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~~March 31, 2021

☐

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~~April 23, 2021
Class A common stock, $.01 par value		~~83,371,059~~62,024,785

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


	March 31,
	2021		December 31,
	(Unaudited)		2020
Assets:
Cash and cash equivalents	$	193,864	273,756
Cash and cash equivalents - restricted		62,460	63,594
Investment securities		452,059	486,765
Receivables:
Funds and separate accounts		13,995	14,837
Customers and other		46,151	68,466
Prepaid expenses and other current assets		31,341	36,318
Total current assets		799,870	943,736

Property and equipment, net		19,073	21,903
Goodwill and identifiable intangible assets		145,869	145,869
Deferred income taxes		22,089	19,200
Other non-current assets		21,288	23,123
Total assets	$	1,008,189	1,153,831

Liabilities:
Accounts payable	$	17,780	18,330
Payable to investment companies for securities		21,678	30,514
Payable to third party brokers		20,941	16,316
Payable to customers		70,890	82,165
Short-term notes payable		—	94,997
Accrued compensation		84,748	101,749
Other current liabilities		56,824	52,476
Total current liabilities		272,861	396,547

Accrued pension and postretirement costs		447	446
Other non-current liabilities		25,507	29,081
Total liabilities		298,815	426,074

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; 62,043 shares outstanding (62,398 at December 31, 2020)		997	997
Additional paid-in capital		309,294	303,757
Retained earnings		1,234,154	1,248,299
Cost of 37,658 common shares in treasury (37,303 at December 31, 2020)		(837,096)	(828,193)
Accumulated other comprehensive income		2,025	2,897
Total stockholders’ equity		709,374	727,757

Total liabilities and stockholders’ equity	$	1,008,189	1,153,831

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

~~Table of contents~~

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 March 31,
	2021		2020

Revenues:
Investment management fees	$	118,016		105,219
Underwriting and distribution fees		154,795		136,943
Shareholder service fees		22,540		21,571
Total		295,351		263,733

Operating expenses:
Distribution		136,692		120,033
Compensation and benefits (including share-based compensation of $12,112 and $9,983, respectively)		100,498		58,425
General and administrative		30,290		18,598
Technology		17,384		13,502
Occupancy		2,283		4,709
Marketing and advertising		301		1,896
Depreciation		2,396		3,513
Subadvisory fees		3,447		3,666
Total		293,291		224,342

Operating income		2,060		39,391
Investment and other income (loss)		1,808		(7,745)
Interest expense		(431)		(1,549)

Income before provision for income taxes		3,437		30,097
Provision for income taxes		1,825		9,633
Net income		1,612		20,464
Net loss attributable to redeemable noncontrolling interests		—		(1,522)
Net income attributable to Waddell & Reed Financial, Inc.	$	1,612		21,986

Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted:	$	0.03		0.32

Weighted average shares outstanding, basic and diluted:		62,485		67,675

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

~~Table of contents~~

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 March 31,
	2021		2020

Net income	$	1,612		20,464

Other comprehensive income:

Unrealized loss on available for sale investment securities during the period, net of income tax benefit of $(274) and $(760), respectively		(861)		(2,430)

Postretirement benefit, net of income tax benefit of $(4) and $(18), respectively		(11)		(49)

Comprehensive income		740		17,985
Comprehensive loss attributable to redeemable noncontrolling interests		—		(1,522)
Comprehensive income attributable to Waddell & Reed Financial, Inc.	$	740		19,507

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

~~Table of contents~~

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 March 31,
							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 December 31, 2019	99,701	$	997	312,693	1,241,598	(749,625)	3,234	808,897	19,205
Net income (loss)	—		—	—	21,986	—	—	21,986	(1,522)
Net subscription of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	1,387
Recognition of equity compensation	—		—	7,693	71	—	—	7,764	—
Net issuance/forfeiture of nonvested shares	—		—	(37,985)	—	37,985	—	—	—
Dividends accrued, $0.25 per share	—		—	—	(16,571)	—	—	(16,571)	—
Repurchase of common stock	—		—	—	—	(53,939)	—	(53,939)	—
Other comprehensive loss	—		—	—	—	—	(2,479)	(2,479)	—
Balance at March 31, 2020	99,701	$	997	282,401	1,247,084	(765,579)	755	765,658	19,070



Balance at December 31, 2020	99,701	$	997	303,757	1,248,299	(828,193)	2,897	727,757	—
Net income	—		—	—	1,612	—	—	1,612	—
Recognition of equity compensation	—		—	5,491	4	—	—	5,495	—
Net issuance/forfeiture of nonvested shares	—		—	46	—	(46)	—	—	—
Dividends accrued, $0.25 per share	—		—	—	(15,761)	—	—	(15,761)	—
Repurchase of common stock	—		—	—	—	(8,857)	—	(8,857)	—
Other comprehensive loss	—		—	—	—	—	(872)	(872)	—
Balance at March 31, 2021	99,701	$	997	309,294	1,234,154	(837,096)	2,025	709,374	—

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 three months ended March 31,
	2021		2020

Cash flows from operating activities:
Net income	$	1,612		20,464
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,660		3,168
Write-down of impaired assets		282		—
Amortization of deferred sales commissions		259		395
Share-based compensation		12,112		9,983
Investments and derivatives (gain) loss, net of collateral		(1,991)		50,012
Net purchases, maturities, and sales of trading and equity securities		9,297		(2,144)
Deferred income taxes		(2,612)		(12,071)
Net change in equity securities and trading debt securities held by consolidated sponsored funds		—		1,326
Other		171		212
Changes in assets and liabilities:
Customer and other receivables		18,090		6,804
Payable to investment companies for securities and payable to customers		(20,111)		(29,763)
Receivables from funds and separate accounts		842		3,023
Other assets		2,619		3,214
Accounts payable and payable to third party brokers		2,630		(3,219)
Other liabilities		(20,328)		(22,128)
Net cash provided by operating activities	$	5,532		29,276
��
Cash flows from investing activities:
Purchases of available for sale and equity method securities		—		(2,999)
Proceeds from maturities of available for sale securities		32,941		33,875
Additions to property and equipment		(71)		(3,182)
Net cash provided by investing activities	$	32,870		27,694

Cash flows from financing activities:
Dividends paid		(15,555)		(17,119)
Repurchase of common stock		(8,857)		(53,599)
Repayment of short-term debt, net of debt issuance costs		(94,997)		—
Net subscriptions (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds		—		1,387
Other		(19)		(40)
Net cash used in financing activities	$	(119,428)		(69,371)

Net decrease in cash and cash equivalents		(81,026)		(12,401)
Cash, cash equivalents, and restricted cash at beginning of period		337,350		226,140
Cash, cash equivalents, and restricted cash at end of period	$	256,324		213,739

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,~~March 31, 2021, we had ~~$80.9~~$76.0 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.

Table of Contents

●

Within our wealth management business, approximately 25% 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 due to COVID-19. 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 and made targeted 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~~2020 (our “2020 Form 10-K”). ~~Certain amounts in the prior year’s financial statements have been reclassified for consistent presentation.~~

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~~2020 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) ~~2016-09, “Improvements to Employee Share-Based Payment~~2019-12, Income Taxes (Topic 740): Simplifying the Accounting” for Income Taxes, 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

2021.

~~Table of contents~~

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~~March 31, 2021 and the results of operations and cash flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016~~2020 in conformity with accounting principles generally accepted in the United States.

~~2.New Accounting Guidance~~Proposed Acquisition of Waddell & Reed Financial, Inc. by Macquarie

On December 2, 2020, the Company announced a merger agreement with Macquarie Asset Management, the asset management division of Macquarie Group. Subject to the terms and conditions of the Agreement and Plan of Merger (the “Merger Agreement”) by andamong the Company, Macquarie Management Holdings, Inc. (“Macquarie”), Merry Merger Sub, Inc. (“Merger Sub”) and (solely for limited purposes) Macquarie Financial Holdings Pty Ltd, Merger Sub will be merged with and into the Company (the “merger”), with the Company surviving the merger as a wholly owned subsidiary of Macquarie. Pursuant to the Merger Agreement, at the effective time of the merger, each share of the Company’s Class A common stock (“common stock”) issued and outstanding immediately prior to the effective time will be converted into the right to receive $25.00 per share in cash, without interest and subject to any withholding of taxes required by applicable law in accordance with the Merger Agreement. On completion of the merger, Macquarie intends to sell our wealth management business to LPL Holdings, Inc.

~~In May 2014,~~The closing of the ~~Financial~~ merger remains subject to the satisfaction or waiver of the remaining conditions to the merger set forth in the Merger Agreement. The Company expects the closing of the merger to occur on April 30, 2021.

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Assets Held for Sale

Assets held for sale included real property and fractional aircraft ownership. The three months ended March 31, 2021 included asset impairment charges of $0.2 million on assets held for sale, which were recorded in general and administrative expenses in our consolidated statements of income. As of March 31, 2021, $3.8 million of buildings, $1.9 million of land and $1.0 million of equipment held for sale were included in Property and equipment, net on our consolidated balance sheets. As of December 31, 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. The Company continues to actively pursue the sale of 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 March 31, 2021 and December 31, 2020, the Company had $4.8 million of capitalized implementation costs for hosting arrangements with $793 thousand and $459 thousand, respectively, of accumulated amortization in prepaid and other current assets on the consolidated balance sheets. 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.

2.	New Accounting Guidance

Accounting ~~Standards Board (“FASB”) issued~~Guidance Adopted During the First Quarter of 2021

On January 1, 2021, the Company adopted 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.guidance. 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. 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, with early adoption permitted. We have concluded that the adoption of this ASU will have~~had an immaterial impact on our consolidated financial statements and related disclosures.

~~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 period 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

3.	Revenue Recognition

~~as a component of cash and cash equivalents on~~

All revenue recognized in 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 March 31,
		2021	2020

		(in thousands)
Investment management fees:
Funds	$	114,395	102,293
Institutional		3,621	2,926
Total investment management fees	$	118,016	105,219
Underwriting and distribution fees:
Unaffiliated
Service and distribution fees	$	14,642	15,276
Sales commissions		15	451
Other revenues		44	135
Total unaffiliated distribution fees	$	14,701	15,862
Wealth Management
Advisory fees	$	94,280	77,118
Service and distribution fees		16,763	14,589
Sales commissions		19,423	20,657
Other revenues		9,628	8,717
Total wealth management distribution fees		140,094	121,081
Total underwriting and distribution fees	$	154,795	136,943
Shareholder service fees:
Total shareholder service fees	$	22,540	21,571

Total revenues	$	295,351	263,733

~~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~~March 31, 2021 and December 31, ~~2016 are~~2020 were as follows:


				March 31,		December 31,
				2021		2020

	September 30,		December 31,
	2017		2016
		(in thousands)
					(in thousands)
Available for sale securities:
Certificates of deposit	$	13,004	—
Commercial paper		29,882	—	$	—	9,705
Corporate bonds		171,099	—		133,652	157,832
U.S. treasury bills		19,937	—
Total available for sale securities					133,652	167,537
Trading debt securities:
Commercial paper					14,079	11,785
Corporate bonds					70,427	76,734
Mortgage-backed securities					—	1
Term loans					48,077	47,224
Total trading securities					132,583	135,744
Equity securities:
Common stock					42,323	41,410
Sponsored funds		144,423	122,806		82,323	81,019
Sponsored privately offered funds		—	570		1,224	1,165
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					125,870	123,594
Equity method securities:
Sponsored funds		52,380	26,775		59,954	59,890
Sponsored privately offered funds		—	3,234
Total equity method securities		52,380	30,009
Total securities	$	697,138	328,750	$	452,059	486,765

~~Certificates of deposit, commercial paper, corporate~~Corporate bonds ~~and U.S. treasury bills~~ accounted for as available for sale and held as of ~~September 30, 2017~~March 31, 2021 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	$	74,726	75,746
After one year but within five years		56,513	57,906
	$	131,239	133,652

~~Certificates of deposit, commercial~~Commercial paper, corporate bonds and ~~mortgage-backed securities~~term loans accounted for as trading and held as of ~~September 30, 2017~~March 31, 2021 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	$	38,039
After one year but within five years		68,227
After five years but within 10 years		26,317
	$	132,583

The following is a summary of the gross unrealized gains ~~(losses)~~ related to securities classified as available for sale at ~~September 30, 2017:~~March 31, 2021:


	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value

	(in thousands)
Available for sale securities:
Corporate bonds	$	131,239	2,413	—	133,652

Amortized

Unrealized

Unrealized


cost

gains

losses

Fair value



(in thousands)

Available for sale securities:

Certificates of deposit

$
13,000

4

—

13,004

Commercial paper

29,855

27

—

29,882

Corporate bonds

171,306

34

(241)

171,099

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

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The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, ~~2016:~~2020:

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	$	9,720	—	(15)	9,705
Corporate bonds		154,270	3,562	—	157,832
	$	163,990	3,562	(15)	167,537

There are no available for sale investment securities with fair values below carrying values at March 31, 2021. 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)

Corporate bonds

2,414

(15)

—

2,414

(15)

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 of these~~The Company’s investment portfolio included 0 available for sale securities ~~the time frame the investments have been~~ in aan unrealized loss position at March 31, 2021. The Company’s evaluation of available for sale securities in an unrealized loss position includes reviewing credit ratings, assessing the extent of losses, and ~~our intent to hold~~considering the ~~investment~~impact of market conditions for each individual security.

For equity securities ~~until they have recovered, we determined that a write-down was not necessary~~held at ~~September 30, 2017.~~the end of the period, net unrealized gains of $2.6 million and net unrealized losses of $35.9 million were recognized for the three months ended March 31, 2021 and March 31, 2020, respectively.

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.~~

~~Table of contents~~

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, and at December 31, 2016, as well as the Company’s net interest in these funds:~~

September 30,

December 31,

2017

2016

(in thousands)
Cash

$
4,877

6,885
Investments

196,496

145,710
Other assets

6,334

763
Other liabilities

(7,072)

(390)
Redeemable noncontrolling interests

(30,636)

(10,653)
Net interest in consolidated sponsored funds

$
169,999

142,315

During the nine months ended September 30, 2017, we consolidated certain of the Ivy Funds, Ivy NextShares and Ivy ProShares in which we provided initial seed capital at the time of the funds’ formation. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements. During 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.

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.

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●

Level 3 – Investments are valued using significant unobservable inputs, including the Company’s own assumptions in determining the fair value of investments.

Assets classified as Level 2 can have a variety of observable inputs. These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches ~~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~~March 31, 2021 and December 31, ~~2016~~2020 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.


March 31, 2021	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total

	(in thousands)
Cash equivalents:⁽¹⁾
Money market funds	$	20,062	—	—	—	20,062
Commercial paper		—	25,801	—	—	25,801
Total cash equivalents	$	20,062	25,801	—	—	45,863
Available for sale securities:
Corporate bonds	$	—	133,652	—	—	133,652
Trading debt securities:
Commercial paper		—	14,079	—	—	14,079
Corporate bonds		—	70,427	—		70,427
Term loans		—	46,355	1,722	—	48,077
Equity securities:
Common stock		42,018	—	305	—	42,323
Sponsored funds		82,323	—	—	—	82,323
Sponsored privately offered funds measured at net asset value⁽²⁾		—	—	—	1,224	1,224
Equity method securities: ⁽³⁾
Sponsored funds		59,954	—	—	—	59,954
Total investment securities	$	184,295	264,513	2,027	1,224	452,059

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

	(in thousands)
Cash equivalents:⁽¹⁾
Money market funds	$	82,085	—	—	—	82,085
Commercial paper		—	47,421	—	—	47,421
Total cash equivalents	$	82,085	47,421	—	—	129,506
Available for sale securities:
Commercial paper	$	—	9,705	—	—	9,705
Corporate bonds		—	157,832	—	—	157,832
Trading debt securities:
Commercial paper		—	11,785	—	—	11,785
Corporate bonds		—	76,734	—		76,734
Mortgage-backed securities		—	1	—	—	1
Term loans		—	46,030	1,194	—	47,224
Equity securities:
Common stock		41,079	—	331	—	41,410
Sponsored funds		81,019	—	—	—	81,019
Sponsored privately offered funds measured at net asset value⁽²⁾		—	—	—	1,165	1,165
Equity method securities: ⁽³⁾
Sponsored funds		59,890	—	—	—	59,890
Total investment securities	$	181,988	302,087	1,525	1,165	486,765

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.

The following table summarizes the activity of investments categorized as Level 3 for the three months ended March 31, 2021:

~~4.Derivative Financial Instruments~~



	For the three months ended
	March 31, 2021
	(in thousands)
Level 3 assets at December 31, 2020	$	1,525
Transfers into level 3		4,863
Transfers out of level 3		(4,293)
Gains in Investment and other income (loss)		33
Redemptions and paydowns		(101)
Level 3 assets at March 31, 2021	$	2,027

Change in unrealized losses for Level 3 assets held at March 31, 2021	$	(26)

~~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~~9 total return swap contracts with a combined notional value of ~~$208.5~~$205.1 million and ~~three~~10 total return swap contracts with a combined notional value of ~~$160.2~~$198.2 million as of ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016,~~2020, 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 $1.4 million in cash collateral with the Company as of March 31, 2021, which is included in accounts payable in the Company’s consolidated balance sheet. The Company posted ~~$9.2 million and $7.1~~$3.4 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~~ 2020, 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~~March 31, 2021 and December 31, ~~2016:~~2020 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


			March 31,		December 31,
	Balance sheet		2021		2020
	location	Fair value		Fair value

		(in thousands)
Total return swap contracts	Prepaid expenses and other current assets	$	529		—
Total return swap contracts	Other current liabilities	$	26		3,464
Net total return swap asset (liability)		$	503		(3,464)

The following is a summary of net ~~losses~~(losses) gains recognized in income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~September 30, 2016:~~March 31, 2020:

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
	Income statement	March 31,
	location		2021	2020

		(in thousands)
Total return swap contracts	Investment and other income	$	(4,080)	42,069

~~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 most recent assessment. Goodwill and identifiable intangible assets (all considered indefinite lived) at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020 are as follows:


				March 31,		December 31,
				2021		2020

	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~~During the ~~consolidated balance sheet. The fair value~~first quarter of 2021, the ~~Company’s~~Company repaid our senior unsecured notes ~~maturing~~that matured January 13, ~~2018 is $95.8 million at September 30, 2017 compared to the carrying value net of~~

2021.

8.	Income Tax Uncertainties

~~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, we entered into a three-year 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. 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.

~~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; 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,~~March 31, 2021 and December 31, 2020, 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 $2.0 million ($~~3.1~~1.7 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$1.9 million ($~~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 2017-2020 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~~2016 and, in certain states, income tax returns for ~~2012,~~2016, 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 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.

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

Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final 10 years of employment. On July 26, 2017, the Compensation Committee of the Company’s Board of Directors approved an amendment to freeze the Pension Plan effective September 30, 2017. After September 30, 2017, participants in the Pension Plan will not accrue additional benefits for future service or compensation. Participants will retain benefits accumulated as of September 30, 2017 in accordance with the terms of the Pension Plan. During the first nine months of 2017, we contributed $10.0 million to the Pension Plan. In accordance with applicable accounting standards, the Pension Plan’s assets and liabilities were remeasured as of July 31, 2017, the date participants were notified of the freeze. This resulted in a reduction of the accrued pension liability of approximately $30.0 million.

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. The medical plan is contributory with participant contributions adjusted annually. The medical plan does not provide for benefits after age 65 with the exception of a small group of employees that were grandfathered when such plan was established. During the third quarter of 2016,

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

~~The components of net periodic pension and other postretirement costs related to these plans were as follows:~~

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)

~~(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,
	2017		2016	2017		2016
	(in thousands, except per share amounts)


							Three months ended
							March 31,
							2021		2020

Net income attributable to Waddell & Reed Financial, Inc.	$	37,951	53,827	$	94,314	124,490	$	1,612	21,986


Weighted average shares outstanding, basic and diluted		83,476	82,834		83,719	82,629		62,485	67,675


Earnings per share, basic and diluted	$	0.45	0.65	$	1.13	1.51	$	0.03	0.32

Dividends

~~On July 26, 2017,~~During the quarter, the Board of Directors ~~approved~~declared a 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~~quarterly dividend on our common stock in the amount of $0.25 per share ~~payable~~with an April 30, 2021 payment date and an April 9, 2021 record date. The total dividend to be paid on ~~February 1, 2018 to stockholders of record on January 11, 2018.~~April 30, 2021 is $15.8 million.

Common Stock Repurchases

The Board of Directors has authorized the repurchase of our common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including issuing shares to employees in our stock-based compensation programs. The terms of the Merger Agreement restrict our ability to repurchase shares of our common stock while the merger is pending; however, we may continue to repurchase shares of our common stock from employees to cover their tax withholdings in connection with the vesting of restricted shares.

There were ~~190,056~~353,909 shares and ~~28,537~~3,807,438 shares repurchased in the open market or privately during the three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016,~~2020, respectively, which includes 56353,909 shares and ~~28,537~~231,393 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~~two reporting periods. There were 904,410 shares and 2,230,034 shares repurchased in the open market or privately during the nine months ended September 30, 2017 and 2016, respectively, which includes 239,410 shares and 333,034 shares, respectively, repurchased from employees who tendered shares to cover their minimum income tax withholdings with respect to the vesting

Table of ~~stock awards during each of these two reporting periods.~~Contents

Accumulated Other Comprehensive ~~Loss~~Income

The following tables summarize accumulated other comprehensive ~~loss~~income (loss) activity for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~September 30, 2016.~~March 31, 2020.

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 March 31,
				Total
	Unrealized		Postretirement	accumulated
	gains (losses) on		benefits	other
	AFS investment		unrealized	comprehensive
	securities		gains (losses)	income (loss)

	(in thousands)
Balance at December 31, 2020	$	2,696	201	2,897
Other comprehensive loss before reclassification		(700)	—	(700)
Amount reclassified from accumulated other comprehensive income		(161)	(11)	(172)
Net current period other comprehensive loss		(861)	(11)	(872)
Balance at March 31, 2021	$	1,835	190	2,025

Balance at December 31, 2019	$	2,521	713	3,234
Other comprehensive loss before reclassification		(2,228)	—	(2,228)
Amount reclassified from accumulated other comprehensive income		(202)	(49)	(251)
Net current period other comprehensive loss		(2,430)	(49)	(2,479)
Balance at March 31, 2020	$	91	664	755

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)

~~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.

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


		For the three months ended March 31, 2021
			Tax
	Pre-tax		expense	Net of tax	Statement of income line item

	(in thousands)
Reclassifications included in net income:
Gains on available for sale debt securities	$	213	(52)	161	Investment and other income (loss)
Amortization of postretirement benefits		15	(4)	11	Compensation and benefits
Total	$	228	(56)	172


	For the three months ended March 31, 2020
			Tax
	Pre-tax		expense	Net of tax	Statement of income line item

	(in thousands)
Reclassifications included in net income:
Gains on available for sale debt securities	$	266	(64)	202	Investment and other income (loss)
Amortization of postretirement benefits		67	(18)	49	Compensation and benefits
Total	$	333	(82)	251

Table of ~~contents~~Contents

10.

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 five 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 was expected to commence during 2022, relating to the development of a new 260,000 square foot corporate headquarters building in 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. The impact that our proposed merger with Macquarie will have on our new corporate headquarters lease, including eligibility for state and local tax savings, has not been determined.

The components of lease expense were as follows:


	For the three months ended March 31,
	2021		2020

	(in thousands)
Operating Lease Cost	$	1,478	$	3,233

Finance Lease Cost:
Amortization of ROU assets	$	14	$	55
Interest on lease liabilities		1		9
Total	$	15	$	64

Supplemental cash flow information related to leases was as follows:


	For the three months ended March 31,
	2021		2020

	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,792	$	3,143
Operating cash flows from finance leases		1		9
Financing cash flows from finance leases		19		58

ROU assets obtained in exchange for lease obligations:
Operating leases		—		7
Finance leases		—		—

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

Table of Contents

~~10.Contingencies~~

Supplemental balance sheet information related to leases was as follows:


	March 31, 2021		December 31, 2020

	(in thousands, except lease term and discount rate)
Operating Leases:
Operating lease ROU assets (Other non-current assets)	$	12,124	$	13,461

Other current liabilities	$	5,394	$	6,247
Other non-current liabilities		7,765		8,812
Total operating lease liabilities	$	13,159	$	15,059


Finance Leases:
Property and equipment, gross	$	181	$	333
Accumulated depreciation		(144)		(277)
Property and equipment, net	$	37	$	56

Other current liabilities	$	25	$	41
Other non-current liabilities		8		11
Total finance lease liabilities	$	33	$	52


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

Weighted average discount rate:
Operating leases		4.11%		4.08%
Finance leases		6.00%		6.00%

Maturities of lease liabilities are as follows:


	Operating		Finance
	Leases		Leases

	(in thousands)
Year ended December 31,
2021 (excluding the three months ended March 31, 2021)	$	4,834	22
2022		2,424	12
2023		2,090	—
2024		2,090	—
Thereafter		2,613	—
Total lease payments		14,051	34
Less imputed interest		(892)	(1)
Total	$	13,159	33

11.

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.

~~Table of contents~~

~~In an action~~Litigation Relating to the Merger — NaN complaints were 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~~purported stockholders of the Company ~~(who plaintiffs subsequently voluntarily dismissed)~~challenging the merger (the “Complaints”). 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,The Complaints generally allege, among other things, ~~investigate~~that the ~~claims alleged~~Company and the Board of Directors authorized the filing of a materially incomplete and misleading proxy statement with the SEC. While the Company believes that the disclosures set forth in the ~~complaint; examine,~~proxy statement comply fully with applicable law, and ~~make recommendations~~vigorously denies any wrongdoing or liability with respect to the ~~board~~allegations and claims asserted, or which could have been asserted, in the Complaints, the Company voluntarily supplemented the proxy statement on March 15, 2021 with additional disclosures (the “Supplemental Disclosures”). The 7 plaintiffs who filed suit have advised the Company that they intend to dismiss their claims in light of ~~trustees regarding,~~ the ~~merits~~Supplemental Disclosures, subject to plaintiffs’ right to seek a mootness fee payment and the Company’s right to oppose such a request. The Company believes that the Complaints are without merit, but is unable to predict the outcome of ~~such alleged claims; and to make a recommendation to~~ the ~~court concerning the proper~~ultimate resolution of the ~~litigation. On June 13, 2017,~~lawsuits or 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 possiblepotential loss, if any, that ~~such matter~~ may ~~represent. While the ultimate resolution of this matter is uncertain, an adverse determination against~~result.

12.	Subsequent Events

Investment Portfolio – During April 2021, the Company ~~could have~~liquidated a ~~material adverse impact on~~portion of our ~~business, financial condition and results~~investment portfolio. Net gains of ~~operations.~~

~~In an action filed on June 23, 2017 and amended on June 26, 2017 in~~$2.4 million were recognized from the ~~U.S. District Court for the District~~sale of ~~Kansas,~~ ~~Schapker v. Waddell & Reed Financial, Inc., et al, (Case No. 17-2365 D. Kan.), Stacy Schapker,~~$211.4 million of securities during April 2021 as 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 Committeeresult 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.liquidation.

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~~our proposed merger with Macquarie Management Holdings, Inc. (“Macquarie”), 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,~~2020, 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.

Table of Contents

~~Table of contents~~

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~~2020 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, ~~2017.~~2021. 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 916 Advisors and 382 licensed advisor associates as of March 31, 2021, for a total of 1,298 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.

Proposed Acquisition of Waddell & Reed Financial, Inc. by Macquarie

For information related to the proposed merger with Macquarie, 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.

Please see the Risks Related to the Proposed Merger included in Part 1, Item 1A—“Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of certain risks related to our proposed merger with Macquarie. Please see the Company’s definitive proxy statement filed with the SEC on February 17, 2021, for additional information on the merger.

Impact of COVID-19

We transitioned most of our workforce to a work from home environment early in March 2020 as part of our response to the COVID-19 pandemic. By late March 2020, 98% of our employees were working remotely, with negligible downtime. The remote work environment has largely continued through the end of 2020 and into 2021. 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 2020 or in the first quarter of 2021. 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.

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 1, Item 1A—“Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020.

~~Company Developments~~

Operating Results

●

~~In August 2017, we announced an actionable plan around four strategic pillars that is estimated~~Net income attributable to ~~add $30~~Waddell & Reed Financial, Inc. for the first quarter of 2021 was $1.6 million, or $0.03 per diluted share, compared to ~~$40~~$22.0 million, ~~on a run-rate basis,~~or $0.32 per diluted share, during the first quarter of 2020. The first quarter of 2021 included $51.6 million in costs related to ~~pre-tax~~the proposed merger with Macquarie. Excluding the merger-related costs, adjusted net income ~~over~~⁽¹⁾for 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~~first quarter 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 for three years with initial lender commitments of $100.0~~2021 was $43.7 million and ~~an expansion option for an additional $100.0 million.~~

adjusted net incomeper diluted share⁽¹⁾was $0.70.

●

~~We continue~~Revenues of $295.4 million during the ~~implementation~~first quarter of ~~significant enhancements~~2021 increased 12% compared to ~~our investment advisory programs~~the first quarter of 2020. Operating expenses of $293.3 million during the first quarter of 2021 increased 31% compared to the same quarter in 2020. The operating margin was 0.7% during the first quarter of 2021, compared to 14.9% during the first quarter of 2020. Excluding merger-related costs during the first quarter of 2021, adjusted operating expenses⁽¹⁾ were $241.6 million 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.

adjusted operating margin⁽¹⁾was 18.2%.

●

Asset Management Highlights

~~In April 2016,~~o

Sales improved compared to the ~~U.S. Department~~same quarter in 2020, particularly in the institutional and unaffiliated channels. Redemptions also improved, particularly in our unaffiliated channel.

AUM ended the quarter at $76.0 billion, an increase of ~~Labor released its final rule (the “DOL Fiduciary Rule”) that, among other things, expands~~36% compared to the ~~scope~~first quarter of ~~a “fiduciary” under ERISA~~2020 due to market appreciation partially offset by net outflows.

Investment performance improved from the prior quarter in trailing one-, three- and ~~Section 4975 of the Internal Revenue Code of 1986,~~five-year performance 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 approvedmeasured by the ~~Office~~percentage of ~~Management and Budget on August 28, 2017. Public comments on~~assets ranked in the ~~proposed rule delay were due by September 15, 2017. We anticipate a range~~top half of ~~$6.0 to $7.0 million in implementation costs during 2017.~~

their respective Morningstar universes.

●

Wealth Management Highlights

~~During~~o

AUA ended the ~~third~~quarter at $70.8 billion, a 37% increase compared to the first quarter of ~~2017, we returned $42.1 million~~2020 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 9th consecutive quarter.

$507 thousand average trailing 12-month productivity per Advisor for the first quarter of ~~capital to shareholders through dividends and share repurchases,~~2021 improved 10% compared to ~~$38.6~~the first quarter of 2020.

●

Balance sheet remains strong with $645.9 million in ~~the same period in 2016.~~

~~Our balance sheet remains solid and we ended the third quarter of 2017 with~~ 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~~first quarter of ~~capital~~2021, excluding restricted cash.

______________

(1)

Adjusted net income, adjusted net income per diluted share, adjusted operating expenses and adjusted operating margin are non-GAAP financial measures. See Non-GAAP Financial Measures and Reconciliation of GAAP to ~~stockholders, we are implementing a revised capital return policy. Accordingly, the Board of Directors reduced the quarterly dividend~~non-GAAP Financial Measures 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 $250 million of our common stock, which is inclusive 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 operationspages 33 and ~~maintain a strong balance sheet, as well as continue to provide a competitive return to stockholders.~~

34.

Table of Contents

~~Table of contents~~

Assets Under Management

During the ~~third~~first quarter of ~~2017, assets under management~~2021, AUM increased ~~0.6%~~2% to ~~$80.9~~$76.0 billion from ~~$80.4~~$74.8 billion at ~~June 30, 2017~~December 31, 2020 due to market appreciation of ~~$3.3~~$2.4 billion, partially offset bynet outflows of ~~$2.8~~$1.2 billion.Sales of $3.0 billion during the current quarter increased 17% compared to the first quarter of 2020. Redemptions decreased 14% compared to the first quarter of 2020.

Change in Assets Under Management ⁽¹⁾


	Three months ended March 31, 2021
				Wealth
	Unaffiliated⁽²⁾		Institutional	Management	Total

	(in millions)
Beginning Assets	$	27,977	3,570	43,275	74,822

Sales ⁽³⁾		1,960	303	688	2,951
Redemptions		(2,328)	(222)	(1,588)	(4,138)
Net Exchanges		290	—	(290)	—
Net Flows		(78)	81	(1,190)	(1,187)

Market Action		985	115	1,294	2,394
Ending Assets	$	28,884	3,766	43,379	76,029


	Three months ended March 31, 2020
				Wealth
	Unaffiliated⁽²⁾		Institutional	Management	Total

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

Sales ⁽³⁾		1,581	43	895	2,519
Redemptions		(3,019)	(179)	(1,588)	(4,786)
Net Exchanges		326	—	(326)	—
Net Flows		(1,112)	(136)	(1,019)	(2,267)

Market Action		(4,908)	(533)	(6,240)	(11,681)
Ending Assets	$	20,244	2,427	33,339	56,010

Third Quarter 2017


Retail






Unaffiliated

Retail Broker-

Distribution

Dealer

Institutional

Total

(in millions)

Beginning Assets

$
30,307

43,084

7,036

80,427

Sales (2)

1,790

1,024

68

2,882

Redemptions

(2,486)

(2,049)

(1,139)

(5,674)

Net Exchanges

213

(213)

—

—

Net Flows

(483)

(1,238)

(1,071)

(2,792)

Market Action

1,238

1,626

400

3,264

Ending Assets

$
31,062

43,472

6,365

80,899

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

~~Table of contents~~

Over the nine months ended September 30, 2017, assets under management remained relatively stable, moving from $80.5 billion at December 31, 2016 to $80.9 billion at September 30, 2017 as outflows of $8.6 billion were offset by market appreciation of $9.0 billion.

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 March 31, 2021
				Wealth
	Unaffiliated		Institutional	Management	Total

	(in millions)
Asset Class:
Equity	$	23,477	3,600	33,558	$	60,635
Fixed Income		4,588	—	8,915		13,503
Money Market		148	—	1,779		1,927
Total	$	28,213	3,600	44,252	$	76,065


	Three months ended March 31, 2020
				Wealth
	Unaffiliated		Institutional	Management	Total

	(in millions)
Asset Class:
Equity	$	19,181	2,897	28,612	$	50,690
Fixed Income		4,874	—	8,894		13,768
Money Market		98	—	1,568		1,666
Total	$	24,153	2,897	39,074	$	66,124

Performance

We have seen an increase from the prior quarter in trailing three- and five-year performance, while trailing one-year performance decreased slightly as measured by the percentage of funds ranked in the top half of their respective Morningstar universes. As measured by percentage of assets, one-, three- and five-year performance improved compared to the prior quarter.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 across multiple market cycles.

The following table is a summary of Morningstar rankings and ratings as of March 31, 2021:


MorningStar Fund Rankings ⁽¹⁾	1 Year		3 Years		5 Years
Funds ranked in top half	48	%	57	%	46	%
Assets ranked in top half	54	%	65	%	62	%


MorningStar Ratings ⁽¹⁾	Overall		3 Years		5 Years
Funds with 4/5 stars	35	%	37	%	35	%
Assets with 4/5 stars	56	%	51	%	53	%

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

(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 March 31, 2021 increased 37% as compared to March 31, 2020 primarily due to market appreciation and growth in net new Advisory AUA, partially offset by outflows in Non-advisory AUA. Average AUA increased 18% for the three months ended March 31, 2021, compared to the same period in 2020. This quarter marked the 9^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.



		March 31, 2021	March 31, 2020

	(in millions)
Ending AUA
Advisory AUA	$	34,418	23,192
Non-advisory AUA		36,431	28,644
Total ending AUA	$	70,849	51,836



	Three months ended March 31,
		2021		2020

	(in millions)
Average AUA ⁽¹⁾
Advisory AUA ⁽¹⁾	$	33,489		26,680
Non-advisory AUA ⁽¹⁾		36,555		32,488
Total average AUA ⁽¹⁾	$	70,044		59,168


Net new Advisory AUA ⁽²⁾	$	501		442
Net new Non-advisory AUA ^{(2), (3)}		(619)		(658)
Total net new AUA ^{(2), (3)}	$	(118)		(216)


Annualized Advisory AUA growth ⁽⁴⁾		6.1	%	6.6	%
Annualized AUA growth ⁽⁴⁾		(0.7)	%	(1.4)	%


Advisors and advisor associates		1,298		1,316
Average trailing 12-month production per Advisor ⁽⁵⁾ (in thousands)	$	507		462

(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~~March 31, 2021 as Compared with Three ~~and Nine~~ Months Ended ~~September 30, 2016~~March 31, 2020

Total Revenues

Total revenues ~~decreased 5%~~increased 12% to ~~$289.4~~$295.4 million for the three months ended ~~September 30, 2017~~March 31, 2021 compared to the three months ended ~~September 30, 2016 primarily~~March 31, 2020 due to ~~a decrease~~increases in ~~average assets under~~investment management of 7% driven by net outflows. For the nine months ended September 30, 2017, total revenues decreased $83.4 million, or 9%, compared to the same period in the prior year due to a decrease in average assets under management of 11% driven primarily by net outflowsfees, underwriting and ~~to a lesser extent the share class conversion that occurred in July 2016.~~distribution fees and shareholder service fees.


						Three months ended
						March 31,
						2021		2020	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)	%	$	118,016	105,219	12	%
Underwriting and distribution fees		128,892	135,778	(5)	%		154,795	136,943	13	%
Shareholder service fees		26,406	28,563	(8)	%		22,540	21,571	4	%
Total revenues	$	289,447	303,086	(5)	%	$	295,351	263,733	12	%

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~~first quarter of ~~2017 decreased $4.6~~2021 increased $12.8 million, or 3%12%, from ~~last year’s third quarter. For~~ the ~~nine month period ended September 30, 2017, investment~~first quarter of 2020 due to an increase in average AUM, partially offset by a lower effective management fee ~~revenues decreased $28.9 million, or 7%, compared~~rate, which was primarily due to ~~the same period~~targeted pricing reductions on certain products made in ~~2016.~~ previous periods and money market fee waivers.

~~On October 16,~~2017, nine Advisors Funds merged into Ivy Funds with substantially similar objectives 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 investment management fee revenue in 2018 to decrease between $10 million and $11 million.

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~~March 31, 2021 and ~~2016.~~2020.

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
%


	Three months ended March 31,
	2021			2020			Variance

	(in thousands, except for management fee rate and average assets)
Investment management fees (net)	$	114,395			102,293		12	%
Average assets (in millions)	$	72,465			63,227		15	%
Management fee rate (net)		0.6402	%		0.6507	%
Total fee waivers	$	9,591			6,479		48	%
Institutional investment management fees (net)	$	3,621			2,926		24	%
Institutional average assets (in millions)	$	3,600			2,897		24	%
Institutional management fee rate (net)		0.4078	%		0.4063	%

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
%

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~~increased 12% in the ~~third~~first quarter of

2017 compared to the third quarter of 2016. 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 lower 2021 compared to the same period in ~~2016~~2020. The increase was due to ~~federal~~an increase in average AUM, partially offset by a lower effective management fee rate due to fee reductions on our large cap growth and core bond products that were effective in April 2020 and increased money market fee waivers due to the low interest rate increases. Other fee waivers have increased during both periods due to certain Funds increasing fee waivers to maintain expense ratios, and the launching of new Funds. Fee waivers for the Funds are recorded as an offset to investment management fees up to the amount of fees earned.environment.

Institutional account revenues in the ~~third~~first quarter of ~~2017 decreased $1.5 million~~2021 increased 24% compared to the ~~third~~first quarter of ~~2016. For the nine month period ended September 30, 2017, institutional account revenues decreased $10.3 million compared to the same period in 2016.~~

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
%
Institutional channel

67.3
%
46.4
%

53.7
%
89.8
%
Total

27.1
%
33.3
%

28.5
%
43.5
%

~~The decreased redemption rate for both the three and nine month periods ending September 30, 2017 in the retail unaffiliated distribution channel was driven~~2020 primarily by improved redemption rates in 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”). Redemptions in the Asset Strategy funds represented approximately 14% of the retail unaffiliated distribution channel’s redemptions during the third quarter of 2017, reduced from 30% in the third quarter of 2016. For the nine months ended September 30, 2017, redemptions in the Asset Strategy funds represented approximately 21% of the retail unaffiliated distribution channel’s redemptions, which was reduced from 40% during the same period in 2016. The increased redemption rate for both periods in the retail broker-dealer channel is primarily relateddue to an increase in ~~outflows related~~average AUM.

Table of Contents


	Annualized long-term redemption rates
	(excludes money market redemptions)
	Three months ended
	March 31,
	2021		2020
Unaffiliated channel	33.6	%	50.9	%
Institutional channel	24.9	%	24.9	%
Wealth Management channel	12.8	%	14.6	%
Total	21.2	%	28.5	%

The long-term redemption rate for the three months ended March 31, 2021 decreased in the unaffiliated channel and the wealth management channel as compared 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~~three months ended March 31, 2020. Redemptions decreased 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 redeemedparticularly in our ~~core equity strategy~~International Core Equity and ~~core fixed income strategies, respectively, during~~High Income funds. The redemption rate in the ~~third quarter of 2017. A client in our Institutional~~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.~~unchanged. 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 current~~The year-to-date industry average ~~of approximately 23.7%,~~redemption rate, based on data ~~from~~provided by the Investment Company ~~Institute.~~Institute, was 26.1%, versus our rate of 21.2%.

~~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 March 31, 2021
			Wealth
	Unaffiliated		Management	Total

	(in thousands)
Underwriting and distribution fee revenues
Advisory Fees	$	—	94,280	94,280
Service and distribution fees		14,642	16,763	31,405
Sales commissions		15	19,423	19,438
Other revenues		44	9,628	9,672
Total	$	14,701	140,094	154,795

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 March 31, 2020
			Wealth
	Unaffiliated		Management	Total

	(in thousands)
Underwriting and distribution fee revenues
Advisory Fees	$	—	77,118	77,118
Service and distribution fees		15,276	14,589	29,865
Sales commissions		451	20,657	21,108
Other revenues		135	8,717	8,852
Total	$	15,862	121,081	136,943

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

~~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~~first quarter of ~~2017 decreased~~2021 increased by ~~$6.9~~$17.9 million, or 5%, compared to the third quarter of 2016 primarily driven by a decrease in Rule 12b-1 asset-based 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 in average mutual fund assets under management for which we earn Rule 12b-1 revenues and 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 $3.8 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%, compared to the third quarter of 2016.

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%13%, compared to the first ~~nine months~~quarter of ~~2016, driven by a decrease~~2020 primarily due to increases in average ~~mutual fund~~Advisory AUA and service and distribution assets, ~~under management for which we earn Rule 12b‑1 revenues and the share class conversion. In addition, revenues from fee-based asset allocation products~~in~~our 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~~commissions due to lower sales volume.

Shareholder Service Fee Revenue

During the first quarter of ~~$9.0~~2021, shareholder service fee revenue increased $1.0 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%~~4%, compared to the first ~~nine months~~quarter of ~~2016. Direct expenses in the retail unaffiliated distribution channel decreased by $30.1 million~~2020 primarily due to ~~decreased average retail unaffiliated distribution~~an increase in 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, shareholder service fee revenue decreased $2.2 million, or 8%, compared to the third quarter of 2016 primarily due to~~partially offset by a decrease in the number of accounts ~~causing a decrease in account-based~~on which these 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.are based.

For the nine month period ended September 30, 2017, compared 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 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.

Total Operating Expenses

Operating expenses for the first quarter of 2021 increased ~~$5.1~~by $68.9 million, or 2%, in the third quarter of 2017 compared to the third quarter of 2016, primarily due to increased compensation and related costs, and increased general and administrative costs, partially offset by a decrease in underwriting and distribution expenses and no intangible asset impairment costs in the third quarter of 2017. For the nine months ended September 30, 2017, operating expenses decreased $43.0 million, or 6%31%, compared to the first ~~nine months~~quarter of ~~2016, primarily~~

Table of Contents

2020, due to ~~decreased underwriting~~an increase in distribution costs due to increased revenue from higher assets and ~~distribution expenses, decreased~~an increase in compensation and benefits, general and administrative and technology primarily related to merger costs, ~~and lower intangible asset impairment costs, which were~~ partially offset by ~~an increase~~decreases in ~~general~~occupancy, marketing and ~~administrative costs. Underwriting~~advertising and ~~distribution~~depreciation.


	Three months ended
	March 31,
	2021		2020	Variance

	(in thousands)
Distribution	$	136,692	120,033	14	%
Compensation and benefits		100,498	58,425	72	%
General and administrative		30,290	18,598	63	%
Technology		17,384	13,502	29	%
Occupancy		2,283	4,709	(52)	%
Marketing and advertising		301	1,896	(84)	%
Depreciation		2,396	3,513	(32)	%
Subadvisory fees		3,447	3,666	(6)	%
Total operating expenses	$	293,291	224,342	31	%

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 of contents~~

~~Compensation and Related Costs~~

~~Compensation and related costs during~~for the ~~third~~first quarter of ~~2017~~2021 increased ~~$8.1~~by $16.7 million, or ~~20%~~14%, compared to the ~~third~~first quarter of ~~2016. The increase is~~2020 due to increases in underwriting and distribution revenue primarily in our advisory fee programs and service and distribution fees due to increases in AUA and AUM.

Compensation and benefits during the first quarter of 2021 increased $42.1 million, or 72% compared to the same period of 2020 primarily due to ~~a $3.9~~merger-related compensation expenses of $35.9 million, ~~curtailment gain recognized~~which included retention award accruals, as well as an increase in ~~the third quarter of 2016 due to~~deferred compensation plan valuation adjustments and 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 ofincrease in 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,~~on outstanding restricted share units as a result of the ~~Pension Plan freeze.~~increase in share price of our common stock.

~~For~~

General and administrative expenses for the ~~nine months ended September 30, 2017, compensation and related costs decreased $6.5~~first quarter of 2021 increased $11.7 million, or 4%63%, compared to the first ~~nine months~~quarter of ~~2016. This was~~2020 entirely due to merger-related costs of $13.7 million, including legal fees and expenses related to the Funds for special meetings and proxy solicitation costs, 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 first quarter of 2021 increased $3.9 million, or 29%, compared to the same period of 2020 primarily due to ~~a workforce reduction, which resulted in a $9.6~~merger-related contract termination fees of $2.0 million ~~restructuring charge in~~and software costs for new technologies.

Occupancy expense decreased $2.4 million, or 52%, for 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 fourthfirst 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.

~~General and Administrative Costs~~

~~General and administrative expenses increased $4.6 million to $27.8 million for the third quarter of 2017~~2021 compared to the ~~third~~first quarter of ~~2016. The increase was mainly~~2020 primarily as a result of the planned transition from Advisors leasing space from the Company to Advisors utilizing personal branch offices.

Marketing and advertising expense decreased $1.6 million, or 84%, for the first quarter of 2021 compared to the first quarter of 2020 primarily due to ~~an increase~~lower sponsorship fees in ~~temporary staff~~connection with the shift to virtual industry conferences.

Depreciation expense decreased $1.1 million, or 32%, for the first quarter of 2021 compared to the first quarter of 2020 primarily due to certain assets becoming fully depreciated.

Investment and ~~increased consulting costs~~Other Income

Investment and other income for ~~implementation of~~ the ~~DOL Fiduciary Rule. A decrease in computer services and software expenses partially offset this increase.~~

~~For the nine~~three months ended ~~September 30, 2017, general and administrative expenses~~March 31, 2021 increased ~~$20.0 million to $81.7~~$9.6 million, compared to the same period in ~~2016. Increased temporary staff expense and consulting costs for implementation~~2020 primarily due to unrealized gains, net of ~~Project E and~~hedging activity, on the ~~DOL Fiduciary Rule, increased legal costs andincreased fund related expenses, including start-up costs, drove~~seed investment portfolios in the ~~increase in expenses. Decreased dealer service expense partially offset the increase in other general and administrative costs.~~

~~Subadvisory Fees~~

~~Subadvisory fees are paid~~current period compared to ~~other asset managers for providing advisory services for certain mutual fund portfolios. These expenses reduce our operating margin since we pay out approximately half~~unrealized losses, net of ~~our management fee revenues received from subadvised products.~~

~~Subadvisory expenses increased $1.0 million~~hedging activity, for the prior year comparative period. In addition, there were lower unrealized losses on our corporate fixed income portfolio for the first quarter ~~ended September 30, 2017~~of 2021, compared to the ~~third~~first quarter of ~~2016~~2020 and unrealized losses in the first quarter of 2020 on our consolidated sponsored fund that was deconsolidated during 2020 and therefore did not reoccur. These increases were partially offset by a decline in interest income due to ~~an increase~~lower interest rates and redemptions in ~~subadvised average assets~~our corporate fixed income portfolio.

Table of ~~88%. Subadvisory expenses increased $2.5 million for~~Contents

Taxes

The following table reconciles 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.~~

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

~~Investment and other~~statutory federal income ~~was $7.2 million~~tax rate with our effective income tax rate from continuing operations for the three months ended ~~September 30, 2017 compared to $7.9 million for the same period in 2016. In the third quarter of 2017, we recognized $3.3 million in dividend~~March 31, 2021 and ~~interest income and gains on the sales of sponsored funds held as available for sale. The third quarter of 2017 also included $2.0~~

2020:


	Three months ended
	March 31,
	2021		2020
Statutory federal income tax rate	21.0	%	21.0	%
State income taxes, net of federal tax benefit	19.0		4.5
Permanent differences	69.6		4.0
Share-based compensation	(57.7)		1.4
Losses attributable to redeemable noncontrolling interests	—		1.1
Uncertain tax positions	1.1		—
Other items	0.1		—
Effective income tax rate	53.1	%	32.0	%

~~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 was $11.4 million for the nine months ended September 30, 2017, compared to investment and other losses of $1.7 million in the same period in 2016. The majority of the income 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 income tax rate was ~~34.1%~~53.1% for the ~~third quarter of 2017,~~three months ended March 31, 2021, as compared to ~~30.5%~~32.0% for the ~~third quarter~~same period in 2020, an increase of ~~2016. The 3.6% increase is primarily due to less~~21.1%. Merger-related non-deductible compensation increased the tax rate impact of ~~a tax benefit related to the capital loss carryover valuation allowance in 2017 as compared to 2016.~~state income taxes and permanent differences. This increase was partially offset by ~~the tax benefits associated with stock compensation in 2017.~~

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~~on share-based 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~~the comparable period, resulting from ~~share-based payments of $7.4 million, which increased the effective tax rate. During 2017 and 2016, increases~~changes in the ~~fair value~~Company’s share price. Lower pre-tax book income in 2021 as compared to 2020 magnified the impact of all items on 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.~~rate.

The Company expects increased volatility in the effective tax rate in future periods as the stock-based compensation benefits recognized in our tax provision will be impacted by market fluctuations in our stock price as well as changes in our investment portfolios that are driven by the market.

~~Table of contents~~

Liquidity and Capital Resources

The Merger Agreement limits our ability to take certain actions while the merger is pending, including, among other things, actions related to acquiring businesses or investment securities, making seed capital investments, repurchasing our common stock, entering into or amending material contracts, incurring capital expenditures and incurring additional debt.

Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund the Company’s operating and capital requirements. Subject to the terms and conditions of the Merger Agreement, expected uses of cash include dividend payments, costs related to our proposed merger with Macquarie, income tax payments, seed capital investments, ongoing technology enhancements, capital expenditures, collateral funding for margin accounts established to support derivative positions and operating expenses of our business.

Our operations provide much of the cash necessary to fund our priorities, which historically have been 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 capital return policy that will 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”.

Pay Dividends

We paid quarterly dividends on our ~~Class A~~ common stock that resulted in financing cash outflows of ~~$115.7~~$15.6 million and ~~$114.7~~$17.1 million for the first ~~nine~~three months of ~~2017~~2021 and ~~2016,~~2020, respectively.

The ~~Company’s~~ Board of Directors approved a ~~quarterly~~ dividend on our ~~Class A~~ common stock of ~~$0.46~~$0.25 per share ~~payable~~with an April 30, 2021 payment date and an April 9, 2021 record date.The total dividend to be paid on ~~November 1, 2017~~April 30, 2021 is $15.8 million.

Repurchase Our Stock

We repurchased 353,909 shares and 3,807,438 shares of our common stock in the open market or privately during the three months ended March 31, 2021 and 2020, respectively, resulting in share repurchases of $8.9 million and $53.9 million, respectively.

Table of Contents

The terms of the Merger Agreement restrict our ability to ~~stockholders~~repurchase shares of ~~record as~~our common stock while the merger is pending; however, we may continue to repurchase shares of ~~October 11, 2017. In~~our common stock from employees to cover their tax withholdings in connection with the ~~implementation~~vesting 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 dividend payable 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.restricted shares.

Finance ~~Internal~~ Growth Objectives

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. We continue to invest in our wealth management channel by offering home office resources, wholesaling efforts, enhanced technology tools, including the modernization of our wealth management platforms. Our ~~retail~~ unaffiliated ~~distribution~~ channel requires cash outlays for wholesaler commissions and commissions to third parties on ~~deferred load~~deferred-load product ~~sales. Across both channels, we~~sales and technology enhancements for asset management and distribution. We also provide seed money for new ~~products.~~products to further enhance our product offerings and distribution efforts. The Merger Agreement limits our ability to take certain actions while the merger is pending, including making seed capital investments, entering into or amending material contracts and incurring capital expenditures.

~~Repurchase Our Stock~~

We repurchased 904,410 shares and 2,230,034 shares of our Class A common stock in the open market or privately during the nine months ended September 30, 2017 and 2016, respectively, resulting in cash outflows of $15.6 million and $48.0 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 to engage in an opportunistic share repurchase plan to fulfill the targeted buybacks over the next two years.

~~Operating~~ Cash Flows

Cash from operations is our primary source of funds. Cash from operations decreased ~~$82.6~~$23.7 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 compared to the ~~nine~~three months ended ~~September 30, 2016. The decrease is~~March 31, 2020, primarily due to ~~investment activity and~~ 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~~Future investing cash flows will be impacted by limitations on our ~~2017~~ability to acquire investment securities and make seed capital ~~expenditures~~investments pursuant to ~~be in~~ the ~~range~~terms of ~~$10.0 to $20.0 million.~~the Merger Agreement.

Financing ~~Cash Flows~~

~~As noted previously,~~activities include payment of dividends and ~~stock~~ repurchases ~~accounted for a majority~~ of our ~~financing cash outflows in~~common stock. The first quarter of 2021 also included the ~~first nine months~~repayment of ~~2017 and 2016.~~our Series B senior unsecured notes at maturity. 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 relatedpolicy, subject 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~~terms of the ~~Company.~~Merger Agreement.

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~~2020 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,” “adjusted operating income,” 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 March 31,
	2021			2020
Net income attributable to Waddell & Reed Financial, Inc. (GAAP)	$	1,612		$	21,986
Adjustments
Merger-related costs ⁽¹⁾		51,643			—
Tax effect of adjustments		(9,536)			—
Adjusted net income attributable to Waddell & Reed Financial, Inc. (non-GAAP)	$	43,719		$	21,986

Weighted average shares outstanding-basic and diluted		62,485			67,675
Adjusted net income per share, basic and diluted (non-GAAP)	$	0.70		$	0.32

Operating expenses (GAAP)	$	293,291		$	224,342
Adjustments
Merger-related costs ⁽¹⁾		51,643			—
Adjusted operating expenses (non-GAAP)	$	241,648		$	224,342

Operating income (GAAP)	$	2,060		$	39,391
Adjustments
Merger-related costs ⁽¹⁾		51,643			—
Adjusted operating income (non-GAAP)	$	53,703		$	39,391

Operating revenue	$	295,351		$	263,733

Operating margin (GAAP)		0.7	%		14.9	%
Adjusted operating margin (non-GAAP)		18.2	%		14.9	%

___________

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~~

Primarily represents retention award accruals, expenses related to the Funds for special meetings and proxy solicitation costs, legal fees and contract termination fees all related to our proposed merger with Macquarie.

~~(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.~~2020 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 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

3834

Table of ~~contents~~Contents

Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of ~~September 30, 2017,~~March 31, 2021, have concluded that the Company’s disclosure controls and procedures were effective as of ~~September 30, 2017.~~March 31, 2021.

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~~During the fiscal quarter ended March 31, 2021, the Company completed a human capital management system conversion. This system conversion resulted in changes to processes and controls as we migrated from the legacy system to the new system. The system change was undertaken to enhance our operating platform and was not undertaken in ~~the Company’s~~response to any actual or perceived deficiencies in our internal control over financial ~~reporting that occurred during the fiscal quarter ended September 30, 2017 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~~
Part II.
Other Information

Item 1.

Legal Proceedings

~~Item 1.Legal Proceedings~~

See Part I, Item 1, Notes to the Unaudited Consolidated Financial Statements, Note 1011 – Contingencies, of this ~~Quarter~~Quarterly Report on Form 10-Q.

Item 1A.

Risk Factors

~~Item 1A.Risk Factors~~

~~The Company has had~~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~~2020 Form 10-K.

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~~first quarter of ~~2017.~~2021.


				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)
January 1 - January 31	218,616	$	25.03	—	n/a
February 1 - February 28	496		25.07	—	n/a
March 1 - March 31	134,797		25.02	—	n/a
Total	353,909	$	25.03	—

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 common stock on the open market. Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding common stock or (ii) $50 million of our common stock. We may repurchase our common stock in privately negotiated transactions or through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems. Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased. ~~Our Board~~The terms of ~~Directors reviewed and ratified~~ the Merger Agreement restrict our ability to repurchase shares of our common stock while the merger is pending; however, we may continue to repurchase ~~program in October 2012. During the third quarter~~shares of ~~2017, 56 shares were purchased~~our common stock from employees to cover their tax withholdings in connection with ~~funding employee income tax withholding obligations arising from~~ the vesting of restricted shares.

InDuring the first quarter of 2021, 353,909 shares were purchased 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

Credit Agreement, dated October 20, 2017, by and among Waddell & Reed Financial, Inc., the lenders party thereto, Bank of America, N.A., as Administrative Agent for the lenders and Swingline Lender, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Bookrunner.
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,~~March 31, 2021, 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~~29th day of ~~October 2017.~~April 2021.

	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)

4137

			Page No.

Part I.	Financial Information

Item 1.		Financial Statements (unaudited)

		Consolidated Balance Sheets at ~~September 30, 2017~~March 31, 2021 and December 31, ~~2016~~2020	3
			3

		Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~September 30, 2016~~March 31, 2020	4
			4

		Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2021 and ~~September 30, 201~~March 31, 20206	5
			5

		Consolidated ~~Statement~~Statements of Stockholders’ Equity and ~~redeemable noncontrolling interests~~Redeemable Noncontrolling Interests for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and March 31, 2020	6
			6

		Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~September 30, 201~~March 31, 20206	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 23

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	38 34

Item 4.		Controls and Procedures	38 34

Part II.	Other Information

Item 1.1A.		~~Legal Proceedings~~Risk Factors	39 35

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

~~Item 2.~~		Unregistered Sales of Equity Securities and Use of Proceeds	39 35

Item 6.		Exhibits	40
			36

		Signatures	41 37


	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


		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		Unrealized	Unrealized
	cost		gains	losses	Fair value
	(in thousands)
Available for sale securities:
Certificates of deposit	$	13,000	4	—	13,004
Commercial paper		29,855	27	—	29,882
Corporate bonds		171,306	34	(241)	171,099
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


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

Beginning Assets	$	30,307	43,084	7,036	80,427

Sales (2)		1,790	1,024	68	2,882
Redemptions		(2,486)	(2,049)	(1,139)	(5,674)
Net Exchanges		213	(213)	—	—
Net Flows		(483)	(1,238)	(1,071)	(2,792)

Market Action		1,238	1,626	400	3,264
Ending Assets	$	31,062	43,472	6,365	80,899


	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


	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	%
Institutional channel	67.3	%	46.4	%	53.7	%	89.8	%
Total	27.1	%	33.3	%	28.5	%	43.5	%