the amount that is permitted to be paid to the executive under the Corporations Act, then such payment will be reduced to the greatest amount that is permitted to be paid to the executive.




Fair Value

Fair Value

Assuming a 10%

Assuming a 10%

Investment Securities

Fair Value

Increase

Decrease

(in thousands)

Available for sale:

Commercial paper

$
1,977

2,175

1,779

Corporate bonds

254,291

279,720

228,862

Trading:

Commercial paper

1,977

2,175

1,779

Corporate bonds

84,920

93,412

76,428

U.S. Treasury bills

5,979

6,577

5,381

Mortgage-backed securities

4

4

4

Term Loans

44,268

48,695

39,841

Consolidated sponsored funds

43,567

47,924

39,210

Equity Securities:

Common stock

34,945

38,440

31,451

Sponsored funds

178,386

196,225

160,547

Sponsored privately offered funds

845

930

761

Equity Method:

Sponsored funds

37,187

40,906

33,468

Total

$
688,346

757,183

619,511

The Change of Control Agreement will be null and void if the Merger Agreement terminates for any reason without consummation of the merger.
Accelerated Vesting of Equity Awards
~~Securities Price Sensitivity~~
~~Our revenues~~The equity incentive awards granted to the named executive officers under the Company Stock Plans provide for accelerated vesting upon a “change in control” (as defined in the Company Stock Plans) unless otherwise determined by the Compensation Committee prior to such “change in control,” whether or not the named executive officer’s employment terminates. Equity incentive awards also vest upon the death or “disability” (permanent disability as determined under the Company’s long-term disability plan) of a named executive officer.
Effect of the Merger Agreement
The Merger Agreement provides that the Company’s equity awards that are ~~dependent~~outstanding immediately prior to the Effective Time will be subject to the following treatment:
Each outstanding RSU and CSRSU will be terminated and cancelled as of immediately prior to the Effective Time in exchange for the right to receive a cash payment equal to (i) (A) the merger consideration, multiplied by (B) the number of Shares subject to such RSU or CSRSU immediately prior to the Effective Time, plus (ii) the amount of any accrued but unpaid dividend equivalent rights under such RSU or CSRSU, net of any taxes withheld pursuant to the Merger Agreement.
Each outstanding share of restricted stock will vest in full and any forfeiture restrictions applicable to such restricted stock will immediately lapse. By virtue of the merger, and without any action on the ~~underlying AUM and AUA~~part of the holder thereof, each share of restricted stock will be treated as a Share for ~~which we provide services. These assets are comprised~~all purposes of ~~various combinations of equity, fixed income and other types of securities and commodities. Fluctuations~~the Merger Agreement, including the right to receive the merger consideration in accordance with the terms thereof, less applicable taxes required to be withheld with respect to such vesting.

~~Table of Contents~~32

The table below quantifies (1) amounts payable and the value of ~~these securities are common and are caused by numerous factors, including, without limitation, market volatility,~~benefits available pursuant to the ~~overall economy, inflation, changes in investor strategies, availability of alternative investment vehicles and government regulations. Accordingly, declines in any one or~~Severance Plan if a ~~combination of these factors,~~named executive officer is involuntarily terminated due to a corporate realignment, downsizing or other ~~factors not separately identified, may reduce~~event that the Company, in its sole discretion, determines is a qualifying event for purposes of the Severance Plan [column (a)], (2) the value of ~~investment securities~~restricted stock vesting upon a “change in control,” death or “disability” for purposes of the Company’s Stock Incentive Plan [column (b)] and ~~in turn,~~(3) 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 obligationsamounts payable pursuant to the ~~Company.~~

~~ITEM 8.      Financial Statements~~Change of Control Agreements, all of which assume that the applicable triggering event occurred on December 31, 2020 and ~~Supplementary Data~~where applicable, is based on a stock price of $25.47, which was the closing market price of the Company’s Class A common stock on December 31, 2020.
~~Reference is~~
The amounts indicated below are estimates based on multiple assumptions that may or may not actually occur or be accurate as of the date referenced, therefore, the actual amounts, if any, that may be paid or become payable may materially differ from the amounts set forth below.
For an estimate of payments and benefits to be made to the ~~Consolidated Financial Statements referred~~named executive officers pursuant to the Change of Control Agreement, see “The Merger – Interests of Directors and Executive Officers in the ~~Index on page 56 setting forth our consolidated financial statements, together~~Merger” in the Company’s proxy statement filed with the ~~report of KPMG LLP dated~~SEC on February ~~21, 2020 on pages 57 and 58.~~
~~ITEM 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure~~17, 2021, which used the following assumptions:
~~None.~~
~~ITEM 9A.   Controls and Procedures~~
~~(a)~~ ~~Evaluation of Disclosure Controls and Procedures.~~ ~~The Company maintains a system of disclosure controls and procedures that~~· the relevant price per Share is ~~designed to ensure that information required~~$25.00, which is the price per Share to be ~~disclosed~~paid in connection with the merger;
· the assumed Effective Date of the merger is February 15, 2021, which was the latest practicable date prior to filing the Company’s proxy statement with the SEC on February 17, 2021 in connection with the Special Meeting of Stockholders that was held on March 23, 2021 in connection with the merger; and
· the employment of each named executive officer of the Company will have been involuntarily terminated without cause by the Company immediately following the assumed Effective Date of the merger on February 15, 2021.

33
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
Name Payments and
Benefits under
Severance Plan
($)(1)(2)
Change in Control
Events, Death, or
Disability Pursuant
to Company Stock
Plans
($)(3)

Payments under
Change of Control
Agreements
($)(4)

(a) (b) (c)
Philip J. Sanders
Retention Payment 5,080,300
Severance Payment 613,462 725,000
Medical and Dental Benefits 9,697
Career Transition Services 108,750
Equity Award Vesting 8,242,881
Total 731,908 5,805,300
Benjamin R. Clouse
Retention Payment 2,228,599
Severance Payment 96,923 420,000
Medical and Dental Benefits 3,708
Career Transition Services 63,000
Equity Award Vesting 1,726,560
Total 163,631 2,648,599
Brent K. Bloss
Retention Payment 3,441,400
Severance Payment 363,462 525,000
Medical and Dental Benefits 11,124
Career Transition Services 78,750
Equity Award Vesting 4,403,127
Total 453,336 3,966,400
Daniel P. Hanson
Retention Payment 3,313,000
Severance Payment 121,154 525,000
Medical and Dental Benefits 3,708
Career Transition Services 78,750
Equity Award Vesting 5,977,070
Total 203,612 3,838,000
Shawn M. Mihal
Retention Payment 2,048,661
Severance Payment 92,308 400,000
Medical and Dental Benefits 3,708
Career Transition Services 60,000
Equity Award Vesting 1,869,090
Total 156,016 2,448,661
(1) Severance Plan benefits for Messrs. Sanders, Clouse, Bloss, Hanson and Mihal are equal to 44, 12, 36, 12 and 12 weeks of base pay, respectively, in accordance with the normal payroll practices of the Company. The named executive officers are not entitled to benefits under the Severance Plan in connection with a change of control due to the proposed merger between the Company and Macquarie.
(2) Reflects career transition services equal to 15% of each named executive officer’s base salary. Pursuant to the Severance Plan, career transition services may be offered in the ~~reports that it files or submits~~sole discretion of the Company. Consequently, these amounts may not be payable even if the named executive officer is otherwise eligible for benefits under the ~~Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized~~Severance Plan.
34
(3) Includes unvested restricted stock and ~~reported within the time periods specified~~unvested CSRSUs, 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)aggregate, held as of December 31, ~~2019, have concluded~~2020 by each named executive officer as follows: Messrs. Sanders (323,631), Clouse (67,788), Bloss (172,875), Hanson (234,671) and Mihal (73,384).
(4) The amounts in this column represent, for each of the named executive officers, (i) a Retention Bonus and (ii) a Severance Payment equal to the executive’s 2020 annual base salary. The Retention Bonus represents the sum of the executive’s “fixed retention bonus,” “at-risk retention bonus,” and “at-risk additional bonus,” each as described above assuming each “at-risk” bonus amount is earned in full, except that the ~~Company’s disclosure controls and procedures were effective as of~~“fixed retention bonus” does not include a Prorated 2021 Target LTI Payment because the triggering event is assumed to have occurred on December 31, ~~2019.~~
~~(b)~~ ~~Management’s Report on Internal Control Over Financial Reporting.~~ ~~Our management~~2020. The Prorated 2021 Target STI Payment 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~~also excluded because 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. Becauseassumed date 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.~~triggering event.
~~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.
35
49

~~Table~~

Compensation of ~~Contents~~

~~Report of Independent Registered Public Accounting Firm~~Directors

The Compensation Committee reviews annual compensation for Outside Directors. The Company uses a combination of cash and equity compensation to attract and retain qualified candidates to serve on the ~~Stockholders and~~Board. All amounts are pro-rated if a director joins the 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~~after the ~~Committee of Sponsoring Organizations~~commencement of the ~~Treadway Commission.~~ Company’s fiscal year.

In ~~our opinion,~~setting Outside Director compensation, the ~~Company maintained,~~Compensation Committee considers the significant amount of time that directors spend 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~~fulfilling their duties to the Company, as well as the skill level required of Board members. The Compensation Committee also reviews competitive compensation data and analysis provided by FW Cook.

In December ~~31,~~ 2019, FW Cook provided the Compensation Committee with competitive compensation data and ~~2018,~~analysis of our Outside Director compensation, including retainers and equity-based compensation awards, as compared to that paid to the ~~related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each~~non-employee directors of the ~~years in~~Company’s peer group. The Compensation Committee considered the ~~three-year period ended December 31, 2019,~~current compensation structure for Outside Directors, market trends with respect to director compensation 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~~

peer data. 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,~~companies included in the ~~accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion~~peer group are listed in “How We Determine Compensation – Peer Group Analysis” in the “Compensation Discussion & Analysis” above.

Based 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 lawspeer data and the ~~applicable rules and regulations~~time commitment 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 proceduresMr. Morrissey, 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~~

~~Table of Contents~~

~~(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~~Chair of the Audit Committee, the Compensation Committee ~~and Nominating and Corporate Governance Committee shall consist of not less than three independent directors.~~
~~A copy~~(with Mr. Morrissey abstaining) approved an increase to the cash retainer for the Chair of the ~~Amended~~Audit Committee in 2020 to $25,000, and ~~Restated Bylaws~~the Board ratified the change. Compensation for other Outside Directors in 2020 was unchanged from 2019.
Cash Compensation
For 2020, Outside Directors received the following cash compensation:
Cash Retainers – Board
· $80,000 for each Board member
· $225,000 for the Chairman
Cash Retainers – Committees
· $25,000 for Audit Committee Chair
· $10,000 for Audit Committee Member
· $15,000 for Compensation Committee Chair
· $7,500 for Compensation Committee Member
· $12,000 for Corporate Governance Committee Chair
· $6,000 for Corporate Governance Committee Member
Although, Outside Directors generally are not paid for attending Board or committee meetings, the Chairman of the Board and the Chair of the Compensation Committee may determine to pay meeting fees for one or more meetings to the extent the number of Board or committee meetings exceeds the typical number of meetings during the year. During 2020, the Board met 17 times and the Executive Committee of the Board, comprised of Messrs. Godlasky, Morrissey, Sanders and Walton, met four times. As a result, the Board approved additional cash payments to the Outside Directors as follows: Mr. Godlasky received $50,000; Messrs. Morrissey and Walton each received $45,000; and Mss. Andrade, Gasaway and Kline and Messrs. Jessee and Logue each received $37,500.
The Company also reimburses Outside Directors for travel and lodging expenses, if any, incurred to attend Board and committee meetings, and subject to approval by the Chairman of the Board, expenses incurred by a director in attending continuing education programs relevant to his or her duties as a director of the Company.
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Equity Compensation
For 2020, Outside Directors received the following equity-based compensation:
Restricted Stock Awards
· $125,000 for each Board member
· $165,000 for the Chairman
Equity awards for Outside Directors are intended to increase their beneficial ownership in the Company to more closely align their interests with those of our stockholders. On January 2, 2020, (i) Mss. Andrade and Gasaway and Messrs. Jessee, Logue, Morrissey and Walton were each granted 7,504 shares of restricted stock, (ii) Mr. Kosloff was granted 2,502 shares of restricted stock, and (iii) Mr. Godlasky was granted 9,904 shares of restricted stock. On February 21, 2020, Mss. Kline and Weaver were each granted 6,794 shares of restricted stock. Restricted stock granted to Outside Directors do not have a purchase price and are subject to accelerated vesting upon a change of control, death, disability or mandatory retirement. Restricted stock awards granted to Outside Directors in 2020 vested 100% on the first anniversary of the grant date. Dividends are paid on awards of restricted stock at the same rate that is paid to all stockholders generally.
In addition to the compensation outlined above, the Company maintains director and officer insurance coverage and provides Outside Directors with special indemnification rights in the form of an indemnification agreement that exceeds the general rights provided under our Certificate of Incorporation and Bylaws.
2021 Compensation
In December 2020, FW Cook provided the Compensation Committee with competitive compensation data and analysis of our Outside Director compensation, including retainers and equity compensation awards, as compared to that paid to the non-employee directors of the Company’s peer group. The Compensation Committee considered the current compensation structure for Outside Directors, market trends with respect to director compensation and peer data. Based on the pending merger between the Company and Macquarie, no changes were made to Outside Director compensation for 2021.
The following table reflects the compensation paid to our Outside Directors for 2020.
2020 Director Compensation
Name

Fees
Earned
or Paid in
Cash
($)

Stock
Awards
($)(1)

All Other
Compensation
($)

Total
($)

(a) (b) (c) (d) (e)
Kathie J. Andrade 134,500 125,017 - 259,517
Sharilyn S. Gasaway 137,000 125,017 - 262,017
Thomas C. Godlasky 275,000 165,001 - 440,001
Chairman of the Board
James A. Jessee 134,500 125,017 - 259,517
Katherine M.A. Kline (2) 114,750 109,383 224,133
Alan W. Kosloff (3) 31,167 41,683 855 73,705
Dennis E. Logue 135,500 125,017 - 260,517
Michael F. Morrissey 165,500 125,017 - 290,517
Jerry W. Walton 158,000 125,017 - 283,017
Constance K. Weaver (2) 35,833 109,383 - 145,216
(1) Represents the grant date fair value computed in accordance with Accounting Standards Codification Topic 718, “Stock Compensation” (“ASC 718”) disregarding any forfeiture assumptions. All awards are valued based on the closing market price of a Share on the date of grant ($16.66 and $16.10) for 2020 awards granted on January 2, 2020 and February 21, 2020, respectively). The number of shares of restricted stock granted was determined by dividing the dollar amount of the equity award by such closing market price of a Share and rounding up to the nearest whole share. As of December 31, 2020, (i) each of Mss. Andrade and Gasaway and Messrs. Jessee, Logue, Morrissey, and Walton held 7,504 shares of unvested restricted stock, (ii) Ms. Kline held 6,794 shares of unvested restricted stock and (iii) Mr. Godlasky held 9,904 shares of unvested restricted stock.
(2) Mss. Kline and Weaver were appointed to the Board, effective February 21, 2020. Ms. Weaver resigned from the Board on July 10, 2020 due to her acceptance of a chief marketing officer position with another company.
(3) Mr. Kosloff retired from the Board on April 29, 2020.
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Pay Ratio
Following is a reasonable estimate of the ratio of the annual total compensation of Philip J. Sanders, our Chief Executive Officer, to the median of the annual total compensation of our other employees. We determined our median employee based on compensation during 2019 for each of our employees (excluding Mr. Sanders), as reflected in our payroll records and reported to the IRS on Form W-2. For 2020, we are using the same median employee as used in 2019. The annual total compensation of our median employee for 2020, who was not eligible for equity-based awards, was $57,038 ($89,184 if the reduction in pension value is not included due to the lump sum distribution in connection with the ~~Form 10-K~~termination of the Pension Plan). As disclosed in the Summary Compensation Table, the annual total compensation of Mr. Sanders for 2020 was $4,302,803 ($5,422,009 if the reduction in pension value is not included due to the lump sum distribution in connection with the termination of the Pension Plan). Based on the foregoing, our estimate of the ratio of the annual total compensation of Mr. Sanders to the median of the annual total compensation of all other employees was 75 to 1 (61 to 1 if the reduction in pension value is not included in compensation due to the lump sum distribution in connection with the termination of the Pension Plan).
Compensation Committee Interlocks and Insider Participation
During the 2020 fiscal year, none of the Company’s executive officers served on the board of directors of any entities whose directors or officers serve as ~~Exhibit 3.2~~a director of the Company. No current or past executive officers of the Company serve on the Compensation Committee.
Risk Analysis of Compensation Policies and ~~is incorporated herein by reference,~~Practices
The Compensation Committee assessed, with the assistance of management, the Company’s compensation policies and practices to determine whether these policies and practices create risks that are reasonably likely to have a material adverse effect on the Company.
This assessment included a review of the Company’s executive and broad-based employee compensation programs, the identification of potential risks that could result from such policies and practices, the identification of factors and controls that mitigate those risks, and an analysis of the potential risks against mitigating factors and controls and the ~~foregoing summary is qualified in~~Company’s business strategies and objectives. Based on this assessment, the Compensation Committee concluded that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company. In its ~~entirety by reference to~~assessment and conclusion, the ~~terms and provisions of~~Compensation Committee considered the ~~Amended and Restated Bylaws.~~
~~PART III~~
~~ITEM 10.    Directors, Executive Officers and Corporate Governance~~following design features, among others:
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.
· Overall compensation levels competitive with the market.
~~ITEM 11.    Executive Compensation~~
· The use of financial performance measures that are quantifiable and measurable.
· The use of performance goals that are appropriate in light of past performance and market conditions.
· Oversight by a Compensation Committee comprised of independent, non-employee directors with the ability to use discretion in determining compensation levels, supported by guidance from the Compensation Committee’s independent compensation consultant, FW Cook.
· The use of long-term equity-based incentive awards, which comprise a significant portion of total annual incentive compensation and typically vest over a four-year period, and stock ownership requirements that align the long-term interests of our executive officers with those of our stockholders.
~~Information required by this~~
38
· The ability of management to exercise discretion to reduce payouts, including in connection with extraordinary or unanticipated events.
· Multiple internal controls and approval processes intended to prevent manipulation of performance.
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~~
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2020 with respect to Shares that may be issued under our existing equity compensation plans.
Plan Category
Number of
Securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of
securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a))
Equity compensation plans approved by security holders - $ - 5,255,495 (1)
Equity compensation plans not approved by security holders - - -
Total - $ - 5,255,495
(1) Represents Shares available for future issuance from the Stock Incentive Plan.
Security Ownership of Management
The following table reflects information regarding beneficial ownership of Shares by ~~Item 403~~each director and named executive officer set forth in the Summary Compensation Table, as well as by all directors and executive officers as a group, as of ~~Regulation S-K is incorporated herein by reference~~April 15, 2021. Unless otherwise indicated in the footnotes below, “beneficially owned” means the sole power to ~~our definitive proxy statement for our 2020 Annual Meeting~~vote or direct the voting of ~~Stockholders~~a security and the sole power to dispose or direct the disposition of a security.
Name of Beneficial Owner
Number of Shares
Beneficially Owned
Directly (1)

Number of Shares
Beneficially Owned
Indirectly (2)
Percent of Class
Kathie J. Andrade 13,150 - *
Brent K. Bloss 367,201 - *
Benjamin R. Clouse 105,280 2,588 *
Sharilyn S. Gasaway 52,187 - *
Thomas C. Godlasky 58,026 - *
Daniel P. Hanson 360,414 19,184 *
James A. Jessee 11,229 - *
Katherine M.A. (“Allie”) Kline 6,794 - *
Dennis E. Logue 76,956 - *
Shawn M. Mihal 86,578 - *
Michael F. Morrissey 52,187 - *
Philip J. Sanders 736,496 - 1.19 %
Jerry W. Walton 76,831 - *
All Directors and Executive Officers as a group (16 persons) 2,220,429 21,772 3.62 %
* Denotes less than 1%.
(1) Includes unvested shares of restricted Class A common stock granted under the Company’s Stock Incentive Plan, as amended and restated (the “Stock Incentive Plan”), for Messrs. Bloss (144,642), Clouse (57,079), Hanson (204,005), Mihal (51,461), and Sanders (272,034).
(2) For Messrs. Clouse and Hanson, indirect beneficial ownership reflects shares of Class A common stock owned by their spouse.
39
Security Ownership of Certain Beneficial Owners
The following table reflects all persons known to be ~~filed pursuant~~the beneficial owner of more than 5% of the Company’s Shares as of April 15, 2021. Unless otherwise indicated in the footnotes below, “beneficially owned” means the sole power to ~~Regulation 14A under~~vote or direct the ~~Exchange Act.~~voting of a security and the sole power to dispose or direct the disposition of a security.
Name and Address
Number of
Shares

Percent of
Class

Burgundy Asset Management Ltd. (1) 3,344,677 5.39 %
   181 Bay Street, Suite 4510
   Toronto, Ontario M5J 2T3

The Vanguard Group (2)
   100 Vanguard Boulevard
   Malvern, PA 19355 6,702,961 10.81 %

Blackrock, Inc. (3)
   55 East 52^nd Street
   New York, NY 10055
9,564,315 15.42 %
(1) These shares are beneficially owned, or may be deemed beneficially owned, by Burgundy Asset Management Ltd. on behalf of clients for whom it acts as investment adviser. The reporting stockholder reports sole voting power with respect to 2,362,531 shares and sole investment power with respect to 3,344,677 shares. Information relating to these stockholders is based on the stockholder's Schedule 13G filed with the SEC on February 12, 2021.
(2) These shares are beneficially owned, or may be deemed beneficially owned, by The Vanguard Group, certain of its subsidiaries and affiliates, and other companies. The reporting stockholder reports shared voting power with respect to 62,095 shares, sole investment power with respect to 6,587,480 shares and shared investment power with respect to 115,481 shares. Information relating to this stockholder is based on the stockholder’s Schedule 13G/A filed with the SEC on February 10, 2021.
(3) These shares are beneficially owned, or may be deemed beneficially owned, by Blackrock, Inc., certain of its subsidiaries and affiliates, and other companies. The reporting stockholder reports sole voting power with respect to 9,457,272 shares and sole investment power with respect to 9,564,315 shares. Information relating to this stockholder is based on the stockholder’s Schedule 13G/A filed with the SEC on January 26, 2021.
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~~ITEM~~Item 13. Certain Relationships and Related Transactions, and Director Independence
~~Information required~~
Certain Relationships and Related Transactions
The Audit Committee is charged with the responsibility of reviewing and pre-approving all “related-person transactions” (as defined in SEC regulations), and periodically reassessing any related-person transaction entered into by ~~this Item 13~~the Company to ensure its continued appropriateness. This responsibility is ~~incorporated herein~~set forth in the Company’s Corporate Code of Business Conduct and Ethics. See footnote 16 to the Original Form 10-K for a description of the Company’s investment management and services agreements with the Company’s affiliated mutual funds that are approved or renewed on an annual basis by ~~reference to our definitive proxy statement~~each fund’s board of trustees, including a majority of the disinterested members.
Director Independence
The Board is composed of a majority of directors who satisfy the criteria for ~~our 2020 Annual Meeting~~independence under the NYSE corporate governance listing standards. In determining independence, each year the Board affirmatively determines, among other items, whether the directors have any direct or indirect material relationship with the Company or any of ~~Stockholders to be filed~~its subsidiaries pursuant to ~~Regulation 14A~~the NYSE corporate governance listing standards. When assessing the “materiality” of a director’s relationship with the Company, if any, the Board considers all relevant facts and circumstances, not merely from the director’s standpoint, but from that of the persons or organizations with which the director has an affiliation. Material relationships can include commercial, banking, industrial, consulting, legal, accounting, charitable and familial relationships. The Board also considers any other relationship that could interfere with the exercise of independence or judgment in carrying out the duties of a director.
Applying these independence standards, the Board determined that Kathie J. Andrade, Sharilyn S. Gasaway, Thomas C. Godlasky, James A. Jessee, Katherine M.A. (“Allie”) Kline, Dennis E. Logue, Michael F. Morrissey, and Jerry W. Walton are all independent directors. Additionally, during their time on the Board, Constance K. Weaver and Alan W. Kosloff were also independent directors.
After due consideration, the Board has determined that no non-employee director has a material relationship with the Company or any of its subsidiaries (either directly or indirectly as a partner, stockholder or officer of an organization that has a relationship with the Company or any of its subsidiaries) and they all meet the criteria for independence under the ~~Exchange Act.~~NYSE corporate governance listing standards.
~~ITEM~~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~~
The Audit Committee or its Chair pre-approves audit and non-audit services to be ~~filed pursuant~~rendered to ~~Regulation 14A under~~ the ~~Exchange Act.~~Company and establishes a dollar limit on the amount of fees the Company will pay for each category of services. Generally, management will submit to the Audit Committee a detailed list of services that it recommends the Audit Committee engage the independent registered public accounting firm to provide for the fiscal year. During the year, the Audit Committee periodically reviews the types of services and dollar amounts approved and adjusts such amounts, as it deems appropriate. Unless a service to be provided by the independent registered public accounting firm has received general pre-approval, it will require specific pre-approval by the Audit Committee or its Chair. Any audit or non-audit services pre-approved by the Chair are presented to the full Audit Committee at its next scheduled meeting. The Audit Committee also periodically reviews all non-audit services to ensure such services do not impair the independence of the Company's independent registered public accounting firm. The Audit Committee approved all services provided by KPMG for the 2019 and 2020 fiscal years. These services included the audit of the Company's annual financial statements, audit of the Company's internal control over financial reporting, review of the Company's quarterly financial statements, tax consultation services, preparation of corporate tax returns, auditing of employee benefits plans and certain agreed upon procedures.
The following table shows the fees billed by KPMG for audit and other services provided to the Company for the 2020 and 2019 fiscal years, respectively:

2020

2019

Audit Fees (1) $ 916,800 $ 850,000
Audit-Related Fees (2) 134,719 144,408
Tax Fees (3) 26,693 49,677
All Other Fees — —
Total $ 1,078,212 $ 1,044,085

(1) Audit fees consist of fees for the audit of the Company’s annual financial statements, the audit of its internal control over financial reporting, reviews of the financial statements included in quarterly reports on Form 10-Q and professional services rendered in connection with the audit of the Company’s annual financial statements.
(2) Audit-related fees primarily relate to financial statement audits of employee benefit plans, certain agreed upon procedures and the issuance of SSAE 16 reports.
(3) Tax fees consist of fees for income tax consultation, including tax compliance, preparation and review of corporate tax returns, and other general tax consultation.
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51

~~Table of Contents~~

PART IV
ITEM 15.    Exhibits, Financial Statement Schedules

~~HIDDEN_ROW~~
(a)(1)
Financial Statements.

~~(a)(1)~~
~~Financial Statements.~~

Reference is made to the Index to Consolidated Financial Statements on page 5660 of the Original Form 10-K for a list of all financial statements filed as part of this Report.

(a)(2)
Financial Statement Schedules.

None.

(b)
Exhibits.

Exhibit
No.

Exhibit Description
~~3.1~~
2.1

Agreement and Plan of Merger, dated as of December 2, 2020, by and among Macquarie Management Holdings, Inc., Merry Merger Sub, Inc., Waddell & Reed Financial, Inc. and (solely for purposes of Section 9.15) Macquarie Financial Holdings Pty Ltd.  Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, File No. 001-13913, filed on December 4, 2020 and incorporated herein by reference. †
3.1 Restated Certificate of Incorporation of Waddell & Reed Financial, Inc. Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form ~~10 Q,~~10-Q, File No. ~~333 43687,~~333-43687, for the quarter ended June 30, 2006 and incorporated herein by reference.
3.2

Amended and Restated Bylaws of Waddell & Reed Financial, Inc.  Filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2019 and incorporated herein by reference.
4.1

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.
4.2

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.
4.3

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,~~10-K, File No. ~~001 13913,~~001-13913, for the year ended December 31, 2017 and incorporated herein by reference.
4.4

Description of Securities.  Filed as Exhibit 4.4 to the Company’s Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2019 and incorporated herein by reference.
42
Exhibit
No. Exhibit Description
10.1

Credit Agreement, dated October 20, ~~2017,~~2020, by and among Waddell & Reed Financial, Inc., the lenders party thereto, Bank of America, N.A., as Administrative Agent for the lenders and ~~Swingline~~Swing Line Lender, and ~~Merrill Lynch, Pierce, Fenner & Smith Incorporated,~~BofA Securities, Inc., as Sole Lead Arranger and Sole Bookrunner. Filed as Exhibit 10.1 to the Company’s ~~Quarterly~~Current Report on Form ~~10-Q,~~8-K, File No. 001-13913, filed October ~~27, 2017~~21, 2020 and incorporated herein by reference.
10.2

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.
10.3

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.
10.4

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.

~~Table of Contents~~

Exhibit No.		~~Exhibit Description~~
10.5		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.
10.6		Waddell & Reed Financial, Inc. Executive Incentive Plan, as amended and restated.* +
10.7		Waddell & Reed Financial, Inc. ~~1998~~ Stock Incentive Plan, as amended and restated. ~~Filed as Exhibit 10.1~~* +
10.8		Form of Restricted Stock Unit Award Agreement for awards pursuant to the ~~Company’s Current Report on Form 8-K, File No. 001-13913, filed April 14, 2016 and incorporated herein by reference.~~Waddell & Reed Financial, Inc. Stock Incentive Plan.* +
~~10.8~~ 10.9		Form of Restricted Stock Unit Award Agreement for awards to Non-Employee Directors pursuant to the Waddell & Reed Financial, Inc. Stock Incentive Plan.* +
10.10		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.*
~~10.9~~ 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. 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.*
~~10.10~~ 10.12		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~~ 10.13		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, 2019 and incorporated herein by reference.*
~~10.12~~ 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. Filed as Exhibit 10.14 to the Company’s Annual Report on Form ~~10 K,~~10-K, File No. ~~001 13913,~~001-13913, for the year ended December 31, 2017 and incorporated herein by reference.*

Exhibit No.		Exhibit Description
~~10.13~~ 10.15		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,~~10-K, File No. ~~001 13913,~~001-13913, for the year ended December 31, 2017 and incorporated herein by reference.*
~~10.14~~ 10.16		Form of Restricted Stock Award Agreement for awards to ~~Non Employee~~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, 2019 and incorporated herein by reference.*
~~10.15~~ 10.17		Waddell & Reed Financial, Inc. Cash Settled RSU Plan. 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, 2019 and incorporated herein by reference.*
~~10.16~~ 10.18		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,~~001-13913, filed November 2, 2018 and incorporated herein by reference.*
~~10.17~~ 10.19		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,~~10 K, File No. ~~001-13913,~~001 13913, for the year ended December 31, 2018 and incorporated herein by reference.*
~~10.18~~ 10.20		Form of Restricted Stock Unit Award Agreement for awards pursuant to the Waddell & Reed Financial, Inc. Cash Settled RSU Plan. Filed as Exhibit 10.18 to the Company’s Annual Report on Form 10 K, File No. 001-13913, for the year ended December 31, 2019 and incorporated herein by reference.*
~~10.19~~ 10.21		Form of Indemnification Agreement. Filed as Exhibit 10.1 to the Company’s Current Report on Form ~~8-K,~~8 K, File No. ~~001-13913,~~001 13913, on November 16, 2009 and incorporated herein by reference.*
21 10.22		Form of Change of Control Retention and Severance Agreement. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8 K, File No. 001-13913, filed on December 4, 2020 and incorporated herein by reference.*
21		Subsidiaries of Waddell & Reed Financial, Inc. +

~~Table of Contents~~

Exhibit No.	~~Exhibit Description~~
23	Consent of KPMG LLP +
24	Powers of Attorney +
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer +
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer +
31.3	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer #
~~31.2~~ 31.4	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer #
32.1	Section 1350 Certification of the Chief Executive Officer +
32.2	Section 1350 Certification of the Chief Financial Officer +
101		Materials from the Waddell & Reed Financial, Inc. Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, 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) #

# Filed with this Form 10-K/A.

*Indicates management contract or compensatory plan, contract or arrangement.

† Schedules omitted pursuant to item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule upon request by the SEC; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act, as amended, for any schedule or exhibit so furnished.

+ Previously filed or furnished with the Original Form 10-K.

44

~~ITEM 16. Form 10-K Summary~~SIGNATURES
~~Not applicable.~~

~~Table of Contents~~

~~SIGNATURES~~
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.~~April 29, 2021.

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~~

~~/s/~~ ~~PHILIP J. SANDERS~~

~~Chief Executive Officer and Director (Principal Executive Officer)~~

~~February 21, 2020~~
~~Philip J. Sanders~~

~~/s/~~ ~~BENJAMIN R. CLOUSE~~

~~Senior Vice President and Chief Financial Officer (Principal Financial Officer)~~

~~February 21, 2020~~
~~Benjamin R. Clouse~~

~~/s/ MICHAEL J. DALEY~~

~~Vice President, Chief Accounting Officer,~~

~~February 21, 2020~~
~~Michael J. Daley~~

~~Investor Relations and Treasurer~~

~~(Principal Accounting Officer)~~

~~/s/~~ THOMAS C. GODLASKY*

~~Chairman of the Board and Director~~

~~February 21, 2020~~
~~Thomas C. Godlasky~~

/s/ KATHIE J. ANDRADE*

~~Director~~

~~February 21, 2020~~
~~Kathie J. Andrade~~

~~/s/SHARILYN S. GASAWAY~~*

~~Director~~

~~February 21, 2020~~
~~Sharilyn S. Gasaway~~

~~/s/ JAMES A. JESSEE~~*

~~Director~~

~~February 21, 2020~~
~~James A. Jessee~~

~~/s/ ALAN W. KOSLOFF~~*

~~Director~~

~~February 21, 2020~~
~~Alan W. Kosloff~~

~~/s/ DENNIS E. LOGUE~~*

~~Director~~

~~February 21, 2020~~
~~Dennis E. Logue~~

/s/ MICHAEL F. MORRISSEY*

~~Director~~

~~February 21, 2020~~
~~Michael F. Morrissey~~

~~/s/~~ JERRY W. WALTON*

~~Director~~

~~February 21, 2020~~
~~Jerry W. Walton~~

~~/s/~~ ~~JEFFREY P. BENNETT~~

~~Attorney-in-fact~~

~~February 21, 2020~~
~~Jeffrey P. Bennett~~

*
~~By:~~ ~~Attorney-in-fact~~

~~Table of Contents~~

~~WADDELL & REED FINANCIAL, INC.~~
~~Index to Consolidated Financial Statements~~

~~Page~~
~~Report of Independent Registered Public Accounting Firm~~
57
~~Consolidated Balance Sheets at December 31, 2019 and 2018~~
59
~~Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2019~~
60
~~Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2019~~
61
~~Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended December 31, 2019~~
62
~~Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2019~~
63
~~Notes to Consolidated Financial Statements~~
64

~~Table of Contents~~

~~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

~~Table of Contents~~

~~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~~

~~Table of Contents~~

~~WADDELL & REED FINANCIAL, INC.~~

~~CONSOLIDATED BALANCE SHEETS~~
~~December 31, 2019 and 2018~~

2019

2018

(in thousands)

Assets:






Cash and cash equivalents

$
151,815

231,997

Cash and cash equivalents - restricted

74,325

59,558

Investment securities

688,346

617,135

Receivables:

Funds and separate accounts

15,167

18,112

Customers and other

80,089

151,515

Prepaid expenses and other current assets

31,655

27,164

Total current assets

1,041,397

1,105,481

Property and equipment, net

34,726

63,429

Goodwill and identifiable intangible assets

145,869

145,869

Deferred income taxes

14,418

12,321

Other non-current assets

29,918

16,979

Total assets

$
1,266,328

1,344,079

Liabilities:

Accounts payable

$
20,123

26,253

Payable to investment companies for securities

36,883

100,085

Payable to third party brokers

17,123

19,891

Payable to customers

84,558

86,184

Accrued compensation

79,507

54,129

Other current liabilities

71,001

51,580

Total current liabilities

309,195

338,122

Long-term debt

94,926

94,854

Accrued pension and postretirement costs

3,145

798

Other non-current liabilities

30,960

15,392

Total liabilities

438,226

449,166

Redeemable noncontrolling interests

19,205

11,463

Stockholders’ equity:

Preferred stock—$1.00 par value: 5,000 shares authorized; NaN 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)

997

997

Additional paid-in capital

312,693

311,264

Retained earnings

1,241,598

1,198,445

Cost of 30,854 common shares in treasury (22,911 at December 31, 2018)

(749,625)

(627,587)

Accumulated other comprehensive income

3,234

331

Total stockholders’ equity

808,897

883,450

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

$
1,266,328

1,344,079

~~See accompanying notes to consolidated financial statements.~~

~~Table of Contents~~

~~WADDELL & REED FINANCIAL, INC.~~

~~CONSOLIDATED STATEMENTS OF INCOME~~
~~Years ended December 31, 2019, 2018 and 2017~~

2019

2018

2017

(in thousands, except per share data)

Revenues:










Investment management fees

$
445,144

507,906

531,850

Underwriting and distribution fees

531,836

550,010

518,699

Shareholder service fees

93,335

102,385

106,595

Total

1,070,315

1,160,301

1,157,144

Operating expenses:

Distribution

460,921

456,832

432,264

Compensation and benefits (including share-based compensation of $46,613, $51,565 and $57,716, respectively)

254,534

263,329

271,276

General and administrative

77,482

73,643

88,951

Technology

63,719

65,275

66,078

Occupancy

24,243

27,197

30,721

Marketing and advertising

8,964

10,323

12,425

Depreciation

19,829

25,649

20,983

Subadvisory fees

14,931

14,805

13,174

Intangible asset impairment

—

1,200

1,500

Total

924,623

938,253

937,372

Operating income

145,692

222,048

219,772

Investment and other income

18,886

22,705

37,084

Interest expense

(6,195)

(6,461)

(11,279)

Income before provision for income taxes

158,383

238,292

245,577

Provision for income taxes

41,418

55,480

101,368

Net income

116,965

182,812

144,209

Net income (loss) attributable to redeemable noncontrolling interests

1,973

(776)

2,930

Net income attributable to Waddell & Reed Financial, Inc.

$
114,992

183,588

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.~~

~~Table of Contents~~

~~WADDELL & REED FINANCIAL, INC.~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~
~~Years ended December 31, 2019, 2018 and 2017~~


2019

2018

2017

(in thousands)

Net income

$
116,965

182,812

144,209

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

119,868

183,467

151,490

Comprehensive income (loss) attributable to redeemable noncontrolling interests

1,973

(776)

2,930

Comprehensive income attributable to Waddell & Reed Financial, Inc.

$
117,895

184,243

148,560

~~See accompanying notes to consolidated financial statements.~~

~~Table of Contents~~

~~WADDELL & REED FINANCIAL, INC.~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~
~~Years ended December 31, 2019, 2018 and 2017~~
~~(in thousands)~~

Accumulated

Redeemable

Additional

Other

Total

Non

Common Stock

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

Controlling

For the nine months ended September 30, 2019

Shares

Amount

Capital

Earnings

Stock

Income (Loss)

Equity

interest

Balance at December 31, 2016

99,701

$
997

291,908

1,089,122

(531,268)

(6,757)

844,002

10,653

Adoption of share-based compensation guidance on January 1, 2017

—

—

3,504

(2,200)

—

—

1,304

—

Net income

—

—

—

141,279

—

—

141,279

2,930

Net subscription of redeemable noncontrolling interests in sponsored funds

—

—

—

—

—

—

—

926

Recognition of equity compensation

—

—

50,593

690

—

—

51,283

—

Net issuance/forfeiture of nonvested shares

—

—

(44,595)

—

44,595

—

—

—

Dividends accrued, $1.63 per share

—

—

—

(136,497)

—

—

(136,497)

—

Repurchase of common stock

—

—

—

—

(35,768)

—

(35,768)

—

Other comprehensive income

—

—

—

—

—

7,281

7,281

—

Balance at December 31, 2017

99,701

997

301,410

1,092,394

(522,441)

524

872,884

14,509

Adoption of recognition and measurement of financial assets and liabilities guidance (ASU 2016-01) on January 1, 2018

—

—

—

812

—

(812)

—

—

Adoption of reclassification of tax effects from accumulated other comprehensive income (loss) guidance (ASU 2018-02) on January 1, 2018

—

—

—

36

—

(36)

—

—

Net income (loss)

—

—

—

183,588

—

—

183,588

(776)

Net redemption of redeemable noncontrolling interests in sponsored funds

—

—

—

—

—

—

—

(2,270)

Recognition of equity compensation

—

—

40,598

1,383

—

—

41,981

—

Net issuance/forfeiture of nonvested shares

—

—

(30,744)

—

30,744

—

—

—

Dividends accrued, $1.00 per share

—

—

—

(79,768)

—

—

(79,768)

—

Repurchase of common stock

—

—

—

—

(135,890)

—

(135,890)

—

Other comprehensive income

—

—

—

—

—

655

655

—

Balance at December 31, 2018

99,701

$
997

311,264

1,198,445

(627,587)

331

883,450

11,463

Net income

—

—

—

114,992

—

—

114,992

1,973

Net subscription of redeemable noncontrolling interests in sponsored funds

—

—

—

—

—

—

—

5,769

Recognition of equity compensation

—

—

33,610

423

—

—

34,033

—

Net issuance/forfeiture of nonvested shares

—

—

(32,181)

32,181

—

—

—

Dividends accrued, $1.00 per share

—

—

—

(72,262)

—

—

(72,262)

—

Repurchase of common stock

—

—

—

—

(154,219)

—

(154,219)

—

Other comprehensive income

—

—

—

—

—

2,903

2,903

—

Balance at December 31, 2019

99,701

$
997

312,693

1,241,598

(749,625)

3,234

808,897

19,205

~~See accompanying notes to consolidated financial statements.~~

~~Table of Contents~~

~~WADDELL & REED FINANCIAL, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~
~~Years ended December 31, 2019, 2018 and 2017~~


2019

2018

2017

(in thousands)

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

19,970

28,278

20,983

Write-down of impaired assets

12,841

1,538

1,500

Amortization of deferred sales commissions

1,892

3,348

4,855

Share-based compensation

46,613

51,565

57,716

Investments (gain) loss, net

(35,466)

26,449

(17,104)

Net purchases, maturities, and sales of trading and equity securities

(21,550)

(30,237)

(43,714)

Deferred income taxes

(3,009)

783

20,481

Pension and postretirement plan benefits

10,675

(15,380)

(17,714)

Net change in equity securities and trading debt securities held by consolidated sponsored funds

14,399

81,119

(101,457)

Other

1,786

1,158

3,276

Changes in assets and liabilities:

Customer and other receivables

55,418

(20,407)

(3,013)

Payable to investment companies for securities and payable to customers

(64,828)

76,017

(26,357)

Receivables from funds and separate accounts

2,945

7,552

1,517

Other assets

20,020

2,194

10,134

Accounts payable and payable to third party brokers

(9,299)

(18,007)

4,395

Other liabilities

(3,389)

(21,767)

(8,856)

Net cash provided by operating activities

165,983

357,015

50,851

Cash flows from investing activities:

Purchases of available for sale and equity method securities

(162,378)

(113,975)

(365,770)

Proceeds from sales of available for sale and equity method securities

19,667

1,157

160,158

Proceeds from maturities of available for sale securities

141,613

125,727

—

Additions to property and equipment

(5,753)

(2,566)

(6,783)

Net cash (used in) provided by investing activities

(6,851)

10,343

(212,395)

Cash flows from financing activities:

Dividends paid

(74,291)

(81,215)

(154,042)

Repurchase of common stock

(155,807)

(133,378)

(35,768)

Repayment of short-term debt, net of debt issuance costs

—

(94,925)

—

Net subscriptions (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds

5,769

(2,270)

926

Other

(218)

—

174

Net cash used in financing activities

(224,547)

(311,788)

(188,710)

Net (decrease) increase in cash and cash equivalents

(65,415)

55,570

(350,254)

Cash, cash equivalents, and restricted cash at beginning of period

291,555

235,985

586,239

Cash, cash equivalents, and restricted cash at end of period

$
226,140

291,555

235,985

Cash paid for:

Income taxes, net

$
53,022

59,147

85,299

Interest

$
5,503

7,948

10,299

~~See accompanying notes to consolidated financial statements.~~

~~Table of Contents~~

~~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 1 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).

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~~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.

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~~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. NaN 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.

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~~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

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~~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~~ ~~leaseterms~~ ~~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 1 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.

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~~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,

2019

2018

2017

(in thousands)
Investment management fees:






Funds

$
430,028

486,181

506,868
Institutional

15,116

21,725

24,982
Total investment management fees

445,144

507,906

531,850
Underwriting and distribution fees:

Unaffiliated

Rule 12b-1 service and distribution fees

65,227

78,041

91,313
Sales commissions on front-end load mutual fund and variable annuity sales

1,730

1,886

1,498
Other revenues

290

568

1,182
Total unaffiliated distribution fees

67,247

80,495

93,993
Wealth Management

Fee-based asset allocation product revenues

284,188

269,069

240,089
Rule 12b-1 service and distribution fees

63,197

70,938

75,850
Sales commissions on front-end load mutual fund and variable annuity sales

48,471

54,895

55,293
Sales commissions on other products

32,314

36,131

31,286
Other revenues

36,419

38,482

22,188
Total wealth management distribution fees

464,589

469,515

424,706
Total distribution fees

531,836

550,010

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

$
—

5,001

Commercial paper

1,977

7,970

Corporate bonds

254,291

218,121

U.S. Treasury bills

—

19,672

Total available for sale securities

256,268

250,764

Trading debt securities:

Commercial paper

1,977

1,993

Corporate bonds

84,920

77,250

U.S. Treasury bills

5,979

5,884

Mortgage-backed securities

4

7

Term loans

44,268

—

Consolidated sponsored funds

43,567

33,088

Total trading securities

180,715

118,222

Equity securities:

Common stock

34,945

21,204

Sponsored funds

178,386

153,548

Sponsored privately offered funds

845

678

Consolidated sponsored funds

—

24,879

Total equity securities

214,176

200,309

Equity method securities:

Sponsored funds

37,187

47,840

Total securities

$
688,346

617,135

~~Commercial paper and corporate bonds accounted for as available for sale and held as of December 31, 2019 mature as follows:~~

Amortized

cost

Fair value


(in thousands)
Within one year
$
78,072

78,326
After one year but within five years

174,886

177,942

$
252,958

256,268

~~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


(in thousands)
Within one year

$
30,749
After one year but within five years

78,367
After five years but within 10 years

28,032

$
137,148

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~~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

losses

Fair value



(in thousands)

Available for sale securities:

Commercial paper

$
1,976

1

—

1,977

Corporate bonds

250,982

3,314

(5)

254,291

$
252,958

3,315

(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


cost

gains

losses

Fair value

(in thousands)

Available for sale securities:

Certificates of deposit

$
5,000

1

—

5,001

Commercial paper

7,902

68

—

7,970

Corporate bonds

219,236

254

(1,369)

218,121

U.S. Treasury bills

19,672

—

—

19,672

$
251,810

323

(1,369)

250,764

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:~~

Less than 12 months

12 months or longer

Total

Unrealized

Unrealized

Unrealized


Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)
Corporate bonds

$
4,538

—

8,056

(5)

12,594

(5)

~~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

Unrealized

Unrealized

Unrealized


Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)
Corporate bonds

$
36,302

(160)

119,480

(1,209)

155,782

(1,369)

~~The Company’s investment portfolio included 3 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 0 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

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~~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

$
1,530

4,285
Investments

43,567

57,967
Other assets

483

872
Other liabilities

—

(79)
Redeemable noncontrolling interests

(19,205)

(11,463)
Net interest in consolidated sponsored funds

$
26,375

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

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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

Level 1

Level 2

Level 3

Other Assets Held at Net Asset Value

Total

(in thousands)

Cash equivalents: (1)

Money market funds

$
4,203

—

—

—

4,203

Commercial paper

—

38,143

—

—

38,143

Total cash equivalents

$
4,203

38,143

—

—

42,346

Available for sale securities:

Commercial paper

$
—

1,977

—

—

1,977

Corporate bonds

—

254,291

—

—

254,291

Trading debt securities:

Commercial paper

—

1,977

—

—

1,977

Corporate bonds

—

84,920

—

84,920

U.S. Treasury bills

—

5,979

—

—

5,979

Mortgage-backed securities


—

4

—

—

4

Term loans

—

40,368

3,900

—

44,268

Consolidated sponsored funds

—

43,567

—

—

43,567

Equity securities:

Common stock

34,942

—

3

—

34,945

Sponsored funds

178,386

—

—

—

178,386

Sponsored privately offered funds measured at net asset value (2)

—

—

—

845

845

Equity method securities: (3)

Sponsored funds

37,187

—

—

—

37,187

Total investment securities

$
250,515

433,083

3,903

845

688,346

~~Table of Contents~~

December 31, 2018

Level 1

Level 2

Level 3

Other Assets Held at Net Asset Value

Total

(in thousands)

Cash equivalents: (1)

Money market funds

$
121,759

—

—

—

121,759

U.S. government sponsored enterprise note

—

895

—

—

895

Commercial paper

—

74,277

—

—

74,277

Total cash equivalents

$
121,759

75,172

—

—

196,931

Available for sale securities:

Certificates of deposit

$
—

5,001

—

—

5,001

Commercial paper

—

7,970

—

—

7,970

Corporate bonds

—

218,121

—

—

218,121

U.S. Treasury bills

—

19,672

—

—

19,672

Trading debt securities:

Commercial paper

—

1,993

—

—

1,993

Corporate bonds

—

77,250

—

77,250

U.S. Treasury bills

—

5,884

—

—

5,884

Mortgage-backed securities


—

7

—

—

7

Consolidated sponsored funds

—

33,088

—

—

33,088

Equity securities:

Common stock

21,192

—

12

—

21,204

Sponsored funds

153,548

—

—

—

153,548

Sponsored privately offered funds measured at net asset value (2)

—

—

—

678

678

Consolidated sponsored funds

24,879

—

—

—

24,879

Equity method securities: (3)

Sponsored funds

47,840

—

—

—

47,840

Total investment securities

$
247,459

368,986

12

678

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

$
12
Purchases

2,607
Transfers in to level 3

3,241
Transfers out of level 3

(1,142)
Losses in Investment and other income

(48)
Redemptions and paydowns

(767)
Level 3 assets at December 31, 2019

$
3,903

Change in unrealized losses for Level 3 assets held at December 31, 2019

$
(13)

~~Table of Contents~~

~~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 5 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:

December 31,

December 31,

Balance sheet

2019

2018


location

Fair value

Fair value

(in thousands)
Total return swap contracts

Prepaid expenses and other current assets

$
—

4,968
Total return swap contracts

Other current liabilities

3,990

—
Net total return swap (liability) asset

$
(3,990)

4,968

~~The following is a summary of net (losses) gains recognized in income for the years ended December 31, 2019 and 2018:~~

Year ended

Income statement

December 31,


location


2019

2018

(in thousands)
Total return swap contracts

Investment and other income

$
(38,240)

15,163
45

~~Table of Contents~~

~~6.           Property and Equipment~~
~~A summary of property and equipment at December 31, 2019 and 2018 is as follows:~~

Estimated

2019

2018

useful lives

(in thousands)

Leasehold improvements

$
20,414

21,790

1 - 15
years

Furniture and fixtures

23,872

28,482

3 - 10
years

Equipment

12,561

20,248

2 - 15
years

Computer software

92,033

100,507

1 - 10
years

Data processing equipment

16,726

17,056

1 - 5
years

Buildings

7,490

11,772

1 - 30
years

Land

1,864

2,843

Property and equipment, at cost

174,960

202,698

Accumulated depreciation

(140,234)

(139,269)

Property and equipment, net

$
34,726

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

38,699

38,699

Other

200

200

Total identifiable intangible assets

38,899

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 4 consecutive quarters and a consolidated interest coverage ratio of not less than 4.0 to 1.0 for 4 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.

~~Table of Contents~~

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 0 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

2017

(in thousands)

Current taxes:








Federal

$
37,283

54,071

73,167

State

7,144

625

7,720

Foreign

—

1

—

44,427

54,697

80,887

Deferred taxes

(3,009)

783

20,481

Provision for income taxes

$
41,418

55,480

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

2018

2017

Statutory federal income tax rate

21.0
%
21.0
%
35.0
%
State income taxes, net of federal tax benefit

3.4

2.4

2.2

Share-based compensation

1.4

1.8

3.4

Effects of U.S. tax rate decrease

—

(0.4)

2.2

Uncertain tax positions

(0.2)

(2.2)

(0.2)

Valuation allowance on losses capital in nature

—

—

(1.0)

Other items

0.6

0.7

(0.3)

Effective income tax rate

26.2
%
23.3
%
41.3
%

~~Table of Contents~~

~~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

$
2,194

—

Benefit plans

787

—

Accrued compensation and related costs

11,779

5,868

Other accrued expenses

2,780

3,861

Unrealized losses on investment securities and partnerships

—

6,272

Share-based compensation

9,215

10,300

Unused state tax credits

2,341

2,618

State net operating loss carryforwards

7,082

7,266

Operating lease liabilities

6,042

—

Other

1,061

1,171

Total gross deferred assets

43,281

37,356

Deferred tax liabilities:






Property and equipment

$
—

(3,700)

Benefit plans

—

(1,872)

Identifiable intangible assets

(9,301)

(9,206)

Unrealized gains on investments securities and partnerships

(3,469)

—

Prepaid expenses

(2,283)

(2,478)

Operating lease right-of-use assets

(5,630)

—

Other

(308)

(513)

Total gross deferred liabilities

(20,991)

(17,769)

Valuation allowance

(7,872)

(7,266)

Net deferred tax asset

$
14,418

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.
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

~~Table of Contents~~

~~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:~~

2019

2018

2017

(in thousands)

Balance at beginning of year

$
2,070

6,843

7,734

Increases during the year:

Gross increases - tax positions in prior period

345

712

244

Gross increases - current-period tax positions

44

331

97

Decreases during the year:

Gross decreases - tax positions in prior period

(135)

(4,219)

(56)

Decreases due to settlements with taxing authorities

(348)

(1,385)

(178)

Decreases due to lapse of statute of limitations

(358)

(212)

(998)

Balance at end of year

$
1,618

2,070

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.

~~Table of Contents~~

~~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:~~

Other

Pension Benefits

Postretirement Benefits

2019

2018

2017

2019

2018

2017

(in thousands)

Change in projected benefit obligation:














Net benefit obligation at beginning of year

$
154,528

184,245

180,921

1,048

2,195

2,446

Service cost

—

—

8,367

—

—

—

Interest cost

6,146

5,986

6,248

33

54

58

Benefits paid

(13,221)

(13,690)

(8,511)

(677)

(602)

(954)

Actuarial loss (gain)

39,027

(22,013)

28,841

47

(965)

139

Retiree contributions

—

—

—

275

366

506

Curtailment gain

—

—

(31,621)

—

—

—

Net benefit obligation at end of year

$
186,480

154,528

184,245

726

1,048

2,195

Other

Pension Benefits

Postretirement Benefits

2019

2018

2017

2019

2018

2017

(in thousands)

Change in plan assets:














Fair value of plan assets at beginning of year

$
162,999

170,881

144,529

—

—

—

Actual return on plan assets

34,125

1,808

24,863

—

—

—

Employer contributions

—

4,000

10,000

402

236

448

Retiree contributions

—

—

—

275

366

506

Benefits paid

(13,221)

(13,690)

(8,511)

(677)

(602)

(954)

Fair value of plan assets at end of year

$
183,903

162,999

170,881

—

—

—

Funded status at end of year

$
(2,577)

8,471

(13,364)

(726)

(1,048)

(2,195)

Other

Pension Benefits

Postretirement Benefits

2019

2018

2017

2019

2018

2017

(in thousands, except percentage data)

Amounts recognized in the statement of financial position:















Noncurrent assets

$
—

8,471

—

—

—

—

Current liabilities

—

—

—

(158)

(250)

(422)

Noncurrent liabilities

(2,577)

—

(13,364)

(568)

(798)

(1,773)

Net amount recognized at end of year

$
(2,577)

8,471

(13,364)

(726)

(1,048)

(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.

~~Table of Contents~~

~~Our Pension Plan asset allocation at December 31, 2019 and 2018 is as follows:~~


Percentage of

Percentage of

Plan Assets at

Plan Assets at

Plan assets by category

December 31, 2019

December 31, 2018

Cash

51
%
2
%
Fixed income securities

49
%
98
%
Total

100
%
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

(in thousands)

Cash equivalents

$
—

91,989

—


91,989

Fixed income securities:

U.S. Treasuries

—

19,311

—

19,311

Corporate bond

—

62,313

—

62,313

Foreign bonds

—

8,913

—

8,913

Total investment securities

—

182,526

—

182,526

Cash

1,377

Total

$
183,903

2018

Level 1

Level 2

Level 3

Total

(in thousands)

Cash equivalents

$
—

465

—


465

Equity securities:

International

—

4

—

4

Fixed income securities:

U.S. Treasuries

—

46,415

—

46,415

Corporate bond

—

91,521

—

91,521

Foreign Bonds

—

21,870

—

21,870

Total investment securities

—

160,275

—

160,275

Cash

2,724

Total

$
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%.

~~Table of Contents~~

~~The components of net periodic pension and other postretirement costs consisted of the following for the years ended December 31, 2019, 2018 and 2017:~~

Other

Pension Benefits

Postretirement Benefits

2019

2018

2017

2019

2018

2017

(in thousands)

Components of net periodic benefit cost:














Service cost

$
—

—

8,367

—

—

—

Interest cost

6,146

5,986

6,248

33

54

58

Expected return on plan assets

(6,315)

(8,320)

(10,113)

—

—

—

Actuarial loss (gain)

11,217

(15,501)

14,091

—

—

—

Actuarial gain amortization

—

—

—

(495)

(120)

(180)

Prior service cost amortization

—

—

—

—

(2)

(4)

Curtailment gain

—

—

(31,621)

—

—

—

Total

$
11,048

(17,835)

(13,028)

(462)

(68)

(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:~~

Other

Pension Benefits

Postretirement Benefits

2019

2018

2017

2019

2018

2017

Discount rate

4.45
%
3.76
%
4.39% / 3.96
¹%

4.08
%
3.28
%
3.46
%
Expected return on plan assets

4.00
%
5.00
%
7.00% / 6.00
¹%

Not applicable

Rate of compensation increase

Not applicable

5.12
%

Not applicable

~~________________________~~

~~(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

Postretirement


Benefits

Benefits

(in thousands)

2020

$
8,947

158

2021

9,491

116

2022

9,164

99

2023

9,469

66

2024

9,770

66

2025 through 2029

50,283

143

$
97,124

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.

~~Table of Contents~~

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

(in thousands, except for per share amounts)

Net income attributable to Waddell & Reed Financial, Inc.

$
114,992

183,588

141,279

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

~~Table of Contents~~

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.~~

Total

Unrealized

Postretirement

accumulated

gains (losses) on

benefits

other

AFS investment

unrealized

comprehensive

Year ended December 31, 2019

securities

gains (losses)

income (loss)

(in thousands)

Balance at December 31, 2018



$
(797)

1,128

331

Other comprehensive income (loss) before reclassification

3,496

(36)

3,460

Amount reclassified from accumulated other comprehensive income

(178)

(379)

(557)

Net current period other comprehensive income (loss)

3,318

(415)

2,903

Balance at December 31, 2019

$
2,521

713

3,234

Total

Unrealized

Postretirement

accumulated

gains (losses) on

benefits

other

AFS investment

unrealized

comprehensive

Year ended December 31, 2018

securities

gains (losses)

income (loss)

(in thousands)

Balance at December 31, 2017



$
145

379

524

Amount reclassified to retained earnings for ASUs adopted in 2018

(955)

107

(848)

Other comprehensive (loss) income before reclassification

(360)

736

376

Amount reclassified from accumulated other comprehensive income (loss)

373

(94)

279

Net current period other comprehensive (loss) income

(942)

749

(193)

Balance at December 31, 2018

$
(797)

1,128

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

$
234

(56)

178

Investment and other income

Amortization of postretirement benefits

495

(116)

379

Compensation and benefits

Total

$
729

(172)

557

~~Table of Contents~~

For the year ended December 31, 2018

Tax

(expense)

Statement of income

Pre-tax

benefit

Net of tax

line item or retained earnings

(in thousands)

Reclassifications included in net income or retained earnings for ASUs adopted in 2018:










Sponsored funds investment gains

$
1,295

(340)

955

Retained earnings

Losses on available for sale debt securities

(489)

116

(373)

Investment and other income (loss)

Amortization of postretirement benefits

122

(135)

(13)

Compensation and benefits and retained earnings

Total

$
928

(359)

569

~~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 1 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 1 share of our common stock.

~~Table of Contents~~

~~A summary of nonvested share activity and related fair value for the year ended December 31, 2019 follows:~~




Weighted

Average

Nonvested

Grant Date

Stock Shares

Fair Value

Nonvested at December 31, 2018

4,093,760

$
22.79

Granted

1,433,673

17.65

Vested

(1,672,676)

25.52

Forfeited

(212,772)

21.27

Nonvested at December 31, 2019

3,641,985

$
19.60

~~A summary of nonvested RSU activity for the year ended December 31, 2019 follows:~~

~~Nonvested~~

~~Cash-Settled Units~~
~~Nonvested at December 31, 2018~~

~~1,762,060~~
~~Granted~~
~~1,228,904~~
~~Vested~~
~~(497,092)~~
~~Forfeited~~
~~(118,272)~~
~~Nonvested at December 31, 2019~~
~~2,375,600~~

~~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~~
NaN 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.

~~Table of Contents~~

~~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

(in thousands)

W&R

IDI

W&R

IDI

Net capital

$
60,758


20,217

57,109


25,688

Required capital

250

1,909

250

1,336

Excess of required capital

$
60,508

18,308

56,859

24,352

Ratio of aggregate indebtedness to net capital

Not

Not

applicable

1.42 to 1.0

applicable

0.78 to 1.0

~~15.         Leases~~
~~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

$
283

Interest on lease liabilities

27

Total

$
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

$
16,520
Operating cash flows from finance leases

27
Financing cash flows from finance leases

290

ROU assets obtained in exchange for lease obligations:

Operating leases

39,580
Finance leases

40

~~Table of Contents~~

~~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

$
10,479
Other non-current liabilities

14,694
Total operating lease liabilities

$
25,173

Finance Leases:

Property and equipment, gross

$
985
Accumulated depreciation

(737)
Property and equipment, net

$
248

Other current liabilities

$
203
Other non-current liabilities

55
Total finance lease liabilities

$
258

Weighted average remaining lease term:

Operating leases

4 years
Finance leases

1 year

Weighted average discount rate:

Operating leases

4.32%
Finance leases

6.00%

~~Maturities of lease liabilities are as follows:~~

Operating

Finance

Leases

Leases

(in thousands)
Year ended December 31,

2020

$
11,346


208
2021

6,691

47
2022

2,178

9
2023

2,090

—
2024

2,090

—
Thereafter

2,613

—
Total lease payments

27,008

264
Less imputed interest

(1,835)

(6)
Total

$
25,173

258

~~Table of Contents~~

~~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

Commitments

(in thousands)

2019

$
16,488

2020

9,797

2021

5,757

2022

2,913

2023

2,320

Thereafter

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:~~

2019

2018

2017

(in thousands)

Investment management fees

$
430,028

486,581

508,035

Rule 12b-1 service and distribution fees

121,603

141,220

159,873

Shareholder service fees

93,335

102,385

106,595

Total revenues

$
644,966

730,186

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~~

~~Table of Contents~~

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

270,154

270,680

270,071

Net income attributable to Waddell & Reed Financial, Inc.

$
32,053

33,948

33,054

15,936

Net income per share, basic and diluted

$
0.42

0.45

0.46

0.23

Quarter

First

Second

Third

Fourth

(in thousands)

2018









Total revenues

$
297,615

295,338

295,118

272,230

Net income attributable to Waddell & Reed Financial, Inc.

$
46,337

44,478

46,305

46,468

Net income per share, basic and diluted

$
0.56

0.55

0.58

0.60

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, $.01 par value	WDR	New York Stock Exchange

Large accelerated filer☑		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐

		Emerging growth company ☐

		Page
Part III		~~Page~~
~~Part I~~
~~Item 1.~~	~~Business~~	3
~~Item 1A.~~	~~Risk Factors~~	10
~~Item 1B.~~	~~Unresolved Staff Comments~~	25
~~Item 2.~~	~~Properties~~	25
~~Item 3.~~	~~Legal Proceedings~~	25
~~Item 4.~~	~~Mine Safety Disclosures~~	25
~~Part II~~
~~Item 5.~~	~~Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~	25
~~Item 6.~~	~~Selected Financial Data~~	28
~~Item 7.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	29
~~Item 7A.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	47
~~Item 8.~~	~~Financial Statements and Supplementary Data~~	49
~~Item 9.~~	~~Changes in and Disagreements with Accountants on Accounting and Financial Disclosure~~	49
~~Item 9A.~~	~~Controls and Procedures~~	49
~~Item 9B.~~	~~Other Information~~	51
~~Part III~~
Item 10.	Directors, Executive Officers and Corporate Governance	51 4
Item 11.	Executive Compensation	51 10
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	51 39
Item 13.	Certain Relationships and Related Transactions, and Director Independence	51 41
Item 14.	Principal Accounting Fees and Services	51 41
~~Part IV~~
Part IV
Item 15.	Exhibits, Financial Statement Schedules	52 42
~~Item 16.~~SIGNATURES		~~Form 10-K Summary~~45	54
~~SIGNATURES~~		55


				Total Number of	Maximum Number (or
				Shares	Approximate Dollar
				Purchased as	Value) of Shares That
	Total Number	Average		Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced	Purchased Under The
Period	Purchased	per Share		Program (1)	Program (1)
October 1 - October 31	1,042,196	$	15.80	1,042,196	n/a
November 1 - November 30	650,076		16.55	650,000	n/a
December 1 - December 31	623,054		16.56	515,000	n/a
Total	2,315,326	$	16.21	2,207,196


	Period Ending
Index	12/31/2014	12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019
Waddell & Reed Financial, Inc.	100.00	59.86	44.70	56.39	47.95	47.08
SNL Asset Manager	100.00	85.28	90.22	119.80	90.38	125.98
S&P 500	100.00	101.38	113.51	138.29	132.23	173.86

Name	Age	Position
Kathie. J. Andrade	60	Class III Director
Brent K. Bloss	52	President
Mark P. Buyle	54	Senior Vice President, Chief Legal Officer, General Counsel and Secretary
Benjamin R. Clouse	47	Senior Vice President and Chief Financial Officer
Sharilyn S. Gasaway	52	Class I Director
Thomas C. Godlasky	65	Class II Director
Daniel P. Hanson	51	Senior Vice President and Chief Investment Officer
James A. Jessee	63	Class III Director
Katherine M.A. (“Allie”) Kline	49	Class I Director
Dennis E. Logue	77	Class II Director
Shawn M. Mihal	46	Senior Vice President – Wealth Management, President of Waddell & Reed, Inc.
Michael F. Morrissey	78	Class II Director
Christopher W. Rackers	50	Senior Vice President and Chief People and Brand Officer
Philip J. Sanders	61	Chief Executive Officer and Class III Director
Amy J. Scupham	46	Senior Vice President – Distribution, President of Ivy Distributors, Inc.
Jerry W. Walton	74	Class I Director


	For the Year Ended December 31,
	2019			2018		2017		2016		2015
	(in thousands, except per share data and percentages)
Revenues from:
Investment management fees	$	445,144		507,906		531,850		557,112		709,562
Underwriting and distribution fees		531,836		550,010		518,699		561,670		663,998
Shareholder service fees		93,335		102,385		106,595		120,241		143,071
Total revenues		1,070,315		1,160,301		1,157,144		1,239,023		1,516,631
Net income attributable to Waddell & Reed Financial, Inc.	$	114,992		183,588		141,279		156,695		237,578
Operating margin		14	%	19	%	19	%	21	%	27	%
Net income per share from continuing operations, basic and diluted	$	1.57		2.28		1.69		1.90		2.85
Dividends declared per common share	$	1.00		1.00		1.63		1.84		1.75
Shares outstanding at December 31,		68,847		76,790		82,687		83,118		82,850


	As of December 31,
	2019		2018	2017	2016	2015
	(in millions)
Assets under management	$	69,958	65,809	81,082	80,521	104,399

Balance sheet data:
Goodwill and identifiable intangible assets	$	145.9	145.9	147.1	148.6	158.1
Total assets		1,266.3	1,344.1	1,384.4	1,406.3	1,555.2
Long-term debt		94.9	94.9	94.8	189.6	189.4
Total liabilities		438.2	449.2	497.0	551.6	708.7
Total Waddell & Reed stockholders’ equity		808.9	883.5	872.9	844.0	846.5

Name	Title
Philip J. Sanders	Chief Executive Officer
Benjamin R. Clouse	Senior Vice President and Chief Financial Officer
Brent K. Bloss	President
Daniel P. Hanson	Senior Vice President and Chief Investment Officer
Shawn M. Mihal	Senior Vice President – Wealth Management and President, Waddell & Reed, Inc.

	2020			2019
Earnings per share	$	1.08		$	1.57
Adjusted Earnings per share (1)	$	1.58		$	1.87
Net income attributable to the Company	$	70.5 million		$	115.0 million
Adjusted net income attributable to the Company (1)	$	102.8 million		$	137.4 million
Operating income	$	94.8 million		$	145.7 million
Adjusted operating income (1)	$	134.4 million		$	163.9 million
Operating expenses	$	954.7 million		$	924.6 million
Adjusted operating expenses (1)	$	915.1 million		$	906.4 million
Controllable expenses (2)	$	449.4 million		$	428.9 million
Operating Margin		9.0	%		13.6	%
Adjusted operating Margin (1)		12.8	%		15.3	%
AUM	$	74.8 billion at December 31		$	70.0 billion at December 31
AUA	$	69.7 billion at December 31		$	60.1 billion at December 31
Cash and investments	$	760.5 million		$	840.2 million
Capital return	$	180.2 million		$	228.5 million

	·	Dividends – $65.6 million		·	Dividends – $74.3 million

	·	Stock repurchases – $114.7 million		·	Stock repurchases – $154.2 million



				Wealth
	Unaffiliated⁽²⁾		Institutional	Management	Total
	(in millions)
2019
Beginning Assets	$	24,977	3,655	37,177	65,809
Sales⁽³⁾		4,737	276	2,948	7,961
Redemptions		(9,933)	(1,901)	(6,311)	(18,145)
Net Exchanges		1,192	25	(1,217)	—
Net Flows		(4,004)	(1,600)	(4,580)	(10,184)
Market Action		5,291	1,041	8,001	14,333
Ending Assets at December 31, 2019	$	26,264	3,096	40,598	69,958
2018
Beginning Assets	$	31,133	6,289	43,660	81,082
Sales⁽³⁾		7,287	873	3,835	11,995
Redemptions		(11,399)	(4,108)	(6,889)	(22,396)
Net Exchanges		759	511	(1,270)	—
Net Flows		(3,353)	(2,724)	(4,324)	(10,401)
Market Action		(2,803)	90	(2,159)	(4,872)
Ending Assets at December 31, 2018	$	24,977	3,655	37,177	65,809
2017
Beginning Assets	$	30,295	7,904	42,322	80,521
Sales⁽³⁾		7,243	356	4,221	11,820
Redemptions		(11,990)	(3,446)	(7,753)	(23,189)
Net Exchanges		1,001	6	(1,007)	—
Net Flows		(3,746)	(3,084)	(4,539)	(11,369)
Market Action		4,584	1,469	5,877	11,930
Ending Assets at December 31, 2017	$	31,133	6,289	43,660	81,082

	Base Salary		Cash Incentive		Equity- Based Incentive		2020 Total Direct Compensation		2019 Total Direct Compensation
Philip J. Sanders	$	725,000	$	2,030,000	$	2,718,500	$	5,473,500	$	4,325,000
Benjamin R. Clouse	$	420,000	$	1,338,750	$	420,000	$	2,178,750	$	1,525,000
Brent K. Bloss	$	525,000	$	1,748,250	$	1,575,000	$	3,848,250	$	2,650,000
Daniel P. Hanson	$	525,000	$	1,575,000	$	1,575,000	$	3,675,000	$	2,332,692
Shawn M. Mihal	$	400,000	$	1,225,000	$	400,000	$	2,025,000	$	1,375,000


MorningStar Fund Rankings ¹	1 Year		3 Years		5 Years
Funds ranked in top half	43	%	42	%	33	%
Assets ranked in top half	52	%	62	%	41	%


MorningStar Ratings ¹	Overall		3 Years		5 Years
Funds with 4/5 stars	34	%	31	%	23	%
Assets with 4/5 stars	51	%	42	%	34	%


	For the Year ended
	December 31,							Variance
								2019 vs.		2018 vs.
	2019			2018		2017		2018		2017
	(in thousands, except per share and percentage data)
Net income attributable to Waddell & Reed Financial, Inc.	$	114,992		183,588		141,279		(37)	%	30	%
Earnings per share, basic and diluted	$	1.57		2.28		1.69		(31)	%	35	%
Operating Margin		14	%	19	%	19	%	(5)	%	—

	2020 Target									2020 Actual									2019 Actual
	Base Salary %			Cash Incentive %			Equity- Based Incentive %			Base Salary %			Cash Incentive %			Equity- Based Incentive %			Base Salary %			Cash Incentive %			Equity- Based Incentive %
Philip J. Sanders		15	%		27	%		58	%		13	%		37	%		50	%		17	%		22	%		61	%
Benjamin R. Clouse		31	%		38	%		31	%		19	%		62	%		19	%		26	%		38	%		36	%
Brent K. Bloss		18	%		27	%		55	%		14	%		45	%		41	%		18	%		27	%		55	%
Daniel P. Hanson		18	%		27	%		55	%		14	%		43	%		43	%		12	%		20	%		68	%
Shawn M. Mihal		31	%		38	%		31	%		20	%		60	%		20	%		27	%		35	%		38	%

·AllianceBernstein Holding L.P.	·GAMCO Investors, Inc.
·Artisan Partners Asset Management Inc.	·Legg Mason, Inc.
·BrightSphere Investment Group plc	·Victory Capital Holdings, Inc.
·Cohen & Steers, Inc.	·Virtus Investment Partners, Inc.
·Federated Investors, Inc.	·WisdomTree Investments, Inc.


	Long-term redemption rates
	(excludes money market redemptions)
	for the year ended December 31,
	2019		2018		2017
Unaffiliated channel	38.1	%	38.7	%	40.1	%
Institutional channel	51.0	%	75.2	%	48.7	%
Wealth Management channel	13.8	%	13.9	%	15.6	%
Total	25.0	%	27.8	%	27.8	%


	Unaffiliated Channel
	2019		2018	2017
	(in thousands)
Underwriting and distribution fee revenues:
Rule 12b-1 service and distribution fees	$	65,227	78,041	91,313
Sales commissions on front-end load mutual fund sales		1,730	1,886	1,498
Other revenues		290	568	1,182
Total	$	67,247	80,495	93,993


	Wealth Management Channel
	2019		2018	2017
	(in thousands)
Underwriting and distribution fee revenues:
Fee-based asset allocation product revenues	$	284,188	269,069	240,089
Rule 12b-1 service and distribution fees		63,197	70,938	75,850
Sales commissions on front-end load mutual fund and variable annuity sales		48,471	54,895	55,293
Sales commissions on other products		32,314	36,131	31,286
Other revenues		36,419	38,482	22,188
Total	$	464,589	469,515	424,706

	○	Announced partnerships with non-profit organizations focused on connecting and increasing women in the workplace

	Base Salary		Cash Target %			Cash Target $		Equity-Based Target %			Equity-Based Target $
Philip J. Sanders	$	725,000		175	%	$	1,268,750		375	%	$	2,718,750
Benjamin R. Clouse	$	420,000		125	%	$	525,000		100	%	$	420,000
Brent K. Bloss	$	525,000		150	%	$	787,500		300	%	$	1,575,000
Daniel P. Hanson	$	525,000		150	%	$	787,500		300	%	$	1,575,000
Shawn M. Mihal	$	400,000		125	%	$	500,000		100	%	$	400,000


				2021-	2023-	Thereafter/
	Total		2020	2022	2024	Indeterminate
	(in thousands)
Short-term and long-term debt obligations, including interest	$	103,194	5,463	97,731	—	—
Non-cancelable operating lease commitments		37,402	11,660	14,300	8,537	2,905
Purchase obligations		133,728	61,093	54,239	18,396	—
Unrecognized tax benefits		2,005	15	—	—	1,990
	$	276,329	78,231	166,270	26,933	4,895

	Cash Target		Cash Award		Equity-Based Target		Equity-Based Award
Philip J. Sanders	$	1,268,750	$	2,030,000	$	2,718,750	$	2,718,750
Benjamin R. Clouse	$	525,000	$	1,338,750	$	420,000	$	420,000
Brent K. Bloss	$	787,500	$	1,748,250	$	1,575,000	$	1,575,000
Daniel P. Hanson	$	787,500	$	1,575,000	$	1,575,000	$	1,575,000
Shawn M. Mihal	$	500,000	$	1,225,000	$	400,000	$	400,000

	2019 Cash Award		2020 Cash Award		Change $		Change %
Philip J. Sanders	$	950,000	$	2,030,000	$	1,080,000		114	%
Benjamin R. Clouse	$	575,000	$	1,338,750	$	763,750		133	%
Brent K. Bloss	$	725,000	$	1,748,250	$	1,023,250		141	%
Daniel P. Hanson	$	475,000	$	1,575,000	$	1,100,000		232	%
Shawn M. Mihal	$	475,000	$	1,225,000	$	750,000		158	%

	2019 Equity Award		2020 Equity Award		Change $			Change %
Philip J. Sanders	$	2,650,000	$	2,718,750	$	68,750			3	%
Benjamin R. Clouse	$	550,000	$	420,000	$	(130,000	)		(24	)%
Brent K. Bloss	$	1,450,000	$	1,575,000	$	125,000			9	%
Daniel P. Hanson	$	1,575,000	$	1,575,000		-			-
Shawn M. Mihal	$	525,000	$	400,000	$	(125,000	)		(24	)%

Name and Principal Position	Year		Salary ($)		Bonus ($)		Equity-Based Awards ($)(1)		Non-Equity Incentive Plan Compensation ($)(2)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(3)			All Other Compensation ($)(4)		Total ($)
(a)	(b)		(c)		(d)		(e)		(f)		(g)			(h)		(i)
Philip J. Sanders		2020		725,000				2,650,009		2,030,000		(1,119,206	)		17,000		4,302,803
Chief Executive		2019		725,000		-		-		950,000		221,238			30,572		1,926,810
Officer		2018		725,000		-		2,975,010		750,000		-			18,478		4,468,488

Benjamin R. Clouse		2020		420,000		-		550,001		1,338,750		(55,427	)		17,000		2,270,324
SVP and Chief		2019		400,000				-		575,000		17,169			16,800		1,008,969
Financial Officer		2018		350,000		-		700,003		375,000		-			12,060		1,437,063

Brent. K. Bloss		2020		525,000				1,450,008		1,748,250		(672,099	)		17,000		3,068,159
President		2019		475,000		-		-		725,000		184,031			31,960		1,415,991
		2018		475,000		-		1,500,007		600,000		-			18,934		2,593,941

Daniel P. Hanson		2020		525,000				1,575,006		1,575,000		-			17,000		3,692,006
SVP and Chief		2019		282,692		-		2,500,002		475,000		-			34,389		3,292,083
Investment Officer (5)

Shawn M. Mihal		2020		400,000				525,002		1,225,000		(83,059	)		17,922		2,084,865
SVP – Wealth		2019		375,000		-		-		475,000		26,707			38,359		915,066
Management		2018		350,000		375,000		900,023		250,011		-			35,344		1,910,378

	Salary		Equity-Based Awards		Non-Equity Incentive		Change in Pension			All Other Compensation		Total
Philip J. Sanders	$	725,000	$	2,718,764	$	2,030,000	$	(1,119,206	)	$	17,000	$	4,354,558
Benjamin R. Clouse	$	420,000	$	420,021	$	1,338,750	$	(55,247	)	$	17,000	$	2,123,344
Brent K. Bloss	$	525,000	$	1,575,016	$	1,748,250	$	(672,099	)	$	17,000	$	3,176,167
Daniel P. Hanson	$	525,000	$	1,575,016	$	1,575,000		n/a		$	17,000	$	3,675,016
Shawn M. Mihal	$	400,000	$	400,019	$	1,225,000	$	(83,059	)	$	17,922	$	1,941,960

					Estimated Possible Payouts Under Non-Equity Incentive Plan Awards						All Other Stock Awards: Number of Shares of		Grant Date Fair Value of
Name	Grant Date		Date of Committee Action		Thres- hold ($)		Target ($)(1)		Maximum ($)		Stock or Units (#) (2)		Stock and Unit Awards ($) (3)
(a)	(b)		(c)		(d)		(e)		(f)		(g)		(h)
Philip J.		-		-		-		1,268,750		-		-		-
Sanders		03/10/2020		01/27/2020								206,387		2,650,009

Benjamin R.		-		-		-		525,000		-		-		-
Clouse		03/10/2020		01/27/2020								42,835		550,001

Brent K.		-		-		-		787,500		-		-		-
Bloss		03/10/2020		01/27/2020								112,929		1,450,008

Daniel P		-		-		-		787,500		-		-		-
Hanson		03/10/2020		01/27/2020								122,664		1,575,006

Shawn M.		-		-		-		500,000		-		-		-
Mihal		03/10/2020		01/27/2020								40,888		525,002


	Year Ended
	December 31,
	2019			2018

Net income attributable to Waddell & Reed Financial, Inc. (GAAP)	$	114,992		$	183,588
Adjustments
Severance		5,401			9,066
Non-cash asset impairments		12,841			—
Intangible impairment		—			1,200
Pension revaluation		11,217			(16,129)
Tax effect of adjustments		(7,070)			1,407
Adjusted net income attributable to Waddell & Reed Financial, Inc. (non-GAAP)	$	137,381		$	179,132

Weighted average share outstanding-basic and diluted		73,299			80,468
Adjusted net income per share, basic and diluted (non-GAAP)	$	1.87		$	2.23

Operating expenses (GAAP)	$	924,623		$	938,253
Adjustments
Severance		5,401			9,066
Non-cash asset impairments		12,841			—
Intangible impairment		—			1,200
Adjusted operating expenses (non-GAAP)	$	906,381		$	927,987

Operating income (GAAP)	$	145,692		$	222,048
Adjustments
Severance		5,401			9,066
Non-cash asset impairments		12,841			—
Intangible impairment		—			1,200
Adjusted operating income (non-GAAP)	$	163,934		$	232,314

Operating revenue	$	1,070,315		$	1,160,301
Adjusted operating margin (non-GAAP)		15.3	%		20.0	%

	Stock Awards
Name	Grant Date	Number of Shares or Units of Stock That Have Not Vested (#)			Market Value of Shares or Units of Stock That Have Not Vested ($)
(a)		(b)			(c)
Philip J. Sanders	12/31/17		34,971	(1)		890,711
	12/31/18		82,273	(2)		2,095,493
	03/10/20		206,387	(3)		5,256,677

Benjamin R. Clouse	12/31/17		5,595	(1)		142,505
	12/31/18		19,358	(2)		493,048
	03/10/20		42,835	(3)		1,091,007

Brent K. Bloss	12/31/17		18,464	(1)		470,278
	12/31/18		41,482	(2)		1,056,547
	03/10/20		112,929	(3)		2,876,302

Daniel P. Hanson	06/10/19		112,007	(4)		2,852,818
	03/10/20		122,664	(3)		3,124,252

Shawn M. Mihal	01/10/17		1,622	(5)		41,312
	01/10/17		1,622	(5)		41,312
	01/10/18		5,638	(6)		143,600
	01/10/18		5,638	(6)		143,600
	12/31/18		17,976	(2)		457,849
	03/10/20		40,888	(3)		1,041,417

	Stock Awards
Name	Number of Shares Acquired on Vesting(#)(1)		Value Realized on Vesting ($)(2)
(a)		(b)		(c)
Philip J. Sanders		111,983		2,852,207
Benjamin R. Clouse		19,118		486,935
Brent K. Bloss		58,106		1,479,960
Daniel P. Hanson		37,336		582,068
Shawn M. Mihal		20,491		405,638

Name	Plan Name	Number of Years Credited Service (#)		Present Value of Accumulated Benefit ($)		Payments During Last Fiscal Year ($)(1)
(a)	(b)	(c)		(d)		(e)
Philip J. Sanders	Pension Plan		19		-		1,095,595
Benjamin R. Clouse	Pension Plan		1.98		-		48,507
Brent K. Bloss	Pension Plan		15.75		-		615,277
Daniel P. Hanson (2)	Pension Plan		-		-		-
Shawn M. Mihal	Pension Plan		2.52		-		71,354


			Fair Value	Fair Value
			Assuming a 10%	Assuming a 10%
Investment Securities	Fair Value		Increase	Decrease
	(in thousands)
Available for sale:
Commercial paper	$	1,977	2,175	1,779
Corporate bonds		254,291	279,720	228,862
Trading:
Commercial paper		1,977	2,175	1,779
Corporate bonds		84,920	93,412	76,428
U.S. Treasury bills		5,979	6,577	5,381
Mortgage-backed securities		4	4	4
Term Loans		44,268	48,695	39,841
Consolidated sponsored funds		43,567	47,924	39,210
Equity Securities:
Common stock		34,945	38,440	31,451
Sponsored funds		178,386	196,225	160,547
Sponsored privately offered funds		845	930	761
Equity Method:
Sponsored funds		37,187	40,906	33,468
Total	$	688,346	757,183	619,511

Name	Payments and Benefits under Severance Plan ($)(1)(2)		Change in Control Events, Death, or Disability Pursuant to Company Stock Plans ($)(3)		Payments under Change of Control Agreements ($)(4)
	(a)		(b)		(c)
Philip J. Sanders
Retention Payment						5,080,300
Severance Payment		613,462				725,000
Medical and Dental Benefits		9,697
Career Transition Services		108,750
Equity Award Vesting				8,242,881
Total		731,908				5,805,300
Benjamin R. Clouse
Retention Payment						2,228,599
Severance Payment		96,923				420,000
Medical and Dental Benefits		3,708
Career Transition Services		63,000
Equity Award Vesting				1,726,560
Total		163,631				2,648,599
Brent K. Bloss
Retention Payment						3,441,400
Severance Payment		363,462				525,000
Medical and Dental Benefits		11,124
Career Transition Services		78,750
Equity Award Vesting				4,403,127
Total		453,336				3,966,400
Daniel P. Hanson
Retention Payment						3,313,000
Severance Payment		121,154				525,000
Medical and Dental Benefits		3,708
Career Transition Services		78,750
Equity Award Vesting				5,977,070
Total		203,612				3,838,000
Shawn M. Mihal
Retention Payment						2,048,661
Severance Payment		92,308				400,000
Medical and Dental Benefits		3,708
Career Transition Services		60,000
Equity Award Vesting				1,869,090
Total		156,016				2,448,661