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, ~~2018~~2019

☐

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.☐.

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

Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐

		Emerging growth company ☐

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

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

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


Class		Outstanding as of October ~~26, 2018~~25, 2019
Class A common stock, $.01 par value		~~78,318,708~~70,323,231

Table of Contents

~~Table of contents~~

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended September 30, ~~2018~~2019

			Page No.

Part I.	Financial Information

Item 1.		Financial Statements (unaudited)

		Consolidated Balance Sheets at September 30, ~~2018~~2019 and December 31, ~~2017~~2018	3
			3

		Consolidated Statements of Income for the three and nine months ended September 30, ~~2018~~2019 and September 30, ~~2017~~2018	4
			4

		Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2018~~2019 and September 30, ~~2017~~2018	5
			5

		Consolidated ~~Statement~~Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests for the three and nine months ended September 30, 2019 and September 30, 2018	6
			6

		Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2018~~2019 and September 30, ~~2017~~2018	7
			7

		Notes to the Unaudited Consolidated Financial Statements	8

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	26 23

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	40 37

Item 4.		Controls and Procedures	40 37

Part II.	Other Information

Item 1.1A.		~~Legal Proceedings~~Risk Factors	41 37

Item ~~1A.~~2.		~~Risk Factors~~	41

~~Item 2.~~		Unregistered Sales of Equity Securities and Use of Proceeds	41 38

Item 6.		Exhibits	42
			39

		Signatures	43 40

Table of ~~contents~~Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

September 30,

2018

December 31,

(Unaudited)

2017

Assets:





Cash and cash equivalents

$
270,478

207,829

Cash and cash equivalents - restricted

29,175

28,156

Investment securities

588,407

700,492

Receivables:

Funds and separate accounts

22,319

25,664

Customers and other

121,822

131,108

Prepaid expenses and other current assets

27,762

25,593

Total current assets

1,059,963

1,118,842

Property and equipment, net

69,340

87,667

Goodwill and identifiable intangible assets

145,869

147,069

Deferred income taxes

8,241

13,308

Other non-current assets

9,382

17,476

Total assets

$
1,292,795

1,384,362

Liabilities:

Accounts payable

$
40,479

38,998

Payable to investment companies for securities

37,941

43,422

Payable to third party brokers

22,284

25,153

Payable to customers

57,917

66,830

Short-term notes payable

—

94,996

Accrued compensation

58,467

47,643

Other current liabilities

45,556

44,797

Total current liabilities

262,644

361,839

Long-term debt

94,836

94,783

Accrued pension and postretirement costs

9,472

15,137

Other non-current liabilities

16,200

25,210

Total liabilities

383,152

496,969

Commitments and contingencies

Redeemable noncontrolling interests

16,133

14,509

Stockholders’ equity:

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

—

—

Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 78,904 shares outstanding (82,687 at December 31, 2017)

997

997

Additional paid-in capital

312,213

301,410

Retained earnings

1,170,785

1,092,394

Cost of 20,797 common shares in treasury (17,014 at December 31, 2017)

(589,391)

(522,441)

Accumulated other comprehensive (loss) income

(1,094)

524

Total stockholders’ equity

893,510

872,884

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

$
1,292,795

1,384,362


	September 30,
	2019		December 31,
	(Unaudited)		2018
Assets:
Cash and cash equivalents	$	162,567	231,997
Cash and cash equivalents - restricted		23,350	59,558
Investment securities		691,616	617,135
Receivables:
Funds and separate accounts		14,752	18,112
Customers and other		98,667	151,515
Prepaid expenses and other current assets		20,464	27,164
Total current assets		1,011,416	1,105,481

Property and equipment, net		49,785	63,429
Goodwill and identifiable intangible assets		145,869	145,869
Deferred income taxes		6,775	12,321
Other non-current assets		41,261	16,979
Total assets	$	1,255,106	1,344,079

Liabilities:
Accounts payable	$	17,095	26,253
Payable to investment companies for securities		31,022	100,085
Payable to third party brokers		18,036	19,891
Payable to customers		49,294	86,184
Accrued compensation		67,432	54,129
Other current liabilities		87,946	51,580
Total current liabilities		270,825	338,122

Long-term debt		94,908	94,854
Accrued pension and postretirement costs		822	798
Other non-current liabilities		32,108	15,392
Total liabilities		398,663	449,166

Redeemable noncontrolling interests		16,913	11,463

Stockholders’ equity:
Preferred stock—$1.00 par value: 5,000 shares authorized; NaN issued		—	—
Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 71,211 shares outstanding (76,790 at December 31, 2018)		997	997
Additional paid-in capital		303,138	311,264
Retained earnings		1,242,677	1,198,445
Cost of 28,490 common shares in treasury (22,911 at December 31, 2018)		(710,565)	(627,587)
Accumulated other comprehensive income		3,283	331
Total stockholders’ equity		839,530	883,450

Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	1,255,106	1,344,079

See accompanying notes to the unaudited consolidated financial statements.

Table of ~~contents~~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,

2018

2017

2018

2017

Revenues:











Investment management fees

$
129,302

134,149

$
393,385

395,463

Underwriting and distribution fees

140,308

128,892

416,222

386,499

Shareholder service fees

25,508

26,406

78,464

80,706

Total

295,118

289,447

888,071

862,668

Operating expenses:

Distribution

116,591

106,878

345,376

324,375

Compensation and benefits (including share-based compensation of $12,856, $14,180, $42,526 and $42,419, respectively)

64,561

69,636

199,174

202,003

General and administrative

17,559

23,400

56,240

68,882

Technology

15,414

16,039

49,293

50,796

Occupancy

7,148

7,645

21,081

22,978

Marketing and advertising

2,461

3,197

7,638

9,072

Depreciation

8,141

5,230

19,262

15,626

Subadvisory fees

3,767

3,566

11,158

9,457

Intangible asset impairment

—

—

1,200

1,500

Total

235,642

235,591

710,422

704,689

Operating income

59,476

53,856

177,649

157,979

Investment and other income

1,697

33,293

5,354

39,302

Interest expense

(1,555)

(2,796)

(4,908)

(8,370)

Income before provision for income taxes

59,618

84,353

178,095

188,911

Provision for income taxes

13,105

29,499

41,355

74,988

Net income

46,513

54,854

136,740

113,923

Net income (loss) attributable to redeemable noncontrolling interests

208

1,272

(380)

2,408

Net income attributable to Waddell & Reed Financial, Inc.

$
46,305

53,582

$
137,120

111,515

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

$
0.58

0.64

$
1.69

1.33

Weighted average shares outstanding, basic and diluted:

79,595

83,476

81,372

83,719


	For the three months ended September 30,				For the nine months ended September 30,
	2019		2018		2019		2018

Revenues:
Investment management fees	$	111,806		129,302	$	334,438		393,385
Underwriting and distribution fees		135,787		140,308		395,527		416,222
Shareholder service fees		23,087		25,508		70,279		78,464
Total		270,680		295,118		800,244		888,071

Operating expenses:
Distribution		117,425		116,591		343,696		345,376
Compensation and benefits (including share-based compensation of $11,580, $12,856, $35,471, and $42,526, respectively)		64,999		64,561		191,718		199,174
General and administrative		16,680		17,559		47,421		56,240
Technology		15,019		15,414		47,769		49,293
Occupancy		5,684		7,148		19,100		21,081
Marketing and advertising		2,134		2,461		6,497		7,638
Depreciation		4,833		8,141		16,062		19,262
Subadvisory fees		3,882		3,767		11,154		11,158
Intangible asset impairment		—		—		—		1,200
Total		230,656		235,642		683,417		710,422

Operating income		40,024		59,476		116,827		177,649
Investment and other income		5,212		1,697		23,690		5,354
Interest expense		(1,562)		(1,555)		(4,662)		(4,908)

Income before provision for income taxes		43,674		59,618		135,855		178,095
Provision for income taxes		10,175		13,105		35,036		41,355
Net income		33,499		46,513		100,819		136,740
Net income (loss) attributable to redeemable noncontrolling interests		445		208		1,763		(380)
Net income attributable to Waddell & Reed Financial, Inc.	$	33,054		46,305	$	99,056		137,120

Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted:	$	0.46		0.58	$	1.33		1.69

Weighted average shares outstanding, basic and diluted:		72,387		79,595		74,446		81,372

See accompanying notes to the unaudited consolidated financial statements.

Table of ~~contents~~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,

2018

2017

2018

2017


Net income

$
46,513

54,854

$
136,740

113,923

Other comprehensive income:

Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $80, $364, $(218) and $(1,310), respectively

262

2,070

(700)

6,904

Postretirement benefit, net of income tax benefit of $(7), $(16), $(22) and $(51), respectively

(24)

(30)

(70)

(87)

Comprehensive income

46,751

56,894

135,970

120,740

Comprehensive income (loss) attributable to redeemable noncontrolling interests

208

1,272

(380)

2,408

Comprehensive income attributable to Waddell & Reed Financial, Inc.

$
46,543

55,622

$
136,350

118,332


	For the three months ended September 30,				For the nine months ended September 30,
	2019		2018		2019		2018

Net income	$	33,499		46,513	$	100,819		136,740

Other comprehensive income:

Unrealized gain (loss) on available for sale investment securities during the period, net of income tax expense (benefit) of $92, $80, $1,011 and $(218), respectively		296		262		3,235		(700)

Postretirement benefit, net of income tax benefit of $(30), $(7), $(88) and $(22), respectively		(94)		(24)		(283)		(70)

Comprehensive income		33,701		46,751		103,771		135,970
Comprehensive income (loss) attributable to redeemable noncontrolling interests		445		208		1,763		(380)
Comprehensive income attributable to Waddell & Reed Financial, Inc.	$	33,256		46,543	$	102,008		136,350

See accompanying notes to the unaudited consolidated financial statements.

Table of ~~contents~~Contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

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

~~For the Nine Months Ended September 30, 2018~~

(Unaudited, in thousands)


	For the three months ended September 30,
							Accumulated		Redeemable
				Additional			Other	Total	Non
	Common Stock			Paid-In	Retained	Treasury	Comprehensive	Stockholders’	Controlling
	Shares	Amount		Capital	Earnings	Stock	Income (Loss)	Equity	interest
Balance at June 30, 2018	99,701	$	997	302,144	1,144,090	(560,181)	(1,332)	885,718	17,052
Net income	—		—	—	46,305	—	—	46,305	208
Net redemption of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	(1,127)
Recognition of equity compensation	—		—	9,228	78	—	—	9,306	—
Net issuance/forfeiture of nonvested shares	—		—	841	—	(841)	—	—	—
Dividends accrued, $0.25 per share	—		—	—	(19,688)	—	—	(19,688)	—
Repurchase of common stock	—		—	—	—	(28,369)	—	(28,369)	—
Other comprehensive income	—		—	—	—	—	238	238	—
Balance at September 30, 2018	99,701	$	997	312,213	1,170,785	(589,391)	(1,094)	893,510	16,133



Balance at June 30, 2019	99,701	$	997	294,487	1,227,314	(669,223)	3,081	856,656	15,115
Net income	—		—	—	33,054	—	—	33,054	445
Net subscription of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	1,353
Recognition of equity compensation	—		—	8,024	57	—	—	8,081	—
Net issuance/forfeiture of nonvested shares	—		—	627	—	(627)	—	—	—
Dividends accrued, $0.25 per share	—		—	—	(17,748)	—	—	(17,748)	—
Repurchase of common stock	—		—	—	—	(40,715)	—	(40,715)	—
Other comprehensive income	—		—	—	—	—	202	202	—
Balance at September 30, 2019	99,701	$	997	303,138	1,242,677	(710,565)	3,283	839,530	16,913


	For the nine months ended September 30,
							Accumulated		Redeemable
				Additional			Other	Total	Non
	Common Stock			Paid-In	Retained	Treasury	Comprehensive	Stockholders’	Controlling
	Shares	Amount		Capital	Earnings	Stock	Income (Loss)	Equity	interest
Balance at December 31, 2017	99,701	$	997	301,410	1,092,394	(522,441)	524	872,884	14,509
Adoption of recognition and measurement of financial assets and liabilities guidance (ASU 2016-01) on January 1, 2018	—		—	—	812	—	(812)	—	—
Adoption of reclassification of tax effects from accumulated other comprehensive income (loss) guidance (ASU 2018-02) on January 1, 2018	—		—	—	36	—	(36)	—	—
Net income (loss)	—		—	—	137,120	—	—	137,120	(380)
Net subscription of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	2,004
Recognition of equity compensation	—		—	32,871	991	—	—	33,862	—
Net issuance/forfeiture of nonvested shares	—		—	(22,068)	—	22,068	—	—	—
Dividends accrued, $0.75 per share	—		—	—	(60,568)	—	—	(60,568)	—
Repurchase of common stock	—		—	—	—	(89,018)	—	(89,018)	—
Other comprehensive loss	—		—	—	—	—	(770)	(770)	—
Balance at September 30, 2018	99,701	$	997	312,213	1,170,785	(589,391)	(1,094)	893,510	16,133



Balance at December 31, 2018	99,701	$	997	311,264	1,198,445	(627,587)	331	883,450	11,463
Net income	—		—	—	99,056	—	—	99,056	1,763
Net subscription of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	3,687
Recognition of equity compensation	—		—	25,573	297	—	—	25,870	—
Net issuance/forfeiture of nonvested shares	—		—	(33,699)		33,699	—	—	—
Dividends accrued, $0.75 per share	—		—	—	(55,121)	—	—	(55,121)	—
Repurchase of common stock	—		—	—	—	(116,677)	—	(116,677)	—
Other comprehensive income	—		—	—	—	—	2,952	2,952	—
Balance at September 30, 2019	99,701	$	997	303,138	1,242,677	(710,565)	3,283	839,530	16,913

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, 2017

99,701

$
997

301,410

1,092,394

(522,441)

524

872,884

14,509

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

—

—

—

812

—

(812)

—

—

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

36

(36)

—

—

Net income (loss)

—

—

—

137,120

—

—

137,120

(380)

Net subscription of redeemable noncontrolling interests in sponsored funds

—

—

—

—

—

—

—

2,004

Recognition of equity compensation

—

—

32,871

991

—

—

33,862

—

Net issuance/forfeiture of nonvested shares

—

—

(22,068)

22,068

—

—

Dividends accrued, $0.75 per share

—

—

—

(60,568)

—

—

(60,568)

—

Repurchase of common stock

—

—

—

—

(89,018)

—

(89,018)

—

Other comprehensive loss

—

—

—

—

—

(770)

(770)

—

Balance at September 30, 2018

99,701

$
997

312,213

1,170,785

(589,391)

(1,094)

893,510

16,133

Table of Contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	For the nine months ended September 30,
	2019		2018

Cash flows from operating activities:
Net income	$	100,819		136,740
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16,057		19,262
Write-down of impaired assets		—		1,200
Amortization of deferred sales commissions		1,492		2,682
Share-based compensation		35,471		42,526
Investments (gain) loss, net		(25,916)		2,521
Net purchases, maturities, and sales of trading and equity securities		(47,641)		(4,387)
Deferred income taxes		4,622		5,307
Net change in equity securities and trading debt securities held by consolidated sponsored funds		16,697		71,452
Other		1,273		2,973
Changes in assets and liabilities:
Customer and other receivables		74,807		9,286
Payable to investment companies for securities and payable to customers		(105,953)		(14,394)
Receivables from funds and separate accounts		3,360		3,345
Other assets		19,599		7,650
Accounts payable and payable to third party brokers		(11,013)		(1,388)
Other liabilities		557		(21,042)
Net cash provided by operating activities	$	84,231		263,733

Cash flows from investing activities:
Purchases of available for sale and equity method securities		(149,835)		(56,840)
Proceeds from sales of available for sale and equity method securities		19,667		1,157
Proceeds from maturities of available for sale securities		116,197		100,085
Additions to property and equipment		(4,189)		(1,831)
Net cash (used in) provided by investing activities	$	(18,160)		42,571

Cash flows from financing activities:
Dividends paid		(56,560)		(61,531)
Repurchase of common stock		(118,668)		(88,166)
Repayment of short-term debt, net of debt issuance costs		—		(94,943)
Net subscriptions (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds		3,687		2,004
Other		(168)		—
Net cash used in financing activities	$	(171,709)		(242,636)

Net (decrease) increase in cash, cash equivalents and restricted cash		(105,638)		63,668
Cash, cash equivalents, and restricted cash at beginning of period		291,555		235,985
Cash, cash equivalents, and restricted cash at end of period	$	185,917		299,653

See accompanying notes to the unaudited consolidated financial statements.

Table of ~~contents~~Contents

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

~~Consolidated Statements of Cash Flows~~

~~(Unaudited, in thousands)~~

For the nine months ended September 30,

2018

2017


Cash flows from operating activities:

Net income

$
136,740

113,923

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

19,262

15,626

Write-down of impaired assets

1,200

1,500

Amortization of deferred sales commissions

2,682

3,799

Share-based compensation

42,526

42,419

Investments loss (gain), net

2,521

(9,157)

Net purchases of trading securities

(4,387)

(36,643)

Deferred income taxes

5,307

13,638

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

71,452

(123,865)

Other

2,973

(30,793)

Changes in assets and liabilities:

Customer and other receivables

9,286

13,372

Payable to investment companies for securities and payable to customers

(14,394)

(26,171)

Receivables from funds and separate accounts

3,345

4,671

Other assets

7,650

5,050

Accounts payable and payable to third party brokers

(1,388)

(3,510)

Other liabilities

(21,042)

3,975

Net cash provided by (used in) operating activities

$
263,733

(12,166)

Cash flows from investing activities:

Purchases of available for sale and equity method securities

(56,840)

(291,539)

Proceeds from sales of available for sale and equity method securities

1,157

92,936

Proceeds from maturities of available for sale securities

100,085

4,981

Additions to property and equipment

(1,831)

(5,358)

Net cash provided by (used in) investing activities

$
42,571

(198,980)

Cash flows from financing activities:

Dividends paid

(61,531)

(115,691)

Repurchase of common stock

(88,166)

(15,635)

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

(94,943)

—

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

2,004

17,575

Other

—

131

Net cash used in financing activities

$
(242,636)

(113,620)

Net increase (decrease) in cash and cash equivalents

63,668

(324,766)

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

235,985

586,239

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

$
299,653

261,473

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

~~Table of contents~~

~~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”). In 2016, we introduced the Ivy NextShares^® exchange-traded managed funds (“Ivy NextShares”), which were liquidated in the third quarter of 2019 (collectively, Ivy Funds, Ivy VIP, InvestEd, IVH, and Ivy NextShares are referred to as the “Funds”). ~~On February 26, 2018, we completed~~In addition to the ~~merger of Advisor~~ Funds, ~~into Ivy Funds with substantially similar objectives and strategies.~~our assets under management (“AUM”) include institutional managed accounts. As of September 30, ~~2018,~~2019, we had ~~$79.5~~$68.8 billion in ~~assets under management.~~AUM.

We derive our revenues from providing investment management and advisory services, investment product underwriting and distribution, and shareholder services administration to the 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/or~~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~~fee-based asset allocation programs and related advisory services, ~~asset‑based~~asset-based service and distribution fees promulgated under Rule 12b-1 of the Investment Company Act of 1940 ~~Act~~ (“Rule 12b-1”), distribution fees on certain variable products, and commissions derived from sales of investment and insurance products. The products sold have various commission structures and the revenues received from those sales vary based on the type and dollar amount sold. Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees, and is earned based on ~~assets under management~~client AUM or number of client accounts. Our major expenses are for ~~commissions, employee~~distribution of our products, compensation ~~field services, dealer services,~~related costs, occupancy, general and administrative, and information ~~technology, occupancy and marketing and advertising.~~technology.

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, ~~2017 (the “2017~~2018 (our “2018 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 ~~2017~~2018 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) ~~2014-09, “Revenue from Contracts from Customers,~~2016-02, “Leases” ~~ASU 2016-01,~~ ~~“Recognition and Measurement of Financial Assets and Financial Liabilities,”~~ ~~ASU 2016-18,~~ ~~“Statement of Cash Flows: Restricted Cash,”~~ ~~ASU 2017-07,~~ ~~“Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,”~~ and ASU ~~2018-02,~~ 2018-07, “~~Reclassification~~Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting,” both of ~~Certain Tax Effects from Accumulated Other Comprehensive Income,”~~ which ~~all~~ became effective January 1, ~~2018.~~

~~Table of contents~~

~~The implementation of~~2019, and ASU ~~2014-09 did not have a material impact on the measurement or recognition of revenue from prior periods. See Note 3~~2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Revenue Recognition, for additional accounting policy information and the additional disclosures required by this ASU. Upon adoption of ASU 2016-01, we reclassified net unrealized holding gains, net of taxes, related to our available for sale investment portfolio from accumulated other comprehensive income to retained earnings. See consolidated statement of stockholders’ equity and redeemable noncontrolling interests for the financial statement reclassification impact of adopting this ASU. Upon adoption of ASU 2016-18, the Cash and cash equivalents – restricted financial statement line item was included as a component of cash and cash equivalents on the Company’s consolidated statements of cash flows for all periods presented. The adoption of ASU 2017-07 changed the income statement presentation of our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, mark-to-market gains and losses, curtailments and settlements, etc.). In addition, only the service cost component is eligible for capitalization as part of an asset. The adoption of this ASU had no effect on our net income because it only impacted the classification of certain information on the consolidated statements of income. An amendment to freeze the Pension Plan was approved effective September 30, 2017; therefore, after September 30, 2017, we no longer incur service costs. The service cost component of net periodic benefit cost was recognized in compensation and related costs through September 30, 2017. The other components of net periodic cost were reclassified to investment and other income (loss) on a retrospective basis. Upon early adoption of ASU 2018-02 tax effects that were stranded in other comprehensive income dueChanges to the Tax Reform Act were reclassified from accumulated other comprehensive income to retained earnings. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures. See consolidated statement of stockholders’ equity and redeemable noncontrolling interestsDisclosure Requirements for ~~the financial statement reclassification impact of adopting this ASU.~~

~~Additionally,~~Fair Value Measurement,” which was early adopted during the ~~first~~second quarter of 2018, we changed the presentation of certain line items in the consolidated statements of income that were intended to improve the transparency of the Company’s financial statements through clearer alignment of operating expenses with financial statement captions. Specifically, the Company revised its accounting policy related to the reporting of indirect underwriting and distribution expenses in the former underwriting and distribution caption and certain expenses historically reported as general and administrative. Expenses previously recorded as Underwriting and distribution expenses were retrospectively reclassified into (a) the following existing operating expense captions: Compensation and benefits and General and administrative, and (b) the following newly created operating expense captions: Distribution, Technology, Occupancy, and Marketing and advertising. Certain expenses historically reported as general and administrative were retrospectively reclassified into the following newly created operating expense captions: Technology, Occupancy, and Marketing and advertising. The Company considered the change in policy to be preferable and did not consider the change to be material to its consolidated financial statements. These changes were applied retrospectively to all periods presented and did not affect net income attributable to the Company.2019.

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, ~~2018~~2019 and the results of operations and cash flows for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 in conformity with accounting principles generally accepted in the United States.

Table of Contents

2.	New Accounting Guidance

~~Table of contents~~

~~2.New Accounting Guidance~~

~~In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02,~~ ~~Leases~~, which increases transparency and comparability among organizations by establishing a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet with additional disclosures of key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted and certain practical expedients are available. The Company will adopt the provisions of this guidance on January 1, 2019. We expect to elect the ‘package of practical expedients’, which allows us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also expect to elect a practical expedient to use hindsight in determining the lease term and in assessing impairment of the entity’s right-of-use assets. Additionally, we currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. The Company has identified its population of impacted leasesand continues to evaluate the impact that the ASU will have on its consolidated financial statements and related disclosures. While we continue to assess all of the effects of adoption, we currently believe the most significant effects on our financial statements relate to the recognition of new right-of-use assets and lease liabilities on our balance sheet for our real estate operating leases and providing new disclosures about our leasing activities.

~~In June 2018, FASB issued ASU 2018-07,~~ ~~Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share–based payments granted to nonemployees by aligning the accounting with the requirements for employee share–based compensation. This ASU~~ is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company will adopt the provisions of this guidance on January 1, 2019. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.

~~In August 2018, FASB issued ASU 2018-13,~~ ~~Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which~~ ~~eliminates certain disclosure requirements for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements.~~ ~~This ASU~~ is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are evaluating the impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

~~In August 2018, FASB issued ASU 2018-14,~~ ~~Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans,~~ ~~which removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. This ASU~~ is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are evaluating the impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

In August 2018, FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. ~~We are evaluating~~The Company will adopt the ~~impact~~provisions of this guidance on January 1, 2020 and expects to elect the prospective adoption approach, which does not require the restatement of prior years. While we continue to assess all of the effects of adoption, we currently believe the adoption of this ASU will not have a material impact on our operating income or net income as requirements under the standard are generally consistent with our current accounting for cloud computing arrangements, with the primary difference being the classification of certain information in our consolidated financial statements and related disclosures.

3.	Revenue Recognition

~~3.Revenue Recognition~~

~~As of January 1, 2018, the Company adopted ASU 2014-09,~~ ~~“Revenue from Contracts with Customers” and all subsequent ASUs that modified Accounting Standards Codification (“ASC”) 606,~~ ~~“Revenue from Contracts with Customers.”~~ ~~The Company elected to apply the standard utilizing the cumulative effect approach. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue.~~

~~Table of contents~~

~~Investment Management and Advisory Fees~~

We recognize investment management fees as earned over the period in which investment management services are provided. While our investment management contracts are long-term in nature, the performance obligations are generally satisfied daily or monthly based on assets under management. We calculate investment management fees from the Funds daily based upon average daily net assets under management in accordance with investment management agreements between the Funds and the Company. The majority of investment and/or advisory fees earned from institutional and separate accounts are calculated either monthly or quarterly based upon an average of net assets under management in accordance with such investment management agreements. The Company may waive certain fees for investment management services at its discretion, or in accordance with contractual expense limitations, and these waivers are reflected as a reduction to investment management fees on the consolidated statements of income.

The Company has contractual arrangements with third parties to provide subadvisory services. Investment advisory fees are recorded gross of any subadvisory payments and are included in investment management fees based on management’s determination that the Company is acting in the capacity of principal service provider with respect to its relationship with the Funds. Any corresponding fees paid to subadvisors are included in operating expenses.

~~Underwriting, Distribution and Shareholder Service Fees~~

Fee‑based asset allocation revenues are calculated monthly based upon average daily net assets under management. For certain types of investment products, primarily variable annuities, distribution revenues are generally calculated based upon average daily net assets under management. Fees collected from independent financial advisors associated with Waddell & Reed, Inc. for various services are recorded in underwriting and distribution fees on a gross basis, as the Company is the principal in these arrangements.

Under a Rule 12b-1 service plan, the Funds may charge a maximum fee of 0.25% of the average daily net assets under management for Ivy Funds Class C, E and Y shares for expenses paid to broker-dealers and other sales professionals in connection with providing ongoing services to the Funds’ shareholders and/or maintaining the Funds’ shareholder accounts, with the exception of the Funds’ Class R shares, for which the maximum fee is 0.50%. The Funds’ Class C shares may charge a maximum of 0.75% of the average daily net assets under management under a Rule 12b-1 distribution plan to broker-dealers and other sales professionals for their services in connection with distributing shares of that class. The Funds’ Class A shares may charge a maximum fee of 0.25% of the average daily net assets under management under a Rule 12b-1 service and distribution plan for expenses detailed previously. The Rule 12b-1 plans are subject to annual approval by the Funds’ board of trustees, including a majority of the disinterested members, by votes cast in person at a meeting called for the purpose of voting on such approval. All Funds may terminate the service and distribution plans at any time with approval of fund trustees or portfolio shareholders (a majority of either) without penalty.

Underwriting and distribution commission revenues resulting from the sale of investment products are recorded upon satisfaction of performance obligations, which occurs on the trade date. When a client purchases Class A or Class E shares (front-end load), the client pays an initial sales charge of up to 5.75% of the amount invested. The sales charge for Class A or Class E shares typically declines as the investment amount increases. In addition, investors may combine their purchases of all fund shares to qualify for a reduced sales charge. When a client invests in a fee-based asset allocation product, Class I or Y shares are purchased at net asset value, and we do not charge an initial sales charge.

Underwriting and distribution revenues resulting from payments from independent financial advisors for office space, compliance oversight and affiliation fees are earned over the period in which the service is provided, which is generally monthly and is based on a fee schedule.

~~Table of contents~~

Shareholder service fee revenue primarily includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees. Transfer agency fees and portfolio accounting and administration fees are asset‑based revenues or account‑based revenues, while custodian fees from retirement plan accounts are based on the number of client accounts. Custodian fees, transfer agency fees and portfolio accounting and administration fees are earned upon completion of the service when all performance obligations have been satisfied.

All revenue recognized in the consolidated statements of income is considered to be revenue from contracts with customers. The vast majority of revenue is determined based on average assets and is earned daily or monthly or is transactional and is earned on the trade date. As such, revenue from remaining performance obligations is not significant. The following table depicts the disaggregation of revenue by product and distribution channel:

Three months ended
September 30, 2018

Three months ended
September 30, 2017

Nine months ended
September 30, 2018

Nine months ended
September 30, 2017

(in thousands)

(in thousands)

Investment management fees:









Funds

$
123,764

128,078

376,193

376,563

Institutional

5,538

6,071

17,192

18,900

Total investment management fees

$
129,302

134,149

393,385

395,463

Underwriting and distribution fees:

Unaffiliated

Rule 12b-1 service and distribution fees

$
19,707

22,322

60,734

69,191

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

441

353

1,418

1,118

Other revenues

126

217

459

996

Total unaffiliated distribution fees

$
20,274

22,892

62,611

71,305

Broker-Dealer

Fee-based asset allocation product revenues

$
69,468

61,115

201,565

176,184

Rule 12b-1 service and distribution fees

18,106

19,026

54,591

56,544

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

13,651

12,941

41,900

41,796

Sales commissions on other products

9,111

7,974

26,632

23,671

Other revenues

9,698

4,944

28,923

16,999

Total broker-dealer distribution fees

120,034

106,000

353,611

315,194

Total distribution fees

$
140,308

128,892

416,222

386,499

Shareholder service fees:

Total shareholder service fees

$
25,508

26,406

78,464

80,706

Total revenues

$
295,118

289,447

888,071

862,668



		Three months ended September 30, 2019	Three months ended September 30, 2018	Nine months ended September 30, 2019	Nine months ended September 30, 2018
		(in thousands)		(in thousands)
Investment management fees:
Funds	$	107,926	123,764	322,678	376,193
Institutional		3,880	5,538	11,760	17,192
Total investment management fees	$	111,806	129,302	334,438	393,385
Underwriting and distribution fees:
Unaffiliated
Rule 12b-1 service and distribution fees	$	16,003	19,707	48,514	60,734
Sales commissions on front-end load mutual fund and variable annuity sales		361	441	1,287	1,418
Other revenues		67	126	242	459
Total unaffiliated distribution fees	$	16,431	20,274	50,043	62,611
Wealth Management
Fee-based asset allocation product revenues	$	73,356	69,468	208,806	201,565
Rule 12b-1 service and distribution fees		16,426	18,106	48,441	54,591
Sales commissions on front-end load mutual fund and variable annuity sales		12,523	13,651	36,845	41,900
Sales commissions on other products		8,024	9,111	24,127	26,632
Other revenues		9,027	9,698	27,265	28,923
Total wealth management distribution fees		119,356	120,034	345,484	353,611
Total distribution fees	$	135,787	140,308	395,527	416,222
Shareholder service fees:
Total shareholder service fees	$	23,087	25,508	70,279	78,464

Total revenues	$	270,680	295,118	800,244	888,071

Table of ~~contents~~Contents

4.	Investment Securities

~~4.Investment Securities~~

Investment securities at September 30, ~~2018~~2019 and December 31, ~~2017 are~~2018 were as follows:

September 30,

December 31,

2018

2017

(in thousands)

Available for sale securities:

Certificates of deposit

$
5,002

12,999

Commercial paper

7,920

34,978

Corporate bonds

180,780

197,442

U.S. Treasury bills

25,445

19,779

Total available for sale securities

219,147

265,198

Trading debt securities:

Certificates of deposit

—

1,999

Commercial paper

1,981

—

Corporate bonds

58,545

55,414

U.S. Treasury bills

8,810

4,929

Mortgage-backed securities

8

10

Consolidated sponsored funds

35,086

62,038

Total trading securities

104,430

124,390

Equity securities:

Common stock

8,088

116

Sponsored funds(1)

160,852

137,857

Sponsored privately offered funds

839

695

Consolidated sponsored funds

32,548

77,048

Total equity securities

202,327

215,716

Equity method securities:

Sponsored funds

62,503

95,188

Total securities

$
588,407

700,492

~~(1)~~

Includes $124.0 million of investments at December 31, 2017, that were previously reported as available for sale securities prior to the adoption of ASU 2016-01 on January 1, 2018. Refer to Note 1 – Description of Business and Significant Accounting Policies – Basis of Presentation.


	September 30,		December 31,
	2019		2018
		(in thousands)
Available for sale securities:
Certificates of deposit	$	—	5,001
Commercial paper		1,975	7,970
Corporate bonds		267,064	218,121
U.S. Treasury bills		—	19,672
Total available for sale securities		269,039	250,764
Trading debt securities:
Commercial paper		1,975	1,993
Corporate bonds		89,057	77,250
U.S. Treasury bills		5,968	5,884
Mortgage-backed securities		5	7
Term loans		42,272	—
Consolidated sponsored funds		41,269	33,088
Total trading securities		180,546	118,222
Equity securities:
Common stock		31,744	21,204
Sponsored funds		174,219	153,548
Sponsored privately offered funds		781	678
Consolidated sponsored funds		—	24,879
Total equity securities		206,744	200,309
Equity method securities:
Sponsored funds		35,287	47,840
Total securities	$	691,616	617,135

~~Certificates of deposit, commercial~~Commercial paper and corporate bonds ~~and U.S. Treasury bills~~ accounted for as available for sale and held as of September 30, ~~2018~~2019 mature as follows:

Amortized

cost

Fair value

(in thousands)
Within one year
$
90,565

90,143
After one year but within five years

130,562

129,004

$
221,127

219,147


		Amortized
		cost	Fair value
		(in thousands)
Within one year	$	83,965	84,173
After one year but within five years		181,873	184,866
	$	265,838	269,039

Commercial paper, corporate bonds, U.S. Treasury bills, ~~and~~ mortgage-backed securities and term loans accounted for as trading and held as of September 30, ~~2018~~2019 mature as follows:

Fair value

(in thousands)
Within one year

$
25,031
After one year but within five years

39,654
After 10 years

4,659

$
69,344


		Fair value
		(in thousands)
Within one year	$	32,977
After one year but within five years		76,645
After five years but within 10 years		29,655
	$	139,277

Table of ~~contents~~Contents

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at September 30, ~~2018:~~2019:


	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value

						Amortized		Unrealized	Unrealized
						cost		gains	losses	Fair value
	(in thousands)					(in thousands)
Available for sale securities:
Certificates of deposit	$	5,000	2	—	5,002
Commercial paper		7,902	18	—	7,920	$	1,975	—	—	1,975
Corporate bonds		182,276	7	(1,503)	180,780		263,863	3,240	(39)	267,064
U.S. Treasury bills		25,949	—	(504)	25,445
	$	221,127	27	(2,007)	219,147
						$	265,838	3,240	(39)	269,039

The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, ~~2017:~~2018:


	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value
	(in thousands)

						Amortized		Unrealized	Unrealized
						cost		gains	losses	Fair value
						(in thousands)
Available for sale securities:
Certificates of deposit	$	13,000	1	(2)	12,999	$	5,000	1	—	5,001
Commercial paper		34,836	142	—	34,978		7,902	68	—	7,970
Corporate bonds		198,404	33	(995)	197,442		219,236	254	(1,369)	218,121
U.S. Treasury bills		20,019	—	(240)	19,779		19,672	—	—	19,672
	$	266,259	176	(1,237)	265,198
						$	251,810	323	(1,369)	250,764

A summary of available for sale investment securities with fair values below carrying values at September 30, ~~2018 and December 31, 2017~~2019 is as follows:

Less than 12 months

12 months or longer

Total

Unrealized

Unrealized

Unrealized
September 30, 2018

Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)
Corporate bonds

$
55,682

(293)

112,246

(1,210)

167,928

(1,503)
U.S. Treasury bills

5,920

(16)

19,525

(488)

25,445

(504)

$
61,602

(309)

131,771

(1,698)

193,373

(2,007)

Less than 12 months

12 months or longer

Total

Unrealized

September 30, 2019

Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)

Corporate bonds

19,987

(19)

27,105

(20)

47,092

(39)

Less than 12 months

12 months or longer

Total

Unrealized

Unrealized

Unrealized
December 31, 2017

Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)
Certificates of deposit

$
2,998

(2)

—

—

2,998

(2)
Corporate bonds

192,409

(995)

—

—

192,409

(995)
U.S. Treasury bills

19,779

(240)

—

—

19,779

(240)

$
215,186

(1,237)

—

—

215,186

(1,237)

A summary of available for sale investment securities with fair values below carrying values at December 31, 2018 is as follows:

Less than 12 months

12 months or longer

Total

Unrealized

December 31, 2018

Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)

Corporate bonds

36,302

(160)

119,480

(1,209)

155,782

(1,369)

The Company’s investment portfolio included 46 securities, having an aggregate fair value of $193.4 million, which were in an unrealized loss position at September 30, 2018, compared to 53 securities, with an aggregate fair value of $215.2 million at December 31, 2017.

~~The Company evaluated all of the~~12 available for sale securities in an unrealized loss position at September 30, ~~2018 and December 31, 2017,~~2019.

The Company evaluated available for sale securities in an unrealized loss position at September 30, 2019 and concluded no other-than-temporary impairment ~~existed at September 30, 2018 or December 31, 2017.~~existed. The unrealized losses in the Company’s investment portfolio ~~at September 30, 2018~~ were primarily caused by changes in interest rates. At this time, the Company does not intend to sell, and does not believe it will be required to sell these securities before recovery of their amortized cost.

~~Table of contents~~

Sponsored Funds

The Company has classified its equity investments in the Ivy Funds as equity method investments (when the Company owns between 20% and 50% of the fund) or 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 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.

Table of Contents

Sponsored Privately Offered Funds

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

Consolidated Sponsored Funds

The following table details the balances related to consolidated sponsored funds at September 30, ~~2018,~~2019 and at December 31, ~~2017,~~2018, as well as the Company’s net interest in these funds:


	September 30,		December 31,
	2018		2017
	(in thousands)

				September 30,		December 31,
				2019		2018
				(in thousands)
Cash	$	77,480	8,472	$	5,161	4,285
Investments		67,634	139,086		41,269	57,967
Other assets		2,661	1,588		486	872
Other liabilities		(1,125)	(1,040)		—	(79)
Redeemable noncontrolling interests		(16,133)	(14,509)		(16,913)	(11,463)
Net interest in consolidated sponsored funds	$	130,517	133,597	$	30,003	51,582

~~During the three months ended~~At September 30, ~~2018,~~2019, we consolidated an Ivy Fund ~~Ivy NextShares~~ and Ivy Global Investors Funds in which we provided initial seed capital at the time of the funds’ formation. ~~In May,~~During 2018, we ~~started the process of liquidating~~liquidated the Ivy Global Investors Société d’Investissement à Capital Variable and its Ivy Global Investors sub-funds, including converting the investments held by the sub-funds to ~~cash.~~cash, and redeemed the majority of our investment. During the third quarter of 2019, the formerly consolidated Ivy Nextshares were liquidated and distributed to shareholders. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements.

Fair Value

Accounting standards establish a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of the asset. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset. An individual investment’s fair value measurement is assigned a level based upon the observability of the inputs that are significant to the overall valuation. The three-level hierarchy of inputs is summarized as follows:

●

Level 1 – Investments are valued using quoted prices in active markets for identical securities.

●

Level 2 – Investments are valued using other significant observable inputs, including quoted prices in active markets for similar securities.

●

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

Table of ~~contents~~Contents

Assets classified as Level 2 can have a variety of observable inputs. These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches depending upon the specific asset to determine a value. The carrying amounts of certificates of deposit and commercial paper are measured at amortized cost, which approximates fair value due to the short-time between purchase and expected maturity of the investments. Depending on the nature of the inputs, these investments are generally classified as Level 1 or 2 within the fair value hierarchy. U.S. Treasury bills are valued upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active and inputs other than quoted prices that are observable or corroborated by observable market data. The fair value of corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer. Term loans are valued using a price or composite price from one or more brokers or dealers as obtained from an independent pricing service. The fair value of loans is estimated using recently executed transactions, market price quotations, credit/market events, and cross-asset pricing. Inputs are generally observable market inputs obtained from independent sources. Term loans are generally categorized in Level 2 of the fair value hierarchy, unless key inputs are unobservable in which case they would be categorized as Level 3. The fair value of equity derivatives is measured based on active market broker quotes, evaluated broker quotes and evaluated prices from vendors.

The following tables summarize our investment securities as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.


September 30, 2018	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total
	(in thousands)

September 30, 2019							Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total
							(in thousands)
Cash equivalents: (1)
Money market funds	$	112,289	—	—	—	112,289	$	3,090	—	—	—	3,090
U.S. government sponsored enterprise note								—	896	—	—	896
Commercial paper		—	48,554	—	—	48,554		—	37,104	—	—	37,104
Total cash equivalents	$	112,289	48,554	—	—	160,843	$	3,090	38,000	—	—	41,090
Available for sale securities:
Certificates of deposit	$	—	5,002	—	—	5,002
Commercial paper		—	7,920	—	—	7,920	$	—	1,975	—	—	1,975
Corporate bonds		—	180,780	—	—	180,780		—	267,064	—	—	267,064
U.S. Treasury bills		—	25,445	—	—	25,445
Trading debt securities:
Commercial paper		—	1,981	—	—	1,981		—	1,975	—	—	1,975
Corporate bonds		—	58,545	—		58,545		—	89,057	—		89,057
U.S. Treasury bills		—	8,810	—	—	8,810		—	5,968	—	—	5,968
Mortgage-backed securities		—	8	—	—	8		—	5	—	—	5
Term loans								—	40,879	1,393	—	42,272
Consolidated sponsored funds		—	35,086	—	—	35,086		—	41,269	—	—	41,269
Equity securities:
Common stock		8,049	—	39	—	8,088		31,742	—	2	—	31,744
Sponsored funds		160,852	—	—	—	160,852		174,219	—	—	—	174,219
Sponsored privately offered funds measured at net asset value (2)		—	—	—	839	839		—	—	—	781	781
Consolidated sponsored funds		32,548	—	—	—	32,548
Equity method securities: (3)
Sponsored funds		62,503	—	—	—	62,503		35,287	—	—	—	35,287
Total	$	263,952	323,577	39	839	588,407
Total investment securities							$	241,248	448,192	1,395	781	691,616

1613

Table of ~~contents~~Contents

December 31, 2018	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total
	(in thousands)
Cash equivalents: (1)
Money market funds	$	121,759	—	—	—	121,759
U.S. government sponsored enterprise note		—	895	—	—	895
Commercial paper		—	74,277	—	—	74,277
Total cash equivalents	$	121,759	75,172	—	—	196,931
Available for sale securities:
Certificates of deposit	$	—	5,001	—	—	5,001
Commercial paper		—	7,970	—	—	7,970
Corporate bonds		—	218,121	—	—	218,121
U.S. Treasury bills		—	19,672	—	—	19,672
Trading debt securities:
Commercial paper		—	1,993	—	—	1,993
Corporate bonds		—	77,250	—		77,250
U.S. Treasury bills		—	5,884	—	—	5,884
Mortgage-backed securities		—	7	—	—	7
Consolidated sponsored funds		—	33,088	—	—	33,088
Equity securities:
Common stock		21,192	—	12	—	21,204
Sponsored funds		153,548	—	—	—	153,548
Sponsored privately offered funds measured at net asset value (2)		—	—	—	678	678
Consolidated sponsored funds		24,879	—	—	—	24,879
Equity method securities: (3)
Sponsored funds		47,840	—	—	—	47,840
Total investment securities	$	247,459	368,986	12	678	617,135

December 31, 2017

Level 1

Level 2

Level 3

Other Assets Held at Net Asset Value

Total

(in thousands)

Cash equivalents: (1)

Money market funds

$
145,785

—

—

—

145,785

Commercial paper

—

11,064

—

—

11,064

Total cash equivalents

$
145,785

11,064

—

—

156,849

Available for sale securities:

Certificates of deposit

$
—

12,999

—

—

12,999

Commercial paper

—

34,978

—

—

34,978

Corporate bonds

—

197,442

—

—

197,442

U.S. Treasury bills

—

19,779

—

—

19,779

Trading debt securities:

Certificates of deposit

—

1,999

—

—

1,999

Corporate bonds

—

55,414

—

55,414

U.S. Treasury bills

—

4,929

—

—

4,929

Mortgage-backed securities


—

10

—

—

10

Consolidated sponsored funds

—

62,038

—

—

62,038

Equity securities:

Common stock

116

—

—

—

116

Sponsored funds

137,857

—

—

—

137,857

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

—

—

—

695

695

Consolidated sponsored funds

77,048

—

—

—

77,048

Equity method securities: (3)

Sponsored funds

95,188

—

—

—

95,188

Total

$
310,209

389,588

—

695

700,492

(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 ~~NAV~~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)

~~(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)

~~(3)~~

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

Table of ~~contents~~Contents

The following table summarizes the activity of investments categorized as Level 3 for the nine months ended September 30, ~~2018:~~

For the nine months ended

September 30, 2018

(in thousands)

Level 3 assets at December 31, 2017

$
—

Additions

419

Valuation change

(63)

Redemptions

(317)

Level 3 assets at September 30, 2018

$
39

2019:


	For the nine months ended
	September 30, 2019
	(in thousands)
Level 3 assets at December 31, 2018	$	12
Additions		2,357
Transfers out of level 3		(196)
Losses in Investment and other income		(23)
Redemptions/Paydowns		(755)
Level 3 assets at September 30, 2019	$	1,395

Change in unrealized losses for Level 3 assets held at September 30, 2019	$	(21)

~~5.Derivative Financial Instruments~~

5.	Derivative Financial Instruments

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

Excluding derivative financial instruments held in certain consolidated sponsored funds, the Company was party to ~~five~~14 total return swap contracts with a combined notional value of ~~$198.4~~$222.1 million and ~~six~~5 total return swap contracts with a combined notional value of ~~$213.9~~$194.4 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 and other income onin the Company’s consolidated statements of income.

The Company posted ~~$6.4~~$0.6 million and ~~$9.7~~$5.2 million in cash collateral with the counterparties of the total return swap contracts as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The cash collateral is 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, ~~2018~~2019 and December 31, ~~2017~~2018 and is calculated based on Level 2 inputs:

The following table presents the fair value of the derivative financial instruments, excluding 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, 2018 and December 31, 2017 and is calculated based on Level 2 inputs:

September 30,

December 31,

2018

2017

Balance sheet

location

Fair value

(in thousands)

September 30,

December 31,

Balance sheet

2019

2018

location

Fair value

(in thousands)

Total return swap contracts

Other current liabilities

550

1,093

Prepaid expenses and other current assets

153

4,968

Total return swap contracts

Other current liabilities

467

—

Net total return swap (liability) asset

(314)

4,968

~~Table of contents~~

The following is a summary of net ~~losses~~gains (losses) recognized in income for the three and nine months ended September 30, ~~2018~~2019 and September 30, ~~2017:~~2018:

Three months ended

Nine months ended

Income statement

September 30,

September 30,


location


2018
2017


2018

2017

(in thousands)

(in thousands)
Total return swap contracts

Investment and other income

$
(6,769)
(8,855)

$
(7,313)

(27,321)


		Three months ended			Nine months ended
	Income statement	September 30,			September 30,
	location		2019	2018		2019	2018
		(in thousands)			(in thousands)
Total return swap contracts	Investment and other income	$	135	(6,769)	$	(25,728)	(7,313)

~~6.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. Goodwill and identifiable intangible assets (all considered indefinite lived) at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 are as follows:


	September 30,		December 31,
	2018		2017
	(in thousands)

				September 30,		December 31,
				2019		2018
				(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
Other		200	200		200	200
Total identifiable intangible assets		38,899	40,099		38,899	38,899


Total	$	145,869	147,069	$	145,869	145,869

~~7.Indebtedness~~

7.	Indebtedness

Debt is reported at its carrying amount in the consolidated balance sheet. The fair value, calculated based on Level 2 inputs, of the Company’s senior unsecured ~~note~~notes maturing January 13, 2021 ~~is $98.4~~was $98.6 million at September 30, ~~2018~~2019 compared to the carrying value net of debt issuance costs of ~~$94.8~~$94.9 million, which is listed under long-term debt in the consolidated balance sheet. ~~Fair value is calculated based on Level 2 inputs.~~

~~8.Income Tax Uncertainties~~
8.
Income Tax Uncertainties

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. As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company’s consolidated balance sheet included unrecognized tax benefits, including penalties and interest, of ~~$2.9~~$2.7 million ($~~2.5~~2.3 million net of federal benefit) and ~~$10.9~~$2.7 million ($~~8.9~~2.4 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate. ~~The Company finalized a voluntary disclosure agreement with a state tax jurisdiction in June 2018, which reduced unrecognized tax benefits by $9.3 million ($7.6 million net of federal benefit).~~

The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes. The total amount of penalties and interest, net of federal ~~impact,~~benefit, related to income tax uncertainties recognized in the ~~statement~~statements of income for the three and nine month ~~period~~periods ended September 30, ~~2018~~2019 was ~~a benefit of $2.7 million.~~$38 thousand and $79 thousand, respectively. The total amount of accrued penalties and interest related to uncertain tax positions recognized in the consolidated balance sheet at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 is ~~$0.8~~$0.7 million ($~~0.7~~0.6 million net of federal benefit) and ~~$4.0~~$0.7 million ($~~3.5~~0.6 million net of federal benefit), respectively.

In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. The Company ~~is currently under audit in a state jurisdiction in which it operates. The Company expects to settle~~does not expect the ~~audit in this jurisdiction within the next 12-month period. The Company’s liability for unrecognized tax benefits, including~~

~~Table of contents~~

~~penalties and interest, is not expected to decrease significantly upon~~resolution or settlement of ~~this audit. Additionally, such settlement is not anticipated~~any open audits, Federal or State, to ~~have a significant~~materially impact on the ~~results of operations.~~consolidated financial statements.

The ~~2015,~~ 2016, 2017, and ~~2017~~2018 federal income tax returns are open tax years that remain subject to potential future audit. State income tax returns for all years after ~~2013~~2014 and, in certain states, income tax returns for ~~2013,~~2014, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.

~~9.Pension Plan and Postretirement Benefits Other Than Pension~~Table of Contents

9.	Pension Plan and Postretirement Benefits Other Than Pension

Benefits payable under ~~the Pension Plan are~~our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) were based on employees’ years of service and compensation during the final 10 years of employment. On July 26, 2017, the Compensation Committee of the Company’s Board of Directors approved an amendment to freeze the Pension Plan, effective September 30, 2017. After September 30, 2017, participants in the Pension Plan ~~do not accrue~~ceased accruing additional benefits for future service or compensation. Participants retain benefits accumulated as of September 30, 2017 in accordance with the terms of the Pension Plan. ~~During the third quarter of 2018, we contributed $4.0 million~~The Company intends to terminate the Pension ~~Plan.~~Plan in a standard termination, as defined by the Pension Benefit Guaranty Corporation, with an expected completion date in 2020.

We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially all employees, as well as ~~independent financial advisors associated with Waddell & Reed, Inc.~~Advisors. The medical plan is contributory with participant contributions adjusted annually. The medical plan does not provide for benefits after age 65 with the exception of a small group of employees that were grandfathered when this 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,

2018

2017

2018

2017

2018

2017

2018

2017

(in thousands)

(in thousands)

Components of net periodic benefit cost:



















Service cost

$
—

2,958

$
—

—

$
—

8,367

$
—

—

Interest cost

1,497

1,522

14

15

4,490

4,780

41

44

Expected return on plan assets

(2,065)

(2,510)

—

—

(6,196)

(7,627)

—

—

Actuarial loss

—

6,552

—

—

—

6,552

—

—

Actuarial gain amortization

—

—

(30)

(45)

—

—

(90)

(135)

Prior service credit amortization

—

—

(1)

(1)

—

—

(2)

(3)

Curtailment gain

—

(31,621)

—

—

(31,621)

—

—

Total

$
(568)

(23,099)

$
(17)

(31)

$
(1,706)

(19,549)

$
(51)

(94)


				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,
	2019		2018		2019	2018	2019		2018		2019	2018
		(in thousands)						(in thousands)
Components of net periodic benefit cost:
Interest cost	$	1,537	1,497	$	9	14	$	4,610	4,490	$	25	41
Expected return on plan assets		(1,579)	(2,065)		—	—		(4,736)	(6,196)		—	—
Actuarial gain amortization		—	—		(124)	(30)		—	—		(371)	(90)
Prior service credit amortization		—	—		—	(1)		—	—		—	(2)
Total	$	(42)	(568)	$	(115)	(17)	$	(126)	(1,706)	$	(346)	(51)

~~Table of contents~~

~~10.Stockholders’ Equity~~

10.

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,
	2018		2017	2018		2017
	(in thousands, except per share amounts)


							Three months ended			Nine months ended
							September 30,			September 30,
							2019		2018	2019		2018
							(in thousands, except per share amounts)
Net income attributable to Waddell & Reed Financial, Inc.	$	46,305	53,582	$	137,120	111,515	$	33,054	46,305	$	99,056	137,120


Weighted average shares outstanding, basic and diluted		79,595	83,476		81,372	83,719		72,387	79,595		74,446	81,372


Earnings per share, basic and diluted	$	0.58	0.64	$	1.69	1.33	$	0.46	0.58	$	1.33	1.69

Dividends

~~On July 24, 2018,~~During the quarter, the Board of Directors ~~approved~~declared a quarterly dividend on our Class A common stock in the amount of $0.25 per share ~~to stockholders of record on~~with a November 1, 2019 payment date and an October 11, ~~2018.~~2019 record date. The total dividend paid on November 1, ~~2018~~2019 was ~~$19.7 million and was included in other current liabilities as~~$17.7 million.

Table of ~~September 30, 2018.~~Contents

Common Stock Repurchases

The Board of Directors has authorized the repurchase of our Class A common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including issuing shares to employees in our stock-based compensation programs.

There were ~~1,424,612~~2,480,019 shares and ~~190,056~~1,424,612 shares repurchased in the open market or privately during the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, which includes ~~225~~19 shares and 56225 shares, respectively, repurchased from employees who tendered shares to cover income tax withholdings with respect to vesting of stock awards during these two reporting periods. There were ~~4,519,546~~6,849,238 shares and ~~904,410~~4,519,546 shares repurchased in the open market or privately during the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, which includes ~~630,159~~440,002 shares and ~~239,410~~630,159 shares, respectively, repurchased from employees who tendered shares to cover income tax withholdings with respect to ~~the~~ vesting of stock awards during ~~each of~~ these two reporting periods.

~~Table of contents~~

Accumulated Other Comprehensive Income (Loss)

The following tables summarize accumulated other comprehensive income (loss) activity for the three and nine months ended September 30, ~~2018~~2019 and September 30, ~~2017.~~2018.

Total

Unrealized

Postretirement

accumulated

gains (losses)

benefits

other

on investment

unrealized

comprehensive

Three months ended September 30, 2018

securities

gains (losses)

income (loss)

(in thousands)

Balance at June 30, 2018

$
(1,772)

440

(1,332)

Other comprehensive income before reclassification

218

—

218

Amount reclassified from accumulated other comprehensive loss

44

(24)

20

Net current period other comprehensive income (loss)

262

(24)

238

Balance at September 30, 2018

$
(1,510)

416

(1,094)

Change in

valuation

allowance for

unrealized

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)

546

(1,980)

Other comprehensive income before reclassification

1,968

800

—

2,768

Amount reclassified from accumulated other comprehensive loss

(438)

(260)

(30)

(728)

Net current period other comprehensive income (loss)

1,530

540

(30)

2,040

Balance at September 30, 2017

$
(456)

—

516

60


	For the three months ended September 30,
				Total
	Unrealized		Postretirement	accumulated
	gains (losses) on		benefits	other
	AFS investment		unrealized	comprehensive
	securities		gains (losses)	income (loss)
	(in thousands)
Balance at June 30, 2019	$	2,142	939	3,081
Other comprehensive income before reclassification		379	—	379
Amount reclassified from accumulated other comprehensive (loss)		(83)	(94)	(177)
Net current period other comprehensive income (loss)		296	(94)	202
Balance at September 30, 2019	$	2,438	845	3,283


Balance at June 30, 2018	$	(1,772)	440	(1,332)
Other comprehensive income before reclassification		218	—	218
Amount reclassified from accumulated other comprehensive income (loss)		44	(24)	20
Net current period other comprehensive income (loss)		262	(24)	238
Balance at September 30, 2018	$	(1,510)	416	(1,094)

Total

Unrealized

Postretirement

accumulated

gains (losses)

benefits

other

on investment

unrealized

comprehensive

Nine months ended September 30, 2018

securities

gains (losses)

income (loss)

(in thousands)

Balance at December 31, 2017

$
145

379

524

Amount reclassified to retained earnings for recently adopted ASUs

(955)

107

(848)

Other comprehensive loss before reclassification

(744)

—

(744)

Amount reclassified from accumulated other comprehensive loss

44

(70)

(26)

Net current period other comprehensive (loss) income

(1,655)

37

(1,618)

Balance at September 30, 2018

$
(1,510)

416

(1,094)

Table of ~~contents~~Contents

Change in

valuation

allowance for

unrealized

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)

603

(6,757)

Other comprehensive income before reclassification

4,113

3,743

—

7,856

Amount reclassified from accumulated other comprehensive loss

(597)

(355)

(87)

(1,039)

Net current period other comprehensive income (loss)

3,516

3,388

(87)

6,817

Balance at September 30, 2017

$
(456)

��
—

516

60


	For the nine months ended September 30,
				Total
	Unrealized		Postretirement	accumulated
	gains (losses)		benefits	other
	on investment		unrealized	comprehensive
	securities		gains (losses)	income (loss)
	(in thousands)
Balance at December 31, 2018	$	(797)	1,128	331
Other comprehensive income before reclassification		3,413	—	3,413
Amount reclassified from accumulated other comprehensive (loss)		(178)	(283)	(461)
Net current period other comprehensive income (loss)		3,235	(283)	2,952
Balance at September 30, 2019	$	2,438	845	3,283


Balance at December 31, 2017	$	145	379	524
Amount reclassified to retained earnings for ASUs adopted in 2018		(955)	107	(848)
Other comprehensive loss before reclassification		(744)	—	(744)
Amount reclassified from accumulated other comprehensive income (loss)		44	(70)	(26)
Net current period other comprehensive (loss) income		(1,655)	37	(1,618)
Balance at September 30, 2018	$	(1,510)	416	(1,094)

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


		For the three months ended September 30, 2018
			Tax
			(expense)		Statement of income
	Pre-tax		benefit	Net of tax	line item or retained earnings
	(in thousands)

								Tax
For the three months ended September 30, 2019						Pre-tax		expense	Net of tax	Statement of income line item
						(in thousands)
Reclassifications included in net income:
Losses on available for sale debt securities	$	(58)	14	(44)	Investment and other income (loss)
Gains on available for sale debt securities						$	109	(26)	83	Investment and other income
Amortization of postretirement benefits		31	(7)	24	Compensation and benefits and retained earnings		124	(30)	94	Compensation and benefits
Total	$	(27)	7	(20)		$	233	(56)	177


	For the three months ended September 30, 2017
			Tax
			(expense)
	Pre-tax		benefit	Net of tax	Statement of income line item
	(in thousands)

								Tax
								benefit
For the three months ended September 30, 2018						Pre-tax		(expense)	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
Losses on available for sale debt securities						$	(58)	14	(44)	Investment and other income
Amortization of postretirement benefits		46	(16)	30	Compensation and benefits and retained earnings		31	(7)	24	Compensation and benefits
Total	$	744	(16)	728		$	(27)	7	(20)

For the nine months ended September 30, 2018

Tax

Pre-tax

expense

Net of tax

Statement of income line item

(in thousands)

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










Sponsored funds investment gains

$
1,295

(340)

955

Investment and other income (loss)

Losses on available for sale debt securities

(58)

14

(44)

Investment and other income (loss)

Amortization of postretirement benefits

92

(129)

(37)

Compensation and benefits and retained earnings

Total

$
1,329

(455)

874


			Tax
For the nine months ended September 30, 2019	Pre-tax		expense	Net of tax	Statement of income line item
	(in thousands)
Reclassifications included in net income:
Gains on available for sale debt securities	$	234	(56)	178	Investment and other income
Amortization of postretirement benefits		371	(88)	283	Compensation and benefits
Total	$	605	(144)	461

Table of ~~contents~~Contents


			Tax
			(expense)		Statement of income
For the nine months ended September 30, 2018	Pre-tax		benefit	Net of tax	line item or retained earnings
	(in thousands)
Reclassifications included in net income or retained earnings for ASUs adopted in 2018:
Sponsored funds investment gains	$	1,295	(340)	955	Retained earnings
Losses on available for sale debt securities		(58)	14	(44)	Investment and other income
Amortization of postretirement benefits		92	(129)	(37)	Compensation and benefits and retained earnings
Total	$	1,329	(455)	874

11.

Leases

On January 1, 2019, the Company adopted ASU 2016-02, Leases, and related ASUs (“ASU 2016-02”), which increases transparency and comparability among organizations by establishing a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet with additional disclosures of key information about leasing arrangements. The Company applied the required modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application, and elected the effective date of the ASU as its initial date of application. The implementation of the new standard included recognition of new ROU assets and lease liabilities on our balance sheet as of January 1, 2019.

The Company has operating and finance leases for corporate office space and equipment. Our leases have remaining lease terms of less than one year to seven years, some of which include options to extend leases for up to 20 years, and some of which include options to terminate the leases within one year. Certain leases include variable lease payments in future periods based on a market index or rate. We determine if an arrangement is a lease at inception (or the effective date of ASU 2016-02). Operating lease assets and liabilities are included in other non-current assets, other current liabilities, and other non-current liabilities in our consolidated balance sheet at September 30, 2019. Finance leases are included in property and equipment, net, other current liabilities, and other non-current liabilities in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date (or the effective date of ASU 2016-02) based on the present value of lease payments over the lease term. The Company uses an incremental borrowing rate based on the information available at the commencement date (or the effective date of ASU 2016-02) 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 are generally accounted for separately.

The components of lease expense were as follows:


	For the three		For the nine
	months ended		months ended
	September 30, 2019		September 30, 2019
	(in thousands)
Operating Lease Cost	$	4,189	$	14,472

Finance Lease Cost:
Amortization of ROU assets	$	80	$	224
Interest on lease liabilities		8		23
Total	$	88	$	247

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 postretirement benefits

138

(51)

87

Compensation and benefits and retained earnings

Total

$
1,090

(51)

1,039

Table of Contents

~~11.Contingencies~~

Supplemental cash flow information related to leases was as follows:


	For the nine
	months ended
	September 30, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	13,661
Operating cash flows from finance leases		23
Financing cash flows from finance leases		222

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

Supplemental balance sheet information related to leases was as follows:


	September 30, 2019
	(in thousands,
	except lease term
	and discount rate)
Operating Leases:
Operating lease ROU assets (Other non-current assets)	$	25,795

Other current liabilities	$	10,873
Other non-current liabilities		16,445
Total operating lease liabilities	$	27,318


Finance Leases:
Property and equipment, gross	$	1,054
Accumulated depreciation		(734)
Property and equipment, net	$	320

Other current liabilities	$	241
Other non-current liabilities		90
Total finance lease liabilities	$	331


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

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

Table of Contents

Maturities of lease liabilities are as follows:


	Operating		Finance
	Leases		Leases
	(in thousands)
Year ended December 31,
2019 (excluding the nine months ended September 30, 2019)	$	3,361	68
2020		10,580	218
2021		6,468	45
2022		2,178	6
2023		2,090	—
Thereafter		4,703	—
Total lease payments		29,380	337
Less imputed interest		(2,062)	(6)
Total	$	27,318	331

The adoption of the lease standard using the effective date as the date of initial application requires the inclusion of the disclosures for periods prior to adoption, which are included below.

Minimum future rental commitments as of December 31, 2018 for all non-cancelable operating leases were as follows:


Year	Commitments
	(in thousands)
2019	$	16,488
2020		9,797
2021		5,757
2022		2,913
2023		2,320
Thereafter		5,161
	$	42,436

Rent expense was $5.8 million and $17.6 million for the three and nine months ended September 30, 2018, respectively.

As of December 31, 2018, we had property and equipment under capital leases with a cost of $1.6 million and accumulated depreciation of $1.1 million.

12.

Contingencies

The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.

The Company establishes reserves for litigation and similar matters when those matters present material loss contingencies that management determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in light of new information. The Company discloses the nature of the contingency when management believes it is reasonably possible the outcome may be significant to the Company’s consolidated financial statements and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items that management believes should be disclosed. Management’s judgment is required related to contingent liabilities because the outcomes are difficult to predict.

~~Shareholder Derivative Litigation~~

In an action filed on April 18, 2016 in the District Court of Johnson County, Kansas, Hieu Phan v. Ivy Investment Management Company, et al. (Case No. I6CV02338 Div. 4), plaintiff filed a putative derivative action on behalf of the nominal defendant, a mutual fund trust affiliated with the Company, alleging breach of fiduciary duty and breach of contract claims relating to an investment held in the affiliated mutual fund by the Company's registered investment adviser subsidiary. On behalf of the nominal defendant trust, plaintiff filed claims against the Company’s registered investment adviser subsidiary and current and retired trustees of the trust seeking monetary damages and demanding a jury trial. While the Company denies that any of its subsidiaries breached their fiduciary duties to, or committed a breach of the investment management agreement with, the nominal defendant trust, the parties to the litigation reached a settlement. The February 14, 2018 settlement agreement provided a full release for the benefit of defendants and for the payment of $19.9 million (less $6.1 million for attorney’s fees plus nominal costs associated with notice to shareholders), recoverable to the Company through insurance, to the affiliated mutual fund for the benefit of its shareholders. On July 30, 2018, the court entered an order granting final approval of the settlement.

~~401(k) Plan Class Action Litigation~~

In an action filed on June 23, 2017 and amended on June 26, 2017 in the U.S. District Court for the District of Kansas, Schapker v. Waddell & Reed Financial, Inc., et al, (Case No. 17-2365 D. Kan.), Stacy Schapker, a participant in the Company’s 401(k) and Thrift Plan, as amended and restated (the “401(k) Plan”), filed a lawsuit against the Company, the Company’s Board of Directors, the Administrative Committee of the 401(k) Plan, and unnamed Jane and John Doe Defendants 1-25. On August 7, 2017, plaintiff filed a second amended complaint, which was 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 during a proposed class period of June 23, 2011 to present. The second amended complaint dismissed the Company’s Board of Directors as a defendant

Table of ~~contents~~Contents

and named as defendants the Company, the Compensation Committee of the Company’s Board of Directors, the Administrative Committee of the 401(k) Plan, and the individuals who served on those committees during the proposed class period. Following the denial of their motion to dismiss, on March 8, 2018, defendants filed their answer and defenses to plaintiff’s second amended complaint. On April 23, 2018, the court entered an initial scheduling order, ordering the parties to complete mediation by August 31, 2018. While the Company and the other defendants deny any and all liability with respect to the claims, the parties have reached an agreement in principle to settle the litigation. The parties are finalizing the terms of the proposed settlement, which will be subject to preliminary and final court approval. The payment contemplated by the proposed settlement is recoverable to the Company through insurance. The Company has recorded a liability and offsetting receivable from insurance, as reflected in the Company's consolidated balance sheet.

~~Table of contents~~

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, distribution sources, expense levels, redemption rates, stock repurchases and the financial markets and other conditions. These statements are generally identified by the use of such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by us or on our behalf is not a guarantee of future performance. Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those 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, ~~2017,~~2018, which include, without limitation:

●

The loss of existing distribution relationships or inability to access new distribution 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 evolving fiduciary 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 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~~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, ~~2017~~2018 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, ~~2018.~~2019. 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.

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

Through our unaffiliated channel, we distribute mutual funds through broker-dealers, retirement platforms and registered investment advisers through a team of external and internal ~~wholesalers,~~wholesalers.

In our wealth management channel, we had 948 Advisors and 396 licensed advisor associates as ~~well as~~of September 30, 2019, for a ~~team dedicated to home office relationship coverage.~~total of 1,344 licensed individuals associated with W&R 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.

We manage assets in a variety of investment styles ~~for a variety~~in our institutional channel. Most of ~~types of institutions. The largest percentage client type is~~the clients in this channel are other asset managers that hire us to act as a subadviser for their branded products; they are typically domestic and 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.

In our broker-dealer channel, 1,074 independent financial advisors associated with W&R and 351 licensed advisor associates, who operate out of offices located throughout the United States, provide financial advice for retirement, education funding, estate planning and other financial needs for clients.

Operating Results

●

Net income attributable to Waddell & Reed Financial, Inc. for the third quarter ~~2018~~of 2019 was ~~$46.3~~$33.1 million, or ~~$0.58~~$0.46 per diluted share, compared to ~~$53.6~~$46.3 million, or ~~$0.64~~$0.58 per diluted share, during the third quarter of ~~2017.~~

2018.

●

Revenues of ~~$295.1~~$270.7 million during the third quarter of ~~2018 increased 2%~~2019 decreased 8% compared to the third quarter of ~~2017.~~2018. Operating expenses of ~~$235.6~~$230.7 million during the third quarter of ~~2018 were unchanged~~2019 decreased 2% compared to the same quarter in ~~2017.~~2018. The operating margin was 14.8% during the third quarter of 2019, compared to 20.2% during the third quarter of ~~2018,~~2018.

●

AUM ended the quarter at $68.8 billion, a decrease of 14% compared to ~~18.6% during~~ the third quarter of ~~2017.~~

~~Funds showed~~2018. Equity markets during the quarter continued ~~improvement across the 1, 3~~to experience volatility leading to lower sales in key products as investors preferred lower-risk fixed income and ~~5-year Lipper and Morningstar rankings.~~

~~Effective July 31, 2018, the Company implemented fee reductions in selected mutual~~money market funds. ~~This was a result of a comprehensive analysis of industry pricing and a commitment~~Redemptions improved 3% compared to ~~remain competitive.~~

~~Average trailing 12-month productivity per advisor increased to $350 thousand in~~ the third quarter of ~~2018~~2018.

●

Wealth management AUA ended the quarter at $57.1 billion, a 2% decrease compared to ~~$240 thousand~~the same quarter in ~~the third quarter of 2017, as we continue~~2018 primarily due to ~~focus our advisory programs on high performing financial advisors.~~

outflows in non-advisory assets.

●

During the third quarter of ~~2018,~~2019, we returned ~~$48.4~~$59.1 million of capital to stockholders through dividends and share repurchases, compared to ~~$42.1~~$48.4 million in the same period in ~~2017.~~2018. We repurchased ~~1,424,612~~2,480,019 shares during the third quarter of ~~2018~~2019 at a weighted average share price of ~~$19.91.~~

$16.42.

●

Our balance sheet remains solid and we ended the third quarter of ~~2018~~2019 with cash and investments of ~~$843.3~~

~~Table of contents~~

$837.5 million, excluding restricted cash and cash and investments of redeemable noncontrolling interests in consolidated sponsored funds.

Table of Contents

●

Within our wealth management channel, we are boosting our recruiting efforts nationally, targeting experienced financial advisors and hiring two veteran regional recruiting executives. During the third quarter of 2019, we also announced the addition of a platform of client engagement tools and analytics technology, which is designed to help Advisors enhance their service and align risk metrics with specific client needs and risk tolerances.

Assets Under Management

During the third quarter of ~~2018, assets under management increased 1%~~2019, AUM decreased 4% to ~~$79.5~~$68.8 billion from ~~$78.7~~$71.9 billion at June 30, ~~2018~~2019 due to ~~market appreciation of $2.9 billion, partially offset by~~ net outflows of ~~$2.0~~$2.7 billion and market depreciation of $0.4 billion.Sales of $1.8 billion during the current quarter declined 30% compared to the third quarter of 2018. Redemptions improved 3% compared to the third quarter of 2018.

Change in Assets Under Management ⁽¹⁾


	Three months ended September 30, 2018
				Broker-
	Unaffiliated(2)		Institutional	Dealer	Total
	(in millions)


						Three months ended September 30, 2019
									Wealth
						Unaffiliated⁽²⁾		Institutional	Management	Total
						(in millions)
Beginning Assets	$	30,782	5,250	42,619	78,651	$	27,545	3,887	40,444	71,876


Sales (3)		1,589	83	874	2,546		999	49	744	1,792
Redemptions		(2,425)	(535)	(1,612)	(4,572)		(2,684)	(230)	(1,542)	(4,456)
Net Exchanges		360	—	(360)	—		334	—	(334)	—
Net Flows		(476)	(452)	(1,098)	(2,026)		(1,351)	(181)	(1,132)	(2,664)


Market Action		866	389	1,662	2,917		(337)	(29)	(64)	(430)
Ending Assets	$	31,172	5,187	43,183	79,542	$	25,857	3,677	39,248	68,782

Three months ended September 30, 2017

Broker-

Unaffiliated(2)

Institutional

Dealer

Total

(in millions)

Beginning Assets

$
30,307

7,036

43,084

80,427

Sales (3)

1,790

68

1,024

2,882

Redemptions

(2,486)

(1,139)

(2,049)

(5,674)

Net Exchanges

213

—

(213)

—

Net Flows

(483)

(1,071)

(1,238)

(2,792)

Market Action

1,238

400

1,626

3,264

Ending Assets

$
31,062

6,365

43,472

80,899


	Three months ended September 30, 2018
				Wealth
	Unaffiliated⁽²⁾		Institutional	Management	Total
	(in millions)
Beginning Assets	$	30,782	5,250	42,619	78,651

Sales ⁽³⁾		1,589	83	874	2,546
Redemptions		(2,425)	(535)	(1,612)	(4,572)
Net Exchanges		360	—	(360)	—
Net Flows		(476)	(452)	(1,098)	(2,026)

Market Action		866	389	1,662	2,917
Ending Assets	$	31,172	5,187	43,183	79,542

Table of ~~contents~~Contents

Change in Assets Under Management (continued) ⁽¹⁾

During the first nine months of ~~2018, assets under management decreased 2%~~2019, AUM increased 5% to ~~$79.5~~$68.8 billion from ~~$81.1~~$65.8 billion at December 31, ~~2017~~2018 due to market appreciation of $9.8 billion, offset by net outflows of ~~$6.6~~$6.8 billion. Sales of $6.4 billion ~~partially offset by market appreciation~~during the first nine months of ~~$5.1 billion.~~2019 declined 31% compared to same period in 2018. Redemptions improved 17% compared to the first nine months of 2018.


	Nine months ended September 30, 2019
				Wealth
	Unaffiliated⁽²⁾		Institutional	Management	Total
	(in millions)
Beginning Assets	$	24,977	3,655	37,177	65,809

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

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


	Nine months ended September 30, 2018
				Wealth
	Unaffiliated⁽²⁾		Institutional	Management	Total
	(in millions)
Beginning Assets	$	31,133	6,289	43,660	81,082

Sales ⁽³⁾		5,613	788	2,877	9,278
Redemptions		(7,762)	(2,792)	(5,341)	(15,895)
Net Exchanges		890	—	(890)	—
Net Flows		(1,259)	(2,004)	(3,354)	(6,617)

Market Action		1,298	902	2,877	5,077
Ending Assets	$	31,172	5,187	43,183	79,542

Nine months ended September 30, 2018

Broker-

Unaffiliated(2)

Institutional

Dealer

Total

(in millions)

Beginning Assets

$
31,133

6,289

43,660

81,082

Sales (3)

5,613

788

2,877

9,278

Redemptions

(7,762)

(2,792)

(5,341)

(15,895)

Net Exchanges

890

—

(890)

—

Net Flows

(1,259)

(2,004)

(3,354)

(6,617)

Market Action

1,298

902

2,877

5,077

Ending Assets

$
31,172

5,187

43,183

79,542

Nine months ended September 30, 2017

Broker-

Unaffiliated(2)

Institutional

Dealer

Total

(in millions)

Beginning Assets

$
30,295

7,904

42,322

80,521

Sales (3)

5,667

290

3,143

9,100

Redemptions

(9,078)

(2,925)

(5,727)

(17,730)

Net Exchanges

684

6

(690)

—

Net Flows

(2,727)

(2,629)

(3,274)

(8,630)

Market Action

3,494

1,090

4,424

9,008

Ending Assets

$
31,062

6,365

43,472

80,899

(1)

~~(1)~~

Includes all activity of the 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)

~~(3)~~

Sales ~~is primarily~~consists of gross sales (net of sales commissions)~~. This amount also~~ and includes net reinvested dividends, ~~and~~ capital gains and investment income.

Table of ~~contents~~Contents

Average Assets Under Management

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


	Three months ended September 30, 2018
				Broker-
	Unaffiliated		Institutional	Dealer	Total
	(in millions)


							Three months ended September 30, 2019
										Wealth
							Unaffiliated		Institutional	Management	Total
							(in millions)
Asset Class:
Equity	$	24,946	5,176	32,121	$	62,243	$	20,988	3,808	29,642	$	54,438
Fixed Income		5,595	27	9,856		15,478		5,210	3	9,256		14,469
Money Market		89	—	1,652		1,741		97	—	1,523		1,620
Total	$	30,630	5,203	43,629	$	79,462	$	26,295	3,811	40,421	$	70,527


	Three months ended September 30, 2017
				Broker-
	Unaffiliated		Institutional	Dealer	Total
	(in millions)


							Three months ended September 30, 2018
										Wealth
							Unaffiliated		Institutional	Management	Total
							(in millions)
Asset Class:
Equity	$	23,477	6,385	31,268	$	61,130	$	24,946	5,176	32,121	$	62,243
Fixed Income		6,659	331	10,432		17,422		5,595	27	9,856		15,478
Money Market		102	—	1,834		1,936		89	—	1,652		1,741
Total	$	30,238	6,716	43,534	$	80,488	$	30,630	5,203	43,629	$	79,462


	Nine months ended September 30, 2018
				Broker-
	Unaffiliated		Institutional	Dealer	Total
	(in millions)


							Nine months ended September 30, 2019
										Wealth
							Unaffiliated		Institutional	Management	Total
							(in millions)
Asset Class:
Equity	$	24,970	5,740	32,319	$	63,029	$	21,237	3,851	29,396	$	54,484
Fixed Income		5,701	66	9,996		15,763		5,217	14	9,281		14,512
Money Market		92	—	1,728		1,820		100	—	1,571		1,671
Total	$	30,763	5,806	44,043	$	80,612	$	26,554	3,865	40,248	$	70,667


	Nine months ended September 30, 2017
				Broker-
	Unaffiliated		Institutional	Dealer		Total
	(in millions)


							Nine months ended September 30, 2018
										Wealth
							Unaffiliated		Institutional	Management		Total
							(in millions)
Asset Class:
Equity	$	23,256	6,924	31,311	$	61,491	$	24,970	5,740	32,319	$	63,029
Fixed Income		6,801	365	10,201		17,367		5,701	66	9,996		15,763
Money Market		107	—	1,887		1,994		92	—	1,728		1,820
Total	$	30,164	7,289	43,399	$	80,852	$	30,763	5,806	44,043	$	80,612

Table of ~~contents~~Contents

Performance

We have seen improvements in trailing one-, three- and five-year performance as measured by the percentage of assets ranked in the top half of their respective Morningstar universes. As measured by percentage of funds, three- and five-year performance improved modestly, however one-year performance slightly declined.

The following table is a summary of Morningstar rankings and ratings as of September 30, 2019:


MorningStar Fund Rankings ¹	1 Year		3 Years		5 Years
Funds ranked in top half	54	%	42	%	29	%
Assets ranked in top half	63	%	63	%	40	%


MorningStar Ratings ¹	Overall		3 Years		5 Years
Funds with 4/5 stars	29	%	29	%	23	%
Assets with 4/5 stars	45	%	42	%	36	%

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

Table of Contents

Assets Under Administration

~~Assets~~ ~~under administration (“AUA”) include assets for which our broker-dealer provides administrative services, such as~~AUA includes both client assets invested in the Funds and in other companies’ products that ~~we offer outside of~~are distributed through W&R and held in brokerage accounts or within our fee-based asset allocation programs. ~~These assets include those held in clients’ brokerage accounts.~~ AUA are presented below.



(in millions)		September 30, 2018		September 30, 2017


							September 30, 2019		September 30, 2018
						(in millions)
AUA
Advisory assets	$	23,653		20,734		$	25,107		23,653
Non-advisory assets		34,468		34,856			32,006		34,468
Total assets under administration	$	58,121		55,590		$	57,113		58,121


		Three months ended		Three months ended
(in millions)		September 30, 2018		September 30, 2017

							Three months ended		Three months ended
							September 30, 2019		September 30, 2018
						(in millions, except percentage data)
Net new advisory assets (1)	$	(87)		420		$	236		(87)
Net new non-advisory assets (1), (2)		(931)		(965)			(769)		(931)
Total net new assets (1), (2)	$	(1,018)		(545)		$	(533)		(1,018)


Annualized advisory AUA growth (3)		(1.5)	%	8.6	%		3.8	%	(1.5)	%
Annualized AUA growth (3)		(7.1)	%	(4.0)	%		(3.7)	%	(7.1)	%

		Nine months ended		Nine months ended
(in millions)		September 30, 2018		September 30, 2017

							Nine months ended		Nine months ended
							September 30, 2019		September 30, 2018
						(in millions, except percentage data)
Net new advisory assets (1)	$	620		342		$	709		620
Net new non-advisory assets (1), (2)		(2,831)		(2,526)			(2,474)		(2,831)
Total net new assets (1), (2)	$	(2,210)		(2,184)		$	(1,765)		(2,211)


Annualized advisory AUA growth (3)		3.8	%	2.5	%		4.5	%	3.8	%
Annualized AUA growth (3)		(5.2)	%	(5.6)	%		(4.6)	%	(5.2)	%


		September 30, 2018		September 30, 2017
Advisor count		1,074		1,481
Average trailing 12-month production per advisor (4) (in thousands)	$	350		240
Advisor associate count		351		262



							September 30, 2019		September 30, 2018
Advisors and advisor associates							1,344		1,425
Average trailing 12-month production per Advisor ⁽⁴⁾ (in thousands)						$	422		350

(1)

Net new assets isare calculated as total client deposits and net transfers less client withdrawals.

(2)

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

(3)

Annualized growth is calculated as annualized total net new assets divided by beginning ~~assets under administration.~~

AUA.

(4)

Production per ~~advisor~~Advisor is calculated as trailing 12-month Total Underwriting and ~~distributions~~distribution fees less “other” underwriting and distribution fees divided by the average number of ~~advisors.~~Advisors. “Other” underwriting and distribution fees predominantly include fees paid by ~~independent advisors~~Advisors for programs and services.

Table of ~~contents~~Contents

Results of Operations — Three and Nine Months Ended September 30, ~~2018~~2019 as Compared with Three and Nine Months Ended September 30, ~~2017~~2018

Total Revenues

Total revenues ~~increased 2%~~decreased 8% to ~~$295.1~~$270.7 million for the three months ended September 30, ~~2018~~2019 compared to the three months ended September 30, ~~2017.~~2018. For the nine months ended September 30, ~~2018,~~2019, total revenues ~~increased $25.4~~decreased $87.8 million, or 3%10%, compared to the same period in the prior year.

Three months ended

September 30,


2018

2017

Variance

(in thousands, except percentage data)

Investment management fees

$
129,302

134,149

(4)
%
Underwriting and distribution fees

140,308

128,892

9
%
Shareholder service fees

25,508

26,406

(3)
%
Total revenues

$
295,118

289,447

2
%


	Nine months ended
	September 30,
	2018		2017	Variance
	(in thousands, except percentage data)

						Three months ended
						September 30,
						2019		2018	Variance
						(in thousands, except percentage data)
Investment management fees	$	393,385	395,463	(1)	%	$	111,806	129,302	(14)	%
Underwriting and distribution fees		416,222	386,499	8	%		135,787	140,308	(3)	%
Shareholder service fees		78,464	80,706	(3)	%		23,087	25,508	(9)	%
Total revenues	$	888,071	862,668	3	%	$	270,680	295,118	(8)	%


	Nine months ended
	September 30,
	2019		2018	Variance
	(in thousands, except percentage data)
Investment management fees	$	334,438	393,385	(15)	%
Underwriting and distribution fees		395,527	416,222	(5)	%
Shareholder service fees		70,279	78,464	(10)	%
Total revenues	$	800,244	888,071	(10)	%

Investment Management Fee Revenues

Investment management fee revenues for the third quarter of ~~2018~~2019 decreased ~~$4.8~~$17.5 million, or 4%14%, from the third quarter of ~~2017.~~2018. For the nine month period ~~ended~~ending September 30, ~~2018,~~2019, investment management fee revenues decreased ~~$2.1~~$58.9 million, or 1%15%, compared to the same period in ~~2017. Decreases in investment management fees for~~2018. For both comparative periods, ~~were~~the decrease was due to an increase in fees waivers related to fee reductions in selected mutual funds implemented as of July 31, 2018, as well as the impact of fund mergers in previous periods. In the fourth quarter of 2017, nine Advisors Funds were merged into Ivy Funds with substantially similar objectiveslower average AUM and ~~strategies. The remaining 11 Advisor Funds were merged into Ivy Funds on February 26, 2018.~~

~~The following table summarizes investment~~a lower effective management fee ~~revenues, related average assets under~~rate. The effective management fee ~~waivers and investment management fee rates for the three and nine months ended September 30, 2018 and 2017.~~

Three months ended September 30,


2018

2017


Variance

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

Funds investment management fees (net)

$
123,764

128,078

(3)
%
Funds average assets (in millions)

74,259

73,772

1
%
Funds management fee rate (net)

0.6612
%

0.6888
%

Total fee waivers

$
5,641

1,826

209
%
Institutional investment management fees (net)

$
5,538

6,071

(9)
%
Institutional average assets (in millions)

5,203

6,716

(23)
%
Institutional management fee rate (net)

0.4071
%

0.3871
%

~~Table of contents~~

Nine months ended September 30,


2018

2017


Variance

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

Funds investment management fees (net)

$
376,193

376,563

—

Funds average assets (in millions)

74,806

73,563

2
%
Funds management fee rate (net)

0.6724
%

0.6844
%

Total fee waivers

$
11,087

6,015

84
%
Institutional investment management fees (net)

$
17,192

18,900

(9)
%
Institutional average assets (in millions)

5,806

7,289

(20)
%
Institutional management fee rate (net)

0.4055
%

0.3722
%

Revenues from investment management services provided to our affiliated mutual funds, which are distributed through the unaffiliated and broker-dealer channels, decreased 3% in the third quarter of 2018 compared to the third quarter of 2017 primarilyrate decrease is due to ~~an increase in~~ fee waivers related to fee reductions in selected mutual funds ~~that were~~ implemented as of July 31, 2018. Fee waivers are recorded as an offset to investment management fees up to the amount of fees earned. ~~Fee~~

The following table summarizes investment management fee revenues, related average AUM, fee waivers ~~increased during~~and investment management fee rates for the three and nine months ended September 30, 2019 and 2018.


	Three months ended September 30,
	2019			2018			Variance
	(in thousands, except for management fee rate and average assets)
Investment management fees (net)	$	107,926			123,764		(13)	%
Average assets (in millions)	$	66,716			74,259		(10)	%
Management fee rate (net)		0.6418	%		0.6612	%
Total fee waivers	$	8,154			5,641		45	%
Institutional investment management fees (net)	$	3,880			5,538		(30)	%
Institutional average assets (in millions)	$	3,811			5,203		(27)	%
Institutional management fee rate (net)		0.4040	%		0.4071	%

Table of Contents

	Nine months ended September 30,
	2019			2018			Variance
	(in thousands, except for management fee rate and average assets)
Investment management fees (net)	$	322,678			376,193		(14)	%
Average assets (in millions)		66,802			74,806		(11)	%
Management fee rate (net)		0.6458	%		0.6724	%
Total fee waivers	$	22,127			11,087		100	%
Institutional investment management fees (net)	$	11,760			17,192		(32)	%
Institutional average assets (in millions)		3,865			5,806		(33)	%
Institutional management fee rate (net)		0.4068	%		0.4055	%

Revenues from investment management services provided to our retail mutual funds, which are distributed through the unaffiliated and wealth management channels, decreased 13% in the third quarter of 2019 and 14% for the nine months ended September 30, ~~2018~~2019, compared to the same ~~period~~periods in ~~2017~~2018. These decreases were due to ~~the Advisors Funds mergers, the inclusion of common fund expenses that were previously not reimbursed~~a decrease in average AUM and a lower effective management fee rate due to fee waivers related to fee reductions in selected mutual ~~funds. The change in fee waivers was partially offset by increased investment management fees due to slightly higher average assets.~~funds that were implemented as of July 31, 2018.

Institutional account revenues in the third quarter of ~~2018~~2019 decreased ~~$0.5~~$1.7 million compared to the third quarter of ~~2017 due to a 23% decrease in average assets under management, partially offset by an increase in the average management fee rate.~~2018. For the nine ~~month period~~months ended September 30, ~~2018,~~2019, institutional account revenues decreased ~~$1.7~~$5.4 million compared to the same period in ~~2017 primarily~~2018. The decreases for both comparative periods were due to ~~a 20% decrease~~decreases in average ~~assets under management, partially offset by an increase in the average management fee rate.~~AUM due to elevated event-driven redemptions.


	Annualized long-term redemption rates
	(excludes money market redemptions)
	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017

											Annualized long-term redemption rates
											(excludes money market redemptions)
									Three months ended				Nine months ended
									September 30,				September 30,
									2019		2018		2019		2018
Unaffiliated channel	31.8	%	33.0	%	34.1	%	40.8	%	40.9	%	31.8	%	37.8	%	34.1	%
Institutional channel	40.8	%	67.3	%	64.3	%	53.7	%	23.9	%	40.8	%	35.5	%	64.3	%
Broker-Dealer channel	12.9	%	16.4	%	14.1	%	15.4	%
Wealth Management channel									13.4	%	12.9	%	13.9	%	14.1	%
Total	22.1	%	27.1	%	25.5	%	28.5	%	24.3	%	22.1	%	24.2	%	25.5	%

The ~~decreased~~ long-term redemption rate for the three and nine months ended September 30, ~~2018~~2019 increased in the unaffiliated channel ~~was driven primarily by improved redemption rates in~~as compared to the ~~Ivy Asset Strategy Fund~~three and ~~the Ivy VIP Asset Strategy Fund (the “Asset Strategy funds”). Redemptions in the Asset Strategy funds represented approximately 9% of the unaffiliated channel’s redemptions for the~~ nine months ended September 30, ~~2018, reduced from 21%~~2018. For both comparative periods, increased volatility in the ~~nine months ended September 30, 2017.~~equity markets in recent quarters led to continued redemptions, particularly in our International Core Equity fund. The ~~decreased~~ long-term redemption rate ~~for the third quarter of 2018 as compared to the same period in 2017~~has decreased in the institutional channel, ~~was~~primarily due to ~~larger~~ client redemptions ~~in the third quarter~~ of 2017, primarily in our Core Equity strategy. The increased long-term redemption rate for the nine months ended September 30, 2018 in the institutional channel was due to larger client redemptions than the comparative period primarily$1.3 billion from our Core Equity and Large Cap Growth ~~strategies. Additionally, we have~~strategies during the second quarter of 2018. We had been previously notified of ~~approximately $1.0~~$0.5 billion of redemptions in ~~our~~the institutional channel ~~for~~of which $0.3 billion was redeemed during the ~~fourth~~second quarter of ~~2018, of which $0.6 billion has been~~2019 and the remainder was redeemed in October 2018. The redemptions are a result of a variety of factors including performance, a move to passive and personnel turnover. The decreased redemption rate in the broker-dealer channel for the three months ended September 30, 2018 reflects a reduction in redemption rates in this channel after the 2017 launch of the MAP Navigator product.2019. Prolonged redemptions in any of our distribution channels could negatively affect revenues in future periods.

~~Our overall current year-to-date annualized redemption rate of 25.5% is slightly higher than the~~The current year-to-date industry average ~~of approximately 23.0%,~~redemption rate, based on data ~~from~~provided by the Investment Company ~~Institute.~~Institute, was 22.1%, versus our rate of 24.2%.

Table of Contents

~~Table of contents~~

Underwriting and Distribution Fee Revenues

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


	For the three months ended September 30, 2019
			Wealth
	Unaffiliated		Management	Total
	(in thousands)
Underwriting and distribution fee revenues
Fee-based asset allocation product revenues	$	—	73,356	73,356
Rule 12b-1 service and distribution fees		16,003	16,426	32,429
Sales commissions on front-end load mutual fund and variable annuity products		361	12,523	12,884
Sales commissions on other products		—	8,024	8,024
Other revenues		67	9,027	9,094
Total	$	16,431	119,356	135,787


	For the three months ended September 30, 2018
			Wealth
	Unaffiliated		Management	Total
	(in thousands)
Underwriting and distribution fee revenues
Fee-based asset allocation product revenues	$	—	69,468	69,468
Rule 12b-1 service and distribution fees		19,707	18,106	37,813
Sales commissions on front-end load mutual fund and variable annuity products		441	13,651	14,092
Sales commissions on other products		—	9,111	9,111
Other revenues		126	9,698	9,824
Total	$	20,274	120,034	140,308


	For the nine months ended September 30, 2019
			Wealth
	Unaffiliated		Management	Total
	(in thousands)
Underwriting and distribution fee revenues
Fee-based asset allocation product revenues	$	—	208,806	208,806
Rule 12b-1 service and distribution fees		48,514	48,441	96,955
Sales commissions on front-end load mutual fund and variable annuity products		1,287	36,845	38,132
Sales commissions on other products		—	24,127	24,127
Other revenues		242	27,265	27,507
Total	$	50,043	345,484	395,527


	For the nine months ended September 30, 2018
			Wealth
	Unaffiliated		Management	Total
	(in thousands)
Underwriting and distribution fee revenues
Fee-based asset allocation product revenues	$	—	201,565	201,565
Rule 12b-1 service and distribution fees		60,734	54,591	115,325
Sales commissions on front-end load mutual fund and variable annuity products		1,418	41,900	43,318
Sales commissions on other products		—	26,632	26,632
Other revenues		459	28,923	29,382
Total	$	62,611	353,611	416,222

For the three months ended September 30, 2018

Broker-

Unaffiliated

Dealer

Total

(in thousands)

Underwriting and distribution fee revenues

Fee-based asset allocation product revenues

$
—

69,468

69,468
Rule 12b-1 service and distribution fees

19,707

18,106

37,813
Sales commissions on front-end load mutual fund and variable annuity products

441

13,651

14,092
Sales commissions on other products

—

9,111

9,111
Other revenues

126

9,698

9,824
Total

$
20,274

120,034

140,308

For the three months ended September 30, 2017

Broker-

Unaffiliated

Dealer

Total

(in thousands)

Underwriting and distribution fee revenues

Fee-based asset allocation product revenues

$
—

61,115

61,115
Rule 12b-1 service and distribution fees

22,322

19,026

41,348
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

Table of Contents

For the nine months ended September 30, 2018

Broker-

Unaffiliated

Dealer

Total

(in thousands)

Underwriting and distribution fee revenues

Fee-based asset allocation product revenues

$
—

201,565

201,565
Rule 12b-1 service and distribution fees

60,734

54,591

115,325
Sales commissions on front-end load mutual fund and variable annuity products

1,418

41,900

43,318
Sales commissions on other products

—

26,632

26,632
Other revenues

459

28,923

29,382
Total

$
62,611

353,611

416,222

~~Table of contents~~

For the nine months ended September 30, 2017

Broker-

Unaffiliated

Dealer

Total

(in thousands)

Underwriting and distribution fee revenues

Fee-based asset allocation product revenues

$
—

176,184

176,184
Rule 12b-1 service and distribution fees

69,191

56,544

125,735
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

Underwriting and distribution revenues earned in the third quarter of ~~2018 increased~~2019 decreased by ~~$11.4~~$4.5 million, or 9%3%, compared to the third quarter of ~~2017,~~2018. For the nine months ended September 30, 2019, underwriting and distribution revenues decreased by $20.7 million, or 5%, compared to the nine months ended September 30, 2018. For both comparative periods, the decreases were primarily driven ~~by an increase in fee-based asset allocation product revenues of $8.4 million in the broker-dealer channel, partially offset~~ by a decrease in Rule 12b-1 asset-based service and distribution fees and commissionable sales across both ~~channels. Fee-based asset allocation product revenues increased primarily due to an increase~~channels, partially offset by increases in fee-based asset allocation ~~assets of $3.2 billion, or 16%, while~~revenues. Rule 12b-1 asset-based service and distribution fees decreased due to a decrease in average mutual fund ~~assets under management~~AUM for which we earn Rule 12b-1 revenues. Additionally, ~~other revenues increased $4.7 million in the third quarter of 2018 compared to the third quarter of 2017~~sales commissions decreased primarily due to ~~an increase in payments received from independent financial advisors for services.~~

For the nine months ended September 30, 2018, underwriting and distribution revenues increased by $29.7 million, or 8%, compared to the nine months ended September 30, 2017, primarily driven by an increase in fee-based asset allocation product revenues of $25.4 million in the broker-dealer channel, partially offset by a decrease in ~~Rule 12b-1 asset-based service~~mutual fund and ~~distribution fees across both channels.~~variable annuity product commissionable sales. Fee-based asset allocation product revenues increased ~~primarily~~ due to an increase in fee-based asset allocation ~~assets~~assets.

Shareholder Service Fee Revenue

During the third quarter of ~~$3.2 billion,~~2019, shareholder service fee revenue decreased $2.4 million, or ~~17%~~9%, ~~while Rule 12b-1 asset-based service and distribution fees decreased due~~compared to ~~a decrease in average mutual fund assets under management for which we earn Rule 12b-1 revenues. Additionally, other revenues increased $11.4 million in~~the third quarter of 2018. For the nine months ended September 30, ~~2018~~2019, shareholder service fee revenue decreased $8.2 million, or 10%, as compared to the same period ~~in 2017 primarily due to an increase in payments received from independent financial advisors~~ for ~~services.~~

~~Shareholder Service Fee Revenue~~

~~During the third quarter of 2018, shareholder service fee revenue decreased slightly compared to the third quarter of 2017~~2018. Decreases for both comparative periods were primarily due to a decrease in the number of accounts and ~~decreased Fund administrative and accounting service~~assets on which these fees are based, in part due to ~~the~~ fund mergers in ~~October 2017 and February~~ 2018. ~~These decreases were partially offset by increases in asset based services fees,~~

Total Operating Expenses

Operating expenses for the third quarter of 2019 decreased $5.0 million, or 2%, compared to the third quarter of 2018, primarily due to ~~an increase in assets,~~decreased occupancy and ~~custodian fees due to a change in fees that now includes broker-dealer advisory accounts.~~

~~During~~depreciation expenses. For the nine months ended September 30, ~~2018, shareholder service fee revenue~~2019, operating expenses decreased ~~$2.2~~$27.0 million, or 3%4%, compared to the nine months ended September 30, ~~2017. Fund service fees decreased $3.7 million, or 14%,~~2018, primarily due to ~~a decrease~~decreased compensation and benefits, general and administrative costs and depreciation expenses. We have been able to successfully reduce expenses during the year as we execute our corporate strategy while investing in ~~the number~~targeted growth areas.


	Three months ended
	September 30,
	2019		2018	Variance
	(in thousands)
Distribution	$	117,425	116,591	1	%
Compensation and benefits		64,999	64,561	1	%
General and administrative		16,680	17,559	(5)	%
Technology		15,019	15,414	(3)	%
Occupancy		5,684	7,148	(20)	%
Marketing and advertising		2,134	2,461	(13)	%
Depreciation		4,833	8,141	(41)	%
Subadvisory fees		3,882	3,767	3	%
Total operating expenses	$	230,656	235,642	(2)	%


	Nine months ended
	September 30,
	2019		2018	Variance
	(in thousands)
Distribution	$	343,696	345,376	(0)	%
Compensation and benefits		191,718	199,174	(4)	%
General and administrative		47,421	56,240	(16)	%
Technology		47,769	49,293	(3)	%
Occupancy		19,100	21,081	(9)	%
Marketing and advertising		6,497	7,638	(15)	%
Depreciation		16,062	19,262	(17)	%
Subadvisory fees		11,154	11,158	(0)	%
Intangible asset impairment		—	1,200	(100)	%
Total operating expenses	$	683,417	710,422	(4)	%

Table of accounts as a result of the share class conversion. Fund administrative and accounting service fees decreased $1.2 million, or 12%, due to the fund mergers in October 2017 and February 2018. Partially offsetting the decreases, custodian fees increased $1.2 million, or 26%, primarily due to a change in custodian fees that now includes broker-dealer advisory accounts. Service fees based on assets also increased $1.1 million, or 4%, due an increase in assets under management.Contents

~~Total Operating Expenses~~

~~Operating~~Distribution expenses for the third quarter of ~~2018 were relatively unchanged~~2019 increased by $0.8 million, or 1%, compared to the third quarter of ~~2017.~~2018. For the nine months ended September 30, ~~2018, operating~~2019, distribution expenses ~~increased $5.7 million, or 1%,~~decreased slightly compared to the first nine months of 2017, primarily due to increased distribution and depreciation expenses, partially offset by decreases in compensation and benefits and general and administrative costs. In August 2017, we announced a cost reduction plan which we plan to complete by 2019.

~~Table of contents~~

Three months ended

September 30,


2018

2017

Variance

(in thousands)

Distribution

$
116,591

106,878

9
%
Compensation and benefits

64,561

69,636

(7)
%
General and administrative

17,559

23,400

(25)
%
Technology

15,414

16,039

(4)
%
Occupancy

7,148

7,645

(7)
%
Marketing and advertising

2,461

3,197

(23)
%
Depreciation

8,141

5,230

56
%
Subadvisory fees

3,767

3,566

6
%
Intangible asset impairment

—

—

—

Total operating expenses

$
235,642

235,591

0
%

Nine months ended


September 30,


2018

2017

Variance

(in thousands)

Distribution

$
345,376

324,375

6
%
Compensation and benefits

199,174

202,003

(1)
%
General and administrative

56,240

68,882

(18)
%
Technology

49,293

50,796

(3)
%
Occupancy

21,081

22,978

(8)
%
Marketing and advertising

7,638

9,072

(16)
%
Depreciation

19,262

15,626

23
%
Subadvisory fees

11,158

9,457

18
%
Intangible asset impairment

1,200

1,500

(20)
%
Total operating expenses

$
710,422

704,689

1
%

~~Distribution expenses~~same period for ~~the third quarter of 2018 increased by $9.7 million, or 9%, compared to the third quarter of 2017. Expenses in the broker-dealer channel increased $13.4 million, or 18%, primarily due to higher~~2018. For both comparative periods, Rule 12b-1 commissions paid to ~~independent financial advisors under the new commission structure that became effective on January 1, 2018 and higher commissions on our asset-based advisory products~~third parties decreased due to ~~advisory asset growth. Distribution expenses in the unaffiliated channel decreased by $3.7 million due to a decrease in~~lower average mutual fund ~~assets under management for which we pay Rule 12b-1 commissions to third party distributors.~~

~~For the nine months ended September 30, 3018, distribution expenses increased~~AUM in our unaffiliated channel. This decrease in expense was more than offset by ~~$21.0 million, or 6%, compared~~enhancements to the ~~first nine months of 2017. Expenses~~Advisor compensation grid in ~~the broker-dealer~~our wealth management channel increased $32.5 million, or 14%, primarily due to higher commissions paid to independent financial advisors under the new commission structure that became effective on January 1, 2018 and higher commissions on our asset-based advisory products due to advisory asset growth. Distribution expensesstarting in ~~the unaffiliated channel decreased by $11.5 million due to a decrease in average mutual fund assets under management for which we pay Rule 12b-1 commissions to third party distributors.~~2019.

Compensation and benefits during the third quarter of ~~2018 decreased $5.1~~2019 increased $0.4 million, or 7%1%, compared to the same period of 2018, due to severance expense, primarily related to the outsourcing of our transfer agency transactional processing operations. The increase was partially offset by lower costs from reduced headcount as well as a $1.3 million decrease in share-based compensation due to previously issued awards vesting fully as well as forfeitures. For the nine months ended September 30, 2019, compensation and benefits expenses decreased $7.5 million, or 4%, compared to the same period in 2018, primarily due to a decrease in share-based compensation from previously issued awards vesting fully, forfeitures and prior year accelerated vestings as well as lower costs from reduced headcount. These decreases were partially offset by increased severance expense, primarily related to the aforementioned outsourcing. The Company expects to record the remaining amount of the previously disclosed $4.0 million - $6.0 million pre-tax restructuring charge for severance benefits due to the outsourcing of the transactional processing operations of its internal transfer agency during the fourth quarter of 2019.

General and administrative expenses for the third quarter of 2019 decreased $0.9 million, or 5%, compared to the third quarter of ~~2017.~~2018. The decrease iswas primarily due to ~~a a $3.0 million decrease~~decreases in ~~pension expense as a result of the Pension Plan freeze as of September 30, 2017, a $2.1 million decrease~~contractor, legal and consulting costs due to ~~a discretionary 401(k) contribution~~the completion of significant projects in 2017 and a $1.3 million decrease related to share-based compensation primarily driven by changes in the Company’s share price. Partially offsetting these decreases was a $1.3 million increase in base compensation from merit increases.

2018. For the nine months ended September 30, ~~2018, compensation~~2019, general and ~~benefits~~administrative expenses decreased ~~$2.8~~$8.8 million, or 1%16%, compared to the nine months ended September 30, ~~2017.~~2018. The decrease iswas primarily due to ~~a $8.4 million decrease~~decreases in pension expense as a result of the Pension Plan freeze and a $2.1 million decrease due to a discretionary 401(k) contribution in 2017. Partially offsetting these decreases was a combined $8.3 million increase in base compensation from merit increases and the 2017 change in field leader compensation structure, resulting in that compensation being recorded in the compensation

~~Table of contents~~

~~and benefits line as opposed to distribution expense.~~

~~General and administrative expenses in the third quarter of 2018 decreased $5.8 million, compared to the third quarter of 2017. The decrease was mainly due to a decrease in~~contractor, legal and consulting costs due to the completion of significant projects in 2018. Fund expenses also decreased for the comparative period primarily due to decreased fee waivers in excess of revenue on certain ~~projects,~~products.

Technology, occupancy and marketing and advertising expenses for the third quarter of 2019 decreased a ~~decrease~~combined $2.2 million, or 9%, and for the nine months ended September 30, 2019, decreased $4.6 million, or 6%, compared to the same periods in ~~temporary staff~~2018. Technology costs decreased due to lower shareholder servicing expense resulting from fewer accounts and a ~~decrease in~~non-recurring benefit from the outsourcing of our transfer agency transactional processing. These decreases were partially offset by costs from the centralized advisor desktop platform which was rolled out during the second quarter of 2019. Occupancy costs decreased as we realized cost savings from the closure of our field offices. Marketing and advertising expenses decreased as prior period fund ~~expenses related~~mergers have reduced fund-related marketing expenses.

Depreciation expense for third quarter of 2019 decreased $3.3 million, or 41%, compared to ~~prior year fund launches and fund mergers.~~the third quarter of 2018. For the nine months ended September 30, ~~2018, general and administrative expenses~~2019, depreciation expense decreased ~~$12.6~~$3.2 million, or 17%, compared to the same period in ~~2017. The~~2018. For both comparative periods, the decrease was ~~mainly~~primarily due to ~~a decrease in legal and consulting costs due to~~certain fixed assets reaching the ~~completion~~end of ~~certain projects, a decrease in temporary staff expense and a decrease in fund expenses due to fund launches and fund mergers in the prior year.~~their useful lives.

~~Occupancy and Marketing and advertising costs decreased a combined $1.2 million in the third quarter of 2018 compared to the third quarter of 2017 and decreased a combined $3.3 million in the~~The nine months ended September 30, 2018 ~~compared to the same period in 2017. For both comparative periods, costs decreased primarily due to lower office space rent as a result~~included an intangible impairment charge of ~~fewer field office leased locations and less advertising spend as we continue to evolve our broker-dealer market structure.~~

~~Depreciation increased for both comparative periods primarily due~~$1.2 million related to a ~~charge of $2.4 million in~~terminated subadvisory agreement.

Investment and Other Income

Investment and other income for the ~~third quarter of 2018 to adjust the useful life on certain internally developed software assets.~~

~~Subadvisory fees are paid to other asset managers for providing advisory services for certain mutual fund portfolios,~~three and ~~subadvised products generally have a lower operating margin.~~

Subadvisory expenses increased $0.2 million in the third quarter of 2018 compared to the third quarter of 2017 due to an increase in subadvised average assets of 8%. Quarterly subadvised average assets under management at September 30, 2018~~were $5.8 billion compared to $5.3 billion at September 30, 2017. Subadvisory expenses increased $1.7 million for the~~ nine months ended September 30, ~~2018~~2019 increased $3.5 million and $18.3 million, respectively, compared to the same ~~period~~periods in ~~2017,~~2018 primarily due to market appreciation, net of hedging activity, and an increase in subadvised average assets of 12%. Year-to-date subadvised average assets under management at September 30, 2018 were $5.8 billion compared to $5.1 billion at September 30, 2017. The increase in subadvised average assets for both comparative periods is primarily due to the launch of Ivy Proshares in April of 2017 and the introduction of the Wilshire Global Allocation Fund in May of 2017.

~~Investment and Other Income~~

Investment and other income was $1.7 million for the three months ended September 30, 2018 compared to $33.3 million for the same period in 2017. In the third quarter of 2018, we recognized $3.8 million in dividend, capital gain distributions and interest income. The third quarter of 2018 also included $3.1 million of net losses related to our seed capital investments and associated hedges, $0.6 million in mark-to-market pension gains and $0.4 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. During the third quarter of 2017, we recognized $3.3 million in dividend and interest income ~~and gains on the sales of sponsored funds held as available for sale, $1.9 million of net gains related to~~in our seed capital investments and associated hedges and $2.0 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. The third quarter of 2017 also included net gains of $25.1 million related to the freeze of our Pension Plan on September 30, 2017.corporate investment portfolio.

Investment and other income was $5.4 million for the nine months ended September 30, 2018 compared to $39.3 million for the same period in 2017. For the nine months ended September 30, 2018, we recognized $11.3 million in dividend, capital gain distributions and interest income. The first nine months of 2018 also included $8.6 million of net losses related to our seed capital investments and associated hedges, $1.7 million in mark-to-market pension gains and $0.7 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. During the nine months ended September 30, 2017, we recognized $6.1 million in dividend and interest income and gains on the sales of sponsored funds held as available for sale, $0.6 million of net gains related to our seed capital investments and associated hedges and $4.2 million of gains attributable to noncontrolling interests in sponsored funds for the period in which the Company held majority ownership. The first nine months of 2017 also included net gains of $25.1 million related to the freeze of our Pension Plan on September 30, 2017.

~~As a result of the change of accounting method for the Pension Plan enacted in the fourth quarter of 2017, the Company’s pension liability will be marked-to-market in the fourth quarter of 2018.~~

Table of ~~contents~~Contents

Taxes

~~Interest Expense~~

Interest expense was $1.6 million and $2.8 million in the third quarter of 2018 and 2017, respectively. Interest expense was $4.9 million and $8.4 million for the nine months ended September 30, 2018, and September 30, 2017, respectively. The majority of our interest expense is fixed based on our Series A and Series B senior unsecured notes. The $95.0 million Series A senior unsecured notes were repaid upon maturity in January 2018. As a result, interest expense declined in both comparative periods, and we anticipate $4.8 million in annualized interest expense savings.

~~Taxes~~

The following table reconciles the statutory federal income tax rate with our effective income tax rate from continuing operations for the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~2018:


	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017

									Three months ended				Nine months ended
									September 30,				September 30,
									2019		2018		2019		2018
Statutory federal income tax rate	21.0	%	35.0	%	21.0	%	35.0	%	21.0	%	21.0	%	21.0	%	21.0	%
State income taxes, net of federal tax benefit	2.7		2.4		2.8		2.3		2.7		2.7		2.8		2.8
Effects of U.S. tax rate decrease	(1.7)		—		(0.6)		—		—		(1.7)		—		(0.6)
Share-based compensation	(0.4)		(1.0)		2.3		3.9		(0.5)		(0.4)		1.6		2.3
Uncertain tax positions	0.4		(1.0)		(2.9)		(0.2)		0.1		0.4		0.2		(2.9)
Other items	—		(0.4)		0.6		(1.3)		—		—		0.2		0.6
Effective income tax rate	22.0	%	35.0	%	23.2	%	39.7	%	23.3	%	22.0	%	25.8	%	23.2	%

Our effective income tax rate was ~~22.0%~~23.3% and ~~23.2%~~25.8% for the three and nine months ended September 30, ~~2018,~~2019, as compared to ~~35.0%~~22.0% and ~~39.7%~~23.2% for the same periods in ~~2017. The effective~~2018. During the third quarter of 2018, we adjusted our net deferred tax ~~rate in 2018 was lower primarily due~~asset for provision-to-return adjustments related to the 2017 tax year. Accordingly, we recognized a discrete tax benefit of $1.0 million as a result of this provision-to-return revaluation and the related impact of the statutory federal ~~statutory~~ tax rate decrease from 35% to 21% ~~effective January 1, 2018.~~

The enactment of the Tax Cuts and Jobs Act (the “Tax Reform Act”) on December 22, 2017 significantly revised the U.S. Corporate income tax system. As a result of the Tax Reform Act, the Company recorded a one-time charge of $5.4 million in the fourth quarter of 2017 to measure our net deferred tax assets at the reduced federal statutory rate. According to guidance from Staff Accounting Bulletin 118, the Company recognized a provisional tax impact related to the revaluation of deferred tax assets and liabilities and included those amounts in its consolidated financial statements for the year ended December 31, 2017. In the third quarter of 2018, we finalized our 2017 U.S. corporate income tax return and revised provisional adjustments made to our net deferred tax asset. Accordingly, we recorded a discrete tax benefit of $1.0 million in the three months ended September 30, 2018,, which ~~decreased~~increased the three and nine month effective tax ~~rate~~rates by 1.7% and 0.6%, respectively. The ~~Company now considers its accounting for the income tax effects of the Tax Reform Act to be complete.~~

~~Other factors affecting the rate for the~~ nine ~~month comparison period~~months ended September 30, 2018 included the reversal of previously recorded uncertain tax expense upon the completion of a voluntary disclosure agreement with a state tax jurisdiction, ~~during 2018,~~ which decreased the rate by 3.6%. The tax impact of share-based compensation created a tax shortfall in both years, but the impact was greater in 2017 mostly due to a larger differential between grant date and vest date prices on restricted stock awards at vesting, which decreased the rate 2.7% and was partially offset by a lesser benefit on unvested restricted stock dividend payments in 2018.for that period.

The Company expects continued future volatility in its effective tax rate ~~in 2019~~ as the tax effects of share-based compensation will be impacted by market fluctuations in our stock price. ~~Based on current estimates, the Company expects a tax shortfall from share-based payments of $1.5 to $2.0 million in 2019, primarily in the second quarter.~~ The ~~Company expects its~~ future effective tax rate ~~exclusive of the effects of share-based payments,~~could also experience volatility from federal and state tax incentives, unanticipated federal and state tax legislative changes, and unanticipated fluctuations in ~~earnings to range from 23% to 25%.~~earnings.

~~Table of contents~~

Liquidity and Capital Resources

Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund the Company’s short-term operating and capital requirements. Expected short-term uses of cash include dividend payments, repurchases of our Class A common stock, interest on indebtedness, income tax payments, seed money for new products, ongoing technology enhancements, capital expenditures, and collateral funding for margin accounts established to support derivative positions, and could include strategic acquisitions.

Expected long-term capital requirements include interest on indebtedness and maturities of outstanding debt, operating leases and purchase obligations. Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, seed money for new products, and repurchases of our Class A common stock.

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

●

Repurchase our stock

●

Pay dividends

●

Finance ~~internal~~ growth

objectives

~~As part of our regular assessment of the return of capital to stockholders, we implemented a revised~~Our existing capital return policy ~~in the fourth quarter of 2017 that~~ is designed to provide ~~greater~~ financial flexibility to invest in our business, support ongoing operations and maintain a strong balance sheet, while continuing to provide a very competitive return to stockholders. The components of the capital return policy are described below.

Table of Contents

Repurchase Our Stock

We repurchased ~~4,519,546~~6,849,238 shares and ~~904,410~~4,519,546 shares of our Class A common stock in the open market or privately during the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, resulting in share repurchases of ~~$89.0~~$116.7 million and ~~$15.6~~$89.0 million, respectively.

In connection with our existing capital return policy, during the third quarter of 2019, we ~~intend~~completed the two-year initiative to ~~complete the~~ repurchase of $250 million of our Class A common stock ~~through~~by late 2019, which iswas inclusive of buybacks to offset dilution of our equity ~~grants.~~awards. We continue to engage in an ~~opportunistic~~active share repurchase plan ~~to fulfill the targeted buybacks. We have repurchased $109.1 million~~as part of our ~~Class A common stock since the announcement of this program in the fourth quarter of 2017 at a weighted average share price of $20.00.~~ongoing capital management plan.

Pay Dividends

We paid quarterly dividends on our Class A common stock that resulted in financing cash outflows of ~~$61.5~~$56.6 million and ~~$115.7~~$61.5 million for the first nine months of ~~2018~~2019 and ~~2017,~~2018, respectively.

The Board of Directors approved a dividend on our Class A common stock of $0.25 per share ~~that was paid on~~with a November 1, ~~2018 to stockholders of record on~~2019 payment date and an October 11, ~~2018.~~2019 record date.

Finance ~~Internal~~ Growth Objectives

We use cash to fund growth in our distribution channels. We continue to invest in our ~~broker-dealer~~wealth management channel by offering home office resources, wholesaling efforts and enhanced technology tools, including the modernization of our ~~brokerage and product platform. We use cash to fund growth in our distribution channels.~~wealth management platforms. Our unaffiliated channel requires cash outlays for wholesaler commissions and commissions to third parties on ~~deferred load~~deferred-load product sales. We also provide seed money for new products to further enhance our product offerings and distribution efforts. As we continue to advance our investment in improved technology, we expect increased costs in this area in the near term.

~~Operating~~ Cash Flows

Cash from operations ~~increased $275.9~~is our primary source of funds. Cash from operations decreased $179.5 million for the nine months ended September 30, ~~2018~~2019 compared to the nine months ended September 30, ~~2017.~~2018. The ~~increase~~decrease is primarily due to ~~an increase in cash generated from investment activity of $239.3 million and an increase~~a decrease in net income, net purchases, maturities and sales of ~~$22.8 million.~~trading and equity securities, net change in equity and trading debt securities held by consolidated sponsored funds and fluctuations in assets and liabilities, as described below.

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.

~~Investing Cash Flows~~

~~Cash from investing activities increased $241.6~~During the year, cash provided by operations was $84.2 million ~~for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarily~~and was reduced due to a decrease in restricted cash balances of ~~$234.7~~$36.2 million related to customer trading activity.

Investing activities consist primarily of the seeding and sale of sponsored investment securities, purchases and maturities of investments held in our corporate investment portfolio and capital expenditures.

Financing activities include payment of dividends and repurchases of our Class A common stock. Additionally, in the ~~purchases~~first quarter of ~~available for sale and equity method securities.~~

~~Table of contents~~

~~Financing Cash Flows~~

~~The~~2018, financing activities included repayment of our $95.0 million Series A senior unsecured notes in January of 2018, stock repurchases of $88.2 million and dividends of $61.5 million accounted for the majority of our financing cash outflows in the first nine months of 2018. Dividends of $115.7 million and stock repurchases of $15.6 million accounted for the majority of our financing cash outflows in the first nine months of 2017.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 2018. Expected short term uses of cash include dividend payments, repurchases of our Class A common stock, interest on indebtedness, income tax payments, seed money for new products, ongoing technology enhancements, capital expenditures, and collateral funding for margin accounts established to support derivative positions, and could include strategic acquisitions.

Expected long term capital requirements include interest on indebtedness and maturities of outstanding debt, operating leases and purchase obligations. Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, seed money for new products, and repurchases of our Class A common stock.

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 ~~2017~~2018 Form ~~10-K, except for the removal~~10-K.

Table of the Pension and Other Postretirement Benefits critical accounting policy due to an amendment to freeze the Pension Plan effective September 30, 2017, which reduced the number of significant accounting estimates related to the Pension Plan in 2018 and future years.Contents

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

~~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. The Company has had no material changes in its market risk policies or its market risk sensitive instruments and positions since December 31, ~~2017. As further described~~2018 other than the changes to the investment and derivative portfolios disclosed in Note 4 and Note 5 to the unaudited consolidated financial ~~statements,~~statements. As further described in Note 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 Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, ~~2018,~~2019, have concluded that the Company’s disclosure controls and procedures were effective as of September 30, ~~2018.~~2019.

The Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial

~~Table of contents~~

reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

~~Part II.Other Information~~

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

~~See Part I, Item 1, Notes to the Unaudited Consolidated Financial Statements, Note 11 – Contingencies, of this Quarterly Report on Form 10-Q.~~

Item 1A.

Risk Factors

~~Item 1A.Risk Factors~~

Except as noted below, there have been no material changes to the Company’s Risk Factors from those previously reported in the Company’s ~~2017~~2018 Form 10-K.

Regulatory Risk Is Substantial In Our Business And Regulatory Reforms Could Have A Material Adverse Effect On Our Business, Reputation And Prospects.

In ~~March 2018,~~June 2019, the ~~U.S. Court~~SEC adopted a package of ~~Appeals for~~rulemakings and interpretations, including Regulation Best Interest and the ~~Fifth Circuit vacated~~new Form CRS Relationship Summary (“Form CRS”), which are intended to enhance the ~~DOL Fiduciary Rule. Although~~quality and transparency of retail investors’ relationships with broker-dealers and investment advisers. Regulation Best Interest enhances the ~~DOL Fiduciary Rule has been vacated, other regulators have enacted or proposed other fiduciary standards that could require modifications~~broker-dealer standard of conduct beyond existing suitability obligations and requires compliance with disclosure, care, conflict of interest and compliance obligations. Form CRS requires broker-dealers and registered investment advisers to ~~our distribution activities and may impact our ability~~provide a brief relationship summary to ~~service clients or engage in certain~~retail investors, including (i) the types of ~~distribution or other business activities.~~

~~In April 2018,~~client and customer relationships and services the ~~SEC proposed its own fiduciary rule that would impose a new~~firm offers, (ii) the fees, costs, conflicts of interest and required standard of ~~care~~conduct associated with those relationships and services, (iii) whether the firm and its financial professionals currently have reportable legal or disciplinary history; and (iv) how to obtain additional information about the firm. The compliance date for Regulation Best Interest and Form CRS is June 30, 2020. These regulations may have a material impact on ~~broker-dealers when making recommendations~~the provision of investment services to ~~both retirement~~retail investors, including imposing additional compliance, reporting and ~~non-retirement accounts. In addition, various states have also implemented or proposed new fiduciary requirements.~~ operational requirements, which could negatively affect our business.

Specific references in the Risk Factors reported in the Company’s ~~2017~~2018 Form 10-K regarding the impact ~~the DOL Fiduciary Rule~~that new fiduciary standards may have on the Company should be read to ~~refer generally~~include best interest standards, including the SEC’s Regulation Best Interest.

Table of Contents

We remain subject to ~~“new fiduciary standards”,~~various state and federal laws and regulations related to data privacy and protection of data we maintain concerning certain individuals, including Fund shareholders, our clients, Advisors’ clients and our employees. For example, the State of California recently enacted the California Consumer Privacy Act of 2018, which ~~would include any fiduciary standards imposed by~~will be effective January 1, 2020 and, among other things, creates detailed notice, opt-out/opt-in, access and erasure rights for consumers vis-à-vis business that collect their personal information, and provides a new private cause of action for data breaches. Other states have enacted or proposed, or in the ~~DOL,~~future may enact, similar data privacy and protection legislation. Privacy and data protection laws and regulations could impose significant limitations, require changes to our business, restrict our use or storage of personal information and subject us to legal liability or regulatory action, which may result in increased compliance expenses, fines or penalties, the ~~SEC or any states.~~termination of client contracts, costly mitigation activities and harm to our reputation.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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

The following table sets forth certain information about the shares of Class A common stock we repurchased during the third quarter of ~~2018.~~2019.


				Total Number of	Maximum Number (or
				Shares	Approximate Dollar
				Purchased as	Value) of Shares That
	Total Number	Average		Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced	Purchased Under The
Period	Purchased	per Share		Program (1)	Program (1)
July 1 - July 31	715,000	$	16.94	715,000	n/a
August 1 - August 31	1,270,019		15.91	1,270,000	n/a
September 1 - September 30	495,000		16.97	495,000	n/a
Total	2,480,019	$	16.42	2,480,000

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

597,487

$
18.97

597,487

n/a
(1)
Aug 1 - Aug 31

360,225

20.51

360,000

n/a
(1)
Sep 1 - Sep 30

466,900

20.66

466,900

n/a
(1)
Total

1,424,612

$
19.91

1,424,387

(1)

~~(1)~~

~~On August 31, 1998, we announced that~~In October 2012, our Board of Directors approved a program to repurchase shares of our Class A common stock on the open market. Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding Class A common stock or (ii) $50 million of our Class A common stock. We may repurchase our Class A common stock in privately negotiated transactions or through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems. Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased. Our Board of Directors reviewed and ratified the stock repurchase program in October 2012. During the third quarter of 2018, 225 shares were purchased in connection with funding employee income tax withholding obligations arising from the vesting of restricted shares.

During the third quarter of 2019, 19 shares were purchased in connection with funding employee income tax withholding obligations arising from the vesting of restricted shares.

In connection with our existing capital return policy, in the third quarter of 2019 we ~~intend~~completed the two-year initiative to ~~complete the~~ repurchase of $250 million of our Class A common stock ~~through~~by late 2019, which iswas inclusive of buybacks to offset dilution of our equity ~~grants.~~awards. We continue to engage in an ~~opportunistic~~active share repurchase ~~plan to fulfill the targeted buybacks.~~ plan.

Table of ~~contents~~Contents

~~Item 6.Exhibits~~

10.1*Item 6.

~~Waddell & Reed Financial, Inc. Cash Settled RSU Plan.~~

Exhibits

10.2*

~~Form of Restricted Stock Unit Award Agreement for awards pursuant to the Waddell & Reed Financial, Inc. Cash Settled RSU Plan.~~

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, ~~2018,~~2019, 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 ~~2nd~~1st day of November ~~2018.~~2019.

	WADDELL & REED FINANCIAL, INC.

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

	By:	/s/ Benjamin R. Clouse
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)
		~~(Principal Financial Officer and Principal Accounting Officer)~~

4340


	For the three months ended September 30,				For the nine months ended September 30,
	2018		2017		2018		2017

Revenues:
Investment management fees	$	129,302		134,149	$	393,385		395,463
Underwriting and distribution fees		140,308		128,892		416,222		386,499
Shareholder service fees		25,508		26,406		78,464		80,706
Total		295,118		289,447		888,071		862,668

Operating expenses:
Distribution		116,591		106,878		345,376		324,375
Compensation and benefits (including share-based compensation of $12,856, $14,180, $42,526 and $42,419, respectively)		64,561		69,636		199,174		202,003
General and administrative		17,559		23,400		56,240		68,882
Technology		15,414		16,039		49,293		50,796
Occupancy		7,148		7,645		21,081		22,978
Marketing and advertising		2,461		3,197		7,638		9,072
Depreciation		8,141		5,230		19,262		15,626
Subadvisory fees		3,767		3,566		11,158		9,457
Intangible asset impairment		—		—		1,200		1,500
Total		235,642		235,591		710,422		704,689

Operating income		59,476		53,856		177,649		157,979
Investment and other income		1,697		33,293		5,354		39,302
Interest expense		(1,555)		(2,796)		(4,908)		(8,370)

Income before provision for income taxes		59,618		84,353		178,095		188,911
Provision for income taxes		13,105		29,499		41,355		74,988
Net income		46,513		54,854		136,740		113,923
Net income (loss) attributable to redeemable noncontrolling interests		208		1,272		(380)		2,408
Net income attributable to Waddell & Reed Financial, Inc.	$	46,305		53,582	$	137,120		111,515

Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted:	$	0.58		0.64	$	1.69		1.33

Weighted average shares outstanding, basic and diluted:		79,595		83,476		81,372		83,719


							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, 2017	99,701	$	997	301,410	1,092,394	(522,441)	524	872,884	14,509
Adoption of recognition and measurement of financial assets and liabilities guidance (ASU 2016-01) on January 1, 2018	—		—	—	812	—	(812)	—	—
Adoption of reclassification of tax effects from accumulated other comprehensive income (loss) guidance (ASU 2018-02) on January 1, 2018					36		(36)	—	—
Net income (loss)	—		—	—	137,120	—	—	137,120	(380)
Net subscription of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	2,004
Recognition of equity compensation	—		—	32,871	991	—	—	33,862	—
Net issuance/forfeiture of nonvested shares	—		—	(22,068)		22,068		—	—
Dividends accrued, $0.75 per share	—		—	—	(60,568)	—	—	(60,568)	—
Repurchase of common stock	—		—	—	—	(89,018)	—	(89,018)	—
Other comprehensive loss	—		—	—	—	—	(770)	(770)	—
Balance at September 30, 2018	99,701	$	997	312,213	1,170,785	(589,391)	(1,094)	893,510	16,133



		Three months ended September 30, 2018	Three months ended September 30, 2017	Nine months ended September 30, 2018	Nine months ended September 30, 2017
		(in thousands)		(in thousands)
Investment management fees:
Funds	$	123,764	128,078	376,193	376,563
Institutional		5,538	6,071	17,192	18,900
Total investment management fees	$	129,302	134,149	393,385	395,463
Underwriting and distribution fees:
Unaffiliated
Rule 12b-1 service and distribution fees	$	19,707	22,322	60,734	69,191
Sales commissions on front-end load mutual fund and variable annuity sales		441	353	1,418	1,118
Other revenues		126	217	459	996
Total unaffiliated distribution fees	$	20,274	22,892	62,611	71,305
Broker-Dealer
Fee-based asset allocation product revenues	$	69,468	61,115	201,565	176,184
Rule 12b-1 service and distribution fees		18,106	19,026	54,591	56,544
Sales commissions on front-end load mutual fund and variable annuity sales		13,651	12,941	41,900	41,796
Sales commissions on other products		9,111	7,974	26,632	23,671
Other revenues		9,698	4,944	28,923	16,999
Total broker-dealer distribution fees		120,034	106,000	353,611	315,194
Total distribution fees	$	140,308	128,892	416,222	386,499
Shareholder service fees:
Total shareholder service fees	$	25,508	26,406	78,464	80,706

Total revenues	$	295,118	289,447	888,071	862,668


	Less than 12 months			12 months or longer		Total
			Unrealized		Unrealized		Unrealized
September 30, 2018	Fair value		losses	Fair value	losses	Fair value	losses
	(in thousands)
Corporate bonds	$	55,682	(293)	112,246	(1,210)	167,928	(1,503)
U.S. Treasury bills		5,920	(16)	19,525	(488)	25,445	(504)
	$	61,602	(309)	131,771	(1,698)	193,373	(2,007)

December 31, 2017	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total
	(in thousands)
Cash equivalents: (1)
Money market funds	$	145,785	—	—	—	145,785
Commercial paper		—	11,064	—	—	11,064
Total cash equivalents	$	145,785	11,064	—	—	156,849
Available for sale securities:
Certificates of deposit	$	—	12,999	—	—	12,999
Commercial paper		—	34,978	—	—	34,978
Corporate bonds		—	197,442	—	—	197,442
U.S. Treasury bills		—	19,779	—	—	19,779
Trading debt securities:
Certificates of deposit		—	1,999	—	—	1,999
Corporate bonds		—	55,414	—		55,414
U.S. Treasury bills		—	4,929	—	—	4,929
Mortgage-backed securities		—	10	—	—	10
Consolidated sponsored funds		—	62,038	—	—	62,038
Equity securities:
Common stock		116	—	—	—	116
Sponsored funds		137,857	—	—	—	137,857
Sponsored privately offered funds measured at net asset value (2)		—	—	—	695	695
Consolidated sponsored funds		77,048	—	—	—	77,048
Equity method securities: (3)
Sponsored funds		95,188	—	—	—	95,188
Total	$	310,209	389,588	—	695	700,492



		For the nine months ended
	September 30, 2018
	(in thousands)
Level 3 assets at December 31, 2017	$	—
Additions		419
Valuation change		(63)
Redemptions		(317)
Level 3 assets at September 30, 2018	$	39


		Three months ended			Nine months ended
	Income statement	September 30,			September 30,
	location		2018	2017		2018	2017
		(in thousands)			(in thousands)
Total return swap contracts	Investment and other income	$	(6,769)	(8,855)	$	(7,313)	(27,321)


				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,
	2018		2017		2018	2017	2018		2017		2018	2017
		(in thousands)						(in thousands)
Components of net periodic benefit cost:
Service cost	$	—	2,958	$	—	—	$	—	8,367	$	—	—
Interest cost		1,497	1,522		14	15		4,490	4,780		41	44
Expected return on plan assets		(2,065)	(2,510)		—	—		(6,196)	(7,627)		—	—
Actuarial loss		—	6,552		—	—		—	6,552		—	—
Actuarial gain amortization		—	—		(30)	(45)		—	—		(90)	(135)
Prior service credit amortization		—	—		(1)	(1)		—	—		(2)	(3)
Curtailment gain		—	(31,621)		—	—			(31,621)		—	—
Total	$	(568)	(23,099)	$	(17)	(31)	$	(1,706)	(19,549)	$	(51)	(94)





				Total
	Unrealized		Postretirement	accumulated
	gains (losses)		benefits	other
	on investment		unrealized	comprehensive
Three months ended September 30, 2018	securities		gains (losses)	income (loss)
	(in thousands)
Balance at June 30, 2018	$	(1,772)	440	(1,332)
Other comprehensive income before reclassification		218	—	218
Amount reclassified from accumulated other comprehensive loss		44	(24)	20
Net current period other comprehensive income (loss)		262	(24)	238
Balance at September 30, 2018	$	(1,510)	416	(1,094)


			Change in
			valuation
			allowance for
			unrealized			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)	546	(1,980)
Other comprehensive income before reclassification		1,968		800	—	2,768
Amount reclassified from accumulated other comprehensive loss		(438)		(260)	(30)	(728)
Net current period other comprehensive income (loss)		1,530		540	(30)	2,040
Balance at September 30, 2017	$	(456)		—	516	60


		For the nine months ended September 30, 2018

			Tax
	Pre-tax		expense	Net of tax	Statement of income line item
	(in thousands)
Reclassifications included in net income or retained earnings for ASUs adopted in 2018:
Sponsored funds investment gains	$	1,295	(340)	955	Investment and other income (loss)
Losses on available for sale debt securities		(58)	14	(44)	Investment and other income (loss)
Amortization of postretirement benefits		92	(129)	(37)	Compensation and benefits and retained earnings
Total	$	1,329	(455)	874


	Three months ended September 30,
	2018			2017			Variance
	(in thousands, except for management fee rate and average assets)
Funds investment management fees (net)	$	123,764			128,078		(3)	%
Funds average assets (in millions)		74,259			73,772		1	%
Funds management fee rate (net)		0.6612	%		0.6888	%
Total fee waivers	$	5,641			1,826		209	%
Institutional investment management fees (net)	$	5,538			6,071		(9)	%
Institutional average assets (in millions)		5,203			6,716		(23)	%
Institutional management fee rate (net)		0.4071	%		0.3871	%


	Nine months ended September 30,
	2018			2017			Variance
	(in thousands, except for management fee rate and average assets)
Funds investment management fees (net)	$	376,193			376,563		—
Funds average assets (in millions)		74,806			73,563		2	%
Funds management fee rate (net)		0.6724	%		0.6844	%
Total fee waivers	$	11,087			6,015		84	%
Institutional investment management fees (net)	$	17,192			18,900		(9)	%
Institutional average assets (in millions)		5,806			7,289		(20)	%
Institutional management fee rate (net)		0.4055	%		0.3722	%


				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	597,487	$	18.97	597,487	n/a	(1)
Aug 1 - Aug 31	360,225		20.51	360,000	n/a	(1)
Sep 1 - Sep 30	466,900		20.66	466,900	n/a	(1)
Total	1,424,612	$	19.91	1,424,387