UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the quarterly period ended September 30, ~~2017~~2020

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the transition period from to

Commission file number 001-13913

WADDELL & REED FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

~~Delaware~~
Delaware		51-0261715
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

6300 Lamar Avenue

Overland Park, Kansas66202

(Address, including zip code, of Registrant’s principal executive offices)

~~(913)~~ (913) 236-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.☐.

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐.☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐
~~(Do not check if a smaller reporting company)~~
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.☒.

Shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date:


Class		Outstanding as of October ~~20, 2017~~23, 2020
Class A common stock, $.01 par value		~~83,371,059~~62,547,588

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

September 30,

2017

December 31,

(Unaudited)

2016

Assets:





Cash and cash equivalents

$
225,922

555,102

Cash and cash equivalents - restricted

35,551

31,137

Investment securities

697,138

328,750

Receivables:

Funds and separate accounts

22,510

27,181

Customers and other

114,723

128,095

Prepaid expenses and other current assets

22,943

21,574

Total current assets

1,118,787

1,091,839

Property and equipment, net

91,708

102,449

Goodwill and identifiable intangible assets

147,069

148,569

Deferred income taxes

20,457

31,430

Other non-current assets

20,834

31,985

Total assets

$
1,398,855

1,406,272

Liabilities:

Accounts payable

$
31,391

28,023

Payable to investment companies for securities

50,320

53,691

Payable to third party brokers

24,857

31,735

Payable to customers

60,118

82,918

Short-term notes payable

94,971

—

Accrued compensation

49,680

41,672

Other current liabilities

58,867

58,939

Total current liabilities

370,204

296,978

Long-term debt

94,765

189,605

Accrued pension and postretirement costs

8,874

38,379

Other non-current liabilities

24,071

26,655

Total liabilities

497,914

551,617

Commitments and contingencies

Redeemable noncontrolling interests

30,636

10,653

Stockholders’ equity:

Preferred stock—$1.00 par value: 5,000 shares authorized; none issued

—

—

Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 83,373 shares outstanding (83,118 at December 31, 2016)

997

997

Additional paid-in capital

296,116

291,908

Retained earnings

1,112,374

1,135,694

Cost of 16,328 common shares in treasury (16,583 at December 31, 2016)

(509,870)

(531,268)

Accumulated other comprehensive loss

(29,312)

(53,329)

Total stockholders’ equity

870,305

844,002

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

$
1,398,855

1,406,272


	September 30,
	2020		December 31,
	(Unaudited)		2019
Assets:
Cash and cash equivalents	$	165,259	151,815
Cash and cash equivalents - restricted		61,933	74,325
Investment securities		579,344	688,346
Receivables:
Funds and separate accounts		13,050	15,167
Customers and other		57,781	80,089
Prepaid expenses and other current assets		35,946	31,655
Total current assets		913,313	1,041,397

Property and equipment, net		27,213	34,726
Goodwill and identifiable intangible assets		145,869	145,869
Deferred income taxes		15,676	14,418
Other non-current assets		23,359	29,918
Total assets	$	1,125,430	1,266,328

Liabilities:
Accounts payable	$	17,509	20,123
Payable to investment companies for securities		17,443	36,883
Payable to third party brokers		16,559	17,123
Payable to customers		81,265	84,558
Short-term notes payable		94,980	—
Accrued compensation		65,896	79,507
Other current liabilities		56,515	71,001
Total current liabilities		350,167	309,195

Long-term debt		—	94,926
Accrued pension and postretirement costs		579	3,145
Other non-current liabilities		27,173	30,960
Total liabilities		377,919	438,226

Redeemable noncontrolling interests		—	19,205

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; 62,548 shares outstanding (68,847 at December 31, 2019)		997	997
Additional paid-in capital		296,220	312,693
Retained earnings		1,270,678	1,241,598
Cost of 37,153 common shares in treasury (30,854 at December 31, 2019)		(824,309)	(749,625)
Accumulated other comprehensive income		3,925	3,234
Total stockholders’ equity		747,511	808,897

Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	1,125,430	1,266,328

See accompanying notes to the unaudited consolidated financial statements.

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited, in thousands, except for per share data)

For the three months ended September 30,

For the nine months ended September 30,

2017

2016

2017

2016

Revenues:











Investment management fees

$
134,149

138,745

$
395,463

424,403

Underwriting and distribution fees

128,892

135,778

386,499

428,748

Shareholder service fees

26,406

28,563

80,706

92,959

Total

289,447

303,086

862,668

946,110

Operating expenses:

Underwriting and distribution

149,400

152,999

450,843

508,080

Compensation and related costs (including share-based compensation of $14,180, $12,425, $42,419 and $38,573, respectively)

48,340

40,214

144,970

151,495

General and administrative

27,832

23,280

81,709

61,708

Subadvisory fees

3,566

2,566

9,457

6,984

Depreciation

5,230

4,541

15,626

13,163

Intangible asset impairment

—

5,700

1,500

5,700

Total

234,368

229,300

704,105

747,130

Operating income

55,079

73,786

158,563

198,980

Investment and other income (loss)

7,236

7,878

11,386

(1,653)

Interest expense

(2,796)

(2,792)

(8,370)

(8,336)

Income before provision for income taxes

59,519

78,872

161,579

188,991

Provision for income taxes

20,296

24,067

64,857

63,146

Net income

39,223

54,805

96,722

125,845

Net income attributable to redeemable noncontrolling interests

1,272

978

2,408

1,355

Net income attributable to Waddell & Reed Financial, Inc.

$
37,951

53,827

$
94,314

124,490

Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted:

$
0.45

0.65

$
1.13

1.51

Weighted average shares outstanding, basic and diluted:

83,476

82,834

83,719

82,629


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019

Revenues:
Investment management fees	$	106,617		111,806	$	307,660		334,438
Underwriting and distribution fees		139,456		135,787		400,032		395,527
Shareholder service fees		21,597		23,087		63,745		70,279
Total		267,670		270,680		771,437		800,244

Operating expenses:
Distribution		122,195		117,425		350,104		343,696
Compensation and benefits (including share-based compensation of $11,080, $11,580, $33,595, and $35,471 respectively)		62,416		64,999		182,704		191,718
General and administrative		19,156		16,680		58,278		47,421
Technology		14,250		15,019		41,989		47,769
Occupancy		4,160		5,684		13,160		19,100
Marketing and advertising		1,370		2,134		4,385		6,497
Depreciation		2,998		4,833		9,720		16,062
Subadvisory fees		3,490		3,882		10,444		11,154
Total		230,035		230,656		670,784		683,417

Operating income		37,635		40,024		100,653		116,827
Investment and other income		5,449		5,212		12,852		23,690
Interest expense		(1,542)		(1,562)		(4,630)		(4,662)

Income before provision for income taxes		41,542		43,674		108,875		135,855
Provision for income taxes		10,296		10,175		29,341		35,036
Net income		31,246		33,499		79,534		100,819
Net income attributable to redeemable noncontrolling interests		723		445		2,201		1,763
Net income attributable to Waddell & Reed Financial, Inc.	$	30,523		33,054	$	77,333		99,056

Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted:	$	0.48		0.46	$	1.18		1.33

Weighted average shares outstanding, basic and diluted:		64,240		72,387		65,795		74,446

See accompanying notes to the unaudited consolidated financial statements.

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

For the three months ended September 30,

For the nine months ended September 30,

2017

2016

2017

2016


Net income

$
39,223

54,805

$
96,722

125,845

Other comprehensive income:

Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $364, $1, $(1,310), and $2, respectively

2,070

(344)

6,904

1,616

Pension and postretirement benefit, net of income tax expense (benefit) of $9,186, $(167), $10,080, and $1,018, respectively

15,601

(167)

17,113

1,870

Comprehensive income

56,894

54,294

120,739

129,331

Comprehensive income attributable to redeemable noncontrolling interests

1,272

978

2,408

1,355

Comprehensive income attributable to Waddell & Reed Financial, Inc.

$
55,622

53,316

$
118,331

127,976


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019

Net income	$	31,246		33,499	$	79,534		100,819

Other comprehensive (loss) income:

Unrealized (loss) gain on available for sale investment securities during the period, net of income tax (benefit) expense of $(161), $92, $274 and $1,011, respectively		(511)		296		842		3,235

Postretirement benefit, net of income tax benefit of $(16), $(30), $(50) and $(88), respectively		(51)		(94)		(151)		(283)

Comprehensive income		30,684		33,701		80,225		103,771
Comprehensive income attributable to redeemable noncontrolling interests		723		445		2,201		1,763
Comprehensive income attributable to Waddell & Reed Financial, Inc.	$	29,961		33,256	$	78,024		102,008

See accompanying notes to the unaudited consolidated financial statements.

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated ~~Statement~~Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests

~~For the Nine Months Ended September 30, 2017~~

(Unaudited, in thousands)


	For the three months ended September 30,
							Accumulated		Redeemable
				Additional			Other	Total	Non
	Common Stock			Paid-In	Retained	Treasury	Comprehensive	Stockholders’	Controlling
	Shares	Amount		Capital	Earnings	Stock	Income (Loss)	Equity	Interests
Balance at June 30, 2019	99,701	$	997	294,487	1,227,314	(669,223)	3,081	856,656	15,115
Net income	—		—	—	33,054	—	—	33,054	445
Net subscription of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	1,353
Recognition of equity compensation	—		—	8,024	57	—	—	8,081	—
Net issuance/forfeiture of nonvested shares	—		—	627	—	(627)	—	—	—
Dividends accrued, $0.25 per share	—		—	—	(17,748)	—	—	(17,748)	—
Repurchase of common stock	—		—	—	—	(40,715)	—	(40,715)	—
Other comprehensive income	—		—	—	—	—	202	202	—
Balance at September 30, 2019	99,701	$	997	303,138	1,242,677	(710,565)	3,283	839,530	16,913



Balance at June 30, 2020	99,701	$	997	289,439	1,255,770	(783,990)	4,487	766,703	25,857
Net income	—		—	—	30,523	—	—	30,523	723
Net deconsolidation of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	(26,580)
Recognition of equity compensation	—		—	6,514	20	—	—	6,534	—
Net issuance/forfeiture of nonvested shares	—		—	267	—	(267)	—	—	—
Dividends accrued, $0.25 per share	—		—	—	(15,635)	—	—	(15,635)	—
Repurchase of common stock	—		—	—	—	(40,052)	—	(40,052)	—
Other comprehensive loss	—		—	—	—	—	(562)	(562)	—
Balance at September 30, 2020	99,701	$	997	296,220	1,270,678	(824,309)	3,925	747,511	—


	For the nine months ended September 30,
							Accumulated		Redeemable
				Additional			Other	Total	Non
	Common Stock			Paid-In	Retained	Treasury	Comprehensive	Stockholders’	Controlling
	Shares	Amount		Capital	Earnings	Stock	Income (Loss)	Equity	interest
Balance at December 31, 2018	99,701	$	997	311,264	1,198,445	(627,587)	331	883,450	11,463
Net income	—		—	—	99,056	—	—	99,056	1,763
Net subscription of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	3,687
Recognition of equity compensation	—		—	25,573	297	—	—	25,870	—
Net issuance/forfeiture of nonvested shares	—		—	(33,699)	—	33,699	—	—	—
Dividends accrued, $0.75 per share	—		—	—	(55,121)	—	—	(55,121)	—
Repurchase of common stock	—		—	—	—	(116,677)	—	(116,677)	—
Other comprehensive income	—		—	—	—	—	2,952	2,952	—
Balance at September 30, 2019	99,701	$	997	303,138	1,242,677	(710,565)	3,283	839,530	16,913



Balance at December 31, 2019	99,701	$	997	312,693	1,241,598	(749,625)	3,234	808,897	19,205
Net income	—		—	—	77,333	—	—	77,333	2,201
Net deconsolidation of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	(21,406)
Recognition of equity compensation	—		—	20,895	110	—	—	21,005	—
Net issuance/forfeiture of nonvested shares	—		—	(37,368)		37,368	—	—	—
Dividends accrued, $0.75 per share	—		—	—	(48,363)	—	—	(48,363)	—
Repurchase of common stock	—		—	—	—	(112,052)	—	(112,052)	—
Other comprehensive income	—		—	—	—	—	691	691	—
Balance at September 30, 2020	99,701	$	997	296,220	1,270,678	(824,309)	3,925	747,511	—

See accompanying notes to the unaudited consolidated financial statements.

Accumulated

Redeemable

Additional

Other

Total

Non

Common Stock

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

Controlling


Shares

Amount

Capital

Earnings

Stock

Income (Loss)

Equity

interest

Balance at December 31, 2016

99,701

$
997

291,908

1,135,694

(531,268)

(53,329)

844,002

10,653

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

—

—

3,504

(2,200)

—

—

1,304

—

Net income

—

—

—

94,314

—

—

94,314

2,408

Net subscription of redeemable noncontrolling interests in sponsored funds

—

—

—

—

—

—

—

17,575

Recognition of equity compensation

—

—

37,737

374

—

—

38,111

—

Net issuance/forfeiture of nonvested shares

—

—

(37,033)

37,033

—

—

Dividends accrued, $1.38 per share

—

—

—

(115,808)

—

—

(115,808)

—

Repurchase of common stock

—

—

—

—

(15,635)

—

(15,635)

—

Other comprehensive income

—

—

—

—

—

24,017

24,017

—

Balance at September 30, 2017

99,701

$
997

296,116

1,112,374

(509,870)

(29,312)

870,305

30,636

Table of Contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	For the nine months ended September 30,
	2020		2019

Cash flows from operating activities:
Net income	$	79,534		100,819
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,368		16,057
Amortization of deferred sales commissions		1,180		1,492
Share-based compensation		33,595		35,471
Investments and derivatives loss (gain), net of collateral		1,688		(15,250)
Net purchases, maturities, and sales of trading and equity securities		22,468		(47,641)
Deferred income taxes		(1,480)		4,622
Net change in equity securities and trading debt securities held by consolidated sponsored funds		(10,886)		16,697
Other		(1,096)		1,273
Changes in assets and liabilities:
Customer and other receivables		3,801		70,220
Payable to investment companies for securities and payable to customers		(22,733)		(105,953)
Receivables from funds and separate accounts		2,117		3,360
Other assets		4,064		14,784
Accounts payable and payable to third party brokers		(6,383)		(10,243)
Other liabilities		(23,265)		(1,477)
Net cash provided by operating activities	$	91,972		84,231

Cash flows from investing activities:
Purchases of available for sale and equity method securities		(28,286)		(149,835)
Proceeds from sales of available for sale and equity method securities		3,257		19,667
Proceeds from maturities of available for sale securities		96,420		116,197
Proceeds from sale of property and equipment		2,262		—
Additions to property and equipment		(7,445)		(4,189)
Net cash provided by (used in) investing activities	$	66,208		(18,160)

Cash flows from financing activities:
Dividends paid		(49,939)		(56,560)
Repurchase of common stock		(112,865)		(118,668)
Net subscriptions (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds		5,807		3,687
Other		(131)		(168)
Net cash used in financing activities	$	(157,128)		(171,709)

Net increase (decrease) in cash, cash equivalents and restricted cash		1,052		(105,638)
Cash, cash equivalents, and restricted cash at beginning of period		226,140		291,555
Cash, cash equivalents, and restricted cash at end of period	$	227,192		185,917

See accompanying notes to the unaudited consolidated financial statements.

WADDELL & REED FINANCIAL, INC. ~~AND SUBSIDIARIES~~

~~Consolidated Statements of Cash Flows~~

~~(Unaudited, in thousands)~~

For the nine months ended September 30,

2017

2016


Cash flows from operating activities:

Net income

$
96,722

125,845

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

15,626

13,163

Write-down of impaired assets

1,500

5,700

Amortization of deferred sales commissions

3,799

21,842

Share-based compensation

38,111

38,573

Investments gain, net

(9,157)

(13,834)

Net purchases of trading securities

(36,643)

(24,353)

Net change in trading securities held by consolidated sponsored funds

(123,865)

(57,444)

Other

4,473

3,131

Changes in assets and liabilities:

Cash and cash equivalents - restricted

(4,414)

44,816

Customer and other receivables

13,372

67,338

Payable to investment companies for securities and payable to customers

(26,171)

(131,120)

Receivables from funds and separate accounts

4,671

8,729

Other assets

5,050

(2,826)

Accounts payable and payable to third party brokers

(3,510)

(21,738)

Other liabilities

3,856

(11,763)

Net cash (used in) provided by operating activities

$
(16,580)

66,059

Cash flows from investing activities:

Purchases of available for sale and equity method securities

(291,539)

(71,852)

Proceeds from sales of available for sale and equity method securities

97,917

148,373

Additions to property and equipment

(5,358)

(13,933)

Net cash of sponsored funds on consolidation

—

6,887

Other

—

(194)

Net cash (used in) provided by investing activities

$
(198,980)

69,281

Cash flows from financing activities:

Dividends paid

(115,691)

(114,736)

Repurchase of common stock

(15,635)

(47,984)

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

17,575

(3,695)

Other

131

2,364

Net cash used in financing activities

$
(113,620)

(164,051)

Net decrease in cash and cash equivalents

(329,180)

(28,711)

Cash and cash equivalents at beginning of period

555,102

558,495

Cash and cash equivalents at end of period

$
225,922

529,784

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

~~WADDELL & REED FINANCIAL, INC.~~

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	Description of Business and Significant Accounting Policies

~~1.Description of Business and Significant Accounting Policies~~

Waddell & Reed Financial, Inc. and Subsidiaries

Waddell & Reed Financial, Inc. (hereinafter referred to as the “Company,” “we,” “our” or “us”) is a holding company, incorporated in the state of Delaware in 1981, that conducts business through its subsidiaries. Founded in 1937, we are one of the oldest mutual fund complexes in the United States, having introduced the former Waddell & Reed Advisors group of mutual funds (the “Advisors Funds”) in 1940. Over time, we added additional mutual funds: Ivy Funds (the “Ivy Funds”); Ivy Variable Insurance Portfolios, our variable product offering (“Ivy VIP”); InvestEd Portfolios, our 529 college savings plan (“InvestEd”); and the Ivy High Income Opportunities Fund, a closed-end mutual fund (“IVH”)~~; and the Ivy Global Investors~~ ~~Société d’Investissement à Capital Variable (~~the “SICAV”) and its Ivy Global Investors sub‑funds (the “IGI Funds”), an undertaking for the collective investment in transferable securities (“UCITS”). In 2016, we introduced the Ivy NextShares® ~~exchange-traded managed funds (“Ivy NextShares”). In the second quarter of 2017, we launched index funds in partnership with ProShares~~® ~~Advisors LLC (“Ivy ProShares”)~~ (collectively, ~~the Advisors Funds,~~ Ivy Funds, Ivy VIP, InvestEd ~~IVH, Ivy NextShares~~ and ~~Ivy ProShares~~IVH are referred to as the “Funds”). In addition to the Funds, our assets under management (“AUM”) include institutional managed accounts. As of September 30, ~~2017,~~2020, we had ~~$80.9~~$67.9 billion in ~~assets under management.~~AUM.

We derive our revenues from providing investment management ~~investment~~and advisory services, investment product underwriting and distribution, and shareholder services administration to the Funds ~~the IGI Funds,~~ and institutional accounts. We also provide wealth management services, primarily to retail clients through Waddell & Reed, Inc. (“W&R”), and ~~separately managed accounts.~~independent financial advisors associated with W&R (“Advisors”), who provide financial planning and advice to their clients. Investment management and advisory fees and certain underwriting and distribution revenues are based on the ~~amount~~level of ~~average~~AUM and assets under ~~management~~administration (“AUA”) and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of fees earned on ~~fee‑based asset allocation products and related~~fee-based advisory ~~services, asset‑based~~programs, asset-based service and distribution fees promulgated under Rule 12b-1 of the Investment Company Act of 1940 ~~as amended~~ (“Rule 12b-1”), distribution fees on certain variable products, and commissions derived from sales of investment and insurance ~~products, and distribution fees on certain variable~~ products. The products sold have various commission structures and the revenues received from those sales vary based on the type and dollar amount sold. Shareholder service fee revenue ~~primarily~~ includes transfer agency fees, custodian fees from retirement plan accounts, ~~and~~ portfolio accounting and administration ~~fees. Transfer agency~~ fees, ~~are asset-based and/or account-based revenues. Portfolio accounting~~ and ~~administration fees are asset-based revenues. Custodian fees from retirement plan accounts are~~is earned based on ~~the~~client AUM or number of client accounts. Our major expenses are for distribution of our products, compensation related costs, occupancy, general and administrative, and information technology.

The Company continues to proactively manage business continuity and safety considerations as circumstances of the coronavirus disease 2019 (“COVID-19”) evolve. Our leadership team’s priority is on ensuring the health and safety of all employees, clients, Advisors and communities, while also ensuring full continuity of service and access. The Company started transitioning to a work from home environment early in March 2020 and has been following the Centers for Disease Control and Prevention and local authorities’ recommendations on safe practices throughout this process. We have undertaken a number of steps to facilitate safety, security and full continuity of service, including:

●

Our Enterprise Preparedness Team and COVID-19 steering committee continue to meet regularly to assess developments and determine the best action to ensure business continuity and the safety of our employees and partners.

●

We have adopted interim business practices, including restricting business travel, requiring meetings to take place via remote access tools, adopting safety protocols to limit the potential for exposure, adopting social distancing practices, implementing a clearly-defined approval process for reentry to any worksite, advising personnel on preventive measures and offering remote collaboration and productivity tools and training resources to our employees.

●

We enhanced monitoring and capabilities of our systems to allow our remote workforce to function efficiently and have continued our educational and monitoring practices to ensure there are no compromises to confidentiality, privacy and cybersecurity requirements.

●

The Ivy investment management and distribution teams transitioned seamlessly to remote working. Our teams have a strong heritage of active collaboration which has migrated to a virtual environment without compromise.

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●

Within our wealth management business, the majority of Advisors are working from temporary locations. We are demonstrating our differentiated service and support model by continuing regular communications with Advisors as well as delivering additional advisor and client focused resources.

●

We have not initiated any layoffs, furloughs or reduced hours. As we implemented our business continuity plans, we have intentionally maintained the same pay practices for all of our employees based upon their regular work schedule, paid spot bonuses to certain employees, implemented a temporary hourly wage increase to designated client services personnel, increased certain benefit coverages for specific COVID-19 related treatments through December and increased our philanthropic contributions to local organizations to help support the COVID-19 responses in our community.

Basis of Presentation

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented. The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2016 (the “2016~~2019 (our “2019 Form 10-K”). Certain amounts in the prior year’s financial statements have been reclassified for consistent presentation. Derivative activity was reclassified within operating activities on our consolidated statements of cash flows to provide a comprehensive view of the impact of the economic hedge program for our seed investment portfolio.

The accompanying unaudited consolidated financial statements are prepared consistent with the accounting policies described in Note 1 to the consolidated financial statements included in our ~~2016~~2019 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) ~~2016-09, “Improvements to Employee Share-Based Payment~~2016-13, Measurement of Credit Losses on Financial Instruments, ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment and 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, all of which became effective January 1, 2017. As required by this ASU, excess tax benefits and tax shortfalls resulting from share-based compensation are recognized as income tax benefit or expense in the income statement on a prospective basis. Additionally, excess tax benefits or shortfalls recognized on share-based compensation are classified as an operating activity in the statement of cash flows. The Company has applied this provision prospectively, and thus, the prior period presented in the statement of cash flows has not been adjusted. This ASU allows entities to withhold shares issued during the settlement of a stock award or option, as a means of meeting minimum tax withholding due by the employee, in an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without resulting in a liability classification of the award. The value of the withheld shares is then remitted by the Company in cash to the taxing

2020.

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authorities on the employees’ behalf. The Company’s historical policy to withhold shares equivalent to the minimum individual tax rate is consistent with the thresholds meeting the classification of an equity award and, therefore, a retrospective classification adjustment was not required. This ASU requires that all cash payments made to taxing authorities on the employees’ behalf for withheld shares be presented as financing activities on the statement of cash flows. As this requirement is consistent with the Company’s historical accounting policy, a retrospective adjustment to presentation of the statement of cash flows was not required. This standard also allows for the option to account for forfeitures as they occur when determining the amount of share-based compensation expense to be recognized, rather than estimating expected forfeitures over the course of a vesting period. The Company elected to account for forfeitures as they occur. The net cumulative effect to the Company from the adoption of this ASU was an increase to additional paid-in capital of $3.5 million, a reduction to retained earnings of $2.2 million and an increase to the non-current deferred tax asset of $1.3 million as of January 1, 2017.

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at September 30, ~~2017~~2020 and the results of operations and cash flows for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 in conformity with accounting principles generally accepted in the United States.

~~2.New~~ Assets Held for Sale

Assets held for sale included real property related to our corporate headquarters move and aviation equipment. The nine months ended September 30, 2020 included asset impairment charges of $0.9 million on assets held for sale, which were recorded in general and administrative expenses in our consolidated statements of income. During the third quarter of 2020, the aviation equipment was sold. As of September 30, 2020, $3.8 million of buildings and $1.9 million of land that were held for sale were included in Property and equipment, net on our consolidated balance sheets. As of December 31, 2019, $3.1 million of equipment, $3.8 million of buildings and $1.9 million of land that were held for sale were included in Property and equipment, net on our consolidated balance sheets. The Company intends to actively pursue the sale of remaining assets held for sale at market prices as soon as reasonably possible.

Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract

As of September 30, 2020, the Company had $5.3 million of capitalized implementation costs for hosting arrangements with $215 thousand of accumulated amortization in prepaid and other current assets on the consolidated balance sheet. Our hosting arrangements that are service contracts include internal and external costs related to various technology additions in support of our asset management and wealth management businesses. Amortization costs are recorded on a straight-line basis over the term of the hosting arrangement agreement.

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2.	New Accounting Guidance

Accounting Guidance Not Yet Adopted

In ~~May 2014,~~December 2019, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ASU ~~2014-09,~~ ~~“Revenue from Contracts with Customers,”~~2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which ~~requires an entity to recognize~~simplifies and improves the ~~amount~~consistent application of ~~revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard also specifies~~ the accounting for income taxes by removing certain ~~costs~~exceptions to ~~obtain or fulfill a contract with a customer. This ASU will supersede much of the~~general principles and by clarifying and amending existing revenue recognition guidance in accounting principles generally accepted in the United States and is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period; early application is permitted for the first interim period within annual reporting periods beginning after December 15, 2016. This ASU permits the use of either the retrospective or cumulative effect transition method. The Company has assessed its revenue streams to identify contracts that are subject to the requirements of the new standard. The Company plans to review the identified contracts and while we have not identified material changes in the timing of revenue recognition, we continue to evaluate the quantitative impact the ASU will have on the consolidated financial statements and related disclosures.

~~In February 2016, FASB issued ASU 2016-02,~~ ~~“Leases,”~~ which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU will be presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply.guidance. This ASU is effective for fiscal years, beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Although the Company is evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures, the Company currently believes the most significant changes will be related to the recognition of new right-of-use assets and lease liabilities on the Company’s consolidated balance sheet for ~~real estate operating leases.~~

~~In August 2016, FASB issued ASU 2016-15,~~ ~~“Classification of Certain Cash Receipts and Cash Payments.”~~ ~~This ASU~~ eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and ~~beneficial~~ ~~interests obtained in a financial asset securitization. This ASU designates the~~ ~~appropriate~~ ~~cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. This ASU is effective for fiscal years, and~~ interim periods within those fiscal years, beginning after December 15, ~~2017,~~2020, with early adoption permitted. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.

3.	Revenue Recognition

~~In November 2016, FASB issued ASU 2016-18,~~ ~~“Statement of Cash Flows: Restricted Cash.”~~ This ASU is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the periodAll revenue recognized in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The amendments in this ASU should be applied retrospectively to all periods presented. Upon adoption of this ASU on January 1, 2018, we will include cash and cash equivalents – restricted

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~~as a component of cash and cash equivalents on the Company’s~~ consolidated statements of ~~cash flows for all periods presented,~~income is considered to be revenue from contracts with customers. The vast majority of revenue is determined based on average assets and ~~will remove the change in cash~~is earned daily or monthly or is transactional and ~~cash equivalents-restricted as a component of net cash (used in) provided by operating activities.~~

~~In March 2017, FASB issued ASU 2017-07,~~ ~~“Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”~~ This ASU changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported in a separate line item outside of operating items. In addition, only the service cost component is eligible for capitalization as part of an asset. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We have concluded that the adoption of this ASU will have no effect on our net income because it only impacts the classification of certain informationearned on the ~~consolidated statement~~trade date. As such, revenue from remaining performance obligations is not significant. The following table depicts the disaggregation of ~~income. The service cost component of net periodic benefit cost was recognized in underwriting~~revenue by product and distribution and compensation and related costs through September 30, 2017. An amendment to freeze our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) was approved effective September 30, 2017; therefore, after September 30, 2017 we will no longer incur service cost. The other components of net periodic cost will be reclassified to investment and other income (loss) on a retrospective basis.channel:



		Three months ended September 30,		Nine months ended September 30,
		2020	2019	2020	2019

		(in thousands)		(in thousands)
Investment management fees:
Funds	$	103,443	107,926	298,712	322,678
Institutional		3,174	3,880	8,948	11,760
Total investment management fees	$	106,617	111,806	307,660	334,438
Underwriting and distribution fees:
Unaffiliated
Service and distribution fees	$	14,623	16,286	43,569	49,366
Sales commissions		223	364	1,047	1,300
Other revenues		82	67	308	242
Total unaffiliated distribution fees	$	14,928	16,717	44,924	50,908
Wealth Management
Advisory fees	$	82,591	73,356	232,243	208,806
Service and distribution fees		15,305	16,143	43,494	47,589
Sales commissions		17,847	20,544	53,538	60,959
Other revenues		8,785	9,027	25,833	27,265
Total wealth management distribution fees		124,528	119,070	355,108	344,619
Total distribution fees	$	139,456	135,787	400,032	395,527
Shareholder service fees:
Total shareholder service fees	$	21,597	23,087	63,745	70,279

Total revenues	$	267,670	270,680	771,437	800,244

~~In May 2017, FASB issued ASU 2017-09,~~ ~~“Compensation-Stock Compensation: Scope of Modification Accounting.”~~ ~~This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718,~~ ~~“Compensation – Stock Compensation Topic.”~~ This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.

4.	Investment Securities

~~3.Investment Securities~~

Investment securities at September 30, ~~2017~~2020 and December 31, ~~2016 are~~2019 were as follows:


				September 30,		December 31,
				2020		2019

	September 30,		December 31,
	2017		2016
		(in thousands)
					(in thousands)
Available for sale securities:
Certificates of deposit	$	13,004	—
Commercial paper		29,882	—	$	9,714	1,977
Corporate bonds		171,099	—		180,203	254,291
U.S. treasury bills		19,937	—
Total available for sale securities					189,917	256,268
Trading debt securities:
Commercial paper					18,774	1,977
Corporate bonds					70,984	84,920
U.S. Treasury bills					—	5,979
Mortgage-backed securities					1	4
Term loans					44,994	44,268
Consolidated sponsored funds					—	43,567
Total trading securities					134,753	180,715
Equity securities:
Common stock					34,206	34,945
Sponsored funds		144,423	122,806		149,857	178,386
Sponsored privately offered funds		—	570		924	845
Total available for sale securities		378,345	123,376
Trading securities:
Certificates of deposit		2,000	—
U.S. treasury bills		4,964	—
Corporate bonds		48,712	—
Mortgage-backed securities		11	13
Common stock		117	101
Consolidated sponsored funds		191,932	145,710
Consolidated sponsored privately offered funds		4,564	—
Sponsored funds		13,456	29,541
Sponsored privately offered funds		657	—
Total trading securities		266,413	175,365
Total equity securities					184,987	214,176
Equity method securities:
Sponsored funds		52,380	26,775		69,687	37,187
Sponsored privately offered funds		—	3,234
Total equity method securities		52,380	30,009
Total securities	$	697,138	328,750	$	579,344	688,346

~~Certificates of deposit, commercial~~Commercial paper and corporate bonds ~~and U.S. treasury bills~~ accounted for as available for sale and held as of September 30, ~~2017~~2020 mature as follows:

Amortized

cost

Fair value

(in thousands)
Within one year
$
75,335

75,349
After one year but within five years

158,845

158,573

$
234,180

233,922


		Amortized
		cost	Fair value

		(in thousands)
Within one year	$	64,321	65,057
After one year but within five years		121,170	124,860
	$	185,491	189,917

~~Certificates of deposit, commercial~~Commercial paper, corporate bonds, ~~and~~ mortgage-backed securities and term loans accounted for as trading and held as of September 30, ~~2017~~2020 mature as follows:

Fair value

(in thousands)
Within one year

$
10,084
After one year but within five years

40,603
After 10 years

5,000

$
55,687


		Fair value
		(in thousands)
Within one year	$	29,580
After one year but within five years		83,508
After five years but within 10 years		21,665
	$	134,753

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at September 30, ~~2017:~~2020:


	Amortized		Unrealized	Unrealized

						Amortized		Unrealized	Unrealized
						cost		gains	losses	Fair value
	cost		gains	losses	Fair value
	(in thousands)					(in thousands)
Available for sale securities:
Certificates of deposit	$	13,000	4	—	13,004
Commercial paper		29,855	27	—	29,882	$	9,720	3	(9)	9,714
Corporate bonds		171,306	34	(241)	171,099		175,771	4,432	—	180,203
U.S. treasury bills		20,020	—	(83)	19,937
Sponsored funds		144,886	1,961	(2,424)	144,423
	$	379,067	2,026	(2,748)	378,345

						$	185,491	4,435	(9)	189,917

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, ~~2016:~~2019:

Amortized

Unrealized

Unrealized


cost

gains

losses

Fair value

(in thousands)

Available for sale securities:

Sponsored funds

$
129,427

828

(7,449)

122,806

Sponsored privately offered funds

265

305

—

570

$
129,692

1,133

(7,449)

123,376


	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

A summary of available for sale investment securities with fair values below carrying values at September 30, ~~2017 and December 31, 2016~~2020 is as follows:

Less than 12 months

12 months or longer

Total

Unrealized

Unrealized

Unrealized
September 30, 2017

Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)
Corporate bonds

$
141,950

(241)

—

—

141,950

(241)
U.S. treasury bills

19,937

(83)

—

—

19,937

(83)
Sponsored funds

12,663

(153)

44,593

(2,271)

57,256

(2,424)

$
174,550

(477)

44,593

(2,271)

219,143

(2,748)

Less than 12 months

12 months or longer

Total

Unrealized

Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)

Commercial paper

2,420

(9)

—

2,420

(9)

Less than 12 months

12 months or longer

Total

Unrealized

Unrealized

Unrealized
December 31, 2016

Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)
Sponsored funds

$
71,051

(1,834)

34,182

(5,615)

105,233

(7,449)

~~Based upon our assessment~~A summary of ~~these~~available for sale investment securities ~~the time frame the investments have been~~with fair values below carrying values at December 31, 2019 is as follows:

Less than 12 months

12 months or longer

Total

Unrealized

Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)

Corporate bonds

4,538

—

8,056

(5)

12,594

(5)

The Company’s investment portfolio included 1 available for sale security in aan unrealized loss position ~~and our intent to hold the investment securities until they have recovered, we determined that a write-down was not necessary~~ at September 30, ~~2017.~~2020.

The Company evaluated available for sale securities in an unrealized loss position at September 30, 2020, including reviewing credit ratings, assessing the extent of losses, and considering the impact of market conditions for each individual security. The Company concluded no allowance for credit losses was necessary as it expects to recover the entire amortized cost basis of each security. The unrealized losses in the Company’s investment portfolio were primarily caused by changes in interest rates. At this time, the Company does not intend to sell, and does not believe it will be required to sell these securities before recovery of their amortized cost.

For equity securities held at the end of the period, net unrealized gains of $7.3 million and net unrealized losses of $0.2 million were recognized for the three months ended September 30, 2020 and September 30, 2019, respectively and net unrealized losses of $0.5 million and net unrealized gains of $17.9 million were recognized for the nine months ended September 30, 2020 and September 30, 2019, respectively.

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Sponsored Funds

The Company has classified its equity investments in the ~~Ivy Funds, Ivy Nextshares, Ivy ProShares and IGI~~ Funds as ~~either trading,~~ equity method investments (when the Company owns between 20% and 50% of the fund) or ~~as available for sale investments~~equity securities measured at fair value through net income (when the Company owns less than 20% of the fund). These entities do not meet the criteria of a variable interest entity (“VIE”) and are considered to be voting interest entities (“VOE”). The Company has determined the ~~Ivy~~ Funds ~~Ivy NextShares and Ivy ProShares~~ are VOEs because the structure of the investment products is such that the voting rights held by the equity holders provide for equality among equity investors. ~~The Company has determined that the IGI Funds are VOEs as their legal structure and the powers of their equity investors prevent the IGI Funds from meeting characteristics of being a VIE.~~

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Sponsored Privately Offered Funds

The Company holds ~~interests~~an interest in a privately offered ~~funds~~fund structured in the form of a limited liability ~~companies.~~company. The members of ~~these entities~~this entity have the substantive ability to remove the Company as managing member or dissolve the entity upon a simple majority vote. ~~These entities do~~This entity does not meet the criteria of a VIE and ~~are~~is considered to be ~~VOEs.~~a VOE.

Consolidated Sponsored Funds

The following table details the balances related to consolidated sponsored funds at September 30, ~~2017,~~2020 and at December 31, ~~2016,~~2019, as well as the Company’s net interest in these funds:


				September 30,		December 31,
				2020		2019

	September 30,		December 31,
	2017		2016
	(in thousands)
				(in thousands)
Cash	$	4,877	6,885	$	—	1,530
Investments		196,496	145,710		—	43,567
Other assets		6,334	763		—	483
Other liabilities		(7,072)	(390)		—	—
Redeemable noncontrolling interests		(30,636)	(10,653)		—	(19,205)
Net interest in consolidated sponsored funds	$	169,999	142,315	$	—	26,375

During the ~~nine months ended September 30, 2017,~~third quarter of 2020, we ~~consolidated certain of the~~deconsolidated one Ivy ~~Funds, Ivy NextShares and Ivy ProShares~~Fund in which we had provided initial seed capital at the time of the ~~funds’ formation. When we~~fund’s formation due to no longer ~~have~~having a controlling financial interest in ~~a sponsored fund, it is deconsolidated from our consolidated financial statements. During~~ the first nine months of 2017, we closed three IGI Funds and deconsolidated the Ivy ProShares, as we no longer have a controlling interest in the funds. Accordingly, we deconsolidated $2.6 million from cash and cash equivalents, $28.6 million from investments and $31.2 million from redeemable noncontrolling interests. Four IGI Funds remain consolidated as of September 30, 2017. There was no impact to the consolidated statements of income as a result of the closures and deconsolidations, as the funds were carried at fair value.fund.

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.

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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 ~~evaluated differently~~ depending upon the specific asset to determine a value. The carrying amounts of certificates of deposit and commercial paper are measured at amortized cost, which approximates fair value ~~of municipal bonds is measured based on pricing models that take into account, among other factors, information received from market makers~~due to the short time between purchase and ~~broker-dealers, current trades, bid-wants lists, offerings, market movements, the callability~~expected maturity of the ~~bond, state~~investments. Depending on the nature of ~~issuance~~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 ~~benchmark yield curves.~~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 ~~trades~~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.

~~Table of contents~~

The following tables summarize our investment securities as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.


September 30, 2020	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total

	(in thousands)
Cash equivalents: (1)
Money market funds	$	45,007	—	—	—	45,007
Commercial paper		—	23,316	—	—	23,316
Total cash equivalents	$	45,007	23,316	—	—	68,323
Available for sale securities:
Commercial paper	$	—	9,714	—	—	9,714
Corporate bonds	$	—	180,203	—	—	180,203
Trading debt securities:
Commercial paper		—	18,774	—	—	18,774
Corporate bonds		—	70,984	—		70,984
Mortgage-backed securities		—	1	—	—	1
Term loans		—	43,288	1,706	—	44,994
Equity securities:
Common stock		34,206	—	—	—	34,206
Sponsored funds		149,857	—	—	—	149,857
Sponsored privately offered funds measured at net asset value (2)		—	—	—	924	924
Equity method securities: (3)
Sponsored funds		69,687	—	—	—	69,687
Total investment securities	$	253,750	322,964	1,706	924	579,344

September 30, 2017

Level 1

Level 2

Level 3

Other Assets Not Held at Fair Value

Total

(in thousands)

Available for sale securities:

Certificates of deposit

$
—

13,004

—

—

13,004

Commercial paper

—

29,882

—

—

29,882

Corporate bonds

—

171,099

—

—

171,099

U.S. treasury bills

—

19,937

—

—

19,937

Sponsored funds

144,423

—

—

—

144,423

Trading securities:

Certificates of deposit

—

2,000

—

—

2,000

U.S. treasury bills

—

4,964

—

—

4,964

Corporate bonds

—

48,712

—

48,712

Mortgage-backed securities


—

11

—

—

11

Common stock

117

—

—

—

117

Consolidated sponsored funds

114,707

77,225

—

—

191,932

Consolidated sponsored privately offered funds measured at net asset value (1)

—

—

—

4,564

4,564

Sponsored funds

13,456

—

—

—

13,456

Sponsored privately offered funds measured at net asset value (1)

—

—

—

657

657

Equity method securities: (2)

Sponsored funds

52,380

—

—

—

52,380

Total

$
325,083

366,834

—

5,221

697,138

Table of Contents


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

December 31, 2016

Level 1

Level 2

Level 3

Other Assets Not Held at Fair Value

Total

(in thousands)

Available for sale securities:

Sponsored funds

$
122,806

—

—

—

122,806

Sponsored privately offered funds measured at net asset value (1)

—

—

—

570

570

Trading securities:

Mortgage-backed securities


—

13

—

—

13

Common stock

101

—

—

—

101

Consolidated sponsored funds

100,847

44,863

—

—

145,710

Sponsored funds

29,541

—

—

—

29,541

Equity method securities: (2)

Sponsored funds

26,775

—

—

—

26,775

Sponsored privately offered funds measured at net asset value (1)

—

—

—

3,234

3,234

Total

$
280,070

44,876

—

3,804

328,750

(1)

~~(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)

~~(2)~~

~~Substantially all of the~~The Company’s equity method investments are investment companies that record their underlying investments at fair value.

Table of ~~contents~~Contents

The following table summarizes the activity of investments categorized as Level 3 for the nine months ended September 30, 2020:

~~4.Derivative Financial Instruments~~


	For the nine months ended
	September 30, 2020
	(in thousands)
Level 3 assets at December 31, 2019	$	3,903
Additions		6,501
Transfers in to level 3		11,086
Transfers out of level 3		(15,622)
Losses in Investment and other income		(1,026)
Redemptions/Paydowns		(3,136)
Level 3 assets at September 30, 2020	$	1,706

Change in unrealized losses for Level 3 assets held at September 30, 2020	$	(9)

~~In 2016, the~~

5.	Derivative Financial Instruments

The Company ~~implemented~~has in place an economic hedge program that uses total return swap contracts to hedge market risk ~~with~~related to its investments in certain sponsored funds. Certain of the consolidated sponsored funds may utilize derivative financial instruments within their portfolios in pursuit of their stated investment objectives. We do not hedge for speculative purposes.

~~Excluding derivative financial instruments held in certain consolidated sponsored funds, the~~The Company was party to ~~seven~~10 total return swap contracts with a combined notional value of ~~$208.5~~$271.2 million and ~~three~~14 total return swap contracts with a combined notional value of ~~$160.2~~$228.2 million as of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. These derivative financial instruments are not designated as hedges for accounting purposes. Changes in fair value of the total return swap contracts are recognized in ~~investment~~Investment and other income ~~(loss), net on~~in the Company’s consolidated ~~statement~~statements of income.

The counterparties of the total return swap contracts posted $3.2 million in cash collateral with the Company as of September 30, 2020, which is included in accounts payable in the Company’s consolidated balance sheet. The Company posted ~~$9.2 million and $7.1~~$3.7 million in cash collateral with the counterparties of the total return swap contracts as of ~~September 30, 2017 and~~ December 31, ~~2016, respectively. The cash collateral~~ 2019, whichis included in customers and other receivables onin the Company’s consolidated balance sheet. The Company does not record its fair value in derivative transactions against the posted collateral.

The following table presents the fair value of the derivative financial instruments ~~excluding derivative financial instruments held in certain consolidated sponsored funds~~ as of September 30, ~~2017~~2020 and December 31, ~~2016:~~2019 and is calculated based on Level 2 inputs:

September 30,

December 31,

2017

2016

Balance sheet


location

Fair value

Fair value

(in thousands)
Total return swap contracts

Other current liabilities

$
811

475


			September 30,		December 31,
	Balance sheet		2020		2019
	location	Fair value		Fair value

		(in thousands)
Total return swap contracts	Prepaid expenses and other current assets	$	2,017		—
Total return swap contracts	Other current liabilities		—		3,990
Net total return swap asset (liability)		$	2,017		(3,990)

The following is a summary of net ~~losses~~(losses) gains recognized in income for the three and nine months ended September 30, ~~2017~~2020 and September 30, ~~2016:~~2019:

Three months ended

Nine months ended

Income statement

September 30,

September 30,


location


2017
2016


2017
2016

(in thousands)

(in thousands)
Total return swap contracts

Investment and other (loss)

$
(8,855)
(8,837)

(27,321)
(30,767)


		Three months ended			Nine months ended
	Income statement	September 30,			September 30,
	location		2020	2019		2020	2019

		(in thousands)			(in thousands)
Total return swap contracts	Investment and other income	$	(14,191)	135	$	(2,571)	(25,728)

~~5.Goodwill and Identifiable Intangible Assets~~

Table of Contents

6.	Goodwill and Identifiable Intangible Assets

Goodwill represents the excess of purchase price over the tangible assets and identifiable intangible assets of an acquired business. Our goodwill is not deductible for tax purposes. The Company performs an annual goodwill impairment assessment during the second quarter of each year and identified 0 impairment during the current year’s assessment. Goodwill and identifiable intangible assets (all considered indefinite lived) at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 are as follows:


				September 30,		December 31,
				2020		2019

	September 30,		December 31,
	2017		2016
	(in thousands)
				(in thousands)
Goodwill	$	106,970	106,970	$	106,970	106,970


Mutual fund management advisory contracts		38,699	38,699		38,699	38,699
Mutual fund management subadvisory contract		1,200	2,700
Other		200	200		200	200
Total identifiable intangible assets		40,099	41,599		38,899	38,899


Total	$	147,069	148,569	$	145,869	145,869

~~6.Indebtedness~~

7.	Indebtedness

Debt is reported at its carrying amount in the consolidated balance ~~sheet.~~sheets. The fair value, calculated based on Level 2 inputs, of the Company’s senior unsecured notes maturing January 13, ~~2018 is $95.8~~2021 was $96.2 million at September 30, ~~2017~~2020 compared to the carrying value net of

~~Table of contents~~

debt issuance costs of $95.0 million, which is listed under short-term notes payable in the consolidated balance sheet. The fair value of the Company’s senior unsecured notes maturing January 13, 2021 is $102.9 million at September 30, 2017 compared to the carrying value net of debt issuance costs of $94.8 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,~~2020, we entered into a ~~three-year~~364-day unsecured revolving credit facility (the “New 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 New Credit Facility replaced the prior credit facility, which was set to terminate in ~~June 2018.~~October 2020. The covenants in the New Credit Facility are consistent with the covenants in the prior credit facility, including the required consolidated leverage ratio and the consolidated interest coverage ratio.

8.	Income Tax Uncertainties

~~7.Income Tax Uncertainties~~

As of January 1, 2017 and September 30, 2017, the Company had unrecognized tax benefits, including penalties and interest, of $11.5 million ($8.4 million net of federal benefit) and $11.2 million ($7.9 million net of federal benefit), respectively, that, if recognized, would impact the Company’s effective tax rate. In the accompanying consolidated balance ~~sheet,~~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 in ~~income taxes payable;~~other current liabilities; 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.

~~The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes.~~ As of ~~January 1, 2017,~~September 30, 2020 and December 31, 2019, the ~~total amount of accrued interest and penalties related to uncertain tax positions recognized in the~~Company’s consolidated balance ~~sheet was $3.8~~sheets included unrecognized tax benefits, including penalties and interest, of $2.1 million ($~~3.1~~1.8 million net of federal benefit)~~. The total amount of penalties~~ and interest, net of federal benefit, related to income tax uncertainties recognized in the statement of income for the nine month period ended September 30, 2017 was $0.3 million. The total amount of accrued penalties and interest related to uncertain tax positions at September 30, 2017 of $4.1$2.0 million ($~~3.2~~1.7 million net of federal benefit) ~~is included in~~, respectively, that if recognized, would impact the ~~total unrecognized~~Company’s effective tax ~~benefits described above.~~rate.

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 ~~2015 and 2016~~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. ~~State~~Our state income tax returns for all years after ~~2012~~2015 and, in certain states, income tax returns for ~~2012,~~2015, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.

~~During the current quarter, the Company closed an Internal Revenue Service audit~~Table of the 2014 tax year. This audit was settled with no significant adjustments. Additionally, the Company is currently under audit in various state and local jurisdictions in which it operates. It is reasonably possible that the Company will settle the audits in these jurisdictions within the next 12-month period. The Company’s liability for unrecognized tax benefits, including penalties and interest, is not expected to decrease significantly upon settlement of these audits. Additionally, such settlements are not anticipated to have a significant impact on the results of operations.Contents

~~8.Pension Plan and Postretirement Benefits Other Than Pension~~

9.	Pension Plan and Postretirement Benefits Other Than Pension

Benefits payable under ~~the Pension Plan are~~our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) were based on employees’ years of service and compensation during the final 10 years of employment. On July 26, 2017, 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 ~~will not accrue~~ceased accruing additional benefits for future service or compensation. Participants ~~will retain~~retained benefits accumulated as of September 30, 2017 in accordance with the terms of the Pension Plan. ~~During~~The Compensation Committee approved the ~~first nine months~~termination of ~~2017, we~~the Pension Plan, effective June 1, 2019. The Company is currently performing the administrative actions required to terminate the Pension Plan in a standard termination, as defined by the Pension Benefit Guaranty Corporation.

In connection with the termination of the Pension Plan, in July 2020, the Company contributed ~~$10.0~~$3.7 million dollars to the Pension Plan. ~~In accordance with applicable accounting standards,~~Payments were made in July 2020 from the Pension ~~Plan’s assets~~Plan to participants, beneficiaries and ~~liabilities were remeasured as of July 31, 2017,~~alternate payees that elected to receive a lump sum distribution and to the ~~date participants were notified~~selected annuity provider that has assumed the liabilities of the ~~freeze. This resulted in a reduction~~Pension Plan. As part of the ~~accrued~~assumption of Pension Plan liabilities by the annuity provider, the Company relieved the pension liability on its balance sheet and recorded settlement losses in the amount of ~~approximately $30.0 million.~~$1.3 million during the third quarter of 2020.

We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially all employees, as well as ~~financial advisors licensed with Waddell & Reed, Inc.~~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~~this plan was established. During the third quarter of 2016,

~~Table of contents~~

the Company amended this plan to discontinue the availability of coverage for any individuals who retire after December 31, 2016.

The components of net periodic pension costs and other postretirement costs related to these plans ~~were as follows:~~are reflected in the table below. Net periodic pension costs are recorded in investment and other income on the Company’s consolidated statements of income.

Other

Other

Pension Benefits

Postretirement Benefits

Pension Benefits

Postretirement Benefits

Three months ended September 30,

Three months ended September 30,

Nine months ended September 30,

Nine months ended September 30,

2017

2016

2017

2016

2017

2016

2017

2016

(in thousands)

(in thousands)

Components of net periodic benefit cost:


















Service cost

2,726

3,050

—

185

8,178

9,149

—

555

Interest cost

1,654

2,358

15

91

4,962

7,074

44

275

Expected return on plan assets

(2,559)

(3,482)

—

—

(7,677)

(10,445)

—

—

Actuarial (gain) loss amortization

1,265

1,554

(45)

(38)

3,795

4,661

(135)

(115)

Prior service cost (credit) amortization

31

93

(1)

1

93

280

(3)

3

Transition obligation amortization

1

1

—

(8,475)

3

3

—

(8,475)

Total (1)

$
3,118

3,574

(31)

(8,236)

9,354

10,722

(94)

(7,757)


				Other						Other
	Pension Benefits			Postretirement Benefits			Pension Benefits			Postretirement Benefits
	Three months ended September 30,				Three months ended September 30,		Nine months ended September 30,				Nine months ended September 30,
	2020		2019		2020	2019	2020		2019		2020	2019

		(in thousands)						(in thousands)
Components of net periodic benefit cost:
Interest cost	$	439	1,537	$	4	9	$	3,071	4,610	$	12	25
Expected return on plan assets		(374)	(1,579)		—	—		(2,618)	(4,736)		—	—
Actuarial gain amortization		—	—		(67)	(124)		—	—		(201)	(371)
Settlement loss		1,272	—		—	—		1,272	—		—	—
Total	$	1,337	(42)	$	(63)	(115)	$	1,725	(126)	$	(189)	(346)

Table of Contents

10.

~~(1)~~

For the three months ended September 30, 2017, $1.1 million and $2.0 million of net periodic pension and other postretirement benefit costs were included in compensation and related costs and underwriting and distribution expense, respectively. For the nine months ended September 30, 2017, $4.8 million and $4.6 million of net periodic pension and other postretirement benefit costs were included in compensation and related costs and underwriting and distribution expense, respectively.Stockholders’ Equity

~~9.Stockholders’ Equity~~

Earnings per Share

The components of basic and diluted earnings per share were as follows:


							Three months ended			Nine months ended
							September 30,			September 30,
							2020		2019	2020		2019

	Three months ended			Nine months ended
	September 30,			September 30,
	2017		2016	2017		2016
	(in thousands, except per share amounts)

							(in thousands, except per share amounts)
Net income attributable to Waddell & Reed Financial, Inc.	$	37,951	53,827	$	94,314	124,490	$	30,523	33,054	$	77,333	99,056


Weighted average shares outstanding, basic and diluted		83,476	82,834		83,719	82,629		64,240	72,387		65,795	74,446


Earnings per share, basic and diluted	$	0.45	0.65	$	1.13	1.51	$	0.48	0.46	$	1.18	1.33

Dividends

~~On July 26, 2017,~~During the quarter, the Board of Directors ~~approved~~declared a quarterly dividend on our common stock in the amount of $0.46 per share to stockholders of record on October 11, 2017. The total dividend to be paid on November 1, 2017 is approximately $38.4 million and was included in other current liabilities as of September 30, 2017.

~~On October 18, 2017, the Board of Directors approved a dividend on our~~Class A common stock in the amount of $0.25 per share ~~payable~~with a November 2, 2020 payment date and an October 12, 2020 record date. The total dividend to be paid on ~~February 1, 2018 to stockholders of record on January 11, 2018.~~November 2, 2020 is $15.6 million.

~~Table of contents~~

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 stock-based compensation programs.

There were ~~190,056~~2,617,108 shares and ~~28,537~~2,480,019 shares repurchased in the open market or privately during the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively, which includes 5619 shares ~~and 28,537 shares, respectively,~~ repurchased from employees who tendered shares to cover ~~their minimum~~ income tax withholdings with respect to vesting of stock awards during ~~these same reporting periods.~~the three months ended September 30, 2019. There were ~~904,410~~7,892,913 shares and ~~2,230,034~~6,849,238 shares repurchased in the open market or privately during the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively, which includes ~~239,410~~451,245 shares and ~~333,034~~440,002 shares, respectively, repurchased from employees who tendered shares to cover ~~their minimum~~ income tax withholdings with respect to ~~the~~ vesting of stock awards during ~~each of~~ these two reporting periods.

Table of Contents

Accumulated Other Comprehensive ~~Loss~~Income

The following tables summarize accumulated other comprehensive ~~loss~~income activity for the three and nine months ended September 30, ~~2017~~2020 and September 30, ~~2016.~~2019.

Change in

valuation

allowance for

unrealized

Pension and

Total

Unrealized

gains

postretirement

accumulated

gains (losses)

(losses) on

benefits

other

on investment

investment

unrealized

comprehensive

Three months ended September 30, 2017

securities

securities

gains (losses)

income (loss)

(in thousands)

Balance at June 30, 2017

$
(1,986)


(540)

(44,457)

(46,983)

Other comprehensive income before reclassification

1,968

800

14,958

17,726

Amount reclassified from accumulated other comprehensive income (loss)

(438)

(260)

643

(55)

Net current period other comprehensive income

1,530

540

15,601

17,671

Balance at September 30, 2017

$
(456)

$
—

(28,856)

(29,312)


	For the three months ended September 30,
				Total
	Unrealized		Postretirement	accumulated
	gains (losses) on		benefits	other
	AFS investment		unrealized	comprehensive
	securities		gains (losses)	income (loss)

	(in thousands)
Balance at June 30, 2020	$	3,874	613	4,487
Other comprehensive loss before reclassification		(371)	—	(371)
Amount reclassified from accumulated other comprehensive income		(140)	(51)	(191)
Net current period other comprehensive loss		(511)	(51)	(562)
Balance at September 30, 2020	$	3,363	562	3,925


Balance at June 30, 2019	$	2,142	939	3,081
Other comprehensive income before reclassification		379	—	379
Amount reclassified from accumulated other comprehensive income		(83)	(94)	(177)
Net current period other comprehensive income (loss)		296	(94)	202
Balance at September 30, 2019	$	2,438	845	3,283

Change in

valuation

allowance for

unrealized

Pension and

Total

Unrealized

gains

postretirement

accumulated

gains (losses)

(losses) on

benefits

other

on investment

investment

unrealized

comprehensive

Three months ended September 30, 2016

securities

securities

gains (losses)

income (loss)

(in thousands)

Balance at June 30, 2016

$
(2,498)


(2,511)

(52,499)

(57,508)

Other comprehensive income (loss) before reclassification

1,660

1,022

(1,222)

1,460

Amount reclassified from accumulated other comprehensive income (loss)

(1,871)

(1,155)

1,055

(1,971)

Net current period other comprehensive loss

(211)

(133)

(167)

(511)

Balance at September 30, 2016

$
(2,709)

$
(2,644)

(52,666)

(58,019)


	For the nine months ended September 30,
				Total
	Unrealized		Postretirement	accumulated
	gains (losses)		benefits	other
	on investment		unrealized	comprehensive
	securities		gains (losses)	income (loss)

	(in thousands)
Balance at December 31, 2019	$	2,521	713	3,234
Other comprehensive income before reclassification		1,344	—	1,344
Amount reclassified from accumulated other comprehensive income		(502)	(151)	(653)
Net current period other comprehensive income (loss)		842	(151)	691
Balance at September 30, 2020	$	3,363	562	3,925


Balance at December 31, 2018	$	(797)	1,128	331
Other comprehensive income before reclassification		3,413	—	3,413
Amount reclassified from accumulated other comprehensive income		(178)	(283)	(461)
Net current period other comprehensive income (loss)		3,235	(283)	2,952
Balance at September 30, 2019	$	2,438	845	3,283

~~Table of contents~~

Change in
valuation

allowance for

unrealized

Pension and

Total

Unrealized

gains

postretirement

accumulated

gains (losses)

(losses) on

benefits

other

on investment

investment

unrealized

comprehensive

Nine months ended September 30, 2017

securities

securities

gains (losses)

income (loss)

(in thousands)

Balance at December 31, 2016

$
(3,972)


(3,388)

(45,969)

(53,329)

Other comprehensive income before reclassification

4,113

3,743

14,958

22,814

Amount reclassified from accumulated other comprehensive income (loss)

(597)

(355)

2,155

1,203

Net current period other comprehensive income

3,516

3,388

17,113

24,017

Balance at September 30, 2017

$
(456)

$
—

(28,856)

(29,312)

Change in

valuation

allowance for

unrealized

Pension and

Total

Unrealized

gains

postretirement

accumulated

(gains) losses

(losses) on

benefits

other

on investment

investment

unrealized

comprehensive

Nine months ended September 30, 2016

securities

securities

gains (losses)

income (loss)

(in thousands)

Balance at December 31, 2015

$
(3,729)


(3,240)

(54,536)

(61,505)

Other comprehensive income (loss) before reclassification

3,207

1,938

(1,222)

3,923

Amount reclassified from accumulated other comprehensive income (loss)

(2,187)

(1,342)

3,092

(437)

Net current period other comprehensive income

1,020

596

1,870

3,486

Balance at September 30, 2016

$
(2,709)

$
(2,644)

(52,666)

(58,019)

Reclassifications from accumulated other comprehensive ~~loss~~income (loss) and included in net income are summarized in the tables that follow.


			Tax
For the three months ended September 30, 2020	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	$	184	(44)	140	Investment and other income
Amortization of postretirement benefits		67	(16)	51	Compensation and benefits
Total	$	251	(60)	191

For the three months ended September 30, 2017

Tax

(expense)

Pre-tax

benefit

Net of tax

Statement of income line item

(in thousands)

Reclassifications included in net income:










Sponsored funds investment gains

$
698

(260)

438

Investment and other income (loss)

Valuation allowance

—

260

260

Provision for income taxes

Amortization of pension and postretirement benefits

(952)

309

(643)

Underwriting and distribution expense and Compensation and related costs

Total

$
(254)

309

55

Table of Contents

			Tax
For the three months ended September 30, 2019	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	$	109	(26)	83	Investment and other income
Amortization of postretirement benefits	$	124	(30)	94	Compensation and benefits
Total	$	233	(56)	177


			Tax
For the nine months ended September 30, 2020	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	$	661	(159)	502	Investment and other income
Amortization of postretirement benefits		201	(50)	151	Compensation and benefits
Total	$	862	(209)	653



			Tax
For the nine months ended September 30, 2019	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		371	(88)	283	Compensation and benefits
Total	$	605	(144)	461

11.

Leases

The Company has operating and finance leases for corporate office space and equipment. Our leases have remaining lease terms of less than one year to six years, some of which include options to extend leases for up to 20 years, and some of which include options to terminate the leases within one year. Certain leases include variable lease payments in future periods based on a market index or rate. We determine if an arrangement is a lease at inception (or the effective date of ASU 2016-02, Leases). Operating lease assets and liabilities are included in other non-current assets, other current liabilities, and other non-current liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, net, other current liabilities, and other non-current liabilities in our consolidated balance sheets.

Right-of-use (“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. ROU assets and liabilities are recognized at the commencement date (or the effective date of ASU 2016-02, Leases) 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 the commencement date (or the effective date of ASU 2016-02, Leases) in determining the present value of lease payments. The 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.

During January 2020, we signed a fifteen-year lease, which we expect to commence during 2022, relating to the development of a new 260,000 square foot innovative, distinctive and sustainably-designed corporate headquarters building in the heart of downtown Kansas City, Missouri. The lease will be recognized in the Company’s consolidated financial statements during the period that includes the lease’s commencement date.

Table of ~~contents~~Contents

The components of lease expense were as follows:


	Three months ended September 30,
	2020		2019

	(in thousands)
Operating Lease Cost	$	2,903	$	4,189

Finance Lease Cost:
Amortization of ROU assets	$	42	$	80
Interest on lease liabilities		2		8
Total	$	44	$	88


	Nine months ended September 30,
	2020		2019

	(in thousands)
Operating Lease Cost	$	9,164	$	14,472

Finance Lease Cost:
Amortization of ROU assets	$	149	$	224
Interest on lease liabilities		15		23
Total	$	164	$	247

Supplemental cash flow information related to leases was as follows:


	Nine months ended September 30,
	2020		2019

	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	9,106	$	13,661
Operating cash flows from finance leases		15		23
Financing cash flows from finance leases		185		222

ROU assets obtained in exchange for lease obligations:
Operating leases		665		2,410
Finance leases		10		40

For the three months ended September 30, 2016

Tax

(expense)

Pre-tax

benefit

Net of tax

Statement of income line item

(in thousands)

Reclassifications included in net income:










Sponsored funds investment gains

$
2,980

(1,109)

1,871

Investment and other income (loss)

Valuation allowance

—

1,155

1,155

Provision for income taxes

Amortization of pension and postretirement benefits

(1,611)

556

(1,055)

Underwriting and distribution expense and Compensation and related costs

Total

$
1,369

602

1,971

For the nine months ended September 30, 2017

Tax

(expense)

Pre-tax

benefit

Net of tax

Statement of income line item

(in thousands)

Reclassifications included in net income:










Sponsored funds investment gains

$
952

(355)

597

Investment and other income (loss)

Valuation allowance

—

355

355

Provision for income taxes

Amortization of pension and postretirement benefits

(3,359)

1,204

(2,155)

Underwriting and distribution expense and Compensation and related costs

Total

$
(2,407)

1,204

(1,203)

For the nine months ended September 30, 2016

Tax

(expense)

Pre-tax

benefit

Net of tax

Statement of income line item

(in thousands)

Reclassifications included in net income:










Sponsored funds investment gains

$
3,483

(1,296)

2,187

Investment and other income (loss)

Valuation allowance

—

1,342

1,342

Provision for income taxes

Amortization of pension and postretirement benefits

(4,833)

1,741

(3,092)

Underwriting and distribution expense and Compensation and related costs

Total

$
(1,350)

1,787

437

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~~10.Contingencies~~

Supplemental balance sheet information related to leases was as follows:


	September 30, 2020		December 31, 2019

	(in thousands, except lease term and discount rate)
Operating Leases:
Operating lease ROU assets (Other non-current assets)	$	15,181	$	23,457

Other current liabilities	$	7,403	$	10,479
Other non-current liabilities		9,632		14,694
Total operating lease liabilities	$	17,035	$	25,173


Finance Leases:
Property and equipment, gross	$	476	$	985
Accumulated depreciation		(391)		(737)
Property and equipment, net	$	85	$	248

Other current liabilities	$	65	$	203
Other non-current liabilities		13		55
Total finance lease liabilities	$	78	$	258


Weighted average remaining lease term:
Operating leases		4 years		4 years
Finance leases		1 year		1 year

Weighted average discount rate:
Operating leases		4.04%		4.32%
Finance leases		6.00%		6.00%

Maturities of lease liabilities are as follows:


	Operating		Finance
	Leases		Leases

	(in thousands)
Year ended December 31,
2020 (excluding the nine months ended September 30, 2020)	$	2,413	28
2021		6,669	44
2022		2,563	10
2023		2,122	—
2024		2,090	—
Thereafter		2,613	—
Total lease payments		18,470	82
Less imputed interest		(1,435)	(4)
Total	$	17,035	78

12.

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”~~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.

~~In an action filed on April 18, 2016 in the District Court of Johnson County, Kansas,~~ ~~Hieu Phan and Audrey Ohman v. Ivy Investment Management Company, et. al.~~ (Case No. I6CV02338 Div. 4), two individuals who allegedly purchased shares of two affiliated registered investment companies (mutual funds) for which two of the Company’s subsidiaries provide investment management services filed a putative derivative action on behalf of the two nominal defendant affiliated mutual fund trusts alleging breach of fiduciary duty and breach of contract claims relating to investments held in the affiliated mutual funds by the Company's registered investment adviser subsidiaries, the two nominal defendant trusts, the current trustees and three retired trustees of the nominal defendant trusts, and an officer of the Company (who plaintiffs subsequently voluntarily dismissed). On behalf of the nominal defendant trusts, plaintiffs seek monetary damages and demand a jury trial. On April 6, 2017, the court granted one of the nominal defendant trust’s motion to dismiss the claims of plaintiff Ohman for lack of standing, without leave to amend. On May 2, 2017, the remaining nominal defendant filed a motion to stay the litigation pending the investigation and recommendation of special litigation committees of each of the nominal defendant trusts, a special committee of independent trustees established by the board of each trust and empowered to, among other things, investigate the claims alleged in the complaint; examine, and make recommendations to the board of trustees regarding, the merits of such alleged claims; and to make a recommendation to the court concerning the proper resolution of the litigation. On June 13, 2017, the court granted a 60-day stay until August 12, 2017. Formal discovery has commenced. Trial is currently set for July 16, 2018 through August 10, 2018, although there can be no assurance that the trial will take place on those dates. The Company denies that any of its subsidiaries breached their fiduciary duties to, or committed a breach of the investment management agreement with, the nominal defendant trusts.

In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. Given the preliminary nature of the proceedings and the Company's dispute over the merits of the claims, the Company is unable to estimate a range of reasonably possible loss, if any, that such matter may represent. While the ultimate resolution of this matter is uncertain, an adverse determination against the Company could have a material adverse impact on our business, financial condition and results of operations.

~~In an action filed on June 23, 2017 and amended on June 26, 2017 in the U.S. District Court for the District of Kansas,~~ ~~Schapker v. Waddell & Reed Financial, Inc., et al, (Case No. 17-2365 D. Kan.)~~, Stacy Schapker, a participant in the Company’s 401(k) and Thrift Plan, as amended and restated (the “401(k) Plan”), filed a lawsuit against the Company, the Company’s Board of Directors, the Administrative Committee of the 401(k) Plan, and unnamed Jane and John Doe Defendants 1-25. The amended complaint, which is filed on behalf of the 401(k) Plan and a proposed class of 401(k) Plan participants, purports to assert claims for breach of fiduciary duty and prohibited transactions under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) based on the 401(k) Plan’s offering of investments managed by the Company or its affiliates from June 23, 2011 to present. The amended complaint seeks, among other things, an order compelling the disgorgement of fees paid to the Company and its affiliates by the 401(k) Plan and the restoration of losses to the 401(k) Plan arising from defendants alleged ERISA violations, attorneys’ fees and other injunctive and equitable relief. The Company believes the allegations are without merit and intends to vigorously defend this matter. On October 6, 2017, the defendants filed a motion to dismiss the amended complaint.

In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. Given the preliminary nature of the proceedings and the Company’s dispute over the merits of the claims, the Company is unable to estimate a range of reasonably possible loss, if any, that such matter may represent.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited consolidated financial statements and notes to the unaudited consolidated financial statements included elsewhere in this report. Unless otherwise indicated or the context otherwise requires all references to the “Company,” “we,” “our” or “is” refer to Waddell & Reed Financial, Inc. and its consolidated subsidiaries.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of ~~assets under management,~~AUM and AUA, distribution sources, expense levels, redemption rates, stock repurchases and the financial markets and other conditions. These statements are generally identified by the use of such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by us or on our behalf is not a guarantee of future performance. Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to ~~those~~the impact of the COVID-19 pandemic and related economic conditions, as well as the factors discussed below. If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, which include, without limitation:

●

The loss of existing distribution ~~channels~~relationships or inability to access new distribution ~~channels;~~

relationships;

●

A reduction in ~~assets under~~ our ~~management~~AUM on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures;

●

The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;

●

Changes in our business model, operations and procedures, including our methods of distributing our proprietary products, as a result of ~~the Department of Labor’s (“DOL”) new~~evolving fiduciary ~~rule;~~

standards;

●

The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;

●

A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds;

●

Our inability to reduce expenses rapidly enough to align with declines in our revenues due to various factors, including fee pressure, the level of our ~~assets under management~~AUM or our business environment;

●

Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;

●

Our inability to attract and retain senior executive management and other key personnel to conduct our ~~broker-dealer, fund management and investment management advisory~~ business;

●

A failure in, or breach of, our operational or security systems or our technology infrastructure, or those of third parties on which we rely; and

●

Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner.

The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission (the “SEC”), including the information in Item 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, ~~2017.~~2020. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

Overview

~~Overview~~

We are one of the oldest mutual fund and asset management firms in the country, with expertise in a broad range of investment styles and across a variety of market environments. Our earnings and cash flows are heavily dependent on financial market conditions and client activity. Significant increases or decreases in the various securities markets can have a material impact on our results of operations, financial condition and cash flows.

We derive our revenues from providing investment management and advisory services, investment product underwriting and distribution, and shareholder services administration to the Funds, the IGI Funds, and institutional and separately managed accounts. Investment management and/or advisory fees are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of fees earned on fee-based asset allocation products and related advisory services, Rule 12b-1 asset-based service and distribution fees, distribution fees on certain variable products, and commissions derived from sales of investment and insurance products. The products sold have various commission structures and the revenues received from those sales vary based on the type and dollar amount sold. Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees, and is earned based on assets under management or number of client accounts.~~Our major expenses are for commissions, employee compensation, field services, dealer services and information technology.~~

~~One of our distinctive qualities is that we distribute our investment products through a balanced distribution network. Our retail~~ products are distributed through our ~~retail~~ unaffiliated ~~distribution~~ channel, or through our ~~retail broker-dealer~~wealth management channel ~~and independent Waddell and Reed, Inc. (“W&R”) financial advisors.~~by Advisors. Through our institutional channel, we distribute ~~a variety~~an array of investment styles ~~for~~to a variety of clients.

Through our ~~retail~~ unaffiliated ~~distribution~~ channel, we distribute mutual funds through broker-dealers, retirement platforms and registered investment advisers ~~and various retirement platforms~~ through a team of external and internal ~~wholesalers, as well as a team dedicated to home office relationship coverage.~~wholesalers.

In our ~~retail broker-dealer~~wealth management channel, ~~1,481 independent~~we had 921 Advisors and 392 licensed advisor associates as of September 30, 2020, for a total of 1,313 licensed individuals associated with W&R ~~financial advisors~~who operate out of offices located throughout the United States and provide financial advice for retirement, education funding, estate planning and other financial needs for clients. A distinguishing aspect of this channel is its low redemption rate, which can be attributed to the personal and customized nature in which W&R advisors provide service to clients by focusing on meeting their long term financial objectives; this, in turn, leads to a more stable asset base for the channel.

~~Through our institutional channel, we~~We manage assets in a variety of investment styles ~~for a variety~~in our institutional channel. Most of ~~types of institutions, as well as~~ the ~~IGI Funds. The largest percentage of our~~ clients in this channel are other asset managers that hire us to act as a subadviser for their branded products; they are typically domestic orand foreign distributors of investment products who lack scale or the track record to manage internally, or choose to market multi-manager styles. Our diverse client list also includes pension funds, Taft Hartley plans and endowments.

Operating Results

~~Table of contents~~

~~Company Developments~~

●

~~In August 2017, we announced an actionable plan around four strategic pillars that is estimated~~Net income attributable to add $30 million to $40 million, on a run-rate basis, to pre-tax income over the next 18 to 24 months. The plan includes strengthening our investment management resources, processes and results; reinvigorating our product line and sales; continuing the evolution of our broker-dealer to a self-sustaining, fully competitive and profitable entity; and making investments in support of our evolving business model, while improving efficiency.

We enhanced InvestEd by lowering fees and expanding the available investment options. InvestEd offers lower sales charges, reduced minimum initial investment, an increased number of aged-based and static portfolios and individual fund options, along with an expanded range of underlying funds within aged-based and static portfolios.

On October 16, 2017, nine Advisor Funds were merged into Ivy Funds with substantially similar objectives and strategies. The fund reorganization aligns with the objective to delineate Ivy Investments as our asset management brand.

~~On October 20, 2017, we renewed our unsecured revolving credit facility~~Waddell & Reed Financial, Inc. for ~~three years with initial lender commitments of $100.0 million and an expansion option for an additional $100.0 million.~~

We continue the implementation of significant enhancements to our investment advisory programs and financial planning capabilities, which are a part of “Project E.” In May 2017, we launched MAP Navigator, an open architecture advisory program. In July 2017, we launched the retooled SPA program, partnering with Wilshire Associates, Inc. to develop five proprietary investment models consisting of Advisors and Ivy funds. We believe that Project E positions the retail broker-dealer channel for long-term competitiveness. The new platform moved us from a paper-based, labor intensive environment to one utilizing innovative brokerage platform technology, which we expect to enhance both advisor and back office efficiency.

In April 2016, the U.S. Department of Labor released its final rule (the “DOL Fiduciary Rule”) that, among other things, expands the scope of a “fiduciary” under ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended. The DOL issued a 60-day delay of the original April 10, 2017 implementation date; phased implementation began on June 9, 2017. On August 9, 2017, the DOL proposed further delay of the applicability date of the remaining portions of the DOL Fiduciary Rule, including the best interest contract exemption, until July 1, 2019. This proposal was approved by the Office of Management and Budget on August 28, 2017. Public comments on the proposed rule delay were due by September 15, 2017. We anticipate a range of $6.0 to $7.0 million in implementation costs during 2017.

~~During~~ the third quarter of ~~2017, we returned $42.1~~2020 was $30.5 million, ~~of capital to shareholders through dividends and~~or $0.48 per diluted share, ~~repurchases,~~ compared to ~~$38.6~~$33.1 million, ~~in the same period in 2016.~~

~~Our balance sheet remains solid and we ended~~or $0.46 per diluted share, during the third quarter of ~~2017~~2019. The third quarter of 2019 included $3.1 million in severance expense related to the outsourcing of our transfer agency transactional processing operations. Excluding the severance expense, adjusted net income¹for the third quarter of 2019 was $35.4 million and adjusted net incomeper diluted share¹was $0.49.

●

Revenues of $267.7 million during the third quarter of 2020 decreased 1% compared to the third quarter of 2019. Operating expenses of $230.0 million during the third quarter of 2020 held steady compared to the same quarter in 2019. The operating margin was 14.1% during the third quarter of 2020, compared to 14.8% during the third quarter of 2019. Excluding severance expense related to the outsourcing of our transfer agency transactional processing operations during the third quarter of 2019, adjusted operating expenses¹ were $227.6 million and the adjusted operating margin¹was 15.9%.

______________

¹Adjusted net income, adjusted net income per diluted share, adjusted operating expenses and adjusted operating margin are non-GAAP financial measures. See Non-GAAP Financial Measures and Reconciliation of GAAP to non-GAAP Financial Measures on pages 40 and 41.

Table of Contents

●

Continued execution of strategic initiatives in Asset Management

Both sales and redemptions improved vs. the same quarter in 2019, particularly in institutional and unaffiliated

Continued progress in strategic pricing evaluation, with 75% of AUM at or better than competitor median fees

AUM ended the quarter at $67.9 billion, a decrease of 1% compared to the third quarter of 2019 due to net outflows partially offset by market appreciation.

●

Successful quarter for Wealth Management recruiting and asset growth

AUA ended the quarter at $62.7 billion, a 10% increase compared to the third quarter of 2019 primarily due to market appreciation and growth in net new Advisory AUA, partially offset by an ongoing migration away from Non-advisory AUA

Net new AUA continue to improve, and net new Advisory AUA were positive for the 7th consecutive quarter

Since January 1, 2020, 32 Advisors have affiliated with W&R with combined prior firm AUA totaling over $1.9 billion

$474 thousand average trailing 12-month productivity per Advisor for the third quarter of 2020 improved 12% compared to the third quarter of 2019

●

Robust balance sheet continued to support investment in strategic growth and meaningful capital return

$744.6 million in cash and investments ~~of $896.3 million, excluding redeemable noncontrolling interests in consolidated sponsored funds.~~

~~As part of our regular assessment~~at the end of the ~~return~~third quarter of ~~capital~~2020, excluding restricted cash

$56.3 million was returned to ~~stockholders, we are implementing a revised capital return policy. Accordingly,~~shareholders in the ~~Board~~third quarter of Directors reduced the quarterly dividend on our Class A common stock to $0.25 per share, payable on February 1, 2018 to stockholders of record as of January 11, 2018. The policy encompasses a plan to repurchase $2502020, including $40.1 million of ~~our common stock, which is inclusive~~share repurchases

●

Hired two executives focused on strategic growth – one to lead the technology teams dedicated to leveraging technology as a strategic asset across the organization, and one to develop and lead strategies in support of buybacks to offset dilution of our equity grants. Based on our current financial forecast, we intend to engage in an opportunistic share repurchase plan to fulfill the targeted buybacks over the next two years. The new capital return policy will provide greater financial flexibility to invest in our business, support ongoing operationsbest-in-class client and ~~maintain a strong balance sheet, as well as continue to provide a competitive return to stockholders.~~

Advisor experience processes and procedures.

Vision and Growth Strategy

24We remain committed to steadily executing on our long-term vision and growth strategy, which consists of six key, strategic focus areas: (1) competitive products and pricing; (2) continued focus on strong core processes and performance metrics; (3) the ability to leverage technology and analytics as a strategic asset across the organization; (4) having a growth culture and a more agile organization; (5) sharpening our brand awareness in the marketplace; and finally, (6) effectively allocating capital through internal investment initiatives, as well as taking advantage of potential dislocations and acquisition opportunities in the asset management and wealth management industries. Over the quarter, we made progress on these key focus areas as outlined below.

Within product and pricing, we introduced a series of enhancements to our InvestEd products, increasing the number of portfolios(including age-based and static options) and adding two ETFs and three Ivy Funds as underlying investments in those options, all designed to provide flexibility and best meet investor needs as they save for education. Additionally, effective October 1, we reduced load fees on all Class A shares for the Ivy Funds. These reductions, which include various breakpoints on all funds at certain purchase levels, are a further illustration of our desire to maintain competitive pricing across our lineup.

Within core processes and performance, we continue to streamline processes as we incorporate ongoing efficiencies. In our asset management business, our institutional distribution model has benefited from new technology that brings a more seamless client experience to further support sales and retention efforts and leverage data analytics insights. In our wealth management business, we appointed an industry veteran to lead our Advisor & Client Experience initiatives. This role will collaborate with key stakeholders across the business to improve Advisor and client journeys, creating new, innovative experiences, increasing loyalty and driving advocacy. This role will also work to develop and lead strategies in support of best-in-class client and Advisor experience processes and procedures while acting on opportunities for innovative investment, growth and expansion.

Within technology & analytics, we appointed a new Chief Technology Officer, who is a member of our executive leadership team and is leading efforts to leverage technology as a strategic asset across the organization, overseeing areas

Table of ~~contents~~Contents

including enterprise technology architecture and infrastructure, cybersecurity, application development, data integration, and service delivery management. In our asset management business, we continue to progress on our data strategy, with the rollout of an RIA targeting and segmentation tool. We have also continued with our wealth management and asset management technology platform initiatives with the long-term objectives of improved Advisor and client experiences, enhanced sales enablement and improved internal operations. Specifically, within our wealth management business, we are expanding the capabilities of our WaddellOne digital platform with the introduction of OnePath, a digital account opening and maintenance tool that will reduce the time required to open an account through a data-driven, dynamic workflow process. We plan to launch a pilot program for OnePath during the fourth quarter of 2020, with full implementation by early 2021. OnePath is designed to simplify and enhance workflow for Advisors serving their clients by accelerating straight through processing, reducing clicks, improving e-signature capabilities and providing transparency for Advisors into the status of work in-progress.

Within growth culture and a more agile organization, we took additional steps to enhance our culture, including diversity and inclusion initiatives. We have made great strides to ensure we have a true culture of belonging within our organization. In recognition of some of the steps we have taken this year, the Company was recently named a finalist for the Diversity Champions award by InvestmentNews. We were proud to be recognized, along with other firms, for our ability to inspire others from diverse backgrounds to join, flourish and bring their authentic selves to work in the financial services industry.

Within brand awareness, we continue to execute a full brand review that includes all three of our brands across the enterprise. This is a multi-year effort, launched during the second quarter of 2020 and progressing to date, in partnership with a premiere, well respected global brand agency on the assessment and execution strategies.

Within capital allocation, our balance sheet enables us to maintain regular capital return to shareholders by way of dividends and share buybacks, while also positioning us to pursue strategic acquisitions if opportunities arise. Inorganic growth is a key component of our strategy and we continue to evaluate acquisition opportunities across both our wealth management and asset management businesses.

Impact of COVID-19

The market volatility that began in March 2020, as a result of the reaction to COVID-19 and its impact on the global economy, resulted in significant depreciation in the stock markets. In the second and third quarters of 2020, the markets rebounded, benefiting our measures of AUM and AUA for these periods. Both ending and average AUM and AUA increased during the third quarter of 2020, resulting in increased revenue as compared to the prior quarter.

Some of our expenses, particularly certain distribution expenses, are directly correlated with revenue, and we saw increases in these expenses in line with the revenue increases during the third quarter. In regard to controllable expenses, defined as Compensation and benefits, General and administrative, Technology, Occupancy and Marketing and advertising, while the Company took several incremental actions to reduce these expenses through the first nine months of 2020, we continue to take a long-term view and invest in the areas we think will allow us to come out of the pandemic in a stronger position and drive our long-term growth strategy. We expect controllable expenses to be higher in the fourth quarter of 2020 than in the third quarter of 2020 due to strategic project activity and the absence of meeting expense reductions we experienced in the third quarter of 2020. Our continued discipline on controllable expenses, particularly with increases in revenue, provides operating leverage that enables us to continue to invest in growth.

We transitioned most of our workforce and Advisors to a work from home environment early in March 2020. By late March, 98% of our employees were working remotely, with negligible downtime. The remote work environment has continued through the third quarter of 2020. Our steady and proactive response has allowed our asset management and wealth management businesses to maintain full continuity of service and the access that our clients need and expect. With a successful transition to a remote working environment, we plan to closely monitor developments and reintroduce employees to the workplace only when it is safe to do so. The transition of employees to a work from home environment did not result in any material incremental expenses during the first three quarters of 2020, and we do not expect to incur any material incremental expenses in future periods. For additional discussion regarding steps we have taken to facilitate safety, security and full continuity of service, please see Part I – Item 1 – “Financial Statements (unaudited), Note 1 – Description of Business and Accounting Policies”, of this Quarterly Report on Form 10-Q.

We continue to maintain a strong balance sheet without any significant leverage and ended the quarter with

Table of Contents

$744.6 million in cash and investments. Our exceptionally strong balance sheet allows us to continue to execute our long-term growth strategies while retaining our focus on controlling expenses.

For additional discussion regarding the risks that can impact our business, results of operations and financial condition due to COVID-19 and the related economic conditions, please see Part II – Item 1A – “Risk Factors”.

Assets Under Management

During the third quarter of ~~2017, assets under management~~2020, AUM increased ~~0.6%~~4% to ~~$80.9~~$67.9 billion from ~~$80.4~~$65.0 billion at June 30, ~~2017~~2020 due to market appreciation of ~~$3.3~~$4.7 billion, partially offset bynet outflows of ~~$2.8~~$1.8 billion.Sales of $1.8 billion during the current quarter increased 2% compared to the third quarter of 2019. Redemptions decreased 19% compared to the third quarter of 2019.

Change in Assets Under Management ⁽¹⁾


						Three months ended September 30, 2020
									Wealth
						Unaffiliated⁽²⁾		Institutional	Management	Total

	Third Quarter 2017
	Retail
	Unaffiliated		Retail Broker-
	Distribution		Dealer	Institutional	Total
	(in millions)

						(in millions)
Beginning Assets	$	30,307	43,084	7,036	80,427	$	23,724	2,997	38,245	64,966

Sales (2)		1,790	1,024	68	2,882

Sales ⁽³⁾							1,127	59	634	1,820
Redemptions		(2,486)	(2,049)	(1,139)	(5,674)		(1,977)	(165)	(1,488)	(3,630)
Net Exchanges		213	(213)	—	—		239	—	(239)	—
Net Flows		(483)	(1,238)	(1,071)	(2,792)		(611)	(106)	(1,093)	(1,810)


Market Action		1,238	1,626	400	3,264		1,755	297	2,661	4,713
Ending Assets	$	31,062	43,472	6,365	80,899	$	24,868	3,188	39,813	67,869

Third Quarter 2016


Retail






Unaffiliated

Retail Broker-

Distribution

Dealer

Institutional

Total

(in millions)

Beginning Assets

$
35,197

42,261

8,993

86,451

Sales (2)

1,320

1,024

180

2,524

Redemptions

(4,824)

(1,542)

(1,051)

(7,417)

Net Exchanges

161

(194)

33

—

Net Flows

(3,343)

(712)

(838)

(4,893)

Market Action

1,436

1,621

440

3,497

Ending Assets

$
33,290

43,170

8,595

85,055


	Three months ended September 30, 2019
				Wealth
	Unaffiliated⁽²⁾		Institutional	Management	Total

	(in millions)
Beginning Assets	$	27,545	3,887	40,444	71,876

Sales ⁽³⁾		999	49	744	1,792
Redemptions		(2,684)	(230)	(1,542)	(4,456)
Net Exchanges		334	—	(334)	—
Net Flows		(1,351)	(181)	(1,132)	(2,664)

Market Action		(337)	(29)	(64)	(430)
Ending Assets	$	25,857	3,677	39,248	68,782

~~Table~~During the first nine months of ~~contents~~

~~Over~~2020, AUM decreased 3% to $67.9 billion from $70.0 billion at December 31, 2019 due to net outflows of $5.5 billion, partially offset by market appreciation of $3.4 billion. Sales of $6.5 billion during the nine months ended September 30, ~~2017, assets under management remained relatively stable, moving from $80.5 billion at December 31, 2016~~2020 increased 2% compared to ~~$80.9 billion at~~the nine months ended September 30, ~~2017 as outflows~~2019. Redemptions during the nine months ended September 30, 2020 decreased 9% compared to the same period of ~~$8.6 billion were offset by market appreciation~~2019.


	Nine months ended September 30, 2020
				Wealth
	Unaffiliated⁽²⁾		Institutional	Management	Total

	(in millions)
Beginning Assets	$	26,264	3,096	40,598	69,958

Sales ⁽³⁾		4,197	153	2,178	6,528
Redemptions		(7,175)	(546)	(4,335)	(12,056)
Net Exchanges		770	22	(792)	—
Net Flows		(2,208)	(371)	(2,949)	(5,528)

Table of ~~$9.0 billion.~~Contents

Market Action			812		463		2,164		3,439
Ending Assets		$	24,868		3,188		39,813		67,869


	Nine months ended September 30, 2019
				Wealth
	Unaffiliated⁽²⁾		Institutional	Management	Total

	(in millions)
Beginning Assets	$	24,977	3,655	37,177	65,809

Sales ⁽³⁾		3,883	244	2,286	6,413
Redemptions		(7,431)	(1,027)	(4,776)	(13,234)
Net Exchanges		914	25	(939)	—
Net Flows		(2,634)	(758)	(3,429)	(6,821)

Market Action		3,514	780	5,500	9,794
Ending Assets	$	25,857	3,677	39,248	68,782

Year to Date 2017


Retail






Unaffiliated

Retail Broker

Distribution

Dealer

Institutional

Total

(in millions)

Beginning Assets

$
30,295

42,322

7,904

80,521

Sales (2)

5,667

3,143

290

9,100

Redemptions

(9,078)

(5,727)

(2,925)

(17,730)

Net Exchanges

684

(690)

6

—

Net Flows

(2,727)

(3,274)

(2,629)

(8,630)

Market Action

3,494

4,424

1,090

9,008

Ending Assets

$
31,062

43,472

6,365

80,899

Year to Date 2016


Retail






Unaffiliated

Retail Broker

Distribution

Dealer

Institutional

Total

(in millions)

Beginning Assets

$
45,641

43,344

15,414

104,399

Sales (2)

4,990

3,186

823

8,999

Redemptions

(18,047)

(4,068)

(7,818)

(29,933)

Net Exchanges

446

(529)

83

—

Net Flows

(12,611)

(1,411)

(6,912)

(20,934)

Market Action

260

1,237

93

1,590

Ending Assets

$
33,290

43,170

8,595

85,055

(1)

~~(1)~~

Includes all activity of the ~~Funds, the IGI~~ Funds and institutional and separate accounts, including money market funds and transactions at net asset value, accounts for which we receive no commissions.

(2)	~~(2)~~Unaffiliated includes National channel (home office and wholesale), Defined Contribution Investment Only, Registered Investment Advisor and Variable Annuity.

(3)

~~Primarily~~Sales consists of gross sales ~~(net of sales commission), but also~~and includes net reinvested dividends, ~~and~~ capital gains and investment income.

Table of Contents

Average Assets Under Management

Average ~~assets under management,~~AUM, which are generally more indicative of trends in revenue ~~for providing~~from investment management services than the change in ending ~~assets under management,~~AUM, are presented below.


	Three months ended September 30, 2020
				Wealth
	Unaffiliated		Institutional	Management	Total

	(in millions)
Asset Class:
Equity	$	19,849	3,199	29,857	$	52,905
Fixed Income		4,468	—	8,695		13,163
Money Market		147	—	1,731		1,878
Total	$	24,464	3,199	40,283	$	67,946


	Three months ended September 30, 2019
				Wealth
	Unaffiliated		Institutional	Management	Total

	(in millions)
Asset Class:
Equity	$	20,988	3,808	29,642	$	54,438
Fixed Income		5,210	3	9,256		14,469
Money Market		97	—	1,523		1,620
Total	$	26,295	3,811	40,421	$	70,527


	Nine months ended September 30, 2020
				Wealth
	Unaffiliated		Institutional	Management	Total

	(in millions)
Asset Class:
Equity	$	18,866	2,977	28,412	$	50,255
Fixed Income		4,542	—	8,647		13,189
Money Market		135	—	1,693		1,828
Total	$	23,543	2,977	38,752	$	65,272


	Nine months ended September 30, 2019
				Wealth
	Unaffiliated		Institutional	Management		Total

	(in millions)
Asset Class:
Equity	$	21,237	3,851	29,396	$	54,484
Fixed Income		5,217	14	9,281		14,512
Money Market		100	—	1,571		1,671
Total	$	26,554	3,865	40,248	$	70,667

Third Quarter 2017


Retail






Unaffiliated

Retail Broker-

Distribution

Dealer

Institutional

Total

(in millions)

Asset Class:

Equity

$
23,477

31,268

6,385

$
61,130

Fixed Income

6,659

10,432

331

17,422

Money Market

102

1,834

—

1,936

Total

$
30,238

43,534

6,716

$
80,488

Table of Contents

Performance

We have seen an increase from the prior quarter in trailing one- and five-year performance, while trailing three-year performance remained consistent as measured by the percentage of funds ranked in the top half of their respective Morningstar universes. As measured by percentage of assets, one-year performance declined slightly while three- and five-year performance improved.Our relative performance across the complex improved during the quarter, but we continue to see opportunities to improve performance in the future.Our commitment to institutional caliber processes means that while we are mindful of short-term market dynamics, we remain focused on the long term and on maintaining discipline and consistency in volatile times such as we have seen throughout 2020.

The following table is a summary of Morningstar rankings and ratings as of September 30, 2020:


MorningStar Fund Rankings¹	1 Year		3 Years		5 Years
Funds ranked in top half	49	%	49	%	39	%
Assets ranked in top half	43	%	52	%	47	%


MorningStar Ratings¹	Overall		3 Years		5 Years
Funds with 4/5 stars	26	%	28	%	19	%
Assets with 4/5 stars	40	%	42	%	35	%

(1) Based on class I shares, which reflects the largest concentration of sales and assets.

Table of ~~contents~~Contents

Assets Under Administration

AUA includes both client assets invested in the Funds and in other companies’ products that are distributed through W&R and held in direct to fund accounts, brokerage accounts or within our fee-based advisory programs. AUA as of September 30, 2020 increased 10% as compared to September 30, 2019 primarily due to market appreciation and growth in net new Advisory AUA, partially offset by an ongoing migration away from Non-advisory AUA. Average AUA increased 7% for the three months ended September 30, 2020 and increased 5% for the nine months ended September 30, 2020, compared to the same periods in 2019. Starting in the second quarter of 2020, we updated our definition of net new AUA to include dividends and interest to be more consistent with peers and have reflected this new definition for all periods presented in the table below. This quarter marked the 7^th straight quarter of positive Advisory AUA net flows. We continue to see increased average productivity per Advisor 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.


		September 30, 2020	September 30, 2019

	(in millions)
Ending AUA
Advisory AUA	$	29,330	25,107
Non-advisory AUA		33,364	32,006
Total ending AUA	$	62,694	57,113


	Three months ended September 30,					Nine months ended September 30,
		2020		2019			2020		2019

	(in millions, except percentage data)
Average AUA ⁽¹⁾
Advisory AUA ⁽¹⁾	$	28,502		24,921		$	26,737		23,732
Non-advisory AUA ⁽¹⁾		32,898		32,490			31,846		32,038
Total average AUA ⁽¹⁾	$	61,400		57,411		$	58,583		55,770


Net new Advisory AUA ⁽²⁾	$	437		328		$	1,068		977
Net new Non-advisory AUA ^{(2), (3)}		(475)		(720)			(1,479)		(2,240)
Total net new AUA ^{(2), (3)}	$	(38)		(392)		$	(411)		(1,263)

Annualized Advisory AUA growth ⁽⁴⁾		6.4	%	5.3	%		5.3	%	6.1	%
Annualized AUA growth ⁽⁴⁾		(0.3)	%	(2.7)	%		(0.9)	%	(3.3)	%


		September 30, 2020	September 30, 2019
Advisors and advisor associates		1,313	1,344
Average trailing 12-month production per Advisor ⁽⁵⁾ (in thousands)	$	474	422

(1)

Average AUA are calculated as the average of the beginning of month AUA during each reporting period.

(2)

Net new AUA are calculated as total client deposits and net transfers less client withdrawals. Client deposits include dividends and interest.

(3)

Excludes activity related to products held outside of our wealth management platform. These assets represent less than 10% of total AUA.

(4)

Annualized growth is calculated as annualized total net new AUA divided by beginning AUA.

(5)

Production per Advisor is calculated as trailing 12-month Total Underwriting and distribution 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.

Third Quarter 2016


Retail






Unaffiliated

Retail Broker-

Distribution

Dealer

Institutional

Total

(in millions)

Asset Class:

Equity

$
26,732

31,408

8,521

$
66,661

Fixed Income

7,424

10,057

492

17,973

Money Market

149

1,991

—

2,140

Total

$
34,305

43,456

9,013

$
86,774

Year to Date 2017


Retail






Unaffiliated

Retail Broker-

Distribution

Dealer

Institutional

Total

(in millions)

Asset Class:

Equity

$
23,256

31,311

6,924

$
61,491

Fixed Income

6,801

10,201

365

17,367

Money Market

107

1,887

—

1,994

Total

$
30,164

43,399

7,289

$
80,852

Year to Date 2016


Retail






Unaffiliated

Retail Broker-

Distribution

Dealer

Institutional

Total

(in millions)

Asset Class:

Equity

$
29,464

30,683

10,828

$
70,975

Fixed Income

7,362

9,774

801

17,937

Money Market

168

2,010

—

2,178

Total

$
36,994

42,467

11,629

$
91,090

Table of Contents

Results of Operations — Three and Nine Months Ended September 30, ~~2017~~2020 as Compared with Three and Nine Months Ended September 30, ~~2016~~2019

Total Revenues

Total revenues decreased 5%1% to ~~$289.4~~$267.7 million for the three months ended September 30, ~~2017~~2020 compared to the three months ended September 30, ~~2016 primarily due to a decrease in average assets under management of 7% driven by net outflows.~~2019. For the nine months ended September 30, ~~2017,~~2020, total revenues decreased ~~$83.4~~$28.8 million, or 9%4%, compared to the same period in the ~~prior year~~2019. For both comparative periods, the decreases were due to a decrease in investment management fees and shareholder service fees, partially offset by increases in underwriting and distribution fees. The decreases in investment management fees were due to lower average ~~assets under~~AUM and lower effective management ~~of 11% driven primarily by net outflows~~fee rates related to targeted fee reductions on certain products made in previous periods and money market fee waivers. The decreases in shareholder service fees were due to a ~~lesser extent~~reduction in fund reimbursement revenues related to the ~~share class conversion that occurred~~outsourcing of our transfer agency transactional processing operations as well as lower assets and number of accounts. The increases in ~~July 2016.~~underwriting and distribution fees were due to increases in advisory fees due to higher average Advisory AUA and were partially offset by decreases in service and distribution fees due to lower assets and lower sales commissions.


						Three months ended
						September 30,
						2020		2019	Variance

	Three months ended
	September 30,
	2017		2016	Variance
	(in thousands, except percentage data)
						(in thousands, except percentage data)
Investment management fees	$	134,149	138,745	(3)	%	$	106,617	111,806	(5)	%
Underwriting and distribution fees		128,892	135,778	(5)	%		139,456	135,787	3	%
Shareholder service fees		26,406	28,563	(8)	%		21,597	23,087	(6)	%
Total revenues	$	289,447	303,086	(5)	%	$	267,670	270,680	(1)	%


	Nine months ended
	September 30,
	2020		2019	Variance

	(in thousands, except percentage data)
Investment management fees	$	307,660	334,438	(8)	%
Underwriting and distribution fees		400,032	395,527	1	%
Shareholder service fees		63,745	70,279	(9)	%
Total revenues	$	771,437	800,244	(4)	%

~~Table of contents~~

Nine months ended

September 30,


2017

2016

Variance

(in thousands, except percentage data)

Investment management fees

$
395,463

424,403

(7)
%
Underwriting and distribution fees

386,499

428,748

(10)
%
Shareholder service fees

80,706

92,959

(13)
%
Total revenues

$
862,668

946,110

(9)
%

Investment Management Fee Revenues

Investment management fee revenues for the third quarter of ~~2017~~2020 decreased ~~$4.6~~$5.2 million, or 3%5%, from ~~last year’s~~the third ~~quarter.~~quarter of 2019. For the ~~nine month~~nine-month period ~~ended~~ending September 30, ~~2017,~~2020, investment management fee revenues decreased ~~$28.9~~$26.8 million, or 7%8%, compared to the same period in ~~2016.~~

~~On October 16,2017, nine Advisors Funds merged into Ivy Funds with substantially similar objectives~~2019. For both comparative periods, the decrease was due to a decrease in average assets and strategies. The Company intends to recommend that the mutual fund Board of Trustees approve the merger of the remaining Advisors Funds into Ivy Funds. Assuming necessary approvals are received, these additional mergers are expected to close in early 2018. Thereafter, the Company anticipates investmenta lower effective management fee ~~revenue~~rate, which was primarily due to targeted pricing reductions on certain products made in ~~2018 to decrease between $10 million~~previous periods and ~~$11 million.~~ money market fee waivers.

The following ~~table summarizes~~tables summarize investment management fee revenues, related average ~~assets under management,~~AUM, fee waivers and investment management fee rates for the three and nine months ended September 30, ~~2017~~2020 and ~~2016.~~2019.


	Three months ended September 30,
	2020			2019			Variance

	(in thousands, except for management fee rate and average assets)
Investment management fees (net)	$	103,443			107,926		(4)	%
Average assets (in millions)	$	64,747			66,716		(3)	%
Management fee rate (net)		0.6356	%		0.6418	%
Total fee waivers	$	9,171			8,154		12	%
Institutional investment management fees (net)	$	3,174			3,880		(18)	%
Institutional average assets (in millions)	$	3,199			3,811		(16)	%
Institutional management fee rate (net)		0.3945	%		0.4040	%

Three months ended September 30,


2017

2016


Variance

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

Retail investment management fees (net)

$
128,078

131,139

(2)
%
Retail average assets (in millions)

73,772

77,761

(5)
%
Retail management fee rate (net)

0.6888
%

0.6709
%

Money market fee waivers

31

562

(94)
%
Other fee waivers

1,795

1,051

71
%
Total fee waivers

$
1,826

1,613

13
%
Institutional investment management fees (net)

$
6,071

7,606

(20)
%
Institutional average assets (in millions)

6,716

9,013

(25)
%
Institutional management fee rate (net)

0.3871
%

0.3546
%

Nine months ended September 30,


2017

2016


Variance

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

Retail investment management fees (net)

$
376,563

395,208

(5)
%
Retail average assets (in millions)

73,563

79,461

(7)
%
Retail management fee rate (net)

0.6844
%

0.6644
%

Money market fee waivers

218

2,947

(93)
%
Other fee waivers

5,797

3,158

84
%
Total fee waivers

$
6,015

6,105

(1)
%
Institutional investment management fees (net)

$
18,900

29,195

(35)
%
Institutional average assets (in millions)

7,289

11,629

(37)
%
Institutional management fee rate (net)

0.3722
%

0.3500
%

Table of Contents


	Nine months ended September 30,
	2020			2019			Variance

	(in thousands, except for management fee rate and average assets)
Investment management fees (net)	$	298,712			322,678		(7)	%
Average assets (in millions)		62,295			66,802		(7)	%
Management fee rate (net)		0.6405	%		0.6458	%
Total fee waivers	$	23,804			22,127		8	%
Institutional investment management fees (net)	$	8,948			11,760		(24)	%
Institutional average assets (in millions)		2,977			3,865		(23)	%
Institutional management fee rate (net)		0.4013	%		0.4068	%

Revenues from investment management services provided to our ~~affiliated~~ retail mutual funds, which are distributed through the ~~retail~~ unaffiliated ~~distribution~~ and ~~retail broker-dealer~~wealth management channels, decreased ~~$3.1 million~~4% in the third quarter of

~~Table of contents~~

~~2017 compared to the third quarter of 2016. For~~ 2020 and decreased 7% for the nine months ended September 30, 2017, revenues from investment management services provided to our affiliated retail mutual funds decreased $18.6 million, compared to the first nine months of 2016. For both comparative periods, affiliated investment management revenue in the retail channel declined less on a percentage basis than the related average assets under management due to an increase in the average management fee rate. A mix-shift in the retail asset base has resulted in increased average management fee rates in 2017 compared to 2016. Money market fee waivers for the three and nine months ending September 30, 2017 were lower2020, compared to the same ~~period~~periods in ~~2016~~2019. These decreases were due to ~~federal interest~~decreases in average AUM and a lower effective management fee rate ~~increases. Other fee waivers have increased during both periods~~ due to ~~certain Funds increasing~~pricing reductions. Effective April 1, 2020, new fee ~~waivers~~reductions were made on our large cap growth and core bond products, which we expect to ~~maintain expense ratios, and the launching of new Funds. Fee waivers for the Funds are recorded as an offset~~have a one to ~~investment management fees up to the amount of fees earned.~~two cent annualized impact on earnings per share.

Institutional account revenues in the third quarter of ~~2017~~2020 decreased ~~$1.5~~$0.7 million compared to the third quarter of ~~2016.~~2019. For the nine ~~month period~~months ended September 30, ~~2017,~~2020, institutional account revenues decreased ~~$10.3~~$2.8 million compared to the same period in ~~2016.~~2019. These decreases were due to a decrease in average AUM and a slight decrease in effective management fee rate.


	Annualized long-term redemption rates
	(excludes money market redemptions)
	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016
Retail Unaffiliated Distribution channel	33.0	%	56.2	%	40.8	%	65.6	%
Retail Broker-Dealer channel	16.4	%	12.1	%	15.4	%	10.7	%

									Annualized long-term redemption rates
									(excludes money market redemptions)
									Three months ended				Nine months ended
									September 30,				September 30,
									2020		2019		2020		2019
Unaffiliated channel									32.3	%	40.9	%	41.0	%	37.8	%
Institutional channel	67.3	%	46.4	%	53.7	%	89.8	%	20.5	%	23.9	%	24.5	%	35.5	%
Wealth Management channel									13.1	%	13.4	%	13.2	%	13.9	%
Total	27.1	%	33.3	%	28.5	%	43.5	%	20.5	%	24.3	%	23.8	%	24.2	%

The ~~decreased~~long-term redemption rate for ~~both~~ the three ~~and nine month periods ending~~months ended September 30, ~~2017~~2020 decreased in the ~~retail~~ unaffiliated ~~distribution~~ channel ~~was driven primarily by improved redemption rates in~~as compared to the ~~Ivy Asset Strategy Fund, Ivy VIP Asset Strategy Fund and Waddell & Reed Advisors Asset Strategy Fund (prior to being renamed in May 2017) (the “Asset Strategy funds”).~~three months ended September 30, 2019. Redemptions ~~in the Asset Strategy funds represented approximately 14% of the retail unaffiliated distribution channel’s redemptions~~decreased during the ~~third~~ quarter, ~~of 2017, reduced from 30%~~particularly in ~~the third quarter of 2016. For~~our International Core Equity and High Income funds. The long-term redemption rate for the nine months ended September 30, ~~2017, redemptions~~2020 increased in the ~~Asset Strategy funds represented approximately 21% of the retail~~ unaffiliated ~~distribution channel’s redemptions, which was reduced from 40% during~~channel as compared to the same period in ~~2016.~~2019. Increased market volatility during the first half of 2020 led to more redemptions in this channel, particularly in our International Core Equity and High Income funds. The ~~increased~~long-term redemption rate decreased in the institutional channel, primarily due to elevated client redemptions from our Core Equity and Large Cap Growth strategies during the first nine months of 2019. In the wealth management channel, the long-term redemption rate decreased for both periods in the retail broker-dealer channel is primarily related to an increase in outflows related to the launch of the MAP Navigator product in May of 2017. Use of this open architecture fee-based asset allocation product by W&R financial advisors accelerated during the third quarter of 2017. We anticipate that MAP Navigator will continue to add pressure on our retail broker-dealer redemption rates. In the Institutional channel, approximately $558 million and $253 million was redeemed in our core equity strategy and core fixed income strategies, respectively, during the third quarter of 2017. A client in our Institutional channel notified us in April of 2017 of its intent to redeem its $806 million position in our domestic large cap core strategy. Approximately $500 million was redeemed in April of 2017 with the balance intended to be redeemed before the end of the year.comparative periods. Prolonged redemptions in any of our distribution channels could negatively affect revenues in future periods.

~~Our overall current year-to-date redemption rate of 28.5% is higher than the~~The current year-to-date industry average ~~of approximately 23.7%,~~redemption rate, based on data ~~from~~provided by the Investment Company ~~Institute.~~Institute, was 30.8%, versus our rate of 23.8%.

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~~Table of contents~~

Underwriting and Distribution Fee Revenues ~~and Expenses~~

~~The following tables summarize our underwriting and distribution fee revenues and expenses segregated by distribution channel:~~

Third Quarter 2017

Retail

Unaffiliated

Retail Broker-


Distribution

Dealer

Total

(in thousands)

Revenue

$
22,892

106,000

128,892
Expenses - Direct

(31,779)

(71,119)

(102,898)
Expenses - Indirect

(9,648)

(36,854)

(46,502)
Net Distribution Costs

$
(18,535)

(1,973)

(20,508)

Third Quarter 2016


Retail




Unaffiliated

Retail Broker-

Distribution

Dealer

Total

(in thousands)

Revenue

$
29,991

105,787

135,778
Expenses - Direct

(39,489)

(72,276)

(111,765)
Expenses - Indirect

(10,643)

(30,591)

(41,234)
Net Distribution (Costs)/Excess

$
(20,141)

2,920

(17,221)

Year to Date 2017


Retail




Unaffiliated

Retail Broker-

Distribution

Dealer

Total

(in thousands)

Revenue

$
71,305

315,194

386,499
Expenses - Direct

(98,685)

(213,631)

(312,316)
Expenses - Indirect

(29,376)

(109,151)

(138,527)
Net Distribution Costs

$
(56,756)

(7,588)

(64,344)

Year to Date 2016

Retail

Unaffiliated

Retail Broker-

Distribution

Dealer

Total

(in thousands)

Revenue

$
98,424

330,324

428,748
Expenses - Direct

(128,787)

(240,293)

(369,080)
Expenses - Indirect

(38,931)

(100,069)

(139,000)
Net Distribution Costs

$
(69,294)

(10,038)

(79,332)

~~Table of contents~~

The following tables summarize the significant components of underwriting and distribution fee revenues ~~segregated~~ by distribution channel:

Third Quarter 2017


Retail

Retail


Unaffiliated

Broker-

Distribution

Dealer

Total

(in thousands)

Underwriting and distribution fee revenues

Rule 12b-1 service and distribution fees

$
22,322

19,026

41,348
Fee-based asset allocation product revenues

—

61,115

61,115
Sales commissions on front-end load mutual fund and variable annuity products

353

12,941

13,294
Sales commissions on other products

—

7,974

7,974
Other revenues

217

4,944

5,161
Total

$
22,892

106,000

128,892


	For the three months ended September 30, 2020
			Wealth
	Unaffiliated		Management	Total

	(in thousands)
Underwriting and distribution fee revenues
Advisory fees	$	—	82,591	82,591
Service and distribution fees		14,623	15,305	29,928
Sales commissions		223	17,847	18,070
Other revenues		82	8,785	8,867
Total	$	14,928	124,528	139,456

Third Quarter 2016


Retail

Retail


Unaffiliated

Broker-

Distribution

Dealer

Total

(in thousands)

Underwriting and distribution fee revenues

Rule 12b-1 service and distribution fees

$
29,432

19,462

48,894
Fee-based asset allocation product revenues

—

57,269

57,269
Sales commissions on front-end load mutual fund and variable annuity products

—

16,941

16,941
Sales commissions on other products

—

7,203

7,203
Other revenues

559

4,912

5,471
Total

$
29,991

105,787

135,778


	For the three months ended September 30, 2019
			Wealth
	Unaffiliated		Management	Total

	(in thousands)
Underwriting and distribution fee revenues
Advisory fees	$	—	73,356	73,356
Service and distribution fees		16,286	16,143	32,429
Sales commissions		364	20,544	20,908
Other revenues		67	9,027	9,094
Total	$	16,717	119,070	135,787

Year to Date 2017


Retail

Retail


Unaffiliated

Broker-

Distribution

Dealer

Total

(in thousands)

Underwriting and distribution fee revenues

Rule 12b-1 service and distribution fees

$
69,191

56,544

125,735
Fee-based asset allocation product revenues

—

176,184

176,184
Sales commissions on front-end load mutual fund and variable annuity products

1,118

41,796

42,914
Sales commissions on other products

—

23,671

23,671
Other revenues

996

16,999

17,995
Total

$
71,305

315,194

386,499


	For the nine months ended September 30, 2020
			Wealth
	Unaffiliated		Management	Total

	(in thousands)
Underwriting and distribution fee revenues
Advisory fees		—	232,243	232,243
Service and distribution fees		43,569	43,494	87,063
Sales commissions		1,047	53,538	54,585
Other revenues		308	25,833	26,141
Total		44,924	355,108	400,032


	For the nine months ended September 30, 2019
			Wealth
	Unaffiliated		Management	Total

	(in thousands)
Underwriting and distribution fee revenues
Advisory fees	$	—	208,806	208,806
Service and distribution fees		49,366	47,589	96,955
Sales commissions		1,300	60,959	62,259
Other revenues		242	27,265	27,507
Total	$	50,908	344,619	395,527

~~Table of contents~~

Year to Date 2016


Retail

Retail


Unaffiliated

Broker-

Distribution

Dealer

Total

(in thousands)

Underwriting and distribution fee revenues

Rule 12b-1 service and distribution fees

$
95,593

74,567

170,160
Fee-based asset allocation product revenues

—

166,425

166,425
Sales commissions on front-end load mutual fund and variable annuity products

478

50,795

51,273
Sales commissions on other products

—

23,195

23,195
Other revenues

2,353

15,342

17,695
Total

$
98,424

330,324

428,748

Underwriting and distribution revenues earned in the third quarter of ~~2017 decreased~~2020 increased by ~~$6.9~~$3.7 million, or 5%3%, compared to the third quarter of ~~2016 primarily driven~~2019. Underwriting and distribution revenues earned for the nine months ended September 30, 2020 increased $4.5 million, or 1%, compared to the same period in 2019. For both comparative periods, advisory fees revenues increased due to increases in average Advisory AUA. These increases were offset by ~~a decrease in Rule 12b-1 asset-based~~lower service and distribution fees ~~across both channels of $7.5 million. The decrease in Rule 12b-1 asset-based service and distribution fees is~~ due to ~~a decrease~~lower assets and decreases in ~~average mutual fund assets under management for which we earn Rule 12b-1 revenues and~~sales commissions.

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Shareholder Service Fee Revenue

During the share class conversion in July 2016 from load-waived Class A shares previously offered in our advisory products to asset-based institutional share classes, which do not charge a Rule 12b-1 fee. In our retail broker-dealer channel, revenues from our fee-based asset allocation products increased $3.8third quarter of 2020, shareholder service fee revenue decreased $1.5 million, or 7%, due to an increase in fee-based asset allocation assets under management, offset by a decrease in front-end load mutual fund and variable annuity products sales commission revenues of $4.0 million, or 24%6%, compared to the third quarter of ~~2016.~~

2019. For the nine months ended September 30, 2017, underwriting and distribution revenues decreased $42.2 million, or 10%, compared with the nine months ended September 30, 2016. Rule 12b-1 asset based service and distribution fees across both channels decreased $44.4 million, or 26%, compared to the first nine months of 2016, driven by a decrease in average mutual fund assets under management for which we earn Rule 12b‑1 revenues and the share class conversion. In addition, revenues from fee-based asset allocation productsinour retail broker-dealer channel, increased $9.8 million, or 6%, due to an increase in fee-based asset allocation assets under management, partially offset by a decrease in front-end load mutual fund and variable annuity product sales commission revenues of $9.0 million, or 18%, compared to the prior year.

Underwriting and distribution expenses for the third quarter of 2017 decreased by $3.6 million, or 2%, compared to the third quarter of 2016. Approximately 75% of Rule 12b-1 revenues earned are a pass-through to direct underwriting and distribution expenses. Direct expenses in the retail unaffiliated distribution channel decreased by $7.7 million due to decreased average retail unaffiliated distribution assets under management of 12%, which resulted in decreased Rule 12b-1 asset-based service and distribution expenses paid to third party distributors. Direct expense in the retail broker-dealer channel declined $1.2 million, or 2%, primarily due to the changes we made to the management structure in our broker-dealer channel. Compensation for managers has moved from commissions and overrides, which were captured as direct underwriting and distribution expense, to salary and bonus, which will be an indirect underwriting and distribution expense. Indirect expenses in the retail broker-dealer channel increased $6.3 million, or 20%, due to increases in compensation and related costs, resulting from our change in management structure, partially offset by a decrease in shareholder adjustments.

For the nine months ended September 30, 2017, underwriting and distribution expenses decreased by $57.2 million, or 11%, compared to the first nine months of 2016. Direct expenses in the retail unaffiliated distribution channel decreased by $30.1 million due to decreased average retail unaffiliated distribution assets under management of 18%, which resulted in lower Rule 12b-1 asset-based service and distribution expenses paid to third party distributors. Direct expense in the retail broker-dealer channel declined in proportion to the decline in revenue, except for a decrease in deferred acquisition expense of $13.3 million due to a share class conversion in our advisory products in July of 2016. Indirect expenses in the retail unaffiliated distribution channel during the nine months ended September 30, 2017 decreased $9.6 million, or 25%, compared with the nine months ended September 30, 2016 due to decreased computer services and software expenses of $4.2 million, decreased employee compensation and benefits of $3.8 million related to a workforce reduction in 2016, and lower marketing expenses and sales meeting costs. Indirect costs in the retail broker-dealer channel increased $9.1 million, or 9%, due to increases in compensation and related costs as a result of our change in management structure and increased computer services and software expenses.

~~Table of contents~~

~~Shareholder Service Fee Revenue~~

~~During the third quarter of 2017,~~2020, shareholder service fee revenue decreased ~~$2.2~~$6.5 million, or ~~8%,~~9% as compared to the ~~third quarter~~same period of ~~2016~~2019. For both comparative periods, the decrease was primarily due to a decrease in the number of accounts ~~causing~~and assets on which these fees are based and a ~~decrease~~reduction in account-based fees of $1.7 million, or 13%. The decrease in the number of accounts is the result of the share class conversion that occurred in July 2016 from account-based, load-waived Class A shares to asset-based, institutional share classes offered in our advisory programs.

~~For the nine month period ended September 30, 2017, compared~~fund reimbursement revenues related to the ~~nine month period ended September 30, 2016, shareholder service fee revenue decreased $12.3 million, or 13%, due to a decrease in the number~~outsourcing of accounts, primarily due to the share class conversion that occurred in July 2016, causing a decrease in account-based fees of $20.5 million, or 38%. Partially offsetting the decrease, asset-based fees during the nine months ended September 30, 2017 for the I, Y, R and N share classes for the Funds increased $8.5 million, or 36%. Assets in the I, Y, R and N share classes of the Funds increased 41% from an average of $21.5 billion at September 30, 2016 to an average of $30.4 billion at September 30, 2017.our transfer agency transactional processing operations which was offset by lower costs.

Total Operating Expenses

Operating expenses ~~increased $5.1 million, or 2%, in~~for the third quarter of ~~2017~~2020 were flat compared to the third quarter of ~~2016,~~2019, primarily due to ~~increased compensation~~increases in distribution and ~~related costs, and increased~~ general and administrative ~~costs, partially~~expenses offset by ~~a decrease~~decreases in ~~underwriting~~compensation and ~~distribution expenses~~benefits, technology, occupancy, marketing and ~~no intangible asset impairment costs in the third quarter of 2017.~~advertising and depreciation. For the nine months ended September 30, ~~2017,~~2020, operating expenses decreased ~~$43.0~~$12.6 million, or 6%2%, compared to the nine months ended September 30, 2019, primarily due to decreases in compensation and benefits, technology, occupancy, marketing and advertising and depreciation partially offset by increases in distribution and general and administrative expenses. We have been able to successfully reduce controllable expenses compared to the first nine months of ~~2016, primarily due~~2019 even as we continue to ~~decreased underwriting and distribution~~invest in targeted growth areas of our strategy. We expect controllable expenses ~~decreased compensation and related costs and lower intangible asset impairment costs, which were partially offset by an increase~~to be higher in ~~general and administrative costs. Underwriting and distribution expenses are discussed above.~~

Three months ended

September 30,


2017

2016

Variance

(in thousands)

Underwriting and distribution

$
149,400

152,999

(2)
%
Compensation and related costs

48,340

40,214

20
%
General and administrative

27,832

23,280

20
%
Subadvisory fees

3,566

2,566

39
%
Depreciation

5,230

4,541

15
%
Intangible asset impairment

—

5,700

(100)
%
Total operating expenses

$
234,368

229,300

2
%

Nine months ended


September 30,


2017

2016

Variance

(in thousands)

Underwriting and distribution

$
450,843

508,080

(11)
%
Compensation and related costs

144,970

151,495

(4)
%
General and administrative

81,709

61,708

32
%
Subadvisory fees

9,457

6,984

35
%
Depreciation

15,626

13,163

19
%
Intangible asset impairment

1,500

5,700

(74)
%
Total operating expenses

$
704,105

747,130

(6)
%

~~Table~~the fourth quarter of ~~contents~~

~~Compensation and Related Costs~~

~~Compensation and related costs during~~2020 than in the third quarter of ~~2017~~2020 due to strategic project activity and the absence of meeting expense reductions we experienced in the third quarter of 2020.


	Three months ended
	September 30,
	2020		2019	Variance

	(in thousands)
Distribution	$	122,195	117,425	4	%
Compensation and benefits		62,416	64,999	(4)	%
General and administrative		19,156	16,680	15	%
Technology		14,250	15,019	(5)	%
Occupancy		4,160	5,684	(27)	%
Marketing and advertising		1,370	2,134	(36)	%
Depreciation		2,998	4,833	(38)	%
Subadvisory fees		3,490	3,882	(10)	%
Total operating expenses	$	230,035	230,656	—


	Nine months ended
	September 30,
	2020		2019	Variance

	(in thousands)
Distribution	$	350,104	343,696	2	%
Compensation and benefits		182,704	191,718	(5)	%
General and administrative		58,278	47,421	23	%
Technology		41,989	47,769	(12)	%
Occupancy		13,160	19,100	(31)	%
Marketing and advertising		4,385	6,497	(33)	%
Depreciation		9,720	16,062	(39)	%
Subadvisory fees		10,444	11,154	(6)	%
Total operating expenses	$	670,784	683,417	(2)	%

Distribution expenses for the third quarter of 2020 increased ~~$8.1~~by $4.8 million, or ~~20%~~4%, compared to the third quarter of 2016. The increase is primarily due to a $3.9 million curtailment gain recognized in the third quarter of 2016 due to an amendment of the Company’s defined benefit postretirement medical plan that discontinued the availability of coverage for any individual that retires after December 31, 2016. 401(k) plan costs increased $1.4 million during the third quarter of 2017 due to the discretionary transition contribution at the end of the year that is being expensed over the last five months of 2017 and incentive compensation increased $1.1 million. Additionally, amortization of share-based compensation increased $1.8 million in the third quarter of 2017. Partially offsetting the increases, pension expense decreased $1.1 million in the third quarter of 2017, as a result of the Pension Plan freeze.

2019. For the nine months ended September 30, ~~2017, compensation and related costs decreased $6.5~~2020, distribution expenses increased $6.4 million, or 4%2%, compared to the ~~first nine months of 2016. This was primarily~~same period for 2019. For both comparative periods, the increases in expense were due to ~~a workforce reduction, which resulted~~increases in a $9.6 million restructuring charge in the prior year and a $3.5 million decrease in base compensation compared to 2016. These decreases were partially offset by a $3.8 million increase in amortization of share-based compensation and the $3.9 million curtailment gain recorded in 2016.

In July 2017, the Company made the decision to freeze the defined benefit pension plan as of September 30, 2017. The Company will provide eligible employees on December 31, 2017 with a discretionary transition contribution to their 401(k) accounts. The net impact of these changes will result in elevated compensation expenses of approximately $3.0 million in the fourth quarter of 2017. The Company anticipates annual savings of approximately $12.0 million from freezing the defined benefit pension plan beginning in 2018, affecting compensation and related costs and underwriting and distribution ~~expenses.~~revenue and an increase in the average Advisor payout rate from continued increases in production.

~~General~~Compensation and ~~Administrative Costs~~

~~General and administrative expenses increased $4.6 million to $27.8 million for~~benefits during the third quarter of ~~2017~~2020 decreased $2.6 million, or 4% compared to the ~~third quarter~~same period of 2016. The increase was mainly due to an increase in temporary staff expense and increased consulting costs for implementation of the DOL Fiduciary Rule. A decrease in computer services and software expenses partially offset this increase.

2019. For the nine months ended September 30, ~~2017,~~2020, compensation and benefits expenses decreased $9.0 million, or 5%. For both comparative periods, decreases were due to lower severance expense primarily related to the

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outsourcing of our transfer agency transactional processing operations, lower costs from reduced headcount and lower share-based compensation due to previously-issued awards vesting fully, as well as forfeitures. These decreases were partially offset by mark-to-market adjustments on deferred compensation plans.

General and administrative expenses for the third quarter of 2020 increased $2.5 million, or 15%, compared to the third quarter of 2019. For the nine months ended September 30, 2020, general and administrative expenses increased ~~$20.0~~$10.9 million, or 23%, compared to ~~$81.7~~the nine months ended September 30, 2019. For both comparative periods, the increases were primarily due to the shift of our transfer agency transactional processing operations outsourcing costs from technology expenses to general and administrative expenses and increased strategic project spending, partially offset by lower travel and meeting costs due to restricted travel and a transition to virtual meetings during the pandemic.

Technology expense for the third quarter of 2020 decreased $0.8 million, or 5%, compared to the same period of 2019. For the nine months ended September 30, 2020, technology expense decreased $5.8 million, or 12%, compared to the nine months ended September 30, 2019. For both comparative periods, the decreases were primarily due to costs related to the transfer agency transactional processing operations outsourcing shifting to general and administrative expenses, partially offset by increased consulting and software costs for new technologies.

Occupancy expense decreased $1.5 million, or 27%, for the third quarter of 2020 compared to the third quarter of 2019 and decreased $5.9 million, or 31%, for the nine months ended September 30, 2020, as compared to the same period in 2019. For both comparative periods, the decreases are due to the planned transition of field offices from corporate-leased space to Advisor personal branch offices.

Marketing and advertising expense decreased $0.8 million, or 36%, for the third quarter of 2020 compared to the third quarter of 2019 and decreased $2.1 million, or 33%, for the nine months ended September 30, 2020, as compared to the same period in 2019. For both comparative periods, the decreases are primarily due to lower sponsorship fees in connection with the shift to virtual industry conferences.

Depreciation expense decreased $1.8 million, or 38%, for the third quarter of 2020 compared to the third quarter of 2019 and decreased $6.3 million, or 39%, for the nine months ended September 30, 2020, as compared to the same period in 2019. The decreases were primarily due to capitalized software development assets becoming fully depreciated.

Investment and Other Income

Investment and other income for the three months ended September 30, 2020 increased 5%, compared to the same period in 2019 primarily due to greater unrealized gains, net of hedging activity, on the seed and corporate investment portfolios in the current period compared to the prior year comparative period, partially offset by a decline in interest income due to lower interest rates and redemptions in our corporate laddered investment portfolio and Pension Plan settlement expenses. For the nine months ended September 30, 2020, investment and other income decreased $10.8 million compared to the same period in ~~2016. Increased temporary staff expense~~2019 primarily due to lower unrealized gains, net of hedging activity, on the seed and ~~consulting costs for implementation of Project E~~corporate investment portfolios, a decline in interest income and Pension Plan settlement expenses in the ~~DOL Fiduciary Rule, increased legal costs andincreased fund related expenses, including start-up costs, drove~~current period compared to the ~~increase in expenses. Decreased dealer service expense partially offset~~prior year comparative period.

Taxes

The following table reconciles the ~~increase in other general and administrative costs.~~

~~Subadvisory Fees~~

~~Subadvisory fees are paid to other asset managers for providing advisory services for certain mutual fund portfolios. These expenses reduce~~statutory federal income tax rate with our ~~operating margin since we pay out approximately half of our management fee revenues received~~effective income tax rate from ~~subadvised products.~~

~~Subadvisory expenses increased $1.0 million~~continuing operations for the ~~quarter~~three and nine months ended September 30, ~~2017 compared to the third quarter~~2020 and 2019:


	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%	21.0	%
State income taxes, net of federal tax benefit	3.7		2.7		3.6		2.8
Permanent differences	1.2		0.6		1.3		0.5
Share-based compensation	(0.5)		(0.5)		1.4		1.6
Other items	(0.6)		(0.5)		(0.4)		(0.1)
Effective income tax rate	24.8	%	23.3	%	26.9	%	25.8	%

Table of 2016 due to an increase in subadvised average assets of 88%. Subadvisory expenses increased $2.5 million for the nine month period ended September 30, 2017 compared to the same period in 2016 due to an increase in subadvised average assets of 95%. The increase in subadvised average assets in both periods is primarily due to the launch of the Ivy Proshares in April of 2017 and the introduction of the Advisors Wilshire Global Allocation Fund in May of 2017. Subadvised average assets under management at September 30, 2017~~were $5.1 billion compared to an average of $2.6 billion at September 30, 2016.~~Contents

~~Investment and Other Income (Loss) and Taxes~~

~~Investment and other~~Our effective income tax rate was ~~$7.2 million~~24.8% for the three months ended September 30, ~~2017~~2020, as compared to ~~$7.9 million~~23.3% for the same period in ~~2016. In the third quarter~~2019, an increase of ~~2017, we recognized $3.3 million in dividend and interest~~1.5%. Our effective income ~~and gains on the sales of sponsored funds held as available for sale. The third quarter of 2017 also included $2.0~~

~~Table of contents~~

million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership and $1.9 million of net gains related to our seed capital investment and associated hedges. During the third quarter of 2016, we recognized $4.1 million in dividend and interest income and gains on the sales of sponsored funds held as available for sale. The third quarter of 2016 also included $2.2 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. Additionally, the third quarter of 2016 included $1.4 million of net gains related to our seed capital investments and associated hedges.

~~Investment and other income~~tax rate was ~~$11.4 million~~26.9% for the nine months ended September 30, ~~2017,~~2020, as compared to ~~investment and other losses of $1.7 million in~~25.8% for the same period in ~~2016. The majority~~2019, an increase of ~~the income~~1.1%. Increases in the first nine months of 2017 related to $5.2 million in interest and dividend income and $4.2 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. For the nine months ended September 30, 2016, we recognized $9.6 million of unrealized losses related to our portfolio prior to executing total return swap contracts. With our hedge program implemented, we recognized an additional $3.6 million of net losses related to our seed capital investments and associated hedges for the remainder of the first nine months of 2016. The nine months ended September 30, 2016 also included $4.1 million in dividend and interest income, $3.5 million of gains on the sales of sponsored funds held as available for sale and $3.4 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership.

At the end of the second quarter of 2017, we implemented a laddered fixed income investment portfolio to optimize the return on our cash, and estimate the portfolio to generate approximately $4.0 to $5.0 million in incremental investment income on an annual basis depending on the interest rate environment and the demand for seed capital for new products.

~~Our effective~~state income tax ~~rate was 34.1% for the third quarter of 2017, as compared to 30.5% for the third quarter of 2016. The 3.6% increase is primarily~~ due to ~~less of a~~additional state tax ~~benefit related~~filings and non-deductible expenses caused the rate to ~~the capital loss carryover valuation allowance~~increase in ~~2017 as compared to 2016. This increase was partially offset by the tax benefits associated with stock compensation in 2017.~~both comparative periods.

The Company has a deferred tax asset related to a capital loss carryforward that is available to offset current and future capital gains. Due to the limited carryforward permitted upon realization, the Company had a valuation allowance recorded against this deferred tax asset. During the third quarter of 2017 and 2016, increases in the fair value of the Company’s investment portfolios as well as realized capital gains on investment securities decreased the valuation allowance and thereby reduced income tax expense by $0.2 million and $5.1 million, respectively. As of September 30, 2017, the Company determined that it is more likely than not that the deferred tax asset related to the federal capital loss carryforward will be realized prior to its expiration on December 31, 2018. As a result, only a valuation allowance on state capital loss carryover deferred tax assets remains as of September 30, 2017.

~~Upon implementation of ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting,~~” the tax consequences of share-based payment accounting (excess tax benefits and shortfalls) are recorded through the income tax provision in the statement of income. The third quarter of 2017 included a tax benefit of $0.8 million related to dividend payments on non-vested restricted stock awards, which decreased the effective tax rate. Prior to adoption of this ASU in first quarter of 2017, the tax impacts associated with the change in value of share-based payment awards and dividend payments were recorded through additional paid-in capital.

Our effective income tax rate was 40.1% for the nine months ended September 30, 2017, as compared to 33.4% for the nine months ended September 30, 2016. In 2017, the Company recognized a tax shortfall in excess of tax benefits from share-based payments of $7.4 million, which increased the effective tax rate. During 2017 and 2016, increases in the fair value of the Company’s investment portfolios as well as realized capital gains on securities classified as available for sale decreased the valuation allowance and thereby reduced income tax expense by $2.3 million and $7.9 million, respectively.

The Company expects ~~increased~~continued future volatility in ~~the~~its effective tax rate ~~in future periods~~ as the ~~stock-based~~tax effects of share-based compensation ~~benefits recognized in our tax provision~~ will be impacted by market fluctuations in our stock ~~price as well as~~price. The future effective tax rate could also experience volatility from federal and state tax incentives, unanticipated federal and state tax legislative changes, and unanticipated fluctuations in ~~our investment portfolios that are driven by the market.~~earnings.

~~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 indebtednessand maturities of outstanding debt in January 2021, income tax payments, seed money for new products, ongoing technology enhancements, Advisor transition loans, capital expenditures, and collateral funding for margin accounts established to support derivative positions, and could include strategic acquisitions.

Expected long-term capital requirements include 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.

Our operations provide much of the cash necessary to fund our priorities, as follows:

●

Pay dividends

●

~~Finance internal growth~~

Repurchase our stock

●

Finance growth objectives

~~As part of our regular assessment of the return of capital to stockholders, we are implementing a revised~~Our existing capital return policy ~~that will~~is designed to provide ~~greater~~ financial flexibility to invest in our business, support ongoing operations and maintain a strong balance sheet, while continuing to provide a very competitive return to stockholders. The components of the capital return policy are described ~~under “Pay Dividends” and “Repurchase Our Stock”.~~below.

Pay Dividends

We paid quarterly dividends on our Class A common stock that resulted in financing cash outflows of ~~$115.7~~$49.9 million and ~~$114.7~~$56.6 million for the first nine months of ~~2017~~2020 and ~~2016,~~2019, respectively.

The ~~Company’s~~ Board of Directors approved a ~~quarterly~~ dividend on our Class A common stock of $0.46 per share payable on November 1, 2017 to stockholders of record as of October 11, 2017. In connection with the implementation of our new capital return policy, the Company’s Board of Directors reduced the quarterly dividend on our Class A common stock to $0.25 per share ~~for the~~with a November 2, 2020 payment date and an October 12, 2020 record date.The total dividend ~~payable~~to be paid on February 1, 2018 to stockholders of record as of January 11, 2018. This dividend reduction will result in a lower dividend payment of approximately $17.4 million on a quarterly basis based on the number of shares of Class A common stock currently outstanding.November 2, 2020 is $15.6 million.

~~Finance Internal Growth~~

We continue to invest in our retail broker-dealer channel by offering home office resources, wholesaling efforts and enhanced technology tools, including the modernization of our brokerage and product platform associated with Project E. We use cash to fund growth in our distribution channels. Our retail unaffiliated distribution channel requires cash outlays for wholesaler commissions and commissions to third parties on deferred load product sales. Across both channels, we provide seed money for new products.

Repurchase Our Stock

We repurchased ~~904,410~~7,892,913 shares and ~~2,230,034~~6,849,238 shares of our Class A common stock in the open market or privately during the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively, resulting in ~~cash outflows~~share repurchases of ~~$15.6~~$112.1 million and ~~$48.0~~$116.7 million, respectively.

In connection with the implementation of our new capital return policy, we intend to repurchase $250 million our common stock, which is inclusive of buybacks to offset dilution of our equity grants. Based on our current financial forecast, we intend We continue to engage in an ~~opportunistic~~active share repurchase planas part of our ongoing capital management plan.

Finance Growth Objectives

We use cash to ~~fulfill~~fund growth in our distribution channels. We continue to invest in our wealth management channel by offering home office resources, wholesaling efforts, enhanced technology tools, including the ~~targeted buybacks over the next two years.~~modernization of our wealth management platforms, and Advisor transition loans. Our unaffiliated channel requires cash outlays for wholesaler commissions and commissions to third parties on deferred-load product sales and technology enhancements for asset management and distribution. We also provide seed money for new products to further enhance our product offerings and

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~~Operating~~

distribution efforts. As we continue to advance our investment in improved technology, we expect increased costs in this area.

Cash Flows

Cash from operations ~~decreased $82.6~~is our primary source of funds. Cash from operations increased $7.7 million for the nine months ended September 30, ~~2017~~2020 compared to the nine months ended September 30, ~~2016.~~2019. The ~~decrease~~increase is primarily due to ~~investment~~cash inflows during the first nine months of 2020 as compared to cash outflows during first nine months of 2019 related to our net activity in equity and trading debt securities and was partially offset by lower net ~~income, partly offset by changes in operating receivables and payables.~~income.

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 resulted in variances within cash from operations on the statement of cash flows; however, there is no impact to the Company’s liquidity and operations ~~for~~due to the variances in these accounts.

~~Table of contents~~

~~During the first nine months of 2017, we contributed $10.0 million to our pension plan. We do not expect to make additional contributions for the remainder of the year.~~

~~Investing Cash Flows~~

Investing activities consist primarily of the ~~sales~~seeding and ~~purchases~~sale of sponsored investment securities, ~~classified as equity method~~purchases and ~~available for sale~~maturities of investments ~~as well as~~held in our corporate investment portfolio and capital expenditures. ~~We expect our 2017 capital expenditures to be in the range of $10.0 to $20.0 million.~~

Financing ~~Cash Flows~~

~~As noted previously,~~activities include payment of dividends and ~~stock~~ repurchases ~~accounted for a majority~~ of our ~~financing cash outflows in the first nine months of 2017 and 2016.~~Class A common stock. Future financing cash outflows will be affected by the ~~new~~existing capital return policy.

~~Future Capital Requirements~~

Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund its short-term operating and capital requirements during 2017. Expected short term uses of cash include dividend payments, interest on indebtedness and maturities of outstanding debt, income tax payments, seed money for new products, capital expenditures including those related to the Project E initiatives, share repurchases, collateral funding for margin accounts established to support derivative positions, expenditures related to compliance with the DOL Fiduciary Rule, and home office leasehold and building improvements, and could include strategic acquisitions. We intend to pay off the $95.0 million in senior unsecured notes maturing in January 2018, resulting in approximately $5.0 million in annual interest expense savings.

Expected long term capital requirements include interest on indebtedness and maturities of outstanding debt, operating leases and purchase obligations, and potential settlement of tax liabilities. Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, income tax payments, seed money for new products, repurchases of our common stock, and payment of upfront fund commissions for Class C shares and certain fee-based asset allocation products. We expect payment of upfront fund commissions for certain fee-based asset allocation products will decline in future years due to a change in the advisor compensation plan whereby a smaller population of advisors are eligible for upfront fund commissions on the sale of these products.~~Our strong balance sheet allows us some flexibility around our dividend as we evaluate the longer-term earnings power of the Company.~~

Critical Accounting Policies and Estimates

There have been no material changes in the critical accounting policies and estimates disclosed in the “Critical Accounting Policies and Estimates” section of our ~~2016~~2019 Form 10-K.

Non-GAAP Financial Measures

“Adjusted net income attributable to Waddell & Reed Financial, Inc.,” “adjusted net income per share, basic and diluted,” “adjusted operating expenses,” and “adjusted operating margin” are non-GAAP financial measures that are not presented in accordance with U.S. generally accepted accounting principles (GAAP). We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding charges and gains that are not indicative of our core operating results, and allow management and investors to better evaluate our performance between periods and compared to other companies in our industry.

These non-GAAP financial measures should not be considered a substitute for financial measures presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance.

A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is included in the table below.

Table of ~~contents~~Contents

Reconciliation of GAAP to non-GAAP Financial Measures

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


	Three months ended					Nine months ended
	September 30,					September 30,
		2020		2019			2020		2019
Net income attributable to Waddell & Reed Financial, Inc. (GAAP)	$	30,523		33,054		$	77,333		99,056
Adjustments
Severance		—		3,081			—		3,081
Tax effect of adjustments		—		(739)			—		(739)
Adjusted net income attributable to Waddell & Reed Financial, Inc. (non-GAAP)	$	30,523		35,396		$	77,333		101,398

Weighted average shares outstanding - basic and diluted		64,240		72,387			65,795		74,446
Adjusted net income per share, basic and diluted (non-GAAP):	$	0.48		0.49		$	1.18		1.36

Controllable expenses (GAAP)	$	101,352		104,516		$	300,516		312,505
Adjustments
Severance		—		(3,081)			—		(3,081)
Adjusted controllable expenses (non-GAAP)	$	101,352		101,435		$	300,516		309,424

Operating expenses (GAAP)	$	230,035		230,656		$	670,784		683,417
Adjustments
Severance		—		(3,081)			—		(3,081)
Adjusted operating expenses (non-GAAP)	$	230,035		227,575		$	670,784		680,336

Operating income (GAAP)	$	37,635		40,024		$	100,653		116,827
Adjustments
Severance		—		3,081			—		3,081
Adjusted operating income (non-GAAP)	$	37,635		43,105		$	100,653		119,908

Operating revenue	$	267,670		270,680		$	771,437		800,244

Operating margin (GAAP)		14.1	%	14.8	%		13.0	%	14.6	%
Adjusted operating margin (non-GAAP)		14.1	%	15.9	%		13.0	%	15.0	%

Third

Third

Year to

Year to

Quarter

Quarter

Date

Date


2017

2016

Variance

2017

2016

Variance

Asset Manager (in millions)

Retail Unaffiliated Distribution

AUM

$
31,062

33,290

(6.7)
%

$
31,062

33,290

(6.7)
%
Net flows

$
(483)

(3,343)

85.6
%

$
(2,727)

(12,611)

78.4
%
Organic decay annualized

(6.4)
%
(38.0)
%

(12.0)
%
(36.8)
%

Redemption rate

33.0
%
56.2
%

40.8
%
65.6
%

Retail Broker-Dealer

AUM

$
43,472

43,170

0.7
%

$
43,472

43,170

0.7
%
Net flows

$
(1,238)

(712)

(73.9)
%

$
(3,274)

(1,411)

(132.0)
%
Organic decay annualized

(12.0)
%
(6.7)
%

(10.3)
%
(4.3)
%

Redemption rate

16.4
%
12.1
%

15.4
%
10.7
%

Institutional

AUM

$
6,365

8,595

(25.9)
%

$
6,365

8,595

(25.9)
%
Net flows

$
(1,071)

(838)

27.8
%

$
(2,629)

(6,912)

62.0
%
Organic decay annualized

(60.9)
%
(37.3)
%

(44.3)
%
(59.8)
%

Redemption rate

67.3
%
46.4
%

53.7
%
89.8
%

Broker-Dealer

AUA (1) (in billions)

$
55.5

52.1

6.5
%

$
55.5

52.1

6.5
%
AUA fee based accounts (in billions)

$
20.7

18.5

11.9
%

$
20.7

18.5

11.9
%
Number of advisors

1,481

1,796

(17.5)
%

1,481

1,796

(17.5)
%
Advisor productivity (2) (in thousands)

$
69.0

59.0

16.9
%

$
194.3

183.4

5.9
%
U&D revenues (in thousands)

$
106,000

105,787

0.2
%

$
315,194

330,324

(4.6)
%

~~(1)~~

~~Assets under administration~~

~~(2)~~

~~Advisors’ productivity is calculated by dividing underwriting and distribution revenues for the retail broker-dealer channel by the average number of advisors during the period.~~

~~Item 3.Quantitative~~
Item 3.
Quantitative and Qualitative Disclosures About Market Risk

We are primarily exposed to market risk associated with unfavorable movements in interest rates and securities ~~prices.~~prices for both our corporate investments and our AUM and AUA, on which our revenues are based, and credit risk related to collateral on our economic hedge program derivative trading. The Company has had no material changes in its market risk policies or its market risk sensitive instruments and positions since December 31, ~~2016.~~2019 other than the changes to the investment and derivative portfolios disclosed in Note 4 and Note 5 to the unaudited consolidated financial statements and changes to AUM and AUA inPart I – Item 2 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations”. As further described in Note ~~4 to the unaudited consolidated financial statements,~~5, the Company has an economic hedge program that uses total return swap contracts to hedge market risk related to its investments in sponsored funds.

Item 4.

Controls and Procedures

~~Item 4.Controls and Procedures~~

The Company maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding

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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

~~Table of contents~~

Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, ~~2017,~~2020, have concluded that the Company’s disclosure controls and procedures were effective as of September 30, ~~2017.~~2020.

The Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) 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 September 30, ~~2017~~2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

~~Part II.Other Information~~

~~Item 1.Legal Proceedings~~
Part II.
Other Information

~~See Part I, Item 1, Notes to the Unaudited Consolidated Financial Statements, Note 10 – Contingencies, of this Quarter Report on Form 10-Q.~~

Item 1A.

Risk Factors

~~Item 1A.Risk Factors~~

~~The Company has had~~Except as noted below, there have been no material changes ~~during~~to the ~~quarter to its~~Company’s Risk Factors from those previously reported in the Company’s ~~2016~~2019 Form 10-K.

The COVID-19 Pandemic Could Have a Material Adverse Effect on Our Business, Results of Operations or Financial Condition. The ongoing COVID-19 pandemic has caused significant disruption in global financial markets, including significant volatility in the securities markets. Declines in our AUM and AUA negatively impact our future revenues, earnings and growth prospects. In addition, certain of the risk factors set forth in the 2019 Form 10-K could be heightened by the effects of COVID-19 pandemic and related economic conditions resulting in a material adverse effect on our business, results of operations or financial condition, including due to:

●

declines in the securities markets or our Funds’ performance, which could result in decreased sales and increased redemptions;

●

unprecedented market dislocation and disparate impact on particular businesses and industries;

●

availability of financing capital;

●

disruption of worldwide supply chains;

●

negative impacts to our distribution channels or other financial institutions with which we do business;

●

a work-from-home environment, which could result in reductions in our operating effectiveness or efficiency, increased operational, compliance and cybersecurity risks, the failure of controls and risk management policies to identify and manage risks, or the failure or breach of our operational or security systems or our technology infrastructure;

●

the unavailability of key personnel necessary to conduct our business activities and operational challenges and costs associated with the return of employees from their remote working environments to the workplace;

●

travel and visitation restrictions that limit our ability to engage with management of businesses in which we invest or may invest and with clients and business partners;

●

the ability of Advisors to interact with clients and access their leased office spaces;

●

actions and recommendations of federal, state and local governments in response to the COVID-19 pandemic; or

●

our inability to reduce the level of our expenses to align with decreases in our revenues.

We are unable to accurately predict the ultimate impact of the COVID-19 pandemic due to various uncertainties, including the duration of the outbreak and length of time it will take for the financial markets and economy to recover and for our employees to safely return to the workplace. We closely monitor the impact of the COVID-19 pandemic, continually assessing its potential effects on our business and on the businesses in which we invest. The extent to which our business and financial results are affected by COVID-19 will largely depend on future developments, which cannot be accurately predicted and are uncertain.

For additional discussion regarding the impact on our business, results of operations and financial condition due to COVID-19 and the related economic conditions, please see Part I – Item 2 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of COVID-19”.

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

~~Item 2.Unregistered Sales of Equity Securities and Use of Proceeds~~

The following table sets forth certain information about the shares of Class A common stock we repurchased during the third quarter of ~~2017.~~2020.


				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)
July 1 - July 31	75,000	$	14.52	75,000	n/a
August 1 - August 31	1,316,500		15.41	1,316,500	n/a
September 1 - September 30	1,225,608		15.19	1,225,608	n/a
Total	2,617,108	$	15.28	2,617,108

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 (1)

per Share

Program

Program

July 1 - July 31

—

$
—

—

n/a
(1)
August 1 - August 31

190,056

19.06

190,000

n/a
(1)
September 1 - September 30

—

—

—

n/a
(1)
Total

190,056

$
19.06

190,000

(1)

~~(1)~~

~~On August 31, 1998, we announced that~~In October 2012, our Board of Directors approved a program to repurchase shares of our Class A common stock on the open market. Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding Class A common stock or (ii) $50 million of our Class A common stock. We may repurchase our Class A common stock in privately negotiated transactions or through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems. Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased. ~~Our Board of Directors reviewed and ratified the stock~~We continue to engage in an active share repurchase ~~program in October 2012. During the third quarter of 2017, 56~~plan.

During the third quarter of 2020, there were no shares ~~were~~ purchased in ~~connection with funding employee income tax withholding obligations arising from the vesting of restricted shares.~~

In connection with funding employee income tax withholding obligations arising from the ~~implementation~~vesting of our new capital return policy and based on our current financial forecast, we intend to repurchase $250 million our common stock over the next two years, inclusive of buybacks to offset dilution of our equity grants.restricted shares.

Table of ~~contents~~Contents

~~Item 6.Exhibits~~

10.1*Item 6.

Exhibits


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 Current Report on Form 8-K, File No. 001-13913, on October 21, 2020 and incorporated here by reference.
31.1*		Section 302 Certification of Chief Executive Officer

31.2*		Section 302 Certification of Chief Financial Officer

32.1**		Section 906 Certification of Chief Executive Officer

32.2**		Section 906 Certification of Chief Financial Officer

101*		Materials from the Waddell & Reed Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017,~~2020, formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated ~~Statement~~Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) related Notes to the Unaudited Consolidated Financial Statements, tagged in detail.
104*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith

** Furnished herewith

Table of ~~contents~~Contents

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this ~~27th~~30th day of October ~~2017.~~2020.

	WADDELL & REED FINANCIAL, INC.

	By:	/s/ Philip J. Sanders
		Chief Executive Officer ~~Chief Investment Officer~~ and Director
		(Principal Executive Officer)

	By:	~~/s/ Brent K. Bloss~~
		~~Senior Vice President, Chief Financial Officer and Treasurer~~
		~~(Principal Financial Officer)~~

	~~By:~~	/s/ Benjamin R. Clouse
		Senior Vice President and Chief ~~Accounting~~Financial Officer (Principal Financial Officer)
	By:	/s/ Michael J. Daley
		Vice President, Chief Accounting Officer, Investor Relations and Treasurer (Principal Accounting Officer)

4145

			Page No.

Part I.	Financial Information

Item 1.		Financial Statements (unaudited)

		Consolidated Balance Sheets at September 30, ~~2017~~2020 and December 31, ~~2016~~2019	3
			3

		Consolidated Statements of Income for the three and nine months ended September 30, ~~2017~~2020 and September 30, ~~2016~~2019	4
			4

		Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2020 and September 30, ~~201~~20196	5
			5

		Consolidated ~~Statement~~Statements of Stockholders’ Equity and ~~redeemable noncontrolling interests~~Redeemable Noncontrolling Interests for the three and nine months ended September 30, ~~2017~~2020 and September 30, 2019	6
			6

		Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2020 and September 30, ~~201~~20196	7
			7

		Notes to the Unaudited Consolidated Financial Statements	8

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	22 25

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	38 41

Item 4.		Controls and Procedures	38 41

Part II.	Other Information

Item 1.1A.		~~Legal Proceedings~~Risk Factors	39 42

Item ~~1A.~~2.		~~Risk Factors~~	39

~~Item 2.~~		Unregistered Sales of Equity Securities and Use of Proceeds	39 43

Item 6.		Exhibits	40
			44

		Signatures	41 45


	For the three months ended September 30,				For the nine months ended September 30,
	2017		2016		2017		2016

Revenues:
Investment management fees	$	134,149		138,745	$	395,463		424,403
Underwriting and distribution fees		128,892		135,778		386,499		428,748
Shareholder service fees		26,406		28,563		80,706		92,959
Total		289,447		303,086		862,668		946,110

Operating expenses:
Underwriting and distribution		149,400		152,999		450,843		508,080
Compensation and related costs (including share-based compensation of $14,180, $12,425, $42,419 and $38,573, respectively)		48,340		40,214		144,970		151,495
General and administrative		27,832		23,280		81,709		61,708
Subadvisory fees		3,566		2,566		9,457		6,984
Depreciation		5,230		4,541		15,626		13,163
Intangible asset impairment		—		5,700		1,500		5,700
Total		234,368		229,300		704,105		747,130

Operating income		55,079		73,786		158,563		198,980
Investment and other income (loss)		7,236		7,878		11,386		(1,653)
Interest expense		(2,796)		(2,792)		(8,370)		(8,336)

Income before provision for income taxes		59,519		78,872		161,579		188,991
Provision for income taxes		20,296		24,067		64,857		63,146
Net income		39,223		54,805		96,722		125,845
Net income attributable to redeemable noncontrolling interests		1,272		978		2,408		1,355
Net income attributable to Waddell & Reed Financial, Inc.	$	37,951		53,827	$	94,314		124,490

Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted:	$	0.45		0.65	$	1.13		1.51

Weighted average shares outstanding, basic and diluted:		83,476		82,834		83,719		82,629


							Accumulated		Redeemable
				Additional			Other	Total	Non
	Common Stock			Paid-In	Retained	Treasury	Comprehensive	Stockholders’	Controlling
	Shares	Amount		Capital	Earnings	Stock	Income (Loss)	Equity	interest
Balance at December 31, 2016	99,701	$	997	291,908	1,135,694	(531,268)	(53,329)	844,002	10,653
Adoption of share-based compensation guidance on January 1, 2017	—		—	3,504	(2,200)	—	—	1,304	—
Net income	—		—	—	94,314	—	—	94,314	2,408
Net subscription of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	17,575
Recognition of equity compensation	—		—	37,737	374	—	—	38,111	—
Net issuance/forfeiture of nonvested shares	—		—	(37,033)		37,033		—	—
Dividends accrued, $1.38 per share	—		—	—	(115,808)	—	—	(115,808)	—
Repurchase of common stock	—		—	—	—	(15,635)	—	(15,635)	—
Other comprehensive income	—		—	—	—	—	24,017	24,017	—
Balance at September 30, 2017	99,701	$	997	296,116	1,112,374	(509,870)	(29,312)	870,305	30,636


	Less than 12 months			12 months or longer		Total
			Unrealized		Unrealized		Unrealized
September 30, 2017	Fair value		losses	Fair value	losses	Fair value	losses
	(in thousands)
Corporate bonds	$	141,950	(241)	—	—	141,950	(241)
U.S. treasury bills		19,937	(83)	—	—	19,937	(83)
Sponsored funds		12,663	(153)	44,593	(2,271)	57,256	(2,424)
	$	174,550	(477)	44,593	(2,271)	219,143	(2,748)


September 30, 2017	Level 1		Level 2	Level 3	Other Assets Not Held at Fair Value	Total
	(in thousands)
Available for sale securities:
Certificates of deposit	$	—	13,004	—	—	13,004
Commercial paper		—	29,882	—	—	29,882
Corporate bonds		—	171,099	—	—	171,099
U.S. treasury bills		—	19,937	—	—	19,937
Sponsored funds		144,423	—	—	—	144,423
Trading securities:
Certificates of deposit		—	2,000	—	—	2,000
U.S. treasury bills		—	4,964	—	—	4,964
Corporate bonds		—	48,712	—		48,712
Mortgage-backed securities		—	11	—	—	11
Common stock		117	—	—	—	117
Consolidated sponsored funds		114,707	77,225	—	—	191,932
Consolidated sponsored privately offered funds measured at net asset value (1)		—	—	—	4,564	4,564
Sponsored funds		13,456	—	—	—	13,456
Sponsored privately offered funds measured at net asset value (1)		—	—	—	657	657
Equity method securities: (2)
Sponsored funds		52,380	—	—	—	52,380
Total	$	325,083	366,834	—	5,221	697,138


December 31, 2016	Level 1		Level 2	Level 3	Other Assets Not Held at Fair Value	Total
	(in thousands)
Available for sale securities:
Sponsored funds	$	122,806	—	—	—	122,806
Sponsored privately offered funds measured at net asset value (1)		—	—	—	570	570
Trading securities:
Mortgage-backed securities		—	13	—	—	13
Common stock		101	—	—	—	101
Consolidated sponsored funds		100,847	44,863	—	—	145,710
Sponsored funds		29,541	—	—	—	29,541
Equity method securities: (2)
Sponsored funds		26,775	—	—	—	26,775
Sponsored privately offered funds measured at net asset value (1)		—	—	—	3,234	3,234
Total	$	280,070	44,876	—	3,804	328,750


		Three months ended			Nine months ended
	Income statement	September 30,			September 30,
	location		2017	2016		2017	2016
		(in thousands)			(in thousands)
Total return swap contracts	Investment and other (loss)	$	(8,855)	(8,837)		(27,321)	(30,767)


				Other					Other
	Pension Benefits			Postretirement Benefits		Pension Benefits			Postretirement Benefits
	Three months ended September 30,			Three months ended September 30,		Nine months ended September 30,			Nine months ended September 30,
	2017		2016	2017	2016	2017		2016	2017	2016
		(in thousands)					(in thousands)
Components of net periodic benefit cost:
Service cost		2,726	3,050	—	185		8,178	9,149	—	555
Interest cost		1,654	2,358	15	91		4,962	7,074	44	275
Expected return on plan assets		(2,559)	(3,482)	—	—		(7,677)	(10,445)	—	—
Actuarial (gain) loss amortization		1,265	1,554	(45)	(38)		3,795	4,661	(135)	(115)
Prior service cost (credit) amortization		31	93	(1)	1		93	280	(3)	3
Transition obligation amortization		1	1	—	(8,475)		3	3	—	(8,475)

Total (1)	$	3,118	3,574	(31)	(8,236)		9,354	10,722	(94)	(7,757)


			Change in
			valuation
			allowance for
			unrealized		Pension and	Total
	Unrealized		gains		postretirement	accumulated
	gains (losses)		(losses) on		benefits	other
	on investment		investment		unrealized	comprehensive
Three months ended September 30, 2017	securities		securities		gains (losses)	income (loss)
	(in thousands)
Balance at June 30, 2017	$	(1,986)		(540)	(44,457)	(46,983)
Other comprehensive income before reclassification		1,968		800	14,958	17,726
Amount reclassified from accumulated other comprehensive income (loss)		(438)		(260)	643	(55)
Net current period other comprehensive income		1,530		540	15,601	17,671
Balance at September 30, 2017	$	(456)	$	—	(28,856)	(29,312)

			Change in valuation
			allowance for
			unrealized		Pension and	Total
	Unrealized		gains		postretirement	accumulated
	gains (losses)		(losses) on		benefits	other
	on investment		investment		unrealized	comprehensive
Nine months ended September 30, 2017	securities		securities		gains (losses)	income (loss)
	(in thousands)
Balance at December 31, 2016	$	(3,972)		(3,388)	(45,969)	(53,329)
Other comprehensive income before reclassification		4,113		3,743	14,958	22,814
Amount reclassified from accumulated other comprehensive income (loss)		(597)		(355)	2,155	1,203
Net current period other comprehensive income		3,516		3,388	17,113	24,017
Balance at September 30, 2017	$	(456)	$	—	(28,856)	(29,312)


		For the three months ended September 30, 2017
			Tax
			(expense)
	Pre-tax		benefit	Net of tax	Statement of income line item
	(in thousands)
Reclassifications included in net income:
Sponsored funds investment gains	$	698	(260)	438	Investment and other income (loss)
Valuation allowance		—	260	260	Provision for income taxes
Amortization of pension and postretirement benefits		(952)	309	(643)	Underwriting and distribution expense and Compensation and related costs
Total	$	(254)	309	55


	Third Quarter 2016
	Retail
	Unaffiliated		Retail Broker-
	Distribution		Dealer	Institutional	Total
	(in millions)

Beginning Assets	$	35,197	42,261	8,993	86,451

Sales (2)		1,320	1,024	180	2,524
Redemptions		(4,824)	(1,542)	(1,051)	(7,417)
Net Exchanges		161	(194)	33	—
Net Flows		(3,343)	(712)	(838)	(4,893)

Market Action		1,436	1,621	440	3,497
Ending Assets	$	33,290	43,170	8,595	85,055


	Year to Date 2017
	Retail
	Unaffiliated		Retail Broker
	Distribution		Dealer	Institutional	Total
	(in millions)

Beginning Assets	$	30,295	42,322	7,904	80,521

Sales (2)		5,667	3,143	290	9,100
Redemptions		(9,078)	(5,727)	(2,925)	(17,730)
Net Exchanges		684	(690)	6	—
Net Flows		(2,727)	(3,274)	(2,629)	(8,630)

Market Action		3,494	4,424	1,090	9,008
Ending Assets	$	31,062	43,472	6,365	80,899


	Year to Date 2016
	Retail
	Unaffiliated		Retail Broker
	Distribution		Dealer	Institutional	Total
	(in millions)

Beginning Assets	$	45,641	43,344	15,414	104,399

Sales (2)		4,990	3,186	823	8,999
Redemptions		(18,047)	(4,068)	(7,818)	(29,933)
Net Exchanges		446	(529)	83	—
Net Flows		(12,611)	(1,411)	(6,912)	(20,934)

Market Action		260	1,237	93	1,590
Ending Assets	$	33,290	43,170	8,595	85,055