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

For the quarterly period ended ~~September 30, 2020~~March 31, 2021

☐

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

6300 Lamar Avenue

Overland Park, Kansas 66202

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

(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~~April 23, ~~2020~~2021
Class A common stock, $.01 par value		~~62,547,588~~62,024,785

Table of Contents

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended ~~September 30,~~March 31, 202021

			Page No.

Part I.	Financial Information

Item 1.		Financial Statements (unaudited)

		Consolidated Balance Sheets at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020	3

		Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~	4

		Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~	5

		Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~	6

		Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~	7

		Notes to the Unaudited Consolidated Financial Statements	8

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	2523

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	4134

Item 4.		Controls and Procedures	4134

Part II.	Other Information

Item 1A.		Risk Factors	4235

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	4335

Item 6.		Exhibits	4436

		Signatures	4537

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)


	September 30,			March 31,
	2020		December 31,	2021		December 31,
	(Unaudited)		2019	(Unaudited)		2020
Assets:
Cash and cash equivalents	$	165,259	151,815	$	193,864	273,756
Cash and cash equivalents - restricted		61,933	74,325		62,460	63,594
Investment securities		579,344	688,346		452,059	486,765
Receivables:
Funds and separate accounts		13,050	15,167		13,995	14,837
Customers and other		57,781	80,089		46,151	68,466
Prepaid expenses and other current assets		35,946	31,655		31,341	36,318
Total current assets		913,313	1,041,397		799,870	943,736

Property and equipment, net		27,213	34,726		19,073	21,903
Goodwill and identifiable intangible assets		145,869	145,869		145,869	145,869
Deferred income taxes		15,676	14,418		22,089	19,200
Other non-current assets		23,359	29,918		21,288	23,123
Total assets	$	1,125,430	1,266,328	$	1,008,189	1,153,831

Liabilities:
Accounts payable	$	17,509	20,123	$	17,780	18,330
Payable to investment companies for securities		17,443	36,883		21,678	30,514
Payable to third party brokers		16,559	17,123		20,941	16,316
Payable to customers		81,265	84,558		70,890	82,165
Short-term notes payable		94,980	—		—	94,997
Accrued compensation		65,896	79,507		84,748	101,749
Other current liabilities		56,515	71,001		56,824	52,476
Total current liabilities		350,167	309,195		272,861	396,547

Long-term debt		—	94,926
Accrued pension and postretirement costs		579	3,145		447	446
Other non-current liabilities		27,173	30,960		25,507	29,081
Total liabilities		377,919	438,226		298,815	426,074

Redeemable noncontrolling interests		—	19,205

Stockholders’ equity:
Preferred stock—$1.00 par value: 5,000 shares authorized; NaN issued		—	—		—	—
Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 62,548 shares outstanding (68,847 at December 31, 2019)		997	997
Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 62,043 shares outstanding (62,398 at December 31, 2020)					997	997
Additional paid-in capital		296,220	312,693		309,294	303,757
Retained earnings		1,270,678	1,241,598		1,234,154	1,248,299
Cost of 37,153 common shares in treasury (30,854 at December 31, 2019)		(824,309)	(749,625)
Cost of 37,658 common shares in treasury (37,303 at December 31, 2020)					(837,096)	(828,193)
Accumulated other comprehensive income		3,925	3,234		2,025	2,897
Total stockholders’ equity		747,511	808,897		709,374	727,757

Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	1,125,430	1,266,328
Total liabilities and stockholders’ equity				$	1,008,189	1,153,831

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Income

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


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
	2020		2019		2020		2019		2021		2020

Revenues:
Investment management fees	$	106,617		111,806	$	307,660		334,438	$	118,016		105,219
Underwriting and distribution fees		139,456		135,787		400,032		395,527		154,795		136,943
Shareholder service fees		21,597		23,087		63,745		70,279		22,540		21,571
Total		267,670		270,680		771,437		800,244		295,351		263,733

Operating expenses:
Distribution		122,195		117,425		350,104		343,696		136,692		120,033
Compensation and benefits (including share-based compensation of $11,080, $11,580, $33,595, and $35,471 respectively)		62,416		64,999		182,704		191,718
Compensation and benefits (including share-based compensation of $12,112 and $9,983, respectively)										100,498		58,425
General and administrative		19,156		16,680		58,278		47,421		30,290		18,598
Technology		14,250		15,019		41,989		47,769		17,384		13,502
Occupancy		4,160		5,684		13,160		19,100		2,283		4,709
Marketing and advertising		1,370		2,134		4,385		6,497		301		1,896
Depreciation		2,998		4,833		9,720		16,062		2,396		3,513
Subadvisory fees		3,490		3,882		10,444		11,154		3,447		3,666
Total		230,035		230,656		670,784		683,417		293,291		224,342

Operating income		37,635		40,024		100,653		116,827		2,060		39,391
Investment and other income		5,449		5,212		12,852		23,690
Investment and other income (loss)										1,808		(7,745)
Interest expense		(1,542)		(1,562)		(4,630)		(4,662)		(431)		(1,549)

Income before provision for income taxes		41,542		43,674		108,875		135,855		3,437		30,097
Provision for income taxes		10,296		10,175		29,341		35,036		1,825		9,633
Net income		31,246		33,499		79,534		100,819		1,612		20,464
Net income attributable to redeemable noncontrolling interests		723		445		2,201		1,763
Net loss attributable to redeemable noncontrolling interests										—		(1,522)
Net income attributable to Waddell & Reed Financial, Inc.	$	30,523		33,054	$	77,333		99,056	$	1,612		21,986

Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted:	$	0.48		0.46	$	1.18		1.33	$	0.03		0.32

Weighted average shares outstanding, basic and diluted:		64,240		72,387		65,795		74,446		62,485		67,675

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
	2020		2019		2020		2019		2021		2020

Net income	$	31,246		33,499	$	79,534		100,819	$	1,612		20,464

Other comprehensive (loss) income:
Other comprehensive income:

Unrealized (loss) gain on available for sale investment securities during the period, net of income tax (benefit) expense of $(161), $92, $274 and $1,011, respectively		(511)		296		842		3,235
Unrealized loss on available for sale investment securities during the period, net of income tax benefit of $(274) and $(760), respectively										(861)		(2,430)

Postretirement benefit, net of income tax benefit of $(16), $(30), $(50) and $(88), respectively		(51)		(94)		(151)		(283)
Postretirement benefit, net of income tax benefit of $(4) and $(18), respectively										(11)		(49)

Comprehensive income		30,684		33,701		80,225		103,771		740		17,985
Comprehensive income attributable to redeemable noncontrolling interests		723		445		2,201		1,763
Comprehensive loss attributable to redeemable noncontrolling interests										—		(1,522)
Comprehensive income attributable to Waddell & Reed Financial, Inc.	$	29,961		33,256	$	78,024		102,008	$	740		19,507

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests

(Unaudited, in thousands)


	For the three months ended September 30,									For the three months ended March 31,
							Accumulated		Redeemable							Accumulated		Redeemable
				Additional			Other	Total	Non				Additional			Other	Total	Non
	Common Stock			Paid-In	Retained	Treasury	Comprehensive	Stockholders’	Controlling	Common Stock			Paid-In	Retained	Treasury	Comprehensive	Stockholders’	Controlling
	Shares	Amount		Capital	Earnings	Stock	Income (Loss)	Equity	Interests	Shares	Amount		Capital	Earnings	Stock	Income (Loss)	Equity	Interests
Balance at June 30, 2019	99,701	$	997	294,487	1,227,314	(669,223)	3,081	856,656	15,115
Net income	—		—	—	33,054	—	—	33,054	445
Balance at December 31, 2019										99,701	$	997	312,693	1,241,598	(749,625)	3,234	808,897	19,205
Net income (loss)										—		—	—	21,986	—	—	21,986	(1,522)
Net subscription of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	1,353	—		—	—	—	—	—	—	1,387
Recognition of equity compensation	—		—	8,024	57	—	—	8,081	—	—		—	7,693	71	—	—	7,764	—
Net issuance/forfeiture of nonvested shares	—		—	627	—	(627)	—	—	—	—		—	(37,985)	—	37,985	—	—	—
Dividends accrued, $0.25 per share	—		—	—	(17,748)	—	—	(17,748)	—	—		—	—	(16,571)	—	—	(16,571)	—
Repurchase of common stock	—		—	—	—	(40,715)	—	(40,715)	—	—		—	—	—	(53,939)	—	(53,939)	—
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
Other comprehensive loss										—		—	—	—	—	(2,479)	(2,479)	—
Balance at March 31, 2020										99,701	$	997	282,401	1,247,084	(765,579)	755	765,658	19,070



Balance at June 30, 2020	99,701	$	997	289,439	1,255,770	(783,990)	4,487	766,703	25,857
Balance at December 31, 2020										99,701	$	997	303,757	1,248,299	(828,193)	2,897	727,757	—
Net income	—		—	—	30,523	—	—	30,523	723	—		—	—	1,612	—	—	1,612	—
Net deconsolidation of redeemable noncontrolling interests in sponsored funds	—		—	—	—	—	—	—	(26,580)
Recognition of equity compensation	—		—	6,514	20	—	—	6,534	—	—		—	5,491	4	—	—	5,495	—
Net issuance/forfeiture of nonvested shares	—		—	267	—	(267)	—	—	—	—		—	46	—	(46)	—	—	—
Dividends accrued, $0.25 per share	—		—	—	(15,635)	—	—	(15,635)	—	—		—	—	(15,761)	—	—	(15,761)	—
Repurchase of common stock	—		—	—	—	(40,052)	—	(40,052)	—	—		—	—	—	(8,857)	—	(8,857)	—
Other comprehensive loss	—		—	—	—	—	(562)	(562)	—	—		—	—	—	—	(872)	(872)	—
Balance at September 30, 2020	99,701	$	997	296,220	1,270,678	(824,309)	3,925	747,511	—
Balance at March 31, 2021										99,701	$	997	309,294	1,234,154	(837,096)	2,025	709,374	—

For the nine months ended September 30,

Accumulated

Redeemable

Additional

Other

Total

Non

Common Stock

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

Controlling


Shares

Amount

Capital

Earnings

Stock

Income (Loss)

Equity

interest
Balance at December 31, 2018

99,701

$
997

311,264

1,198,445

(627,587)

331

883,450

11,463
Net income

—

—

—

99,056

—

—

99,056

1,763
Net subscription of redeemable noncontrolling interests in sponsored funds

—

—

—

—

—

—

—

3,687
Recognition of equity compensation

—

—

25,573

297

—

—

25,870

—
Net issuance/forfeiture of nonvested shares

—

—

(33,699)

—

33,699

—

—

—
Dividends accrued, $0.75 per share

—

—

—

(55,121)

—

—

(55,121)

—
Repurchase of common stock

—

—

—

—

(116,677)

—

(116,677)

—
Other comprehensive income

—

—

—

—

—

2,952

2,952

—
Balance at September 30, 2019

99,701

$
997

303,138

1,242,677

(710,565)

3,283

839,530

16,913



Balance at December 31, 2019

99,701

$
997

312,693

1,241,598

(749,625)

3,234

808,897

19,205
Net income

—

—

—

77,333

—

—

77,333

2,201
Net deconsolidation of redeemable noncontrolling interests in sponsored funds

—

—

—

—

—

—

—

(21,406)
Recognition of equity compensation

—

—

20,895

110

—

—

21,005

—
Net issuance/forfeiture of nonvested shares

—

—

(37,368)

37,368

—

—

—
Dividends accrued, $0.75 per share

—

—

—

(48,363)

—

—

(48,363)

—
Repurchase of common stock

—

—

—

—

(112,052)

—

(112,052)

—
Other comprehensive income

—

—

—

—

—

691

691

—
Balance at September 30, 2020

99,701

$
997

296,220

1,270,678

(824,309)

3,925

747,511

—

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

For the nine months ended September 30,

2020

2019


Cash flows from operating activities:

Net income

$
79,534

100,819

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

Depreciation and amortization

9,368

16,057

Amortization of deferred sales commissions

1,180

1,492

Share-based compensation

33,595

35,471

Investments and derivatives loss (gain), net of collateral

1,688

(15,250)

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

22,468

(47,641)

Deferred income taxes

(1,480)

4,622

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

(10,886)

16,697

Other

(1,096)

1,273

Changes in assets and liabilities:

Customer and other receivables

3,801

70,220

Payable to investment companies for securities and payable to customers

(22,733)

(105,953)

Receivables from funds and separate accounts

2,117

3,360

Other assets

4,064

14,784

Accounts payable and payable to third party brokers

(6,383)

(10,243)

Other liabilities

(23,265)

(1,477)

Net cash provided by operating activities

$
91,972

84,231

Cash flows from investing activities:

Purchases of available for sale and equity method securities

(28,286)

(149,835)

Proceeds from sales of available for sale and equity method securities

3,257

19,667

Proceeds from maturities of available for sale securities

96,420

116,197

Proceeds from sale of property and equipment

2,262

—

Additions to property and equipment

(7,445)

(4,189)

Net cash provided by (used in) investing activities

$
66,208

(18,160)

Cash flows from financing activities:

Dividends paid

(49,939)

(56,560)

Repurchase of common stock

(112,865)

(118,668)

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

5,807

3,687

Other

(131)

(168)

Net cash used in financing activities

$
(157,128)

(171,709)

Net increase (decrease) in cash, cash equivalents and restricted cash

1,052

(105,638)

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

226,140

291,555

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

$
227,192

185,917


	For the three months ended March 31,
	2021		2020

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

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

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

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

WADDELL & REED FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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”) (collectively, Ivy Funds, Ivy VIP, InvestEd and IVH are referred to as the “Funds”). In addition to the Funds, our assets under management (“AUM”) include institutional managed accounts. As of ~~September 30, 2020,~~March 31, 2021, we had ~~$67.9~~$76.0 billion in 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 independent financial advisors associated with W&R (“Advisors”), who provide financial planning and advice to their clients. Investment management and advisory fees and certain underwriting and distribution revenues are based on the level of AUM and assets under administration (“AUA”) and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of fees earned on fee-based advisory programs, asset-based service and distribution fees promulgated under Rule 12b-1 of the Investment Company Act of 1940 (“Rule 12b-1”), distribution fees on certain variable products, and commissions derived from sales of investment and insurance products. The products sold have various commission structures and the revenues received from those sales vary based on the type and dollar amount sold. Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees, and is earned based on client AUM or number of client accounts. Our major expenses are for distribution of our products, compensation related costs, occupancy, general and administrative, and information technology.

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

●

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

●

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

●

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

●

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

Table of Contents

●

Within our wealth management business, ~~the majority~~approximately 25% of Advisors are working from temporary locations. We are demonstrating our differentiated service and support model by continuing regular communications with Advisors as well as delivering additional advisor and client focused resources.

●

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

Basis of Presentation

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented. The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (our ~~“2019~~“2020 Form 10-K”). Certain amounts in the prior year’s financial statements have been reclassified for consistent presentation. Derivative activity was reclassified within operating activities on our consolidated statements of cash flows to provide a comprehensive view of the impact of the economic hedge program for our seed investment portfolio.

The accompanying unaudited consolidated financial statements are prepared consistent with the accounting policies described in Note 1 to the consolidated financial statements included in our ~~2019~~2020 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) ~~2016-13,~~2019-12, ~~Measurement of Credit Losses on Financial Instruments,~~ ~~ASU 2017-04,~~ ~~Intangibles-Goodwill and Other:~~Income Taxes (Topic 740): Simplifying the ~~Test for Goodwill Impairment~~ ~~and ASU 2018-15,~~ ~~Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s~~ Accounting for ~~Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract~~Income Taxes, ~~, all of~~ which became effective January 1, ~~2020.~~ 2021.

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, 2020~~March 31, 2021 and the results of operations and cash flows for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ in conformity with accounting principles generally accepted in the United States.

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

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

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

Table of Contents

Assets Held for Sale

Assets held for sale included real property ~~related to our corporate headquarters move~~ and ~~aviation equipment.~~fractional aircraft ownership. The ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 included asset impairment charges of ~~$0.9~~$0.2 million on assets held for sale, which were recorded in general and administrative expenses in our consolidated statements of income. ~~During the third quarter of 2020, the aviation equipment was sold.~~ As of ~~September 30, 2020,~~March 31, 2021, $3.8 million of buildings, ~~and~~ $1.9 million of land ~~that were~~and $1.0 million of equipment held for sale were included in Property and equipment, net on our consolidated balance sheets. As of December 31, ~~2019, $3.1 million of equipment,~~2020, $3.8 million of buildings and $1.9 million of land that were held for sale were included in Property and equipment, net on our consolidated balance sheets. The Company ~~intends~~continues to actively pursue the sale of ~~remaining~~ assets held for sale at market prices as soon as reasonably possible.

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

As of ~~September 30,~~March 31, 2021 and December 31, 2020, the Company had ~~$5.3~~$4.8 million of capitalized implementation costs for hosting arrangements with ~~$215~~$793 thousand and $459 thousand, respectively, of accumulated amortization in prepaid and other current assets on the consolidated balance ~~sheet.~~sheets. Our hosting arrangements that are service contracts include internal and external costs related to various technology additions in support of our asset management and wealth management businesses. Amortization costs are recorded on a straight-line basis over the term of the hosting arrangement agreement.

~~Table of Contents~~

2.	New Accounting Guidance

Accounting Guidance ~~Not Yet~~ Adopted During the First Quarter of 2021

~~In December 2019,~~On January 1, 2021, the ~~FASB issued~~Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies and improves the consistent application of the accounting for income taxes by removing certain exceptions to general principles and by clarifying and amending existing guidance. ~~This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We have concluded that the~~The adoption of this ASU ~~will have~~had an immaterial impact on our consolidated financial statements and related disclosures.

Table of Contents

3.	Revenue Recognition

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



		Three months ended September 30,		Nine months ended September 30,			Three months ended March 31,
		2020	2019	2020	2019		2021	2020

		(in thousands)		(in thousands)			(in thousands)
Investment management fees:
Funds	$	103,443	107,926	298,712	322,678	$	114,395	102,293
Institutional		3,174	3,880	8,948	11,760		3,621	2,926
Total investment management fees	$	106,617	111,806	307,660	334,438	$	118,016	105,219
Underwriting and distribution fees:
Unaffiliated
Service and distribution fees	$	14,623	16,286	43,569	49,366	$	14,642	15,276
Sales commissions		223	364	1,047	1,300		15	451
Other revenues		82	67	308	242		44	135
Total unaffiliated distribution fees	$	14,928	16,717	44,924	50,908	$	14,701	15,862
Wealth Management
Advisory fees	$	82,591	73,356	232,243	208,806	$	94,280	77,118
Service and distribution fees		15,305	16,143	43,494	47,589		16,763	14,589
Sales commissions		17,847	20,544	53,538	60,959		19,423	20,657
Other revenues		8,785	9,027	25,833	27,265		9,628	8,717
Total wealth management distribution fees		124,528	119,070	355,108	344,619		140,094	121,081
Total distribution fees	$	139,456	135,787	400,032	395,527
Total underwriting and distribution fees						$	154,795	136,943
Shareholder service fees:
Total shareholder service fees	$	21,597	23,087	63,745	70,279	$	22,540	21,571

Total revenues	$	267,670	270,680	771,437	800,244	$	295,351	263,733

~~Table of Contents~~

4.	~~Investment Securities~~

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

September 30,

December 31,

2020

2019

(in thousands)

Available for sale securities:

Commercial paper

$
9,714

1,977

Corporate bonds

180,203

254,291

Total available for sale securities

189,917

256,268

Trading debt securities:

Commercial paper

18,774

1,977

Corporate bonds

70,984

84,920

U.S. Treasury bills

—

5,979

Mortgage-backed securities

1

4

Term loans

44,994

44,268

Consolidated sponsored funds

—

43,567

Total trading securities

134,753

180,715

Equity securities:

Common stock

34,206

34,945

Sponsored funds

149,857

178,386

Sponsored privately offered funds

924

845

Total equity securities

184,987

214,176

Equity method securities:

Sponsored funds

69,687

37,187

Total securities

$
579,344

688,346

~~Commercial paper and corporate bonds accounted for as available for sale and held as of September 30, 2020 mature as follows:~~

Amortized

cost

Fair value

(in thousands)
Within one year
$
64,321

65,057
After one year but within five years

121,170

124,860

$
185,491

189,917

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

Fair value

(in thousands)
Within one year

$
29,580
After one year but within five years

83,508
After five years but within 10 years

21,665

$
134,753

Table of Contents

4.	Investment Securities

~~The following is a summary of the gross unrealized gains (losses) related to~~

Investment securities ~~classified~~at March 31, 2021 and December 31, 2020 were as follows:


	March 31,		December 31,
	2021		2020

		(in thousands)
Available for sale securities:
Commercial paper	$	—	9,705
Corporate bonds		133,652	157,832
Total available for sale securities		133,652	167,537
Trading debt securities:
Commercial paper		14,079	11,785
Corporate bonds		70,427	76,734
Mortgage-backed securities		—	1
Term loans		48,077	47,224
Total trading securities		132,583	135,744
Equity securities:
Common stock		42,323	41,410
Sponsored funds		82,323	81,019
Sponsored privately offered funds		1,224	1,165
Total equity securities		125,870	123,594
Equity method securities:
Sponsored funds		59,954	59,890
Total securities	$	452,059	486,765

Corporate bonds accounted for as available for sale ~~at September 30, 2020:~~and held as of March 31, 2021 mature as follows:


	Amortized		Unrealized	Unrealized			Amortized
	cost		gains	losses	Fair value		cost	Fair value

	(in thousands)						(in thousands)
Available for sale securities:
Commercial paper	$	9,720	3	(9)	9,714
Corporate bonds		175,771	4,432	—	180,203
Within one year						$	74,726	75,746
After one year but within five years							56,513	57,906
	$	185,491	4,435	(9)	189,917	$	131,239	133,652

Commercial paper, corporate bonds and term loans accounted for as trading and held as of March 31, 2021 mature as follows:


		Fair value
		(in thousands)
Within one year	$	38,039
After one year but within five years		68,227
After five years but within 10 years		26,317
	$	132,583

The following is a summary of the gross unrealized gains ~~(losses)~~ related to securities classified as available for sale at ~~December~~March 31, ~~2019:~~2021:

Amortized

Unrealized

Unrealized


cost

gains

losses

Fair value

(in thousands)

Available for sale securities:

Commercial paper

$
1,976

1

—

1,977

Corporate bonds

250,982

3,314

(5)

254,291

$
252,958

3,315

(5)

256,268

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

Less than 12 months

12 months or longer

Total

Unrealized

Unrealized

Unrealized


Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)
Commercial paper

$
2,420

(9)

—

—

2,420

(9)

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

~~The Company’s investment portfolio included 1 available for sale security in an unrealized loss position at September 30, 2020.~~

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

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


	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value

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

Table of Contents

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


	Amortized		Unrealized	Unrealized
	cost		gains	losses	Fair value

	(in thousands)
Available for sale securities:
Commercial paper	$	9,720	—	(15)	9,705
Corporate bonds		154,270	3,562	—	157,832
	$	163,990	3,562	(15)	167,537

There are no available for sale investment securities with fair values below carrying values at March 31, 2021. A summary of available for sale investment securities with fair values below carrying values at December 31, 2020 is as follows:

Less than 12 months

12 months or longer

Total

Unrealized

Fair value

losses

Fair value

losses

Fair value

losses

(in thousands)

Corporate bonds

2,414

(15)

—

2,414

(15)

The Company’s investment portfolio included 0 available for sale securities in an unrealized loss position at March 31, 2021. The Company’s evaluation of available for sale securities in an unrealized loss position includes reviewing credit ratings, assessing the extent of losses, and considering the impact of market conditions for each individual security.

For equity securities held at the end of the period, net unrealized gains of $2.6 million and net unrealized losses of $35.9 million were recognized for the three months ended March 31, 2021 and March 31, 2020, respectively.

Sponsored Funds

The Company has classified its equity investments in the 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 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.

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, 2020 and December 31, 2019, as well as the Company’s net interest in these funds:~~

September 30,

December 31,

2020

2019

(in thousands)
Cash

$
—

1,530
Investments

—

43,567
Other assets

—

483
Other liabilities

—

—
Redeemable noncontrolling interests

—

(19,205)
Net interest in consolidated sponsored funds

$
—

26,375

During the third quarter of 2020, we deconsolidated one Ivy Fund in which we had provided initial seed capital at the time of the fund’s formation due to no longer having a controlling financial interest in the fund.

Fair Value

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

●

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

●

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

●

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

Table of Contents

●

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

Assets classified as Level 2 can have a variety of observable inputs. These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches depending upon the specific asset to determine a value. The carrying amounts of certificates of deposit and commercial paper are measured at amortized 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, 2020~~March 31, 2021 and December 31, ~~2019~~2020 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.


September 30, 2020	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total
March 31, 2021							Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total

	(in thousands)						(in thousands)
Cash equivalents: (1)
Money market funds	$	45,007	—	—	—	45,007	$	20,062	—	—	—	20,062
Commercial paper		—	23,316	—	—	23,316		—	25,801	—	—	25,801
Total cash equivalents	$	45,007	23,316	—	—	68,323	$	20,062	25,801	—	—	45,863
Available for sale securities:
Commercial paper	$	—	9,714	—	—	9,714
Corporate bonds	$	—	180,203	—	—	180,203	$	—	133,652	—	—	133,652
Trading debt securities:
Commercial paper		—	18,774	—	—	18,774		—	14,079	—	—	14,079
Corporate bonds		—	70,984	—		70,984		—	70,427	—		70,427
Mortgage-backed securities		—	1	—	—	1
Term loans		—	43,288	1,706	—	44,994		—	46,355	1,722	—	48,077
Equity securities:
Common stock		34,206	—	—	—	34,206		42,018	—	305	—	42,323
Sponsored funds		149,857	—	—	—	149,857		82,323	—	—	—	82,323
Sponsored privately offered funds measured at net asset value (2)		—	—	—	924	924		—	—	—	1,224	1,224
Equity method securities: (3)
Sponsored funds		69,687	—	—	—	69,687		59,954	—	—	—	59,954
Total investment securities	$	253,750	322,964	1,706	924	579,344	$	184,295	264,513	2,027	1,224	452,059

Table of Contents


December 31, 2019	Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total
December 31, 2020							Level 1		Level 2	Level 3	Other Assets Held at Net Asset Value	Total

	(in thousands)						(in thousands)
Cash equivalents: (1)
Money market funds	$	4,203	—	—	—	4,203	$	82,085	—	—	—	82,085
Commercial paper		—	38,143	—	—	38,143		—	47,421	—	—	47,421
Total cash equivalents	$	4,203	38,143	—	—	42,346	$	82,085	47,421	—	—	129,506
Available for sale securities:
Commercial paper	$	—	1,977	—	—	1,977	$	—	9,705	—	—	9,705
Corporate bonds		—	254,291	—	—	254,291		—	157,832	—	—	157,832
Trading debt securities:
Commercial paper		—	1,977	—	—	1,977		—	11,785	—	—	11,785
Corporate bonds		—	84,920	—		84,920		—	76,734	—		76,734
U.S. Treasury bills		—	5,979	—	—	5,979
Mortgage-backed securities		—	4	—	—	4		—	1	—	—	1
Term loans		—	40,368	3,900	—	44,268		—	46,030	1,194	—	47,224
Consolidated sponsored funds		—	43,567	—	—	43,567
Equity securities:
Common stock		34,942	—	3	—	34,945		41,079	—	331	—	41,410
Sponsored funds		178,386	—	—	—	178,386		81,019	—	—	—	81,019
Sponsored privately offered funds measured at net asset value (2)		—	—	—	845	845		—	—	—	1,165	1,165
Equity method securities: (3)
Sponsored funds		37,187	—	—	—	37,187		59,890	—	—	—	59,890
Total investment securities	$	250,515	433,083	3,903	845	688,346	$	181,988	302,087	1,525	1,165	486,765

(1)

Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at net asset value and are classified as Level 1. Cash investments in commercial paper are measured at cost, which approximates fair value because of the short time between purchase of the instrument and its expected realization and are classified as Level 2.

(2)

Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.

(3)	The Company’s equity method investments are investment companies that record their underlying investments at fair value.

Table of Contents

The following table summarizes the activity of investments categorized as Level 3 for the ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:

For the nine months ended

September 30, 2020

(in thousands)
Level 3 assets at December 31, 2019

$
3,903
Additions

6,501
Transfers in to level 3

11,086
Transfers out of level 3

(15,622)
Losses in Investment and other income

(1,026)
Redemptions/Paydowns

(3,136)
Level 3 assets at September 30, 2020

$
1,706

Change in unrealized losses for Level 3 assets held at
September 30, 2020

$
(9)



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

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

5.	Derivative Financial Instruments

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

The Company was party to 9 total return swap contracts with a combined notional value of $205.1 million and 10 total return swap contracts with a combined notional value of ~~$271.2 million and 14 total return swap contracts with a combined notional value of $228.2~~$198.2 million as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. These derivative financial instruments are not designated as hedges for accounting purposes. Changes in fair value of the total return swap contracts are recognized in Investment and other income (loss) in the Company’s consolidated statements of income.

The counterparties of the total return swap contracts posted ~~$3.2~~$1.4 million in cash collateral with the Company as of ~~September 30, 2020,~~March 31, 2021, which is included in accounts payable in the Company’s consolidated balance sheet. The Company posted ~~$3.7~~$3.4 million in cash collateral with the counterparties of the total return swap contracts as of December 31, ~~2019,~~2020, which is included in customers and other receivables in 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 as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 and is calculated based on Level 2 inputs:


			September 30,		December 31,			March 31,		December 31,
	Balance sheet		2020		2019	Balance sheet		2021		2020
	location	Fair value		Fair value		location	Fair value		Fair value

		(in thousands)					(in thousands)
Total return swap contracts	Prepaid expenses and other current assets	$	2,017		—	Prepaid expenses and other current assets	$	529		—
Total return swap contracts	Other current liabilities		—		3,990	Other current liabilities	$	26		3,464
Net total return swap asset (liability)		$	2,017		(3,990)		$	503		(3,464)

The following is a summary of net (losses) gains recognized in income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~September 30, 2019:~~March 31, 2020:

Three months ended

Nine months ended

Three months ended

Income statement

September 30,

Income statement

March 31,

location

2020

2019

2020

2019

location

2021

2020

(in thousands)

Total return swap contracts

Investment and other income

(14,191)

135

(2,571)

(25,728)

Investment and other income

(4,080)

42,069

Table of Contents

6.	Goodwill and Identifiable Intangible Assets

Goodwill represents the excess of purchase price over the tangible assets and identifiable intangible assets of an acquired business. Our goodwill is not deductible for tax purposes. The Company performs an annual goodwill impairment assessment during the second quarter of each year and identified 0 impairment during the ~~current year’s~~most recent assessment. Goodwill and identifiable intangible assets (all considered indefinite lived) at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 are as follows:

September 30,

December 31,

2020

2019

(in thousands)

Goodwill

$
106,970

106,970

Mutual fund management advisory contracts

38,699

38,699

Other

200

200

Total identifiable intangible assets

38,899

38,899

Total

$
145,869

145,869


	March 31,		December 31,
	2021		2020

	(in thousands)
Goodwill	$	106,970	106,970

Mutual fund management advisory contracts		38,699	38,699
Other		200	200
Total identifiable intangible assets		38,899	38,899

Total	$	145,869	145,869

7.	Indebtedness

~~Debt is reported at its carrying amount in~~During the ~~consolidated balance sheets. The fair value, calculated based on Level 2 inputs,~~first quarter of 2021, the ~~Company’s~~Company repaid our senior unsecured notes ~~maturing~~that matured January 13, 2021 was $96.2 million at September 30, 2020 compared to the carrying value net of debt issuance costs of $95.0 million, which is listed under short-term notes payable in the consolidated balance sheet.

On October 20, 2020, we entered into a 364-day unsecured revolving credit facility (the “New Credit Facility”) with various lenders, which initially provides for borrowings of up to $100.0 million and may be expanded to $200.0 million. The New Credit Facility replaced the prior credit facility, which was set to terminate in October 2020. The covenants in the New Credit Facility are consistent with the covenants in the prior credit facility, including the required consolidated leverage ratio and the consolidated interest coverage ratio.2021.

8.	Income Tax Uncertainties

In the accompanying consolidated balance sheets, unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities; unrecognized tax benefits that are expected to be settled within the next 12 months are included in ~~other current liabilities;~~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, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company’s consolidated balance sheets included unrecognized tax benefits, including penalties and interest, of ~~$2.1~~$2.0 million ($~~1.8~~1.7 million net of federal benefit) and ~~$2.0~~$1.9 million ($1.7 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate.

In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. The Company does not expect the resolution or settlement of any open audits, federal or state, to materially impact the consolidated financial statements.

Our ~~2016-2019~~2017-2020 federal income tax returns are open tax years that remain subject to potential future audit. Our state income tax returns for all years after ~~2015~~2016 and, in certain states, income tax returns for ~~2015,~~2016, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.

Table of Contents

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

Benefits payable under our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) were based on employees’ years of service and compensation during the final 10 years of employment. On July 26, 2017, the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”) approved an amendment to freeze the Pension Plan, effective September 30, 2017. After September 30, 2017, participants in the Pension Plan ceased accruing additional benefits for future service or compensation. Participants retained benefits accumulated as of September 30, 2017 in accordance with the terms of the Pension Plan. The Compensation Committee approved the termination of the Pension Plan, effective June 1, 2019. The Company is currently performing the administrative actions required to terminate the Pension Plan in a standard termination, as defined by the Pension Benefit Guaranty Corporation.

In connection with the termination of the Pension Plan, in July 2020, the Company contributed $3.7 million dollars to the Pension Plan. Payments were made in July 2020 from the Pension Plan to participants, beneficiaries and alternate payees that elected to receive a lump sum distribution and to the selected annuity provider that has assumed the liabilities of the Pension Plan. As part of the assumption of Pension Plan liabilities by the annuity provider, the Company relieved the pension liability on its balance sheet and recorded settlement losses in the amount of $1.3 million during the third quarter of 2020.

We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially all employees, as well as 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 costs and other postretirement costs related to these plans are reflected in the table below. Net periodic pension costs are recorded in investment and other income on the Company’s consolidated statements of income.

Other

Other

Pension Benefits

Postretirement Benefits

Pension Benefits

Postretirement Benefits

Three months ended September 30,

Three months ended September 30,

Nine months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

2020

2019

2020

2019

(in thousands)

(in thousands)

Components of net periodic benefit cost:



















Interest cost

$
439

1,537

$
4

9

$
3,071

4,610

$
12

25

Expected return on plan assets

(374)

(1,579)

—

—

(2,618)

(4,736)

—

—

Actuarial gain amortization

—

—

(67)

(124)

—

—

(201)

(371)

Settlement loss

1,272

—

—

—

1,272

—

—

—

Total

$
1,337

(42)

$
(63)

(115)

$
1,725

(126)

$
(189)

(346)

~~Table of Contents~~

~~10.~~

Stockholders’ Equity

Earnings per Share

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


	Three months ended			Nine months ended			Three months ended
	September 30,			September 30,			March 31,
	2020		2019	2020		2019	2021		2020

	(in thousands, except per share amounts)
Net income attributable to Waddell & Reed Financial, Inc.	$	30,523	33,054	$	77,333	99,056	$	1,612	21,986

Weighted average shares outstanding, basic and diluted		64,240	72,387		65,795	74,446		62,485	67,675

Earnings per share, basic and diluted	$	0.48	0.46	$	1.18	1.33	$	0.03	0.32

Dividends

During the quarter, the Board of Directors declared a quarterly dividend on our ~~Class A~~ common stock in the amount of $0.25 per share with ~~a November 2, 2020~~an April 30, 2021 payment date and an ~~October 12, 2020~~April 9, 2021 record date. The total dividend to be paid on ~~November 2, 2020~~April 30, 2021 is ~~$15.6~~$15.8 million.

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. The terms of the Merger Agreement restrict our ability to repurchase shares of our common stock while the merger is pending; however, we may continue to repurchase shares of our common stock from employees to cover their tax withholdings in connection with the vesting of restricted shares.

There were ~~2,617,108~~353,909 shares and ~~2,480,019~~3,807,438 shares repurchased in the open market or privately during the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, which includes 19 shares repurchased from employees who tendered shares to cover income tax withholdings with respect to vesting of stock awards during the three months ended September 30, 2019. There were 7,892,913353,909 shares and ~~6,849,238 shares repurchased in the open market or privately during the nine months ended September 30, 2020 and 2019, respectively, which includes 451,245 shares and 440,002~~231,393 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.

1918

Table of Contents

Accumulated Other Comprehensive Income

The following tables summarize accumulated other comprehensive income (loss) activity for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~September 30, 2019.~~March 31, 2020.

For the three months ended September 30,

Total

Unrealized

Postretirement

accumulated

gains (losses) on

benefits

other

AFS investment

unrealized

comprehensive

securities

gains (losses)

income (loss)

(in thousands)
Balance at June 30, 2020

$
3,874

613

4,487
Other comprehensive loss before reclassification

(371)

—

(371)
Amount reclassified from accumulated other comprehensive income

(140)

(51)

(191)
Net current period other comprehensive loss

(511)

(51)

(562)
Balance at September 30, 2020

$
3,363

562

3,925

Balance at June 30, 2019

$
2,142

939

3,081
Other comprehensive income before reclassification

379

—

379
Amount reclassified from accumulated other comprehensive income

(83)

(94)

(177)
Net current period other comprehensive income (loss)

296

(94)

202
Balance at September 30, 2019

$
2,438

845

3,283



	For the nine months ended September 30,				For the three months ended March 31,
				Total				Total
	Unrealized		Postretirement	accumulated	Unrealized		Postretirement	accumulated
	gains (losses)		benefits	other	gains (losses) on		benefits	other
	on investment		unrealized	comprehensive	AFS investment		unrealized	comprehensive
	securities		gains (losses)	income (loss)	securities		gains (losses)	income (loss)

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

Balance at December 31, 2019	$	2,521	713	3,234	$	2,521	713	3,234
Other comprehensive income before reclassification		1,344	—	1,344
Other comprehensive loss before reclassification						(2,228)	—	(2,228)
Amount reclassified from accumulated other comprehensive income		(502)	(151)	(653)		(202)	(49)	(251)
Net current period other comprehensive income (loss)		842	(151)	691
Balance at September 30, 2020	$	3,363	562	3,925


Balance at December 31, 2018	$	(797)	1,128	331
Other comprehensive income before reclassification		3,413	—	3,413
Amount reclassified from accumulated other comprehensive income		(178)	(283)	(461)
Net current period other comprehensive income (loss)		3,235	(283)	2,952
Balance at September 30, 2019	$	2,438	845	3,283
Net current period other comprehensive loss						(2,430)	(49)	(2,479)
Balance at March 31, 2020					$	91	664	755

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


			Tax				For the three months ended March 31, 2021
For the three months ended September 30, 2020	Pre-tax		expense	Net of tax	Statement of income line item
								Tax
						Pre-tax		expense	Net of tax	Statement of income line item

	(in thousands)					(in thousands)
Reclassifications included in net income:
Gains on available for sale debt securities	$	184	(44)	140	Investment and other income	$	213	(52)	161	Investment and other income (loss)
Amortization of postretirement benefits		67	(16)	51	Compensation and benefits		15	(4)	11	Compensation and benefits
Total	$	251	(60)	191		$	228	(56)	172


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

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

2019

Table of Contents

Tax

For the three months ended September 30, 2019

Pre-tax

expense

Net of tax

Statement of income line item

(in thousands)

Reclassifications included in net income:









Gains on available for sale debt securities

$
109

(26)

83

Investment and other income
Amortization of postretirement benefits

$
124

(30)

94

Compensation and benefits
Total

$
233

(56)

177

Tax

For the nine months ended September 30, 2020

Pre-tax

expense

Net of tax

Statement of income line item

(in thousands)

Reclassifications included in net income:









Gains on available for sale debt securities

$
661

(159)

502

Investment and other income
Amortization of postretirement benefits

201

(50)

151

Compensation and benefits
Total

$
862

(209)

653

Tax

For the nine months ended September 30, 2019

Pre-tax

expense

Net of tax

Statement of income line item

(in thousands)

Reclassifications included in net income:









Gains on available for sale debt securities

$
234

(56)

178

Investment and other income
Amortization of postretirement benefits

371

(88)

283

Compensation and benefits
Total

$
605

(144)

461

~~11.~~10.

Leases

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

Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date (or the effective date of ASU 2016-02, Leases) based on the present value of lease payments over the lease term. The Company uses an incremental borrowing rate based on the information available at the commencement date (or the effective date of ASU 2016-02, Leases) in determining the present value of lease payments. The ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which we have elected not to separate.

During January 2020, we signed a fifteen-year lease, which ~~we expect~~was expected to commence during 2022, relating to the development of a new 260,000 square foot ~~innovative, distinctive and sustainably-designed~~ corporate headquarters building in ~~the heart of~~ downtown Kansas City, Missouri. The lease will be recognized in the Company’s consolidated financial statements during the period that includes the lease’s commencement date. The impact that our proposed merger with Macquarie will have on our new corporate headquarters lease, including eligibility for state and local tax savings, has not been determined.

~~Table of Contents~~

The components of lease expense were as follows:

Three months ended September 30,

2020

2019

(in thousands)
Operating Lease Cost

$
2,903

$
4,189

Finance Lease Cost:

Amortization of ROU assets

$
42

$
80
Interest on lease liabilities

2

8
Total

$
44

$
88


	Nine months ended September 30,				For the three months ended March 31,
	2020		2019		2021		2020

	(in thousands)				(in thousands)
Operating Lease Cost	$	9,164	$	14,472	$	1,478	$	3,233

Finance Lease Cost:
Amortization of ROU assets	$	149	$	224	$	14	$	55
Interest on lease liabilities		15		23		1		9
Total	$	164	$	247	$	15	$	64

Supplemental cash flow information related to leases was as follows:


	Nine months ended September 30,				For the three months ended March 31,
	2020		2019		2021		2020

	(in thousands)				(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	9,106	$	13,661	$	1,792	$	3,143
Operating cash flows from finance leases		15		23		1		9
Financing cash flows from finance leases		185		222		19		58

ROU assets obtained in exchange for lease obligations:
Operating leases		665		2,410		—		7
Finance leases		10		40		—		—

2220

Table of Contents

Supplemental balance sheet information related to leases was as follows:


	September 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020

	(in thousands, except lease term and discount rate)				(in thousands, except lease term and discount rate)
Operating Leases:
Operating lease ROU assets (Other non-current assets)	$	15,181	$	23,457	$	12,124	$	13,461

Other current liabilities	$	7,403	$	10,479	$	5,394	$	6,247
Other non-current liabilities		9,632		14,694		7,765		8,812
Total operating lease liabilities	$	17,035	$	25,173	$	13,159	$	15,059


Finance Leases:
Property and equipment, gross	$	476	$	985	$	181	$	333
Accumulated depreciation		(391)		(737)		(144)		(277)
Property and equipment, net	$	85	$	248	$	37	$	56

Other current liabilities	$	65	$	203	$	25	$	41
Other non-current liabilities		13		55		8		11
Total finance lease liabilities	$	78	$	258	$	33	$	52


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

Weighted average discount rate:
Operating leases		4.04%		4.32%		4.11%		4.08%
Finance leases		6.00%		6.00%		6.00%		6.00%

Maturities of lease liabilities are as follows:


	Operating		Finance	Operating		Finance
	Leases		Leases	Leases		Leases

	(in thousands)			(in thousands)
Year ended December 31,
2020 (excluding the nine months ended September 30, 2020)	$	2,413	28
2021		6,669	44
2021 (excluding the three months ended March 31, 2021)				$	4,834	22
2022		2,563	10		2,424	12
2023		2,122	—		2,090	—
2024		2,090	—		2,090	—
Thereafter		2,613	—		2,613	—
Total lease payments		18,470	82		14,051	34
Less imputed interest		(1,435)	(4)		(892)	(1)
Total	$	17,035	78	$	13,159	33

~~12.~~11.

Contingencies

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

The Company establishes reserves for litigation and similar matters when those matters present material loss contingencies that management determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” These amounts are not reduced by amounts that may be recovered under insurance or claims against

2321

Table of Contents

third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in light of new information. The Company discloses the nature of the contingency when management believes it is reasonably possible the outcome may be significant to the Company’s consolidated financial statements and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items that management believes should be disclosed. Management’s judgment is required related to contingent liabilities because the outcomes are difficult to predict.

Litigation Relating to the Merger — NaN complaints were filed by purported stockholders of the Company challenging the merger (the “Complaints”). The Complaints generally allege, among other things, that the Company and the Board of Directors authorized the filing of a materially incomplete and misleading proxy statement with the SEC. While the Company believes that the disclosures set forth in the proxy statement comply fully with applicable law, and vigorously denies any wrongdoing or liability with respect to the allegations and claims asserted, or which could have been asserted, in the Complaints, the Company voluntarily supplemented the proxy statement on March 15, 2021 with additional disclosures (the “Supplemental Disclosures”). The 7 plaintiffs who filed suit have advised the Company that they intend to dismiss their claims in light of the Supplemental Disclosures, subject to plaintiffs’ right to seek a mootness fee payment and the Company’s right to oppose such a request. The Company believes that the Complaints are without merit, but is unable to predict the outcome of the ultimate resolution of the lawsuits or the potential loss, if any, that may result.

12.	Subsequent Events

Investment Portfolio – During April 2021, the Company liquidated a portion of our investment portfolio. Net gains of $2.4 million were recognized from the sale of $211.4 million of securities during April 2021 as a result of the liquidation.

2422

Table of Contents

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 AUM and AUA, distribution sources, expense levels, redemption rates, ~~stock repurchases~~our proposed merger with Macquarie Management Holdings, Inc. (“Macquarie”), and the financial markets and other conditions. These statements are generally identified by the use of such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by us or on our behalf is not a guarantee of future performance. Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to the impact of the COVID-19 pandemic and related economic conditions, as well as the factors discussed below. If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, which include, without limitation:

●

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

●

A reduction in our 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 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.

2523

Table of Contents

The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission (the “SEC”), including the information in Item 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, ~~2020.~~2021. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

Overview

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 wealth management channel by 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.

In our wealth management channel, we had ~~921~~916 Advisors and ~~392~~382 licensed advisor associates as of ~~September 30, 2020,~~March 31, 2021, for a total of ~~1,313~~1,298 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 in our institutional channel. Most of 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.

~~Operating Results~~

●

~~Net income attributable to~~Proposed Acquisition of Waddell & Reed Financial, Inc. for the third quarter of 2020 was $30.5 million, or $0.48 per diluted share, compared to $33.1 million, or $0.46 per diluted share, during the third quarter of 2019. The third quarter of 2019 included $3.1 million in severance expense related to the outsourcing of our transfer agency transactional processing operations. Excluding the severance expense, adjusted net income¹~~for the third quarter of 2019 was $35.4 million and adjusted net incomeper diluted share~~¹~~was $0.49.~~

●

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

~~______________~~

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

~~Table of Contents~~

●

~~Continued execution of strategic initiatives in Asset Management~~

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

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

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

●

~~Successful quarter for Wealth Management recruiting and asset growth~~

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

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

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

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

●

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

~~$744.6 million in cash and investments at the end of the third quarter of 2020, excluding restricted cash~~

~~$56.3 million was returned to shareholders in the third quarter of 2020, including $40.1 million of share repurchases~~

●

Hired two executives focused on strategic growth – one to lead the technology teams dedicated to leveraging technology as a strategic asset across the organization, and one to develop and lead strategies in support of best-in-class client and Advisor experience processes and procedures.

~~Vision and Growth Strategy~~Inc. by Macquarie

~~We remain committed~~For information related to ~~steadily executing~~the proposed merger with Macquarie, please see Part I – Item 1 – “Financial Statements (unaudited), Note 1 – Description of Business and Accounting Policies”, of this Quarterly Report on our long-term vision and growth strategy, which consists of six key, strategic focus areas: (1) competitive products and pricing; (2) continued focus on strong core processes and performance metrics; (3) the ability to leverage technology and analytics as a strategic asset across the organization; (4) having a growth culture and a more agile organization; (5) sharpening our brand awareness in the marketplace; and finally, (6) effectively allocating capital through internal investment initiatives, as well as taking advantage of potential dislocations and acquisition opportunities in the asset management and wealth management industries. Over the quarter, we made progress on these key focus areas as outlined below.Form 10-Q.

~~Within product and pricing, we introduced~~Please see the Risks Related to the Proposed Merger included in Part 1, Item 1A—“Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 for a ~~series~~discussion of ~~enhancements~~certain risks related to our ~~InvestEd products, increasing~~proposed merger with Macquarie. Please see the ~~number of portfolios~~(including age-based and static options) and adding two ETFs and three Ivy Funds as underlying investments in those options, all designed to provide flexibility and best meet investor needs as they save for education. Additionally, effective October 1, we reduced load fees on all Class A shares for the Ivy Funds. These reductions, which include various breakpoints on all funds at certain purchase levels, are a further illustration of our desire to maintain competitive pricing across our lineup.

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

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

~~Table of Contents~~

including enterprise technology architecture and infrastructure, cybersecurity, application development, data integration, and service delivery management. In our asset management business, we continue to progress on our data strategy,Company’s definitive proxy statement filed with the rollout of an RIA targeting and segmentation tool. We have also continued with our wealth management and asset management technology platform initiatives with the long-term objectives of improved Advisor and client experiences, enhanced sales enablement and improved internal operations. Specifically, within our wealth management business, we are expanding the capabilities of our WaddellOne digital platform with the introduction of OnePath, a digital account opening and maintenance tool that will reduce the time required to open an account through a data-driven, dynamic workflow process. We plan to launch a pilot programSEC on February 17, 2021, for OnePath during the fourth quarter of 2020, with full implementation by early 2021. OnePath is designed to simplify and enhance workflow for Advisors serving their clients by accelerating straight through processing, reducing clicks, improving e-signature capabilities and providing transparency for Advisors into the status of work in-progress.

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

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

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

Impact of COVID-19

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

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

We transitioned most of our workforce ~~and Advisors~~ to a work from home environment early in March ~~2020.~~2020 as part of our response to the COVID-19 pandemic. By late March 2020, 98% of our employees were working remotely, with negligible downtime. The remote work environment has largely continued through the ~~third quarter~~end of ~~2020.~~2020 and into 2021. Our steady and proactive response has allowed our asset management and wealth management businesses to maintain full continuity of service and the access that our clients need and expect. With a successful transition to a remote working environment, we plan to closely monitor developments and reintroduce employees to the workplace only when it is safe to do so. The transition of employees to a work from home environment did not result in any material incremental expenses during 2020 or in the first ~~three quarters~~quarter of ~~2020, and we do not expect to incur any material incremental expenses in future periods.~~2021. For additional discussion regarding steps we have taken to facilitate safety, security and full continuity of service, please see Part I – Item 1 – “Financial Statements (unaudited), Note 1 – Description of Business and Accounting Policies”, of this Quarterly Report on Form 10-Q.

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

2824

Table of Contents

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

For additional discussion regarding the risks that can impact our business, results of operations and financial condition due to COVID-19 and the related economic conditions, please see Part ~~II –~~1, Item ~~1A – “Risk~~1A—“Risk Factors”. of our Annual Report on Form 10-K for the year ended December 31, 2020.

~~Assets Under Management~~Operating Results

~~During the third quarter of 2020, AUM increased 4% to $67.9 billion from $65.0 billion at June 30, 2020 due to market appreciation of $4.7 billion, partially offset by net outflows of $1.8 billion.Sales of $1.8 billion during the current quarter increased 2% compared to the third quarter of 2019. Redemptions decreased 19% compared to the third quarter of 2019.~~

●

Net income attributable to Waddell & Reed Financial, Inc. for the first quarter of 2021 was $1.6 million, or $0.03 per diluted share, compared to $22.0 million, or $0.32 per diluted share, during the first quarter of 2020. The first quarter of 2021 included $51.6 million in costs related to the proposed merger with Macquarie. Excluding the merger-related costs, adjusted net income⁽¹⁾for the first quarter of 2021 was $43.7 million and adjusted net incomeper diluted share⁽¹⁾was $0.70.

~~Change in Assets Under Management~~ ⁽¹⁾

●

Revenues of $295.4 million during the first quarter of 2021 increased 12% compared to the first quarter of 2020. Operating expenses of $293.3 million during the first quarter of 2021 increased 31% compared to the same quarter in 2020. The operating margin was 0.7% during the first quarter of 2021, compared to 14.9% during the first quarter of 2020. Excluding merger-related costs during the first quarter of 2021, adjusted operating expenses⁽¹⁾ were $241.6 million and the adjusted operating margin⁽¹⁾was 18.2%.

Three months ended September 30, 2020

Wealth

Unaffiliated⁽²⁾

Institutional

Management

Total

(in millions)

Beginning Assets

$
23,724

2,997

38,245

64,966

Sales ⁽³⁾

1,127

59

634

1,820

Redemptions

(1,977)

(165)

(1,488)

(3,630)

Net Exchanges

239

—

(239)

—

Net Flows

(611)

(106)

(1,093)

(1,810)

Market Action

1,755

297

2,661

4,713

Ending Assets

$
24,868

3,188

39,813

67,869

●

Asset Management Highlights

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

AUM ended the quarter at $76.0 billion, an increase of 36% compared to the first quarter of 2020 due to market appreciation partially offset by net outflows.

Investment performance improved from the prior quarter 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.

●

Wealth Management Highlights

AUA ended the quarter at $70.8 billion, a 37% increase compared to the first quarter of 2020 primarily due to market appreciation and growth in net new Advisory AUA, partially offset by an ongoing migration away from Non-advisory AUA.

Net new AUA continue to improve, and net new Advisory AUA were positive for the 9th consecutive quarter.

$507 thousand average trailing 12-month productivity per Advisor for the first quarter of 2021 improved 10% compared to the first quarter of 2020.

●

Balance sheet remains strong with $645.9 million in cash and investments at the end of the first quarter of 2021, excluding restricted cash.

Three months ended September 30, 2019

Wealth

Unaffiliated⁽²⁾

Institutional

Management

Total

(in millions)

Beginning Assets

$
27,545

3,887

40,444

71,876

Sales ⁽³⁾

999

49

744

1,792

Redemptions

(2,684)

(230)

(1,542)

(4,456)

Net Exchanges

334

—

(334)

—

Net Flows

(1,351)

(181)

(1,132)

(2,664)

Market Action

(337)

(29)

(64)

(430)

Ending Assets

$
25,857

3,677

39,248

68,782

During the first nine months of 2020, AUM decreased 3% to $67.9 billion from $70.0 billion at December 31, 2019 due to net outflows of $5.5 billion, partially offset by market appreciation of $3.4 billion. Sales of $6.5 billion during the nine months ended September 30, 2020 increased 2% compared to the nine months ended September 30, 2019. Redemptions during the nine months ended September 30, 2020 decreased 9% compared to the same period of 2019.

Nine months ended September 30, 2020

Wealth

Unaffiliated⁽²⁾

Institutional

Management

Total

(in millions)

Beginning Assets

$
26,264

3,096

40,598

69,958

Sales ⁽³⁾

4,197

153

2,178

6,528

Redemptions

(7,175)

(546)

(4,335)

(12,056)

Net Exchanges

770

22

(792)

—

Net Flows

(2,208)

(371)

(2,949)

(5,528)

______________

(1)

Adjusted net income, adjusted net income per diluted share, adjusted operating expenses and adjusted operating margin are non-GAAP financial measures. See Non-GAAP Financial Measures and Reconciliation of GAAP to non-GAAP Financial Measures on pages 33 and 34.

2925

Table of Contents

Market Action

812

463

2,164

3,439

Ending Assets

$
24,868

3,188

39,813

67,869

Assets Under Management

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

During the first quarter of 2021, AUM increased 2% to $76.0 billion from $74.8 billion at December 31, 2020 due to market appreciation of $2.4 billion, partially offset by net outflows of $1.2 billion.Sales of $3.0 billion during the current quarter increased 17% compared to the first quarter of 2020. Redemptions decreased 14% compared to the first quarter of 2020.

Change in Assets Under Management ⁽¹⁾


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

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

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

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


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

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

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

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

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

(3)	Sales consists of gross sales and includes net reinvested dividends, capital gains and investment income.

3026

Table of Contents

Average Assets Under Management

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


	Three months ended September 30, 2020						Three months ended March 31, 2021
				Wealth						Wealth
	Unaffiliated		Institutional	Management	Total		Unaffiliated		Institutional	Management	Total

	(in millions)						(in millions)
Asset Class:
Equity	$	19,849	3,199	29,857	$	52,905	$	23,477	3,600	33,558	$	60,635
Fixed Income		4,468	—	8,695		13,163		4,588	—	8,915		13,503
Money Market		147	—	1,731		1,878		148	—	1,779		1,927
Total	$	24,464	3,199	40,283	$	67,946	$	28,213	3,600	44,252	$	76,065

Three months ended September 30, 2019

Wealth

Unaffiliated

Institutional

Management

Total

(in millions)

Asset Class:

Equity

$
20,988

3,808

29,642

$
54,438

Fixed Income

5,210

3

9,256

14,469

Money Market

97

—

1,523

1,620

Total

$
26,295

3,811

40,421

$
70,527

Nine months ended September 30, 2020

Wealth

Unaffiliated

Institutional

Management

Total

(in millions)

Asset Class:

Equity

$
18,866

2,977

28,412

$
50,255

Fixed Income

4,542

—

8,647

13,189

Money Market

135

—

1,693

1,828

Total

$
23,543

2,977

38,752

$
65,272


	Nine months ended September 30, 2019						Three months ended March 31, 2020
				Wealth						Wealth
	Unaffiliated		Institutional	Management		Total	Unaffiliated		Institutional	Management	Total

	(in millions)						(in millions)
Asset Class:
Equity	$	21,237	3,851	29,396	$	54,484	$	19,181	2,897	28,612	$	50,690
Fixed Income		5,217	14	9,281		14,512		4,874	—	8,894		13,768
Money Market		100	—	1,571		1,671		98	—	1,568		1,666
Total	$	26,554	3,865	40,248	$	70,667	$	24,153	2,897	39,074	$	66,124

~~Table of Contents~~

Performance

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

The following table is a summary of Morningstar rankings and ratings as of ~~September 30, 2020:~~March 31, 2021:


MorningStar Fund Rankings¹	1 Year		3 Years		5 Years
MorningStar Fund Rankings ⁽¹⁾							1 Year		3 Years		5 Years
Funds ranked in top half	49	%	49	%	39	%	48	%	57	%	46	%
Assets ranked in top half	43	%	52	%	47	%	54	%	65	%	62	%


MorningStar Ratings¹	Overall		3 Years		5 Years
MorningStar Ratings ⁽¹⁾							Overall		3 Years		5 Years
Funds with 4/5 stars	26	%	28	%	19	%	35	%	37	%	35	%
Assets with 4/5 stars	40	%	42	%	35	%	56	%	51	%	53	%

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

3227

Table of Contents

Assets Under Administration

AUA includes both client assets invested in the Funds and in other companies’ products that are distributed through W&R and held in direct to fund accounts, brokerage accounts or within our fee-based advisory programs. AUA as of ~~September 30, 2020~~March 31, 2021 increased ~~10%~~37% as compared to ~~September 30, 2019~~March 31, 2020 primarily due to market appreciation and growth in net new Advisory AUA, partially offset by ~~an ongoing migration away from~~outflows in Non-advisory AUA. Average AUA increased 7%18% for the three months ended ~~September 30, 2020 and increased 5% for the nine months ended September 30, 2020,~~March 31, 2021, compared to the same ~~periods~~period in 2019. Starting in the second quarter of 2020, we updated our definition of net new AUA to include dividends and interest to be more consistent with peers and have reflected this new definition for all periods presented in the table below.2020. This quarter marked the 79^th straight quarter of positive Advisory AUA net flows. We continue to see increased average productivity per Advisor due to our efforts to transform W&R into a fully competitive and profitable aspect of our business model, with a focus on higher producing Advisors.



		March 31, 2021	March 31, 2020

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

September 30, 2020

September 30, 2019

(in millions)

Ending AUA

Advisory AUA

$
29,330

25,107

Non-advisory AUA

33,364

32,006

Total ending AUA

$
62,694

57,113

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

(in millions, except percentage data)

Average AUA ⁽¹⁾

Advisory AUA ⁽¹⁾

$
28,502

24,921

$
26,737

23,732

Non-advisory AUA ⁽¹⁾

32,898

32,490

31,846

32,038

Total average AUA ⁽¹⁾

$
61,400

57,411

$
58,583

55,770

Net new Advisory AUA ⁽²⁾

$
437

328

$
1,068

977

Net new Non-advisory AUA ^{(2), (3)}

(475)

(720)

(1,479)

(2,240)

Total net new AUA ^{(2), (3)}

$
(38)

(392)

$
(411)

(1,263)

Annualized Advisory AUA growth ⁽⁴⁾

6.4
%

5.3
%

5.3
%

6.1
%
Annualized AUA growth ⁽⁴⁾

(0.3)
%

(2.7)
%

(0.9)
%

(3.3)
%

September 30, 2020

September 30, 2019
Advisors and advisor associates

1,313

1,344
Average trailing 12-month production per Advisor ⁽⁵⁾ (in thousands)

$
474

422



	Three months ended March 31,
		2021		2020

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


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


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


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

(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

3328

Table of Contents

Results of Operations — Three ~~and Nine~~ Months Ended ~~September 30, 2020~~March 31, 2021 as Compared with Three ~~and Nine~~ Months Ended ~~September 30, 2019~~March 31, 2020

Total Revenues

Total revenues ~~decreased 1%~~increased 12% to ~~$267.7~~$295.4 million for the three months ended ~~September 30, 2020~~March 31, 2021 compared to the three months ended ~~September 30, 2019. For the nine months ended September 30,~~March 31, 2020 ~~total revenues decreased $28.8 million, or 4%, compared to the same period in the 2019. For both comparative periods, the decreases were~~ due to ~~a decrease~~increases in investment management fees, and shareholder service fees, partially offset by increases in underwriting and distribution fees. The decreases in investment management fees were due to lower average AUM and lower effective management fee rates related to targeted fee reductions on certain products made in previous periods and money market fee waivers. The decreases in shareholder service fees were due to a reduction in fund reimbursement revenues related to the outsourcing of our transfer agency transactional processing operations as well as lower assets and number of accounts. The increases in underwriting and distribution fees ~~were due to increases in advisory fees due to higher average Advisory AUA~~ and ~~were partially offset by decreases in~~shareholder service ~~and distribution fees due to lower assets and lower sales commissions.~~fees.

Three months ended

September 30,


2020

2019

Variance

(in thousands, except percentage data)

Investment management fees

$
106,617

111,806

(5)
%
Underwriting and distribution fees

139,456

135,787

3
%
Shareholder service fees

21,597

23,087

(6)
%
Total revenues

$
267,670

270,680

(1)
%


	Nine months ended					Three months ended
	September 30,					March 31,
	2020		2019	Variance		2021		2020	Variance

	(in thousands, except percentage data)					(in thousands, except percentage data)
Investment management fees	$	307,660	334,438	(8)	%	$	118,016	105,219	12	%
Underwriting and distribution fees		400,032	395,527	1	%		154,795	136,943	13	%
Shareholder service fees		63,745	70,279	(9)	%		22,540	21,571	4	%
Total revenues	$	771,437	800,244	(4)	%	$	295,351	263,733	12	%

Investment Management Fee Revenues

Investment management fee revenues for the ~~third~~first quarter of 2021 increased $12.8 million, or 12%, from the first quarter of 2020 decreased $5.2 million, or 5%, from the third quarter of 2019. For the nine-month period ending September 30, 2020, investment management fee revenues decreased $26.8 million, or 8%, compared to the same period in 2019. For both comparative periods, the decrease was due to ~~a decrease~~an increase in average ~~assets and~~AUM, partially offset by a lower effective management fee rate, which was primarily due to targeted pricing reductions on certain products made in previous periods and money market fee waivers.

The following tables summarize investment management fee revenues, related average AUM, fee waivers and investment management fee rates for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.

Three months ended September 30,


2020

2019


Variance

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

Investment management fees (net)

$
103,443

107,926

(4)
%
Average assets (in millions)

$
64,747

66,716

(3)
%
Management fee rate (net)

0.6356
%

0.6418
%

Total fee waivers

$
9,171

8,154

12
%
Institutional investment management fees (net)

$
3,174

3,880

(18)
%
Institutional average assets (in millions)

$
3,199

3,811

(16)
%
Institutional management fee rate (net)

0.3945
%

0.4040
%


	Three months ended March 31,
	2021			2020			Variance

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

~~Table of Contents~~

Nine months ended September 30,


2020

2019


Variance

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

Investment management fees (net)

$
298,712

322,678

(7)
%
Average assets (in millions)

62,295

66,802

(7)
%
Management fee rate (net)

0.6405
%

0.6458
%

Total fee waivers

$
23,804

22,127

8
%
Institutional investment management fees (net)

$
8,948

11,760

(24)
%
Institutional average assets (in millions)

2,977

3,865

(23)
%
Institutional management fee rate (net)

0.4013
%

0.4068
%

Revenues from investment management services provided to our retail mutual funds, which are distributed through the unaffiliated and wealth management channels, ~~decreased 4%~~increased 12% in the ~~third~~first quarter of ~~2020 and decreased 7% for the nine months ended September 30, 2020,~~2021 compared to the same ~~periods~~period in ~~2019. These decreases were~~2020. The increase was due to ~~decreases~~an increase in average AUM, ~~and~~partially offset by a lower effective management fee rate due to ~~pricing reductions. Effective April 1, 2020, new~~ fee reductions ~~were made~~ on our large cap growth and core bond products ~~which we expect~~that were effective in April 2020 and increased money market fee waivers due to ~~have a one to two cent annualized impact on earnings per share.~~ the low interest rate environment.

Institutional account revenues in the ~~third~~first quarter of 2021 increased 24% compared to the first quarter of 2020 decreased $0.7 million compared to the third quarter of 2019. For the nine months ended September 30, 2020, institutional account revenues decreased $2.8 million compared to the same period in 2019. These decreases wereprimarily due to ~~a decrease~~an increase in average ~~AUM and a slight decrease in effective management fee rate.~~AUM.

Annualized long-term redemption rates

(excludes money market redemptions)

Three months ended

Nine months ended

September 30,

September 30,


2020

2019


2020

2019

Unaffiliated channel

32.3
%
40.9
%

41.0
%
37.8
%
Institutional channel

20.5
%
23.9
%

24.5
%
35.5
%
Wealth Management channel

13.1
%
13.4
%

13.2
%
13.9
%
Total

20.5
%
24.3
%

23.8
%
24.2
%

Table of Contents


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

The long-term redemption rate for the three months ended ~~September 30, 2020~~March 31, 2021 decreased in the unaffiliated channel and the wealth management channel as compared to the three months ended ~~September 30, 2019.~~March 31, 2020. Redemptions decreased during the quarter, particularly in our International Core Equity and High Income funds. The ~~long-term~~ redemption rate for the nine months ended September 30, 2020 increased in the unaffiliated channel as compared to the same period in 2019. Increased market volatility during the first half of 2020 led to more redemptions in this channel, particularly in our International Core Equity and High Income funds. The long-term redemption rate decreased in the institutional channel primarily due to elevated client redemptions from our Core Equity and Large Cap Growth strategies during the first nine months of 2019. In the wealth management channel, the long-term redemption rate decreased for both comparative periods.was unchanged. Prolonged redemptions in any of our distribution channels could negatively affect revenues in future periods.

The ~~current~~ year-to-date industry average redemption rate, based on data provided by the Investment Company Institute, was ~~30.8%~~26.1%, versus our rate of ~~23.8%~~21.2%.

~~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, 2020				For the three months ended March 31, 2021
			Wealth				Wealth
	Unaffiliated		Management	Total	Unaffiliated		Management	Total

	(in thousands)				(in thousands)
Underwriting and distribution fee revenues
Advisory fees	$	—	82,591	82,591
Advisory Fees					$	—	94,280	94,280
Service and distribution fees		14,623	15,305	29,928		14,642	16,763	31,405
Sales commissions		223	17,847	18,070		15	19,423	19,438
Other revenues		82	8,785	8,867		44	9,628	9,672
Total	$	14,928	124,528	139,456	$	14,701	140,094	154,795

For the three months ended September 30, 2019

Wealth

Unaffiliated

Management

Total

(in thousands)
Underwriting and distribution fee revenues

Advisory fees

$
—

73,356

73,356
Service and distribution fees

16,286

16,143

32,429
Sales commissions

364

20,544

20,908
Other revenues

67

9,027

9,094
Total

$
16,717

119,070

135,787

For the nine months ended September 30, 2020

Wealth

Unaffiliated

Management

Total

(in thousands)
Underwriting and distribution fee revenues

Advisory fees

—

232,243

232,243
Service and distribution fees

43,569

43,494

87,063
Sales commissions

1,047

53,538

54,585
Other revenues

308

25,833

26,141
Total

44,924

355,108

400,032


	For the nine months ended September 30, 2019				For the three months ended March 31, 2020
			Wealth				Wealth
	Unaffiliated		Management	Total	Unaffiliated		Management	Total

	(in thousands)				(in thousands)
Underwriting and distribution fee revenues
Advisory fees	$	—	208,806	208,806
Advisory Fees					$	—	77,118	77,118
Service and distribution fees		49,366	47,589	96,955		15,276	14,589	29,865
Sales commissions		1,300	60,959	62,259		451	20,657	21,108
Other revenues		242	27,265	27,507		135	8,717	8,852
Total	$	50,908	344,619	395,527	$	15,862	121,081	136,943

Underwriting and distribution revenues earned in the ~~third~~first quarter of ~~2020~~2021 increased by ~~$3.7~~$17.9 million, or 3%13%, compared to the ~~third~~first quarter of ~~2019. Underwriting and distribution revenues earned for the nine months ended September 30,~~ 2020 ~~increased $4.5 million, or 1%, compared to the same period in 2019. For both comparative periods, advisory fees revenues increased~~primarily due to increases in average Advisory ~~AUA. These increases were offset by lower~~AUA and service and distribution ~~fees~~assets, partially offset by a decrease in sales commissions due to lower ~~assets and decreases in~~ sales ~~commissions.~~

volume.

Shareholder Service Fee Revenue

During the first quarter of 2021, shareholder service fee revenue increased $1.0 million, or 4%, compared to the first quarter of 2020 primarily due to an increase in assets, partially offset by a decrease in the number of accounts on which these fees are based.

Total Operating Expenses

Operating expenses for the first quarter of 2021 increased by $68.9 million, or 31%, compared to the first quarter of

3630

Table of Contents

~~Shareholder Service Fee Revenue~~

~~During the third quarter of~~ 2020, shareholder service fee revenue decreased $1.5 million, or 6%, compared to the third quarter of 2019. For the nine months ended September 30, 2020, shareholder service fee revenue decreased $6.5 million, or 9% as compared to the same period of 2019. For both comparative periods, the decrease was primarily due to ~~a decrease~~an increase in the number of accounts and assets on which these fees are based and a reduction in fund reimbursement revenues related to the outsourcing of our transfer agency transactional processing operations which was offset by lower costs.

~~Total Operating Expenses~~

~~Operating expenses for the third quarter of 2020 were flat compared to the third quarter of 2019, primarily~~distribution costs due to ~~increases in distribution~~increased revenue from higher assets and ~~general and administrative expenses offset by decreases~~an increase in compensation and benefits, general and administrative and technology primarily related to merger costs, partially offset by decreases in occupancy, marketing and advertising and depreciation. For the nine months ended September 30, 2020, operating expenses decreased $12.6 million, or 2%, compared to the nine months ended September 30, 2019, primarily due to decreases in compensation and benefits, technology, occupancy, marketing and advertising and depreciation partially offset by increases in distribution and general and administrative expenses. We have been able to successfully reduce controllable expenses compared to the first nine months of 2019 even as we continue to invest in targeted growth areas of our strategy. We expect controllable expenses to be higher in the fourth quarter of 2020 than in the third quarter of 2020 due to strategic project activity and the absence of meeting expense reductions we experienced in the third quarter of 2020.


	Three months ended					Three months ended
	September 30,					March 31,
	2020		2019	Variance		2021		2020	Variance

	(in thousands)					(in thousands)
Distribution	$	122,195	117,425	4	%	$	136,692	120,033	14	%
Compensation and benefits		62,416	64,999	(4)	%		100,498	58,425	72	%
General and administrative		19,156	16,680	15	%		30,290	18,598	63	%
Technology		14,250	15,019	(5)	%		17,384	13,502	29	%
Occupancy		4,160	5,684	(27)	%		2,283	4,709	(52)	%
Marketing and advertising		1,370	2,134	(36)	%		301	1,896	(84)	%
Depreciation		2,998	4,833	(38)	%		2,396	3,513	(32)	%
Subadvisory fees		3,490	3,882	(10)	%		3,447	3,666	(6)	%
Total operating expenses	$	230,035	230,656	—		$	293,291	224,342	31	%

Nine months ended


September 30,


2020

2019

Variance

(in thousands)

Distribution

$
350,104

343,696

2
%
Compensation and benefits

182,704

191,718

(5)
%
General and administrative

58,278

47,421

23
%
Technology

41,989

47,769

(12)
%
Occupancy

13,160

19,100

(31)
%
Marketing and advertising

4,385

6,497

(33)
%
Depreciation

9,720

16,062

(39)
%
Subadvisory fees

10,444

11,154

(6)
%
Total operating expenses

$
670,784

683,417

(2)
%

Distribution expenses for the ~~third~~first quarter of ~~2020~~2021 increased by ~~$4.8~~$16.7 million, or 4%14%, compared to the ~~third~~first quarter of ~~2019. For the nine months ended September 30,~~ 2020 ~~distribution expenses increased $6.4 million, or 2%, compared to the same period for 2019. For both comparative periods, the increases in expense were~~ due to increases in underwriting and distribution revenue primarily in our advisory fee programs and ~~an increase in the average Advisor payout rate from continued~~service and distribution fees due to increases in ~~production.~~AUA and AUM.

Compensation and benefits during the ~~third~~first quarter of ~~2020 decreased $2.6~~2021 increased $42.1 million, or 4%72% compared to the same period of ~~2019. For the nine months ended September 30,~~ 2020 ~~compensation and benefits expenses decreased $9.0 million, or 5%. For both comparative periods, decreases were~~primarily due to ~~lower severance~~merger-related compensation expenses of $35.9 million, which included retention award accruals, as well as an increase in deferred compensation plan valuation adjustments and an increase in share-based compensation expense ~~primarily related to~~on outstanding restricted share units as a result of the

~~Table~~ increase in share price of ~~Contents~~our common stock.

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

General and administrative expenses for the ~~third~~first quarter of ~~2020~~2021 increased ~~$2.5~~$11.7 million, or ~~15%~~63%, compared to the ~~third~~first quarter of ~~2019. For the nine months ended September 30,~~ 2020 ~~general~~entirely due to merger-related costs of $13.7 million, including legal fees and ~~administrative~~ expenses ~~increased $10.9 million, or 23%, compared~~related to the ~~nine months ended September 30, 2019. For both comparative periods, the increases were primarily due to the shift of our transfer agency transactional processing operations outsourcing~~Funds for special meetings and proxy solicitation costs, ~~from technology expenses to general and administrative expenses and increased strategic project spending,~~ partially offset by lower travel and meeting costs due to restricted travel and a transition to virtual meetings during the pandemic.

Technology expense for the ~~third~~first quarter of ~~2020 decreased $0.8~~2021 increased $3.9 million, or 5%29%, compared to the same period of ~~2019. For the nine months ended September 30,~~ 2020 ~~technology expense decreased $5.8 million, or 12%, compared to the nine months ended September 30, 2019. For both comparative periods, the decreases were~~ primarily due to ~~costs related to the transfer agency transactional processing operations outsourcing shifting to general and administrative expenses, partially offset by increased consulting~~merger-related contract termination fees of $2.0 million and software costs for new technologies.

Occupancy expense decreased ~~$1.5~~$2.4 million, or ~~27%~~52%, for the ~~third~~first quarter of 2021 compared to the first quarter of 2020 ~~compared to the third quarter~~primarily as a result of ~~2019 and decreased $5.9 million, or 31%, for the nine months ended September 30, 2020, as compared to the same period in 2019. For both comparative periods, the decreases are due to~~ the planned transition ~~of field offices~~ from ~~corporate-leased~~Advisors leasing space from the Company to ~~Advisor~~Advisors utilizing personal branch offices.

Marketing and advertising expense decreased ~~$0.8~~$1.6 million, or ~~36%~~84%, for the ~~third~~first quarter of ~~2020~~2021 compared to the ~~third~~first quarter of ~~2019 and decreased $2.1 million, or 33%, for the nine months ended September 30,~~ 2020 ~~as compared to the same period in 2019. For both comparative periods, the decreases are~~ primarily due to lower sponsorship fees in connection with the shift to virtual industry conferences.

Depreciation expense decreased ~~$1.8~~$1.1 million, or ~~38%~~32%, for the ~~third~~first quarter of 2021 compared to the first quarter of 2020 ~~compared to the third quarter of 2019 and decreased $6.3 million, or 39%, for the nine months ended September 30, 2020, as compared to the same period in 2019. The decreases were~~ primarily due to ~~capitalized software development~~certain assets becoming fully depreciated.

Investment and Other Income

Investment and other income for the three months ended ~~September 30, 2020~~March 31, 2021 increased ~~5%,~~$9.6 million, compared to the same period in ~~2019~~2020 primarily due to ~~greater~~ unrealized gains, net of hedging activity, on the seed ~~and corporate~~ investment portfolios in the current period compared to unrealized losses, net of hedging activity, for the prior year comparative ~~period,~~period. In addition, there were lower unrealized losses on our corporate fixed income portfolio for the first quarter of 2021, compared to the first quarter of 2020 and unrealized losses in the first quarter of 2020 on our consolidated sponsored fund that was deconsolidated during 2020 and therefore did not reoccur. These increases were partially offset by a decline in interest income due to lower interest rates and redemptions in our corporate ~~laddered investment portfolio and Pension Plan settlement expenses. For the nine months ended September 30, 2020, investment and other~~fixed income decreased $10.8 million compared to the same period in 2019 primarily due to lower unrealized gains, net of hedging activity, on the seed and corporate investment portfolios, a decline in interest income and Pension Plan settlement expenses in the current period compared to the prior year comparative period.portfolio.

Table of Contents

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, 2020~~March 31, 2021 and ~~2019:~~2020:

Three months ended

Nine months ended

September 30,

September 30,

2020

2019

2020

2019

Statutory federal income tax rate

21.0
%
21.0
%

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

3.7

2.7

3.6

2.8

Permanent differences

1.2

0.6

1.3

0.5

Share-based compensation

(0.5)

(0.5)

1.4

1.6

Other items

(0.6)

(0.5)

(0.4)

(0.1)

Effective income tax rate

24.8
%
23.3
%

26.9
%
25.8
%

~~Table of Contents~~


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

Our effective income tax rate was ~~24.8%~~53.1% for the three months ended ~~September 30, 2020,~~March 31, 2021, as compared to ~~23.3%~~32.0% for the same period in ~~2019,~~2020, an increase of ~~1.5%~~21.1%. ~~Our effective income~~Merger-related non-deductible compensation increased the tax rate impact of state income taxes and permanent differences. This increase was ~~26.9% for the nine months ended September 30, 2020,~~partially offset by a tax benefit on share-based payments, as compared to ~~25.8% for~~a tax shortfall in the ~~same~~comparable period, resulting from changes in ~~2019, an increase~~the Company’s share price. Lower pre-tax book income in 2021 as compared to 2020 magnified the impact of ~~1.1%. Increases in state income tax due to additional state tax filings and non-deductible expenses caused the rate to increase in both comparative periods.~~

~~The Company expects continued future volatility in its effective tax rate as~~all items on the tax effects of share-based compensation will be impacted by market fluctuations in our stock price. The future effective tax rate could also experience volatility from federal and state tax incentives, unanticipated federal and state tax legislative changes, and unanticipated fluctuations in earnings.rate.

Liquidity and Capital Resources

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

Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund the Company’s ~~short-term~~ operating and capital requirements. ~~Expected short-term~~Subject to the terms and conditions of the Merger Agreement, expected uses of cash include dividend payments, ~~repurchases of~~costs related to our ~~Class A common stock, interest on indebtednessand maturities of outstanding debt in January 2021,~~proposed merger with Macquarie, income tax payments, seed ~~money for new products,~~capital investments, ongoing technology enhancements, ~~Advisor transition loans,~~ capital expenditures, ~~and~~ collateral funding for margin accounts established to support derivative positions and ~~could include strategic acquisitions.~~

~~Expected long-term capital requirements include~~ operating leases and purchase obligations. Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, seed money for new products, and repurchasesexpenses of our ~~Class A common stock.~~business.

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

●

Pay dividends

●

Repurchase our stock

●

Finance growth objectives

Our existing capital return policy is designed to provide 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.

Pay Dividends

We paid quarterly dividends on our ~~Class A~~ common stock that resulted in financing cash outflows of ~~$49.9~~$15.6 million and ~~$56.6~~$17.1 million for the first ~~nine~~three months of ~~2020~~2021 and ~~2019,~~2020, respectively.

The Board of Directors approved a dividend on our ~~Class A~~ common stock of $0.25 per share with ~~a November 2, 2020~~an April 30, 2021 payment date and an ~~October 12, 2020~~April 9, 2021 record date. The total dividend to be paid on ~~November 2, 2020~~April 30, 2021 is ~~$15.6~~$15.8 million.

Repurchase Our Stock

We repurchased ~~7,892,913~~353,909 shares and ~~6,849,238~~3,807,438 shares of our ~~Class A~~ common stock in the open market or privately during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, resulting in share repurchases of ~~$112.1~~$8.9 million and ~~$116.7~~$53.9 million, respectively. We

Table of Contents

The terms of the Merger Agreement restrict our ability to repurchase shares of our common stock while the merger is pending; however, we may continue to ~~engage in an active share~~ repurchase ~~planas part~~shares of our ~~ongoing capital management plan.~~common stock from employees to cover their tax withholdings in connection with the vesting of restricted shares.

Finance Growth Objectives

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

~~Table of Contents~~

distribution efforts. ~~As we continue~~The Merger Agreement limits our ability to ~~advance our investment in improved technology, we expect increased costs in this area.~~take certain actions while the merger is pending, including making seed capital investments, entering into or amending material contracts and incurring capital expenditures.

Cash Flows

Cash from operations is our primary source of funds. Cash from operations ~~increased $7.7~~decreased $23.7 million for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 compared to the ~~nine~~three months ended ~~September 30, 2019. The increase is~~March 31, 2020, primarily due to cash inflows during the first nine months of 2020 as compared to cash outflows during first nine months of 2019 related to our net activity in equity and trading debt securities and was partially offset by lower net income.

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 due to the variances in these accounts.

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. Future investing cash flows will be impacted by limitations on our ability to acquire investment securities and make seed capital investments pursuant to the terms of the Merger Agreement.

Financing activities include payment of dividends and repurchases of our ~~Class A~~ common stock. The first quarter of 2021 also included the repayment of our Series B senior unsecured notes at maturity. Future financing cash outflows will be affected by the existing capital return ~~policy.~~

~~On October 20, 2020, we entered into a 364-day unsecured revolving credit facility (the “New Credit Facility”) with various lenders, which initially provides for borrowings~~policy, subject to the terms of ~~up to $100.0 million and may be expanded to $200.0 million. The New Credit Facility replaced~~ the prior credit facility, which was set to terminate in October 2020. The covenants in the New Credit Facility are consistent with the covenants in the prior credit facility, including the required consolidated leverage ratio and the consolidated interest coverage ratio.Merger Agreement.

Critical Accounting Policies and Estimates

There have been no material changes in the critical accounting policies and estimates disclosed in the “Critical Accounting Policies and Estimates” section of our ~~2019~~2020 Form 10-K.

Non-GAAP Financial Measures

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

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

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

4033

Table of Contents

Reconciliation of GAAP to non-GAAP Financial Measures

(in thousands, except per share and percentage data)


	Three months ended					Nine months ended
	September 30,					September 30,					Three months ended March 31,
		2020		2019			2020		2019		2021			2020
Net income attributable to Waddell & Reed Financial, Inc. (GAAP)	$	30,523		33,054		$	77,333		99,056		$	1,612		$	21,986
Adjustments
Severance		—		3,081			—		3,081
Merger-related costs ⁽¹⁾												51,643			—
Tax effect of adjustments		—		(739)			—		(739)			(9,536)			—
Adjusted net income attributable to Waddell & Reed Financial, Inc. (non-GAAP)	$	30,523		35,396		$	77,333		101,398		$	43,719		$	21,986

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

Controllable expenses (GAAP)	$	101,352		104,516		$	300,516		312,505
Adjustments
Severance		—		(3,081)			—		(3,081)
Adjusted controllable expenses (non-GAAP)	$	101,352		101,435		$	300,516		309,424
Weighted average shares outstanding-basic and diluted												62,485			67,675
Adjusted net income per share, basic and diluted (non-GAAP)											$	0.70		$	0.32

Operating expenses (GAAP)	$	230,035		230,656		$	670,784		683,417		$	293,291		$	224,342
Adjustments
Severance		—		(3,081)			—		(3,081)
Merger-related costs ⁽¹⁾												51,643			—
Adjusted operating expenses (non-GAAP)	$	230,035		227,575		$	670,784		680,336		$	241,648		$	224,342

Operating income (GAAP)	$	37,635		40,024		$	100,653		116,827		$	2,060		$	39,391
Adjustments
Severance		—		3,081			—		3,081
Merger-related costs ⁽¹⁾												51,643			—
Adjusted operating income (non-GAAP)	$	37,635		43,105		$	100,653		119,908		$	53,703		$	39,391

Operating revenue	$	267,670		270,680		$	771,437		800,244		$	295,351		$	263,733

Operating margin (GAAP)		14.1	%	14.8	%		13.0	%	14.6	%		0.7	%		14.9	%
Adjusted operating margin (non-GAAP)		14.1	%	15.9	%		13.0	%	15.0	%		18.2	%		14.9	%

___________

(1)

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

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 for both our corporate investments and our AUM and AUA, on which our revenues are based, and credit risk related to collateral on our economic hedge program derivative trading. The Company has had no material changes in its market risk policies or its market risk sensitive instruments and positions since December 31, ~~2019~~2020 other than the changes to the investment and derivative portfolios disclosed in Note 4 and Note 5 to the unaudited consolidated financial statements and changes to AUM and AUA in Part I – Item 2 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 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

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

~~Table of Contents~~

required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in

Table of Contents

Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of ~~September 30, 2020,~~March 31, 2021, have concluded that the Company’s disclosure controls and procedures were effective as of ~~September 30, 2020.~~March 31, 2021.

The Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. ~~There were no~~During the fiscal quarter ended March 31, 2021, the Company completed a human capital management system conversion. This system conversion resulted in changes to processes and controls as we migrated from the legacy system to the new system. The system change was undertaken to enhance our operating platform and was not undertaken in ~~the Company’s~~response to any actual or perceived deficiencies in our internal control over financial ~~reporting that occurred during the fiscal quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial~~ reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Part II.

Other Information

Item 1.

Legal Proceedings

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

~~Except as noted below, there~~There have been no material changes to the Company’s Risk Factors from those previously reported in the Company’s ~~2019~~2020 Form 10-K.

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

●

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

●

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

●

~~availability of financing capital;~~

●

~~disruption of worldwide supply chains;~~

●

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

●

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

●

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

●

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

●

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

●

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

●

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

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

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

~~Table of Contents~~

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth certain information about the shares of ~~Class A~~ common stock we repurchased during the ~~third~~first quarter of ~~2020.~~2021.

Total Number of

Maximum Number (or

Total Number of

Maximum Number (or

Shares

Approximate Dollar

Shares

Approximate Dollar

Purchased as

Value) of Shares That

Purchased as

Value) of Shares That

Total Number

Average

Part of Publicly

May Yet Be

Total Number

Average

Part of Publicly

May Yet Be

of Shares

Price Paid

Announced

Purchased Under The

of Shares

Price Paid

Announced

Purchased Under The

Period

Purchased

per Share

Program (1)

Purchased

per Share

Program (1)

July 1 - July 31

75,000

14.52

75,000

n/a

August 1 - August 31

1,316,500

15.41

1,316,500

n/a

September 1 - September 30

1,225,608

15.19

1,225,608

n/a

January 1 - January 31

218,616

25.03

—

n/a

February 1 - February 28

496

25.07

—

n/a

March 1 - March 31

134,797

25.02

—

n/a

Total

2,617,108

15.28

2,617,108

353,909

25.03

—

(1)

In October 2012, our Board of Directors approved a program to repurchase shares of our ~~Class A~~ common stock on the open market. Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding ~~Class A~~ common stock or (ii) $50 million of our ~~Class A~~ common stock. We may repurchase our ~~Class A~~ common stock in privately negotiated transactions or through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems. Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased. WeThe terms of the Merger Agreement restrict our ability to repurchase shares of our common stock while the merger is pending; however, we may continue to ~~engage~~repurchase shares of our common stock from employees to cover their tax withholdings in ~~an active share repurchase plan.~~connection with the vesting of restricted shares.

During the ~~third~~first quarter of ~~2020, there~~2021, 353,909 shares were ~~no shares~~ purchased in connection with funding employee income tax withholding obligations arising from the vesting of restricted shares.

4335

Table of Contents

Item 6.

Exhibits


~~10.1~~		Credit Agreement, dated October 20, 2020, by and among Waddell & Reed Financial, Inc., the lenders party thereto, Bank of America, N.A., as Administrative Agent for the lenders and Swing Line Lender, and BofA Securities, Inc., as Sole Lead Arranger and Sole Bookrunner. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 001-13913, on October 21, 2020 and incorporated here by reference.
31.1*		Section 302 Certification of Chief Executive Officer

31.2*		Section 302 Certification of Chief Financial Officer

32.1**		Section 906 Certification of Chief Executive Officer

32.2**		Section 906 Certification of Chief Financial Officer

101*		Materials from the Waddell & Reed Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2020,~~March 31, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) related Notes to the 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

4436

Table of Contents

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 ~~30th~~29th day of ~~October 2020.~~April 2021.

	WADDELL & REED FINANCIAL, INC.

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

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

4537


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

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


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

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

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


		September 30, 2020	September 30, 2019

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