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Section 1: 10-K (10-K)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2019

OR

    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 001-13913

WADDELL & REED FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

51-0261715
(I.R.S. Employer
Identification No.)

6300 Lamar Avenue

Overland Park, Kansas 66202

913-236--2000

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   No .

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 .

The aggregate market value of the registrant’s common stock held by non-affiliates based on the closing sale price on June 30, 2019 was $1.20 billion.

Shares outstanding of the registrant’s common stock as of February 7, 2020 Class A common stock, $.01 par value: 67,837,697

DOCUMENTS INCORPORATED BY REFERENCE

In Parts II and III of this Form 10-K, portions of the definitive proxy statement for the 2020 Annual Meeting of Stockholders to be held April 29, 2020.

Index of Exhibits (Pages 52 through 53)

Total Number of Pages Included Are 91

Table of Contents

WADDELL & REED FINANCIAL, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

For the fiscal year ended December 31, 2019

Page

Part I

Item 1.

Business

3

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

25

Item 2.

Properties

25

Item 3.

Legal Proceedings

25

Item 4.

Mine Safety Disclosures

25

Part II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

25

Item 6.

Selected Financial Data

28

Item 7.

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

29

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 8.

Financial Statements and Supplementary Data

49

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

49

Item 9A.

Controls and Procedures

49

Item 9B.

Other Information

51

Part III

Item 10.

Directors, Executive Officers and Corporate Governance

51

Item 11.

Executive Compensation

51

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

51

Item 13.

Certain Relationships and Related Transactions, and Director Independence

51

Item 14.

Principal Accounting Fees and Services

51

Part IV

Item 15.

Exhibits, Financial Statement Schedules

52

Item 16.

Form 10-K Summary

54

SIGNATURES

55

2

Table of Contents

PART I

Forward-Looking Statements

This Annual Report on Form 10-K and the letter to stockholders contain “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 the industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management and assets under administration, distribution sources, expense levels, redemption rates and the financial markets and other conditions. These statements are generally identified by the use of words such 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 or on behalf of the Company is not a guarantee of future performance. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the Item 1 “Business” and Item 1A “Risk Factors” sections of this Annual Report on Form 10-K, which include, without limitation, the adverse effect from a decline in securities markets or in the relative investment performance of our products, our inability to pay future dividends, the loss of existing distribution channels or the inability to access new ones, a reduction of the assets we manage on short notice, and adverse results of litigation and/or arbitration. The forgoing 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 SEC. 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.

ITEM 1.      Business

General

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 Waddell & Reed Advisors group of mutual funds (the “Advisors Funds”) in 1940. Over time we’ve 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”); Ivy High Income Opportunities Fund, a closed-end mutual fund (“IVH”); the Ivy Global Investors Société d’Investissement à Capital Variable (the “SICAV”) and its Ivy Global Investors sub-funds (the “IGI Funds”), an undertaking for the collective investment in transferable securities (“UCITS”); and the Ivy NextShares® exchange-traded managed funds (“Ivy NextShares”) (collectively, the Advisors Funds, Ivy Funds, Ivy VIP, InvestEd, IVH and Ivy NextShares are referred to as the “Funds”). In 2018, we completed the merger of all Advisors Funds into Ivy Funds with substantially similar objectives and strategies, and substantially completed the liquidation of the IGI Funds. In September 2019, Ivy NextShares were liquidated. In addition to the Funds and IGI Funds, our assets under management (“AUM”) include institutional accounts managed by the Company.

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

3

Table of Contents

Organization

We deliver our investment management advisory services through our subsidiary companies, primarily Ivy Investment Management Company (“IICO”), the registered investment adviser for the Ivy Funds, Ivy VIP, InvestEd, and Ivy NextShares; and, prior to completion of the Advisors Funds mergers into Ivy Funds in 2018, Waddell & Reed Investment Management Company (“WRIMCO”), the registered investment adviser for the former Advisors Funds. WRIMCO merged into IICO in 2018.  

Our underwriting and distribution services are delivered through our two broker-dealers: W&R and Ivy Distributors, Inc. (“IDI”). W&R is a registered broker-dealer and investment adviser that acts as the national distributor and underwriter for shares of InvestEd and other mutual funds and as a distributor of variable annuities and other insurance products issued by our business partners, and was the national distributor for the former Advisors Funds. IDI is the distributor and underwriter for the Ivy Funds and Ivy VIP and was the distributor and underwriter for the former Ivy NextShares.

Waddell & Reed Services Company (“WRSCO”) and/or its subagents provide transfer agency and accounting services to the Funds. Waddell & Reed Financial, Inc., W&R, WRIMCO, WRSCO, IICO and IDI are hereafter collectively referred to as the “Company,” “we,” “us” or “our” unless the context requires otherwise.

Investment Management Operations

Our investment management and advisory services provide one of our largest sources of revenues. We earn investment management fee revenues by providing investment management and advisory services pursuant to investment management agreements with the Funds. While the specific terms of the agreements vary, the basic terms are similar. The agreements provide that we render overall investment management services to each of the Funds, subject to the oversight of each Fund’s board of trustees and in accordance with each Fund’s investment objectives and policies. The agreements permit us to enter into separate agreements for shareholder services or accounting services with each respective Fund.

Each Fund’s board of trustees, including a majority of the trustees who are not “interested persons” of the Fund or the Company within the meaning of the Investment Company Act of 1940, as amended (the “ICA”) (“disinterested members”) and the Fund’s shareholders must approve the investment management agreement between the respective Fund and the Company. These agreements may continue in effect from year to year if specifically approved at least annually by (i) the Fund’s board, including a majority of the disinterested members, or (ii) the vote of a majority of both the shareholders of the Fund and the disinterested members of each Fund’s board, each vote being cast in person at a meeting called for such purpose. Each agreement automatically terminates in the event of its assignment, as defined by the ICA or the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and may be terminated without penalty by any Fund by giving us 60 days’ written notice if the termination has been approved by a majority of the Fund’s trustees or the Fund’s shareholders. We may terminate an investment management agreement without penalty on 120 days’ written notice.

In addition to performing investment management services for the Funds, we act as an investment adviser for institutional and other private investors and we provide subadvisory services to other investment companies.  Such services are provided pursuant to various written agreements, and our fees are generally based on a percentage of AUM.

Our investment management team begins each business day in a collaborative discussion that fosters the sharing of information, analysis and ideas, yet reinforces individual accountability. Through all market cycles, we remain dedicated to the following investment principles:

Rigorous fundamental research—an enduring investment culture that dedicates itself to analyzing companies on our own rather than relying exclusively on widely available research produced by others.
Collaboration and accountability—a balance of collaboration and individual accountability, which ensures the sharing and analysis of investment ideas among investment professionals while empowering portfolio managers to shape their portfolios individually.
Focus on growing and protecting client assets—a sound approach that seeks to capture asset appreciation when market conditions are favorable and strives to manage risk during difficult market periods.

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These three principles shape our investment philosophy and money management approach. For over 80 years, our investment organization has delivered consistently competitive investment performance. Through bull and bear markets, our investment professionals have not strayed from what works—fundamental research and a time-tested investment processes. We believe long-term clients turn to us because they appreciate that our investment approach continues to identify and create opportunities for wealth creation.

Our investment management team is comprised of 90 professionals, including 33 portfolio managers who average 24 years of industry experience and 17 years of tenure with our firm. We have significant experience in virtually all major asset classes, several specialized asset classes and a range of investment styles. We continue to move towards team-based portfolio management on our funds and have fortified our research team with additional investment analysts, while continuing to foster a collaborative culture across our investment management professionals. We also engage subadvisors who bring additional expertise in specific asset classes, when appropriate.

Investment Management Products

Our mutual funds provide a wide variety of investment options. We are the exclusive underwriter and distributor of 80 registered mutual fund portfolios in the Funds, which includes 60 investment strategies. During 2018, the remaining Advisors Funds merged into Ivy Funds with substantially similar objectives and strategies and six Ivy Funds and one Ivy VIP fund merged into Ivy Funds and an Ivy VIP fund, respectively, with generally similar investment objectives. Variable products, Ivy VIP and InvestEd are offered primarily through Advisors in our wealth management channel; in some circumstances, certain of those funds are also offered through the unaffiliated channel. The Ivy Funds are offered through both our unaffiliated channel and wealth management channel. The Funds’ AUM are included in either our unaffiliated channel or our wealth management channel depending on which channel marketed the client account or is the broker of record.  We also offer our strategies in other structures, such as institutional separate accounts, collective investment trusts and model-delivery separately managed accounts.  As of December 31, 2019, we managed $70.0 billion in AUM.

Distribution Channels

One of our distinctive qualities is that we distribute our investment products through a balanced distribution network. Our distribution channels cover retail sales channels, including our affiliated wealth manager, W&R, as well as an institutional sales channel.

Unaffiliated Channel

The IDI focused distribution model centers on two sales channels, National Distribution and Professional Buyers Distribution, to best diversify asset flow and the AUM profile of the Company.  AUM in this channel were $26.3 billion at the end of 2019.

National Distribution, inclusive of National Accounts and National Wholesale, drives sales throughout the nationwide broker-dealer network. The National Accounts team focuses on firm home office interactions and the National Wholesale team focuses on driving sales at the financial advisor level. This alignment provides a holistic, cohesive and collaborative sales and service approach to our national broker-dealer partners. National Wholesale includes 24 external wholesalers, four of which are exclusively devoted to W&R.

Professional Buyers Distribution focuses on sales and service across the institutional, consultant relations, insurance, registered investment advisor (“RIA”) and defined contribution investment only (“DCIO”) categories. Unifying sales strategies within the Professional Buyers Distribution group brings collaboration, shared knowledge and enhanced service levels to key institutional, retirement, insurance and RIA clients that require specialized interactions and communication.

The Distribution Operations team supports IDI’s sales and service-related processes including training, business intelligence, client relationship management and sales systems, and practice management. This group also includes IDI’s professional client experience team, which creates key client-facing deliverables utilized by both distribution groups. The Distribution Operations team is designed to help increase the overall knowledge and responsiveness of the entire distribution channel.

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Wealth Management Channel

Throughout our history and continuing today, Advisors sell investment products to individuals, families and businesses across the country in geographic markets of all sizes. Advisors assist clients on a wide range of financial issues with a significant focus on helping them plan, generally, for long-term goals and offer one-on-one consultations that emphasize long-term relationships through continued service.

Over the past several years, we have expanded our wealth management platform technology and product offering, while continuing to make investments that allow Advisors to simplify the way they conduct business with clients. In 2019, we introduced a texting program for mobile and desktop use to all Advisors. This application allows Advisors to text clients, manage, schedule and track messages and integrate messaging with their customer relationship management system. Also in 2019, we expanded services and advanced planning support and introduced a custom coaching and practice-building program. The program allows Advisors to review key aspects of their business, access direct coaching from industry experts, and personalize a plan for practice growth and continued progress.  We continue to work to transform W&R into a fully competitive and profitable aspect of our business model. These efforts include enhancing the compensation program for Advisors, investing in a new advisor technology platform, transitioning advisors currently leasing space in W&R offices to personal branch offices and redesigning services offered to Advisors. These additional enhancements will continue in the future and are designed to increase our ability to retain and competitively recruit experienced Advisors.  

As of December 31, 2019, there were 939 Advisors and 388 licensed advisor associates, for a total of 1,327 licensed individuals associated with W&R who operate out of offices located throughout the United States. Based on industry data, W&R ranks among the largest independent broker-dealers. As of December 31, 2019, our wealth management channel had AUM of $40.6 billion.

Institutional Channel

We also manage assets in a variety of investment styles for a variety of types of institutions. The largest client type is other asset managers that hire us to act as subadvisor for their branded products; they are typically domestic 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. AUM in the institutional channel were $3.1 billion at December 31, 2019.

Wealth Management Products and Services

Since 1937, W&R has been committed to our client’s financial goals.  W&R offers a variety of sophisticated and personalized financial planning services to address virtually any client goal, objective or situation including retirement planning, education planning, survivor needs, asset allocation, estate planning, business planning, income tax planning, disability and long-term care.  W&R offers a variety of products to clients including fee-based, asset allocation advisory products, mutual funds, general securities, 529 college savings plans, retirement plans and insurance and annuities. In 2019, W&R launched WaddellONE, a centralized advisor technology platform available to all Advisors.  Through WaddellONE, Advisors have direct connectivity to several of the firm’s existing technology partners with the added benefit of market data, research and news coverage.    

W&R offers clients full-service brokerage services as well as a variety of fee-based asset allocation programs, including Managed Allocation Portfolio (“MAP”), MAPChoice, MAPFlex, MAPSelect, MAPLatitude, MAPNavigator and Strategic Portfolio Allocation (“SPA”). These programs utilize a variety of underlying investment options including mutual funds, individual stocks and bonds and exchange traded funds (“ETFs”) and are part of the evolution of our fully independent wealth management business model. During 2019, we launched Guided Investment Strategies and MAPDirect. Guided Investment Strategies provides Advisors multiple options for outsourcing investment management to institutional, third party investment managers.  The program consists of four ETF options and one mutual fund option.  The ETF portfolios are managed by PMC, Wilshire Associates, BlackRock and State Street Global Advisors.  The mutual fund option consists of both affiliated and unaffiliated mutual fund options and is managed with discretion by Wilshire Associates.  MAPDirect is a new fee-based asset allocation program offering investment options from multiple mutual fund managers, including access to more than 1,800 individual mutual funds and nearly 200 ETFs.  As of December 31, 2019, clients had $26.9 billion invested in our fee-based asset allocation programs.

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Through W&R, we distribute various variable annuity products, some of which offer our affiliated Ivy VIP funds as an investment vehicle.  Through our insurance agency subsidiaries, Advisors also offer clients retirement and life insurance products underwritten by our business partners. We offer unaffiliated mutual fund products, other variable annuity products, and full-service brokerage products and services through a third party clearing broker-dealer.  

AUA includes both client assets invested in the Funds and in other companies’ products that are distributed through W&R and held in brokerage accounts or within our fee-based asset allocation programs. As of December 31, 2019, we managed AUA of $60.1 billion.

Service Agreements

We earn service fee revenues by providing various services to the Funds and their shareholders. Pursuant to shareholder servicing agreements, we perform shareholder servicing functions for which the Funds pay us a monthly fee, including: maintaining shareholder accounts; issuing, transferring and redeeming shares; distributing dividends and paying redemptions; furnishing information related to the Funds; and handling shareholder inquiries. During 2019, the Company outsourced the transactional processing operations of its internal transfer agency, which provides some of these services.  Pursuant to accounting service agreements, we provide the Funds with accounting and administrative services and assistance for which the Funds pay us a monthly fee, including: maintaining the Funds’ records; pricing Fund shares; and preparing prospectuses for existing shareholders, proxy statements and certain other shareholder reports.  Agreements with the Funds may be adopted or amended with the approval of the disinterested members of each Fund’s board of trustees and have annually renewable terms.

Competition

The financial services industry is a highly competitive global industry. According to the Investment Company Institute (the “ICI”), at the end of 2019 there were more than 9,400 open-end investment companies, more than 500 closed-end investment companies and more than 2,000 exchange traded funds of varying sizes, investment policies and objectives whose shares are being offered to the public in the United States alone. Factors affecting our business include investment performance, fees, brand recognition, business reputation, quality of service and the continuity of both client relationships and AUM. A majority of mutual fund sales go to funds that are highly rated by a small number of well-known ranking services that focus on investment performance. Competition is influenced by the achievement of competitive investment management performance, distribution methods, the type and quality of shareholder services, the success of marketing efforts and the ability to develop investment products for certain market segments to meet the changing needs of investors.

We compete with other mutual fund management, distribution and service companies that distribute their fund shares through a variety of methods, including affiliated and unaffiliated sales forces, broker-dealers and direct sales to the public of shares offered at a low or no sales charge. Many larger mutual fund complexes have significant advertising budgets and established relationships with brokerage houses with large distribution networks, which enable these fund complexes to reach broad client bases. In recent years, there has been a trend of consolidation in the mutual fund industry resulting in competitors with greater financial resources than us. Many investment management firms and unaffiliated advisors offer services and products similar to ours. We also compete with brokerage and investment banking firms, insurance companies, commercial banks and other financial institutions and businesses offering other financial products in all aspects of their businesses.

The distribution of mutual funds and other investment products has experienced significant evolution and change in recent years, which have intensified the competitive environment. Changes include the introduction of new products, the rationalization of the number of products offered on third party platforms, increasingly complex distribution systems with multiple classes of shares, the development of investors’ ability to invest online and through mobile applications, the introduction of sophisticated technological platforms used by financial advisors to sell and service mutual funds for their clients, the introduction of separately managed accounts—previously available only to institutional investors—to individuals, and growth in the number of mutual funds offered.  In recent years, we have faced significant competition from passive investment strategies, which have taken market share from active managers like ourselves.  While we cannot predict how much market share these competitors will gain, we believe there will always be demand for active management.

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We believe we effectively compete across multiple dimensions of the asset management and wealth management businesses.  First, we market our products, primarily the Ivy Funds family, to unaffiliated broker-dealers and advisors and compete against other asset managers offering mutual fund products. Competition is impacted by sales techniques, personal relationships and skills, and the quality of financial planning products and services offered. We compete against a broad range of asset managers and wealth managers that are both larger and smaller than our firm, but we believe that the breadth and depth of our products position us to compete in this environment. Second, we believe our business model targets clients seeking personal assistance from financial advisors or planners. The market for financial advice is extremely broad and fragmented. Advisors compete with large and small broker-dealers, unaffiliated advisors, registered investment advisers, financial institutions, insurance representatives and others. Finally, we compete in the institutional marketplace, working with consultants who select asset managers for various opportunities, as well as working directly with plan sponsors, foundations, endowments, sovereign funds and other asset managers who hire subadvisors.

We also face competition in attracting and retaining qualified employees and Advisors. To maximize our ability to compete effectively in our business, we offer competitive compensation. We are advancing our culture by focusing on our Core Values and further investing in our people through areas such as talent management, employee experience, diversity and inclusion and total rewards.  For Advisors, we enhanced our compensation program and continue to build on our value proposition through enhancements to technology, products and a leading service model. We also boosted our recruiting efforts nationally and have an expanded national recruiting team in place whose focus is to attract, build relationships with and, ultimately, add experienced financial advisors to W&R’s national network.

For additional discussion regarding the impact of competition, please see the Market and Competition risk factors included in Item 1A—“Risk Factors” in this Annual Report.

Regulation

The securities industry is subject to extensive regulation and virtually all aspects of our business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and shareholders of registered investment companies. Under such laws and regulations, agencies and organizations that regulate investment advisers, broker-dealers, and transfer agents have broad administrative powers, including the power to limit, restrict or prohibit an investment adviser, broker-dealer or transfer agent from carrying on its business in the event that it fails to comply with applicable laws and regulations. In such event, the possible sanctions that may be imposed include, but are not limited to, the suspension of individual employees or agents, limitations on engaging in certain lines of business for specified periods of time, censures, fines and the revocation of investment adviser and other registrations.

The United States Securities and Exchange Commission (the “SEC”) is the federal agency responsible for the administration of federal securities laws. Two of our subsidiaries, W&R and IICO, are registered with the SEC as investment advisers under the Advisers Act, which imposes numerous obligations on registered investment advisers including, among other things, fiduciary duties, record-keeping and reporting requirements, operational requirements and disclosure obligations, as well as general anti-fraud prohibitions. Investment advisers are subject to periodic examination by the SEC, and the SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from censure to termination of an investment adviser’s registration.

The Funds are registered as investment companies with the SEC under the ICA, and various filings are made with states under applicable state rules and regulations. The ICA regulates the relationship between a mutual fund and its investment adviser and prohibits or severely restricts principal transactions and joint transactions. Various regulations cover certain investment strategies that may be used by the Funds for hedging and/or speculative purposes. To the extent the Funds purchase futures contracts, options on futures contracts, swaps and foreign currency contracts above certain de minimis thresholds established by the Commodity Futures Trading Commission (the “CFTC”), they are subject to the commodities and futures regulations of the CFTC.

The Company is also subject to federal and state laws affecting corporate governance, including the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC. Our report on internal controls over financial reporting for 2019 is included in Part I, Item 9A.  As a publicly traded company, we are also subject to the rules of the New York Stock Exchange (the “NYSE”), the exchange on which our stock is listed, including the corporate governance listing standards approved by the SEC.

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Two of our subsidiaries, W&R and IDI, are registered as broker-dealers with the SEC and the states. Much of the broker-dealer regulation has been delegated by the SEC to self-regulatory organizations, principally the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority, Inc. (“FINRA”), which is the primary regulator of our broker-dealer activities. These self-regulatory organizations adopt rules (subject to approval by the SEC) that govern the industry and conduct periodic examinations of our operations over which they have jurisdiction. Securities firms are also subject to regulation by state securities administrators in those states in which they conduct business. Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales practices, market making and trading among broker-dealers, the use and safekeeping of clients’ funds and securities, capital structure, record-keeping, and the conduct of directors, officers, employees and associated persons. Violation of applicable regulations can result in the revocation of broker-dealer licenses, the imposition of censures or fines, and the suspension or expulsion of a firm, its officers or employees.

W&R and IDI are each subject to certain net capital requirements pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Uniform Net Capital Rule 15c3-1 of the Exchange Act (the “Net Capital Rule”) specifies the minimum level of net capital a registered broker-dealer must maintain and also requires that part of its assets be kept in a relatively liquid form. The Net Capital Rule is designed to ensure the financial soundness and liquidity of broker-dealers. Any failure to maintain the required minimum net capital may subject us to suspension or revocation of our registration or other limitations on our activity by the SEC, and suspension or expulsion by FINRA or other regulatory bodies, and ultimately could require the broker-dealer’s liquidation. The maintenance of minimum net capital requirements may also limit our ability to pay dividends. As of December 31, 2019 and 2018, net capital for W&R and IDI exceeded all minimum requirements.

Pursuant to the requirements of the Securities Investor Protection Act of 1970, W&R is a member of the Securities Investor Protection Corporation (the “SIPC”). IDI is exempt from the membership requirements and is not a member of the SIPC. The SIPC provides protection against lost, stolen or missing securities (but not loss in value due to a rise or fall in market prices) for clients in the event of the failure of a broker-dealer. Accounts are protected up to $500,000 per client with a limit of $250,000 for cash balances. However, since the Funds, and not our broker-dealer subsidiaries, maintain client accounts, SIPC protection would not cover mutual fund shareholders whose accounts are maintained directly with the Funds, but would apply to brokerage accounts held on our brokerage platform.

Title III of the USA PATRIOT Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, imposes significant anti-money laundering requirements on all financial institutions, including domestic banks and domestic operations of foreign banks, broker-dealers, futures commission merchants and investment companies.

The Company and Advisors in our wealth management channel are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and related provisions of the Internal Revenue Code of 1986, as amended, to the extent they are considered “fiduciaries” under ERISA with respect to certain clients.  In April 2016, the U.S. Department of Labor (the “DOL”) adopted regulations that, among other things, treated as fiduciaries any person who provides investment advice or recommendations to employee benefit plans, plan fiduciaries, plan participants, plan beneficiaries, IRAs or IRA owners (the “DOL Fiduciary Rule”). Although the U.S. Court of Appeals for the Fifth Circuit vacated the DOL Fiduciary Rule, the DOL is expected to re-propose these regulations and other regulators have enacted or proposed other fiduciary standards. For example, in June 2019, the SEC adopted a package of rulemakings, including Regulation Best Interest, Form CRS Relationship Summary (“Form CRS”), and interpretations, including an interpretation of an investment adviser’s fiduciary standard of conduct and when broker-dealers are deemed to provide advice that is “solely incidental” to brokerage services and thus not subject to the Advisers Act, which are intended to enhance the quality and transparency of retail investors’ relationships with broker-dealers and investment advisers. In addition, certain states have enacted or proposed fiduciary and best interest standards for broker-dealers.

Our businesses may be materially affected not only by regulations applicable to investment advisers, broker-dealers or transfer agents, but also by law and regulations of general application. For example, the volume of our principal investment advisory business in a given time period could be affected by, among other things, existing and proposed tax legislation and other governmental regulations and policies (including the interest rate policies of the Federal Reserve Board), and changes in the interpretation or enforcement of existing laws and rules that affect the business and financial communities.

Our business is also subject to new and changing laws and regulations. For additional discussion regarding the impact of current and proposed legal or regulatory requirements, please see the Legal, Regulatory and Tax risk factors

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included in Item 1A—“Risk Factors” in this Annual Report.

Intellectual Property

We regard our names as material to our business and have registered certain service marks associated with our business with the United States Patent and Trademark Office.

Employees

At December 31, 2019 we had 1,162 full-time employees, consisting of 1,073 home office employees and 89 employees responsible for field supervision and administration.

Available Information

We make available free of charge our proxy statements, Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports under the “Reports & SEC Filings” menu on the “Investor Relations” section of our internet website at ir.waddell.com as soon as reasonably practical after such filing has been made with the SEC.

ITEM 1A.   Risk Factors

You should carefully consider the following risk factors as well as the other risks and uncertainties contained in this Annual Report on Form 10-K or in our other SEC filings. The occurrence of one or more of these risks or uncertainties could materially and adversely affect our business, financial condition, operating results and cash flows. In this Annual Report on Form 10-K, unless the context expressly requires a different reading, when we state that a factor could “adversely affect us,” have a “material adverse effect on our business,” “adversely affect our business” and similar expressions, we mean that the factor could materially and adversely affect our business, financial condition, operating results and cash flows. Information contained in this section may be considered “forward-looking statements.” See “Part I—Forward Looking Statements” for a discussion of cautionary statements regarding forward-looking statements.

MARKET AND COMPETITION RISKS

We Could Experience Adverse Effects On Our Market Share Due To Competition. The investment management industry is highly competitive.  We compete with investment management firms, wealth management companies, investment banking firms, insurance companies, banks, internet investment sites, mobile investment products, automated financial advisors, registered investment advisers, and other financial institutions and individuals based on a number of factors, including investment performance, the level of fees charged, the quality and diversity of products and services offered, name recognition and reputation, and the ability to develop new investment strategies and products to meet the changing needs of investors. Many of these competitors not only offer mutual fund investments and services, but also offer an ever-increasing number of other financial products and services, and have better brand recognition.  See Item 1 – “Business – Competition.”  If existing or potential clients decide to invest with our competitors instead of with us, our market share could decline, which could have a material adverse effect on our business.

There are a number of asset classes and product types that are not well covered by our current products and services. When these asset classes or products are in favor with investors, our competitors may receive outsized flows compared to others in the industry.  As a result, we may miss the opportunity to gain the AUM that are being invested in these assets and face the risk of our managed assets being withdrawn in favor of competitors who offer these classes or products.  For example, the trend in recent years in the asset management business in favor of lower fee, passive investment strategies, such as index and certain types of exchange-traded funds, favors our competitors who provide those products over active managers like us. In addition, we are not typically the lowest cost provider of asset management services. To the extent that we compete on the basis of price, we may not be able to maintain our current fee structure, which could adversely affect our operating revenues.

Our Business And Prospects Could Be Adversely Affected If The Securities Markets Decline or are Volatile. Our results of operations are affected by certain economic factors, including the success of the securities markets. There are often substantial fluctuations in price levels in the securities markets. These fluctuations can occur on a daily basis and over longer periods as a result of a variety of factors, including national and international economic and political events,

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broad trends in business and finance, and interest rate movements.  Adverse market conditions, particularly in the U.S. domestic stock market due to our high concentration of AUM in that market, and lack of investor confidence could result in investors further withdrawing from the markets or decreasing their rate of investment, either of which could adversely affect our revenues, earnings and growth prospects.

Our revenues are, to a large extent, investment management fees that are based on the market value of AUM and AUA.  A decline in the securities markets may cause the value of our AUM and/or AUA to decline or cause investors to redeem or sell assets in favor of investments they perceive offer greater opportunity or lower risk, both of which decrease investment management and other fees and could significantly reduce our revenues and earnings.  We do not hedge our revenue stream from this risk through derivatives or other financial contracts.  Our growth is dependent to a significant degree upon our ability to attract and retain mutual fund assets and advisory assets, and, in an adverse economic environment, this may prove more difficult.  The combination of adverse market conditions reducing both sales and investment management fees could compound one another and materially affect our business.

There May Be Adverse Effects On Our Business If Our Funds’ Performance Declines.  Success in the investment management and mutual fund businesses, including the growth and retention of AUM, is dependent on the investment performance of client accounts relative to market conditions and the performance of competing funds.  From time to time, we may experience poor investment performance, on a relative or absolute basis, in certain products or accounts that we manage, which may contribute to a significant reduction in our AUM and revenues.  A Fund’s performance record is calculated over various trailing periods and, therefore, the Fund’s underperformance may continue to be reflected in a particular trailing period long after the Fund’s performance has improved.  Accordingly, the Fund may experience delays in realizing, or may not realize, any increase in asset flows from improved performance. Good relative performance stimulates sales of the Funds’ shares and tends to keep redemptions low.  Sales of the Funds’ shares in turn generate higher management fees and distribution revenues. Good relative performance may also attract institutional accounts and may result in higher ratings or rankings by research services such as Morningstar, Lipper or eVestment Alliance, which may compound the foregoing effects. Conversely, poor relative performance results in decreased sales, increased redemptions of the Funds’ shares and the loss of institutional accounts, resulting in decreases in our AUM and revenues.  Poor investment performance also may adversely affect our ability to expand the distribution of our products through unaffiliated third parties.  Further, any drop in market share of mutual fund sales in our wealth management channel may further reduce profits as sales of unaffiliated mutual funds are less profitable than sales of our Funds.  

As of December 31, 2019, 39% our AUM were concentrated in five Funds. As a result, our operating results are significantly affected by the performance of those Funds and our ability to minimize redemptions from and maintain AUM in those Funds. If we experienced a significant amount of redemptions of those Funds for any reason, our revenues would decline and our operating results would be adversely affected. Further, any adverse performance of those Funds may also indirectly affect the net sales and redemptions in our other products, which in turn, may adversely affect our business.  

Changes In The Distribution Channels In Which We Operate Could Reduce Our Net Revenues and Adversely Affect Our AUM, Revenues and Growth Prospects.  Our ability to market and distribute mutual funds and other investment products we manage is significantly dependent on access to third party financial intermediaries that distribute these products.  We sell a significant portion of our investment products through a variety of such intermediaries, including major wire houses, national and regional broker-dealers, defined contribution plan administrators, retirement platforms and registered investment advisers.  AUM in our unaffiliated channel at December 31, 2019 were $26.3 billion, or 38% of total AUM.  It would be difficult for us to acquire or retain the management of those assets without the assistance of the intermediaries.  As third party intermediaries rationalize and reduce the number of product offerings on their platforms, including in response to new best interest and  fiduciary standards, we cannot provide assurances that we will be able to maintain an adequate number of investment product offerings, or access to these intermediaries, which could have a material adverse effect on our business.  Relying on third party intermediaries also exposes us to the risk of increasing costs of distribution, as certain intermediaries with which we conduct business charge fees (largely determined by the distributor) to maintain access to their distribution networks.  If we choose not to pay such fees, our ability to distribute through those intermediaries would be limited; significant increases in such fees will cause our distribution costs to increase, which could lower our profitability.  In addition, over time, certain sectors of the financial services industry have become considerably more concentrated, as financial institutions involved in a broad range of financial services have been acquired by or merged into other firms.

Over half of our AUM, $40.6 billion, or 58%, as of December 31, 2019 are held in our wealth management channel.  The investment products distributed in our wealth management channel include our Funds and other products,

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as well as products issued by unaffiliated mutual fund companies.  A significant portion of the sales in this channel are sales of Funds, upon which we earn higher revenues from asset management fees as compared to the sale of unaffiliated funds.  Sales of affiliated investment products in our wealth management channel may decrease (and redemptions increase) materially with the introduction of additional unaffiliated investment products in our advisory programs.  Further, qualified accounts, particularly IRAs, make up a significant portion of our AUM and AUA in this channel, and a significant portion of those retirement assets are invested in our affiliated products.  The introduction of additional unaffiliated products in this channel, sustained underperformance of key investment products, and the implementation of best interest and fiduciary standards could cause us to experience lower sales of our affiliated investment products, increased redemptions, or other developments that may not be fully offset by higher distribution revenues or other benefits.  As a result, our AUM, AUA, revenues and earnings may decline.  See “Legal, Regulatory and Tax Risks below for the impact that changes to standards of conduct applicable to broker-dealers and investment advisers and potential fiduciary standards may have on our business, including our distribution activities”

Increasingly, investors, particularly in the institutional market, rely on external consultants and other third party financial professionals for advice on the choice of an investment adviser and investment portfolio. Further, the institutional account business uses referrals from investment consultants, investment advisers and other professionals.  These consultants and third parties tend to exert a significant degree of influence over their clients’ choices, and they may favor a competitor of ours.  We cannot assure that our investment offerings will be among their recommended choices in the future. The Company cannot be certain that it will continue to have access to these third party distribution channels or have an opportunity to offer some or all of its investment products through these channels.  Further, their recommendations can change over time and we could lose their recommendation and their client assets under our management.  Any failure to maintain strong business relationships with these distribution sources and the consultant community could impair our ability to sell our products, which in turn could have a negative effect on our revenues and profitability.

A Significant Percentage Of Our AUM Are Distributed Through Our Unaffiliated Channel, Which Has Higher Redemption Rates Than Our Wealth Management Channel.  The percentage of our AUM in the unaffiliated channel was 38% at December 31, 2019, and the percentage of our total sales represented by the unaffiliated channel was 60% for the year ended December 31, 2019.  The success of sales in our unaffiliated channel depends upon our maintaining strong relationships with certain strategic partners, third party distributors and institutional accounts, as well as on the performance of our investment products marketed through this channel.  Many of those distribution sources also offer investors competing funds that are internally or externally managed, or may reduce the number of competing products on their platforms through systemic rationalization and reduction, which could limit the distribution of our products. The loss of any of these distribution channels and the inability to continue to access new distribution channels could decrease our AUM and adversely affect our results of operations and growth.  There are no assurances that these channels and their client bases will continue to be accessible to us.  The loss or diminution of the level of business we do with those providers could have a material adverse effect on our business.  Compared to the industry average redemption rate of 21.7% and 24.9% for the years ended December 31, 2019 and 2018, the unaffiliated channel had redemption rates of 38.1% and 38.7% for the years ended December 31, 2019 and 2018, respectively.  Redemption rates were 13.8% and 13.9% for our wealth management channel in the same periods, reflecting the higher rate of transferability of investment assets in the unaffiliated channel.  However, the modernization of our wealth management platforms and products and the introduction of additional unaffiliated investment products in our advisory programs, as well as changes resulting from the implementation of new best interest and fiduciary standards, may result in a higher redemption rate in our wealth management channel, as Advisors may move to sell more unaffiliated products.  An increase in the sale of unaffiliated mutual funds compared to sales of the Funds in our wealth management channel may reduce profits, as sales of unaffiliated mutual funds are less profitable than sales of our Funds.  See “Legal, Regulatory and Tax Risks.”

Fee Pressures Could Reduce Our Revenues And Profitability. There is an accelerating trend toward lower fees in some segments of the investment management business. The SEC has adopted rules that are designed to alter mutual fund corporate governance, which could result in further downward pressure on investment advisory fees in the mutual fund industry. Investors and clients are increasingly fee sensitive. Active management continues to experience pressure by increased flows to lower fee passive products.  This trend has resulted in pressure on active management firms to reduce fees to compete with passive products.  New best interest and fiduciary standards could increase fee pressure as financial advisors may have more fee sensitivity given their higher standard of conduct.  In addition, competition could cause us to reduce the fees we charge for products and services.  In the event that competitors charge lower fees for substantially similar products, we may be forced to compete on the basis of price in order to attract and retain clients.  In the ordinary course of our business, we may reduce or waive investment management fees, or limit total expenses, on certain products or services for particular time periods to manage fund expenses, or for other reasons, and to help retain or

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increase AUM. The investment management agreements with the Funds continue in effect from year to year only if approved by the Funds’ board of trustees. Periodic review of these advisory agreements could result in a reduction in investment management fee revenues received from the Funds. Accordingly, there can be no assurance that we will be able to maintain our current fee structure.  Fee reductions on existing or future new business could reduce our operating revenues and may adversely affect our business, future revenue and profitability.

The fees we earn vary depending on the type of asset managed, the type of client, the type of asset management product or service provided and whether the product is sub-advised.  A shift in the mix of our AUM from higher revenue-generating assets to lower revenue-generating assets may result in a decrease in our operating revenues even if our aggregate AUM do not change.  There can be no assurance that we will achieve a more favorable product mix in the future.  

Our Ability To Attract And Retain Key Personnel Is Significant To Our Success And Growth. Our success is largely dependent on our ability to attract and retain highly skilled personnel, including our corporate officers, portfolio managers, investment analysts, and sales and client relationship personnel, many of whom have specialized expertise and extensive experience in our industry.  The market for experienced asset management personnel is extremely competitive, and is increasingly characterized by the movement of employees among different firms.  Most of our employees do not have employment agreements, and generally can terminate their employment with us at any time.  Those employees who are subject to employment agreements are generally eligible to terminate their employment at any time upon written notice. Due to the competitive market for these professionals and the success of our highly skilled employees, our costs to attract and retain key personnel are significant.  If we are unable to offer competitive compensation or otherwise attract and retain talented individuals, the Company’s ability to execute its strategic objectives, compete effectively and retain its existing clients may be materially impacted.  Because the investment track record of many of our products and services is often attributed to a small number of individual employees, the departure of one or more of these employees could damage our reputation and result in the loss of assets or client accounts, which could have a material adverse effect on our results of operations and financial condition.  If we are unable to attract and retain qualified personnel, it could damage our reputation, make it more difficult to retain and attract new employees, cause our retention costs to increase significantly, and materially adversely impact our financial condition and results of operations.    

Additionally, a significant portion of the sales of our mutual funds, investment products, annuities and insurance products are sold in our wealth management channel. Our growth prospects are directly affected by the quality, quantity and productivity of Advisors who continue to manage their independent practices through their association with us.

There May Be An Adverse Effect On Our Business If Our Investors Redeem The Assets We Manage On Short Notice.  Our investment management agreements with institutions and other non-mutual fund accounts are generally terminable upon relatively short notice, and investors in the Funds that we manage may redeem their investments in the Funds at any time without prior notice.  Institutional and individual clients can terminate their relationships with us, reduce the aggregate amount of AUM, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment trends, investment performance, changes in prevailing interest rates, changes in investment preferences of clients, changes in our reputation in the marketplace, changes in management or control of clients or third party distributors with whom we have relationships, loss of key investment management or other personnel, and financial market performance.  In addition, in a declining securities market, the pace of mutual fund redemptions and withdrawal of assets from other accounts could accelerate. Poor investment performance generally or relative to other investment management firms tends to result in decreased purchases of Fund shares, increased redemptions of Fund shares, and the loss of institutional or individual accounts.  Historically, the risk of our investors redeeming their investments in the Funds on short notice has been greater for assets in our unaffiliated channel.  Additionally, redemptions in our wealth management channel may increase materially with the introduction of additional unaffiliated investment products in our advisory programs.  The implementation of new best interest and fiduciary standards could also result in increased redemptions.  An increase in redemptions and the corresponding decrease in our AUM may have a material adverse effect on our business.

There May Be Adverse Effects On Our Business Upon The Termination Of, Or Failure To Renew, Certain Agreements.  A majority of our revenues are derived from investment management agreements with the Funds that, as required by law, are terminable on 60 days’ notice. Each investment management agreement must be approved and renewed annually by the disinterested members of each Fund’s board of trustees or its shareholders, as required by law.  Additionally, our investment management agreements provide for automatic termination in the event of assignment, which includes a change of control, without the consent of our clients and, in the case of the Funds, approval of the Funds’ board of trustees and shareholders to continue the agreements.  There can be no assurances that our clients will consent to any

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assignment of our investment management agreements, or that those and other contracts will not be terminated or will be renewed on favorable terms, if at all, at their expiration and new agreements may not be available. The decrease in revenues that could result from any such event could have a material adverse effect on our business.

We May Be Unable To Develop New Products And Support Provided To New Products May Reduce Fee Revenue, Increase Expenses And Expose Us To Potential Loss On Invested Capital.  Our financial performance depends, in part, on our ability to develop, market and manage new investment products and services, which may require significant time and resources, as well as ongoing support and investment.  Substantial risk and uncertainties are associated with the introduction of new products and services, including the implementation of new and appropriate operational controls and procedures, shifting client and market preferences, the introduction of competing products or services, and compliance with regulatory requirements. A failure to continue to innovate to introduce new products and services, or to manage successfully the risks associated with such products and services, may impact our market share relevance and may cause our AUM, revenue and earnings to decline.  In addition, changes to the standards of conduct applicable to broker-dealers and investment advisers could require modifications to our distribution activities and impact our ability to engage in certain types of distribution or other business activities.

Additionally, we may support the development of new investment products by waiving a portion of the fees we usually receive for managing such products, by subsidizing expenses, or by making seed capital investments.  There can be no assurance that new investment products we develop will be successful, which could have a material adverse effect on our business. Failure to have or devote sufficient capital to support new products could have an adverse impact on our future growth. Seed capital investments in new products utilize capital that would otherwise be available for general corporate purposes and expose us to capital losses due to investment market risk.  Our non-operating investment and other income could be adversely affected by the realization of losses upon the disposition of our investments or the recognition of significant other-than-temporary impairments in the case of our available-for-sale portfolio and the recognition of unrealized losses related to our sponsored investment portfolios that are held as trading and accounted for under the equity method.  We may use various derivative instruments to mitigate the risk of our seed capital investments, although some market risk would remain. The risk of loss may be greater for seed capital investments that are not hedged, or if an intended hedge does not perform as expected.  Our use of derivatives would result in counterparty risk in the event of non-performance by counterparties to these derivative instruments, regulatory risk and the risk that the underlying positions do not move in relation to the related derivative instruments.  As a result, volatility in the capital markets may affect the value of our seed capital investments, which may increase the volatility of our earnings and adversely affect our business.

The Failure Or Negative Performance Of Products Offered By Competitors May Cause AUM In Our Similar Products To Decline Irrespective Of The Performance Of Our Products.  Many competitors offer similar products to those offered by us and the failure or negative performance of competitors’ products or the loss of confidence in a product type could lead to a loss of confidence in similar products offered by us, irrespective of the performance of our products. Any loss of confidence in a product type could lead to redemptions in such products, which may cause the Company’s AUM to decline and materially affect our business.

The Impairment Or Failure Of Other Financial Institutions Could Adversely Affect Our Business.  We routinely execute transactions with counterparties, including brokers-dealers, commercial and investment banks, clearing organizations, mutual and hedge funds, and other institutional clients that expose us or the Funds or accounts we manage to operational, credit or other risks in the event that a counterparty with whom the Company transacts defaults on its obligations or if there are other unrelated systemic failures in the markets.  Although we regularly assess risks posed by counterparties, such counterparties may be subject to sudden swings in the financial and credit markets that may impair their ability to perform or they may otherwise fail to meet their obligations.  Any such impairment failure could negatively impact the performance of products or accounts we manage, which could lead to the loss of clients and may cause our AUM, revenue and earnings to decline.

Restrictions On Our Ability To Use “Soft Dollars” Could Result In An Increase In Our Expenses. On behalf of our mutual fund and investment advisory clients, we make decisions to buy and sell securities for each portfolio, select broker-dealers to execute trades, and negotiate brokerage commission rates. In connection with these transactions, we may receive “soft dollar credits” from broker-dealers that we can use to defray certain of our research and brokerage expenses consistent with Section 28(e) of the Securities Exchange Act of 1934, as amended. We may be limited in our ability to use “soft dollars”. If our use of “soft-dollars” decreases or is eliminated, including due to the adoption of regulations, or if the “soft dollars” we generate decrease because of reductions to our AUM or commission rates, our operating expenses could increase. The Markets in Financial Instruments Directive II (“MiFID II”), which was effective in Europe in January 2018,

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regulates the use of “soft dollars” to pay for research and other services. Although MiFID II does not apply to our investment management business in the United States, it may result in changes to industry practice that limits our use of “soft dollars”.

LEGAL, REGULATORY AND TAX RISKS

Regulatory Risk Is Substantial In Our Business And Regulatory Reforms Could Have A Material Adverse Effect On Our Business.    Virtually all aspects of our business, including the activities of our parent company and our investment advisory and wealth management subsidiaries, are heavily regulated, primarily at the federal level.  See Item 1 – “Business – Regulation.” The regulatory environment in which we operate frequently changes and has seen a significant increase in regulation in recent years, which could have a material adverse effect on our business.

Potential impacts of current or proposed legal or regulatory requirements include, without limitation, the following:

In Washington, D.C., there has been an increased focus on the framework of the U.S. retirement system. Although the DOL Fiduciary Rule was vacated, we already had implemented a number of business and compliance initiatives in order to change our distribution methods and operations in response to the DOL Fiduciary Rule.  The DOL is expected to promulgate in the future a rule to replace the DOL Fiduciary Rule that could impose materially different requirements on the Company and make such changes implemented in response to the DOL Fiduciary Rule unnecessary or no longer appropriate. Such a rule could also impose additional or different requirements on the Company than the SEC’s Regulation Best Interest and standards adopted by one or more states. Additionally, changes to the current retirement system framework may impact our business in other ways. For example, proposals to reduce contributions to IRAs and defined contribution plans for certain individuals, as well as potential changes to defined benefit plans, may result in increased plan terminations and reduce our opportunity to manage and service retirement assets.
In June 2019, the SEC adopted a package of rulemakings and interpretations, including Regulation Best Interest and Form CRS, as well as the SEC’s interpretation of an investment adviser’s fiduciary standard of conduct and when broker-dealers are deemed to provide advice that is “solely incidental” to brokerage services and thus not subject to the Advisers Act, which are intended to enhance the quality and transparency of retail investors’ relationships with broker-dealers and investment advisers.  Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing suitability obligations and requires compliance with disclosure, care, conflict of interest and compliance obligations.  Form CRS requires broker-dealers and registered investment advisers to provide a brief relationship summary to retail investors, including (i) the types of client and customer relationships and services the firm offers, (ii) the fees, costs, conflicts of interest and required standard of conduct associated with those relationships and services, (iii) whether the firm and its financial professionals currently have reportable legal or disciplinary history; and (iv) how to obtain additional information about the firm.  The compliance date for Regulation Best Interest and Form CRS is June 30, 2020.  In addition, certain states have enacted or proposed fiduciary and best interest standards for broker-dealers.  The SEC and state requirements may have a material impact on the provision of investment services to retail investors, including imposing additional compliance, reporting and operational requirements, which could negatively affect our business, such as by requiring modifications to our distribution activities and impacting our ability to engage in certain types of distribution or other business activities.  These changes could increase our distribution costs as a percentage of our revenues generated.  We could also experience lower sales, incur higher distribution costs, and/or experience pressure on our pricing and market share, including, for example, if some of our competitors seek to increase market share by reducing prices, third-party selling agreements are terminated, or there is a change in the terms of those agreements.

There are no assurances that we will be able to successfully execute changes and enhancements to our business model, operations, technology and compliance policies and procedures required by these new regulations, which could materially and adversely affect our business.  These regulations could necessitate changes in our product structures, including product rationalization and reduction, as well as changes to our fee structures and revenue sharing arrangements.  In addition, it could reduce our opportunities to distribute our products through our current network of business partners.  New best interest and fiduciary standards, at both the federal and state levels, could create additional liability exposure to regulatory enforcement activity,

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litigation and arbitration, which may result in awards, settlements, penalties, injunctions, reputational risk, costs of defense regardless of outcome, or other adverse results.  

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act established enhanced regulatory requirements for non-bank financial institutions designated as “systemically important” by the Financial Stability Oversight Committee (“FSOC”). Under a final rule and interpretive guidance issued by the FSOC in April 2012, certain non-bank financial companies have been designated as Systemically Important Financial Institutions (“SIFIs”). Additional non-bank financial companies, which may include large asset management companies such as us, may be designated as SIFIs in the future.  We do not believe that mutual funds should be deemed SIFIs. Further, we do not believe SIFI designation was intended for traditional asset management businesses. However, if any of the Funds or our affiliates is deemed a SIFI, we would be subject to enhanced prudential measures, which could include capital and liquidity requirements, leverage limits, enhanced public disclosures and risk management requirements, annual stress testing by the Federal Reserve, credit exposure and concentration limits, supervisory and other requirements. These heightened regulatory obligations could, individually or in the aggregate, adversely impact our business and operations.
Pursuant to the mandate of the Dodd-Frank Act, the Commodity Futures Trading Commission (the “CFTC”) and the SEC have promulgated rules that increase the regulation of over-the-counter derivatives markets. The CFTC has adopted certain amendments to its rules that would limit the ability of mutual funds and certain other products we sponsor to use commodities, futures, swaps, and other derivatives without additional registration. If our use of these products on behalf of client accounts increases so as to require registration, we would be subject to additional regulatory requirements and costs associated with registration.  The Dodd-Frank Act also expanded the CFTC’s authority to limit the maximum long or short position that any person may take in futures contracts, options on futures contracts and certain swaps. CFTC rules implementing this authority could apply to the activities of the Company and complying with these rules may negatively affect the Company’s financial condition or performance by requiring changes to existing strategies or preventing an investment strategy from being fully implemented.  
On July 23, 2014, the SEC adopted additional reforms regulating money market funds to address the perceived systemic risks that such funds present.  These reforms require all non-government money market funds to establish processes to review and implement liquidity fees and/or redemption limits or “gates” when fund liquidity drops below established levels. Government and retail money market funds are permitted under the amended rules to continue using the amortized cost method of valuation as long so long as the Board believes that amortized cost continues to fairly reflect the market-based net asset value per share of the Fund.  The SEC also adopted other reforms for money market funds, including additional disclosure and reporting requirements, tightening of diversification requirements, and enhanced stress testing.  The new rules have impacted both the money market funds and shareholders in the form of ongoing operational costs and opportunity costs related to maintaining prescribed liquidity and shortened maturity levels. 
The SEC and its staff continue to engage in various initiatives and reviews that seek to modify the regulatory structure governing the asset management industry, and registered investment companies in particular.  In late 2016, the SEC adopted new rules that require registered open-end funds to adopt liquidity risk management programs with specific requirements for measuring and reporting the liquidity of fund holdings, including the requirement to bucket every portfolio holding within one of four prescribed liquidity buckets.  This particular rule has resulted in an extensive allocation of resources in the form of both systems and people to monitor the funds’ liquidity program and to file required regulatory reports.  In addition, these new and existing rules along with pending initiatives could further limit investment opportunities for certain Funds we manage and may increase our management and administration costs, with potential adverse effects on our revenues, expenses and results of operations.  The SEC has also been directed toward risk identification and controls in trading practices, cybersecurity and the evaluation of systemic risks and has indicated an intention to propose new rules for transition planning by asset managers, including the transfer of client assets.  When finalized, these new rules can be expected to add additional reporting and compliance costs and may affect the development of new products and the ability to continue to offer certain strategies through a registered investment company format.  In 2019, the SEC re-proposed a rule regulating the use of derivatives by registered investment companies on its regulatory agenda. Among other requirements, the rule, as proposed, would require our Funds to adopt a derivatives risk management program unless they

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qualify for certain exceptions and would limit the degree to which our Funds may invest in derivatives based on certain “value at risk” metrics. The ultimate impact on our Funds, and thus the Company, is unclear if the SEC adopts the rule, although certain Funds might be required to alter their principal investment strategies or pursue them in a different manner, which could lead to investment losses, lower investment returns or shareholder redemptions.  Further, if adopted, the rule would cause our Funds to incur increased compliance and administrative costs, which could negatively impact our financial performance.
There has been increased global regulatory focus on the manner in which intermediaries are paid for distribution of mutual funds. Changes to long-standing market practices related to fees or enhanced disclosure requirements may negatively impact sales of mutual funds by intermediaries, especially if such requirements are not applied to other investment products.

At this time, we cannot predict the nature or full impact of future changes to the legal and regulatory requirements applicable to our business, nor the extent to which current or future proposals, or possible enforcement proceedings, will impact our business. All of these new and developing laws and regulations are likely to result in greater compliance and administrative burdens on the Company, including the investment of significant management time and resources in order to satisfy new regulatory requirements or to compete in a changed business environment, and the imposition of new compliance costs and/or capital requirements, including costs related to information technology systems.  The evolving regulatory environment may impact a number of our service providers and, to the extent such providers alter their services or increase their fees, it may impact our expenses or those of the products we offer.  Changes in current rules and regulations that impact the business and financial communities generally, including changes in current legal, regulatory, accounting or compliance requirements, including state and federal taxation, or in governmental policies, could have a material adverse impact on our results of operations, financial condition or liquidity.  

Compliance Within A Complex Regulatory Environment Imposes Significant Financial And Strategic Costs On Our Business, and Non-Compliance Could Result in Fines And Penalties.  Non-compliance with applicable laws or regulations could result in criminal and civil liability, the suspension of our employees, sanctions being levied against us, including fines, penalties and censures, injunctive relief, suspension or expulsion from a certain jurisdiction or market, or the temporary or permanent revocation of licenses or registrations necessary to conduct our business.  A regulatory proceeding, even one that does not result in a finding of wrongdoing or sanctions, could consume substantial expenditures of time and capital. Any regulatory investigation and any failure to maintain compliance with applicable laws and regulations could severely damage our reputation or otherwise adversely affect our business and prospects.

Our Business Is Subject To Substantial Risk From Litigation, Regulatory Investigations And Potential Securities Laws Liability. Many aspects of our business involve substantial risks of litigation, regulatory investigations and/or arbitration, and from time to time, we are involved in various legal proceedings in the course of operating our business.  See Item 3 – “Legal Proceedings.”  We are exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC, FINRA and other regulatory bodies.  These regulatory bodies have the authority to review our products and business practices, and those of our employees and the Advisors, and to bring regulatory or other legal actions against us if, in their view, our practices, or those of our employees or the Advisors, are improper. Actions brought against us may result in awards, settlements, penalties, injunctions or other adverse results, including reputational damage. In addition, we may incur significant expenses in connection with our defense against such actions regardless of their outcome. We, our subsidiaries, and/or certain of our past and present officers, have been named as parties in legal actions, regulatory investigations and proceedings, and/or securities arbitrations in the past, and have been subject to claims alleging violation of such laws, rules and regulations, which have resulted in the payment of fines and settlements.  From time to time, we receive subpoenas or other requests for information from governmental and regulatory authorities in connection with certain industry-wide, company-specific or other investigations or proceedings. These examinations, inquiries and proceedings, have in the past and could in the future, if compliance failures or other violations are found, cause the relevant regulator to institute proceedings and impose sanctions for violations. Any such action may also result in litigation by investors in the Funds, other clients or by our stockholders, which could harm the Company’s reputation, potentially harm the investment returns of the Funds, or result in the Company being liable for damages.

In addition, the Funds to which we provide investment advisory and management services are subject to litigation and governmental and self-regulatory organization investigations and proceedings, any of which could harm the investment returns or reputation of the applicable Fund or result in our investment adviser subsidiaries being liable to the Funds for any resulting damages.

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There has been an increase in litigation and regulatory investigations in the asset management and financial services industries in recent years, including client claims, class action suits and government actions alleging substantial monetary damages and penalties.  An adverse resolution of any lawsuit, legal or regulatory proceeding or claim against us could result in substantial costs or reputational harm to us, and have a material adverse effect on our business.  In addition to these financial costs and risks, the defense of litigation, regulatory investigations or arbitration may divert resources and management’s attention from operations.  

Insurance May Not Be Available On A Cost Effective Basis And Insurance Coverage May Not Protect Us From Liability.  We face inherent liability risk related to litigation from mutual fund investors, clients, third party vendors and others, and actions taken by regulatory agencies.  To help protect against these potential liabilities, we purchase insurance in amounts, and against risks, that we consider appropriate and commercially reasonable, where such insurance is available at prices we deem acceptable. There can be no assurance, however, that a claim or claims will be covered by insurance or, if covered, will not exceed the limits of available insurance coverage, that any insurer will remain solvent and will meet its obligations to provide us with coverage, or that insurance coverage will continue to be available with sufficient limits at a reasonable cost. Insurance costs are impacted by market conditions and the risk profile of the insured, including prior claims, and may increase significantly over relatively short periods. In addition, certain insurance coverage may not be available or may only be available at prohibitive costs. Renewals of insurance policies may expose us to additional costs through higher premiums or the assumption of higher deductibles or co-insurance liability.

Financial Advisors In Our Wealth Management Channel Are Classified As Independent Contractors, And Changes To Their Classification May Increase Our Operating Expenses.  From time to time, various legislative or regulatory proposals are introduced at the federal or state levels addressing the criteria for determining the status of independent contractors’ classification as employees for either employment tax purposes (withholding, social security, Medicare and unemployment taxes) or other employment benefits.  Currently, most individuals are classified as employees or independent contractors for employment tax purposes based on relevant statutory, regulatory and common law tests, including the multi-factor test utilized by the Internal Revenue Service.   We classify Advisors as independent contractors for all purposes, including employment tax.  There can be no assurance that legislative, judicial or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the independent contractor classification of those Advisors or that private litigants might file actions seeking to change such classification.  The costs associated with potential changes, if any, with respect to these independent contractor classifications could have a material adverse effect on our business.

Misconduct By Our Employees And/Or By Advisors Could Result In Liability, Subject Us To Regulatory Sanctions Or Otherwise Adversely Affect Our Business, Results of Operations or Financial Condition. Our business is based on the trust and confidence of our clients, for whom Advisors handle a significant amount of funds, as well as financial and personal information. Misconduct by our employees or by Advisors could result in violations of law, regulatory sanctions and/or serious reputational or financial harm. Misconduct that could occur includes: (i) binding us to transactions that exceed authorized limits; (ii) hiding unauthorized or unsuccessful activities resulting in unknown and unmanaged risks or losses; (iii) improperly using, disclosing or otherwise compromising confidential information; (iv) recommending transactions that are not suitable; (v) engaging in fraudulent or otherwise improper activity, including the misappropriation of funds; (vi) engaging in unauthorized or excessive trading to the detriment of clients; or (vii) otherwise not complying with laws, regulations or our control procedures.  Although we have implemented a system of internal controls to minimize the risk of misconduct, there can be no assurance that our controls or precautions to detect and prevent misconduct will be effective in all cases. Preventing and detecting misconduct among Advisors, who are not employees, presents additional challenges.  We could be liable in the event of misconduct by employees or Advisors and we could also be subject to regulatory sanctions. Although we believe that we have adequately insured against these risks, there can be no assurance that our insurance will be maintained or that it will be adequate to meet any liability resulting from these activities.  Any damage to the trust and confidence placed in us by our clients may cause our AUM and/or AUA to decline, which could adversely affect our reputation, business and prospects and lead to a material adverse effect on our business, results of operations or financial condition.

The Application of Tax Laws and Regulations and Challenges To Our Tax Positions May Adversely Affect Our Effective Tax Rate and Business.  The application of complex tax laws and regulations involves numerous uncertainties.  Tax authorities may disagree with certain tax positions that we have taken, as we are periodically under audit by various state and federal jurisdictions.  We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could have a material impact on our financial statements.  

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Tax authorities may assess additional taxes, which could result in adjustments to, or impact the timing or amount of, taxable income, deductions or other tax allocations, and may adversely affect our effective tax rate and business.

TECHNOLOGY AND OPERATIONAL RISKS

Our Business Is Subject to Numerous Operational Risks.  Sustained Interruptions In Our Operating Systems, Technology Systems, Or Other Failure In Operational Execution, Could Materially And Adversely Affect Our Business.  We face numerous and complex operational risks related to our business on a day-to-day basis.  Operating risks include, but are not limited to:

failure to properly perform or oversee mutual fund or portfolio recordkeeping responsibilities, including portfolio accounting, security pricing, corporate actions, investment restrictions compliance, daily NAV computations, account reconciliations, and required distributions to Fund shareholders to comply with tax regulations;
failure to properly oversee transfer agent and participant recordkeeping responsibilities, including transaction processing, supervision of staff, tax reporting, and record retention;
sales and marketing risks, including the intentional or unintentional misrepresentation of products and services in advertising materials, public relations information, or other external communications, and failure to properly calculate and present investment performance data accurately and in accordance with established guidelines and regulations;
failure to properly perform brokerage business responsibilities, including processing trades and client information timely and accurately, maintenance of books and records, execution of financial planning activities, and supervisory and compliance activities; and
our reliance on third party vendors who, now or in the future, may perform or support important parts of our operations as there can be no assurance that they will perform properly or that our processes and plans to execute, transition or delegate these functions to others will be successful or that there will not be interruptions in services from these third parties.

The systems upon which we rely upon to conduct our business may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other third party service providers that we use to facilitate, or are component providers to, our brokerage operations, securities transactions and other product manufacturing and distribution activities.  Any such failure, termination or constraint could adversely impact our ability to effect transactions, service our clients, manage our exposure to risk, or otherwise achieve desired outcomes.  Failure to keep current and accurate books and records can render us subject to disciplinary action by governmental and self-regulatory authorities, as well as to claims by our clients. In connection with the modernization of our wealth management platforms and products, a significant portion of our software is licensed from and supported by third party vendors upon whom we rely to prevent operating system failure.  A suspension or termination of these licenses or the related support, upgrades and maintenance could cause system delays or interruption.  If any of our financial, portfolio accounting, brokerage or other data processing systems, or the systems of third parties on whom we rely, do not operate properly or are disabled, or if there are other shortcomings or failures in our internal processes, people or systems, or those of third parties on whom we rely, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory problems or damage to our reputation.

Interruptions could be caused by operational failures arising from service provider, employee or Advisor error or malfeasance, interference by third parties, including hackers, our implementation of new technology, as well as from our maintenance of existing technology. Our financial, accounting, brokerage, data processing or other operating systems and facilities may fail to operate or report data properly, experience connectivity disruptions or otherwise become disabled as a result of events that are wholly or partially beyond our control, adversely affecting our ability to process transactions or provide products and services to our clients. These interruptions can include fires, floods, earthquakes and other natural disasters, power losses, equipment failures, attacks by third parties, failures of internal or vendor personnel, software, equipment or systems and other events beyond our control. Although we have developed and maintain a comprehensive business continuity plan, and require our key technology vendors and service providers to do the same, there are inherent

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limitations in such plans and they might not, despite testing and monitoring, operate as designed. Further, we cannot control the execution of any business continuity plans implemented by our service providers.

Failure To Implement New Information Technology Systems Successfully Could Materially And Adversely Affect Our Business.  We are in the process of continuing to modernize our wealth management platforms and products and implementing new information technology systems, including a new business administration platform and integrated data repository that we believe will facilitate and improve our core businesses and our productivity, and position our wealth management channel for long-term competitiveness.  Additionally, new best interest and fiduciary standards could require significant changes to our business operations, including, but not limited to, our distribution methods, compensation models and product shelf.  We may be required to make significant capital expenditures to maintain competitive infrastructure. Our technology infrastructure is vital to the competitiveness of our business.  We depend on specialized technology to operate our business and a number of our key information technology systems were developed solely to handle our particular information technology infrastructure.  Our continued success depends on our ability to effectively integrate necessary technology systems across our organization, and to adopt new or adapt existing technologies to meet client, industry, and regulatory demands.  There can be no assurance that we will successfully implement new information technology systems, that our existing technology infrastructure can support new systems or changes to existing systems, that their implementation will be completed in a timely or cost effective manner, or that we will derive the expected benefits from these new systems.  Failure to implement or maintain adequate information technology infrastructure may cause us to lose investors, clients, Advisors and fail to maintain regulatory compliance, which could severely damage our reputation, impede our ability to support business growth, and materially and adversely affect our results of operations.

A Failure In Or Breach Of Our Operational Or Security Systems Or Our Technology Infrastructure, Or Those Of Third Parties, Or Failure To Maintain Adequate Business Continuity Plans, Could Result In A Material Adverse Effect On Our Business And Reputation.   We are highly dependent upon the use of various proprietary and third party software applications and other technology systems to operate our business.  As part of our normal operations, we process a large number of transactions on a daily basis and maintain and transmit confidential client and employee information, the safety and security of which is dependent upon the effectiveness of our information security policies, procedures, capabilities and employees to protect such systems and the data that reside on or are transmitted through them.  Although we take protective measures and endeavor to modify these protective measures as circumstances warrant, technology is subject to rapid change and the nature of the threats continue to evolve.  As a result, our operating and technology systems, software and networks may fail to operate properly or become disabled, or may be vulnerable to unauthorized access, inadvertent disclosure, loss or destruction of data (including confidential client information), computer viruses or other malicious code, cyber-attacks and other events that could materially damage our operations, have an adverse security impact, or cause the disclosure or modification of sensitive or confidential information.  Further, a cybersecurity intrusion could occur and persist for an extended period of time without detection, and any investigation of a cybersecurity intrusion could require a substantial amount of time. During all this time we might not know the extent of the harm or how best to remediate it, and errors or omissions could be repeated or compounded before being discovered and remediated, all of which could aggravate the costs and consequences of the intrusion. Most of the software applications that we use in our business are licensed from, and are supported, upgraded and maintained by, third party vendors. A suspension or termination of certain of these licenses or the related support, upgrades and maintenance could cause temporary system delays or interruptions.  We also take precautions to password protect and/or encrypt our laptops and other mobile electronic hardware; however, if such hardware is stolen, misplaced or left unattended, it may become vulnerable to hacking or other unauthorized use, creating a possible security risk and resulting in potentially costly actions against us.  While we collaborate with clients, vendors and other third parties to develop secure transmission capabilities and otherwise protect against cyber-attacks, we cannot ensure that we or any third parties haves all appropriate controls in place to protect the confidentiality and integrity of such information. Further, while we have in place a disaster recovery plan to ensure we can recover from and continue our business upon the occurrence of catastrophic and unpredictable events, there is no guarantee that this plan will be sufficient in responding to or ameliorating the effects of all disaster scenarios, and we may experience system delays and interruptions as a result of natural disasters, power failures, acts of war, and third party failures.   In addition, we rely to varying degrees on third party vendors for disaster contingency support, and we cannot be assured that these vendors will always be able to perform in an adequate and timely manner.

The breach of our operational or information security systems or our technology infrastructure, or those of third parties, due to one or more of these events could cause interruptions, malfunctions or failures in our operations and/or the loss or inadvertent disclosure of confidential client information could result in substantial financial loss or costs, liability for stolen assets or information, breach of client contracts, client dissatisfaction and/or other reputational loss, regulatory actions, remediation costs to repair damage caused by the breach, additional security costs to mitigate against future

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incidents, costs to provide notice to and credit monitoring for affected clients, and litigation costs resulting from the incident.  Although we seek to assess regularly and improve our existing disaster recovery plans, a major disaster, or one that affected certain important operating areas, or our inability to recover successfully should we experience a disaster or other business continuity problem, could materially interrupt our business operations and cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.  These events, and those discussed above, could have a material adverse effect on our business and reputation.

We remain subject to various state and federal laws and regulations related to the privacy, integrity and security of nonpublic personal information we create, collect and maintain in the conduct of our business concerning individuals, including Fund trustees and shareholders, our directors and shareholders, our clients, Advisors’ clients and our employees and independent contractors.  For example, the State of California recently enacted the California Consumer Privacy Act of 2018, which was effective January 1, 2020 and, among other things, creates detailed notice, opt-out/opt-in, access and erasure rights for consumers vis-à-vis businesses that collect their personal information, and provides a new private cause of action for data breaches.  Other states have enacted or proposed, or in the future may enact, similar privacy and data security legislation.  Privacy and data security laws and regulations, particularly when enacted on a state by state basis rather than at the federal level, could impose significant limitations, require changes to our business, restrict our collection, use or storage of nonpublic personal information and subject us to legal liability or regulatory action, which may result in increased compliance expenses, fines or penalties, the termination of client contracts, costly mitigation activities and harm to our reputation.

Failure To Establish Adequate Controls And Risk Management Policies, The Circumvention Of Controls And Risk Management Policies, Or Fraud Could Have An Adverse Effect On Our Reputation And Financial Position.  We have established a comprehensive risk management process and continue to enhance various controls, procedures, policies and systems to monitor and manage risks; however, we cannot assure that such controls, procedures, policies and systems will successfully identify and manage internal and external risks to our business. We are subject to the risk that our employees, Advisors, contractors or other third parties may deliberately seek to circumvent established controls to commit fraud or act in ways that are inconsistent with our controls, policies and procedures. Persistent attempts to circumvent policies and controls, or repeated incidents involving fraud, conflicts of interest or transgressions of policies and controls, could have a materially adverse effect on our reputation and lead to costly regulatory inquiries, fines and/or sanctions.

Our Own Operational Failures Or Those Of Third Parties We Rely On, Including Failures Arising Out Of Human Error, Could Disrupt Our Business And Damage Our Reputation.  Our business is highly dependent on our ability to process, on a daily basis, large numbers of transactions. These transactions generally must comply with client investment guidelines, as well as stringent legal and regulatory standards.  Despite our employees being highly trained and skilled, due to the large number of transactions we process, errors may occur. If we make mistakes in performing our services that cause financial harm to our clients, our clients may seek to recover their losses. The occurrence of mistakes, particularly significant ones, could have a material adverse effect on our reputation and business.

RISKS RELATED TO OUR BUSINESS

A Failure To Protect Our Reputation Could Adversely Affect Our Businesses.  Our reputation is one of our most important assets. Our ability to attract and retain clients, investors, employees and Advisors is highly dependent upon external perceptions of our Company. Damage to our reputation could cause significant harm to our business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, compliance failures, any perceived or actual weakness in our financial strength or liquidity, technological, cybersecurity, or other security breaches (including attempted breaches) resulting in improper disclosure of client or employee personal information, unethical behavior, and the misconduct of employees, Advisors and counterparties. Negative perceptions or publicity regarding these matters, even if they are baseless or eventually satisfactorily addressed, could damage our reputation among existing and potential clients, investors, employees and Advisors. Reputations may take decades to re-build, and negative incidents can quickly erode trust and confidence, particularly if they result in adverse mainstream and social media publicity, governmental investigations or litigation. Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us.

Our reputation is also dependent on our continued identification of and mitigation against conflicts of interest, including those relating to our proprietary activities. For example, conflicts may arise between our position as a provider of financial planning services and as an investment adviser to Funds that an Advisor may recommend to a financial

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planning client. We have procedures and controls that are designed to identify, address and appropriately disclose perceived conflicts of interest. However, identifying and appropriately addressing conflicts of interest is complex, and our reputation could be damaged if we fail, or appear to fail, to address conflicts of interest appropriately.

In addition, the SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest, including through the implementation of new best interest and fiduciary standards. It is possible that potential or perceived conflicts could give rise to litigation or enforcement actions. It is possible also that the regulatory scrutiny of, and litigation in connection with, conflicts of interest will make our clients less willing to enter into transactions in which such a conflict may occur, and may materially affect our business.

Our Expenses Are Subject To Fluctuations That Could Materially Affect Our Operating Results.  Our results of operations are dependent on the level of expenses, which can vary significantly from period to period. Our expenses may fluctuate as a result of, among other things:

expenses incurred in connection with our strategic plans to strengthen our long-term competitive position;
variations in the level of total compensation expense due to bonuses, equity compensation, changes in employee benefit costs due to regulatory or plan design changes, changes in our employee count and mix, competitive factors and inflation;
expenses incurred to support distribution of our investment products and to develop new products;
expenses and capital costs incurred to maintain and enhance our administrative and operation services infrastructure, including compliance systems, technology assets, and related depreciation and amortization;
the future impairment of intangible assets or goodwill that is currently recognized on our balance sheet;
unanticipated costs incurred to protect investor accounts and client goodwill;
disruptions of third party services such as communications, power, client account management and processing systems, and mutual fund transfer agency and accounting systems; and
responding to significant changes in our business model brought on by regulatory change.

Increases in our level of expenses, or our inability to reduce our level of expenses, could materially affect our operating results. If we are unable to effect appropriate expense reductions in a timely manner to align with decreases in our revenue due to, among other things, a decline in the level of our AUM or AUA,  or our current business environment, through operational changes or performance improvement, our business may be adversely affected.  

We Have Significant Goodwill and Intangibles On Our Balance Sheet, And Any Impairment Could Adversely Affect Our Results of Operations.  At December 31, 2019, our total assets were approximately $1.27 billion, of which approximately $145.9 million, or 11%, consisted of goodwill and identifiable intangible assets.  See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”  We complete an ongoing review of goodwill and intangible assets for impairment on an annual basis or more frequently whenever events or a change in circumstances warrant.  Important factors in determining whether an impairment of goodwill or intangible assets might exist include significant continued underperformance compared to peers, the likelihood of termination or non-renewal of a mutual fund advisory or sub-advisory contract or substantial changes in revenues earned from such contracts, significant changes in our business and products, material and ongoing negative industry or economic trends, or other factors specific to each asset or subsidiary being tested.  Because of the significance of goodwill and other intangibles to our consolidated balance sheets, the impairment analysis is critical. Any changes in key assumptions about our business and our prospects, or changes in market conditions or other externalities, could result in an impairment charge.  Any such charge could have a material effect on our results of operations.

We May Engage In Strategic Transactions And Opportunities That Could Create Risk In Order To Maintain Or Enhance Our Competitive Position.  The Company has and may acquire or invest in businesses that it believes will add value and generate positive net returns.  Any strategic transaction can involve a number of risks, including additional

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demands on our existing employees; additional or new regulatory requirements, operating facilities and technologies; adverse effects in the event acquired intangible assets or goodwill become impaired; and the existence of liabilities or contingencies not disclosed to or otherwise known by us prior to closing a transaction.  Acquisitions also pose the risk that any business we acquire may lose clients or employees or could underperform relative to expectations. We could also experience financial or other setbacks if pending transactions encounter unanticipated problems, including problems related to closing or the integration of technology and new employees.  There can be no assurance that we will find suitable candidates for strategic transactions at acceptable prices, have sufficient capital resources to pursue such transactions or be successful in negotiating the required agreements. Following the completion of an acquisition, we may have to rely on the seller to provide administrative and other support, including financial reporting and internal controls, to the acquired business for a period of time. There can be no assurance that such sellers will do so in a manner that is acceptable to us.  We may be required to spend additional time or money on integration which could decrease its earnings and prevent the Company from focusing on the development and expansion of its existing business and services.  These risks could result in decreased earnings and harm to the Company’s competitive position in the investment management and/or wealth management industry.  

Our Ability To Maintain Our Credit Ratings And To Access The Capital Markets In A Timely Manner Should We Seek To Do So Depends On A Number Of Factors.  Our access to the capital markets depends significantly on our credit rating. We believe that rating agency concerns include, but are not limited to, the fact that our revenues are exposed to equity market volatility and the potential impact from regulatory changes to the industry. Additionally, rating agencies could decide to downgrade the entire investment management industry based on their perspective of future growth and solvency. Material deterioration of these factors, and others defined by each rating agency, could result in downgrades to our credit ratings, thereby limiting our ability to generate additional financing. We cannot predict what actions rating organizations may take, or what actions we may take in response to the actions of rating organizations, which could adversely affect our business. As with other companies in the financial services industry, our rating could be changed at any time and without any notice by the ratings organizations.  Our credit facility borrowing rates are tied to our credit rating. Management believes that solid investment grade ratings are an important factor in winning and maintaining institutional business and strives to manage the Company to maintain such ratings.  A downgrade in our credit rating, or the announced potential for a downgrade, could have a significant adverse effect on our financial condition and results of operations.

A reduction in our long-term credit rating could increase our borrowing costs, could limit our access to the capital markets, and may result in outflows thereby reducing AUM and operating revenues. Volatility in global finance markets may also affect our ability to access the capital markets should we seek to do so. If we are unable to access capital markets in a timely manner, our business could be adversely affected.

The Terms Of Our Credit Facility And Senior Unsecured Notes Impose Restrictions On Our Operations That May Adversely Impact Our Prospects And The Operations Of Our Business. There are no assurances that we will be able to raise additional capital if needed, which could negatively impact our liquidity, prospects and operations. On October 20, 2017, we entered into a three-year revolving credit facility (the “Credit Facility”) with various lenders providing for total availability of $100 million. Under the Credit Facility, the lenders may, at their option upon our request, expand the Credit Facility to $200 million. At February 7, 2020, there was no balance outstanding under the Credit Facility. We also have outstanding $95 million of 5.75% senior notes, series B, due 2021, which were issued on January 13, 2011 pursuant to a note purchase agreement.   The terms and conditions of the Credit Facility and note purchase agreement impose restrictions that affect, among other things, our ability to incur additional debt, make capital expenditures and acquisitions, merge, sell assets, pay dividends and create or incur liens. Our ability to comply with the financial covenants set forth in the Credit Facility and note purchase agreement could be affected by events beyond our control, and there can be no assurance that we will achieve operating results that will comply with such terms and conditions, a breach of which could result in a default under our credit facility and note purchase agreement. In the event of a default under the Credit Facility and/or note purchase agreement, the banks could elect to declare the outstanding principal amount of the Credit Facility, all interest thereon, and all other amounts payable under the Credit Facility to be immediately due and payable, and the Company’s obligations under the senior unsecured notes could be accelerated and become due and payable, including any make-whole amount, respectively.

Our ability to meet our cash needs and satisfy our debt obligations will depend upon our future operating performance, asset values, the perception of our creditworthiness and, indirectly, the market value of our stock. These factors may be affected by prevailing economic, financial and business conditions and other circumstances, some of which are beyond our control. We anticipate that any funds generated by any borrowings from the Credit Facility and/or cash

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provided by operating activities will provide sufficient funds to finance our business plans, meet our operating expenses and service our debt obligations as they become due. However, in the event that we require additional capital, there can be no assurance that we will be able to raise such capital when needed or on satisfactory terms, if at all, and there can be no assurance that we will be able to renew or refinance the Credit Facility or senior unsecured notes upon their maturity or on favorable terms. If we are unable to raise capital or obtain financing, we may be forced to incur unanticipated costs or revise our business plan.

Net Capital Requirements May Impede The Business Operations Of Our Subsidiaries.  Certain of our subsidiaries are subject to net capital requirements imposed by various federal, state, and foreign authorities. Each of our subsidiaries’ net capital meets or exceeds all current minimum requirements; however, a significant change in the required net capital, an operating loss, or an extraordinary charge against net capital could adversely affect the ability of our subsidiaries to expand or even maintain their operations if we were unable to make additional investments in them.

RISKS RELATED TO OUR COMMON STOCK

The Market Price Of Our Stock May Fluctuate.  The market price of our Class A common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including changes in expectations concerning our future financial performance and the future performance of the financial services industry in general, including financial estimates and recommendations by securities analysts; differences between our actual financial and operating results and those expected by investors and analysts; our strategic moves and those of our competitors, such as acquisitions, divestitures or restructurings; changes in the regulatory framework of the financial services industry and regulatory action; changes in and the adoption of accounting standards and securities and insurance rating agency processes and standards applicable to our businesses and the financial services industry; and changes in general economic or market conditions.  Additionally, stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

Our Holding Company Structure Results In Structural Subordination And May Affect Our Ability To Fund Our Operations And Make Payments On Our Debt. We are a holding company and, accordingly, substantially all of our operations are conducted through our subsidiaries. As a result, our cash flow and our ability to service our debt, including $95 million of our senior notes, are dependent upon the earnings of our subsidiaries and the distribution of earnings, loans or other payments by our subsidiaries to us. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts due on our debt or provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments. In addition, any payment of dividends, distributions, loans or advances to us by our subsidiaries could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries’ earnings and business considerations. Our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right of the holders of our debt to participate in those assets, would be effectively subordinated to the claims of those subsidiaries’ creditors, including trade creditors. In addition, even if we were a creditor of any of our subsidiaries, our rights as a creditor would be effectively subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us.

There Are No Assurances That We Will Pay Future Dividends On, Or Repurchase Shares Of, Our Class A Common Stock, Which Could Adversely Affect Our Stock Price. The Waddell & Reed Financial, Inc. Board of Directors (the “Board of Directors”) currently intends to continue to declare quarterly dividends on, and to authorize the repurchase of shares of, our Class A common stock.  However, the declaration and payment of dividends and the repurchase of common stock is subject to the discretion of our Board of Directors. Any determination as to the payment of dividends or repurchase of common stock, as well as the level of such dividends and stock repurchases, will depend on, among other things, general economic and business conditions, our strategic plans, our financial results and condition, and contractual, legal and regulatory restrictions on the payment of dividends by us or our subsidiaries and our ability to repurchase shares of our common stock. We are a holding company and, as such, our ability to pay dividends and repurchase shares of our common stock is subject to the ability of our subsidiaries to provide us with cash. There can be no assurance that the current quarterly dividend level or the level of stock repurchases will be maintained or that we will pay any dividends or repurchase shares of common stock in any future period.  Any change in the level of our dividends or stock repurchases or the suspension of the payment of dividends or stock repurchases could adversely affect our stock price.  See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

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Provisions Of Our Organizational Documents Could Deter Takeover Attempts, Which Some Of Our Stockholders May Believe To Be In Their Best Interest. Under our Restated Certificate of Incorporation, our Board of Directors has the authority, without action by our stockholders, to fix certain terms and issue shares of our Preferred Stock, par value $1.00 per share. Actions of our Board of Directors pursuant to this authority may have the effect of delaying, deterring or preventing a change in control of the Company. Other provisions in our Restated Certificate of Incorporation and in our Amended and Restated Bylaws impose procedural and other requirements that could be deemed to have anti-takeover effects, including replacing incumbent directors. Our Board of Directors is divided into three classes, each of which is to serve for a staggered three-year term after the initial classification and election, and incumbent directors may not be removed without cause, all of which may make it more difficult for a third party to gain control of our Board of Directors. In addition, as a Delaware corporation, we are subject to section 203 of the Delaware General Corporation Law. With certain exceptions, section 203 imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our voting stock.

ITEM 1B.   Unresolved Staff Comments

None.

ITEM 2.      Properties

Our existing home office lease agreements cover approximately 298,000 square feet located in Overland Park, Kansas and 38,000 square feet for our disaster recovery facility.  We also own three buildings on our home office campus: two 50,000 square foot buildings and a 52,000 square foot building.  In January 2020, we signed a fifteen-year lease, which commences during early 2022, relating to the development of a new 260,000 square foot corporate headquarters in Kansas City, Missouri.  As a result, the buildings we own are in the process of being sold.  See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Corporate Headquarters Relocation.”  In addition, we lease office space utilized by Advisors and field office support staff in various locations throughout the United States totaling approximately 253,000 square feet. We are continuing the transition of all of the Advisors currently leasing space from W&R to personal branch offices.

ITEM 3.      Legal Proceedings

The information set forth in response to Item 103 of Regulation S-K under “Legal Proceedings” is incorporated by reference from Part II, Item 8. “Financial Statements and Supplementary Data,” Note 17 – Contingencies, of this Annual Report on Form 10-K.

ITEM 4.      Mine Safety Disclosures

Not applicable.

PART II

ITEM 5.      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our Class A common stock (“common stock”) is listed on the NYSE under the ticker symbol “WDR.”

According to the records of our transfer agent, we had 2,189 holders of record of common stock as of February 7, 2020. We believe that a substantially larger number of beneficial stockholders hold such shares in depository or nominee form.

Dividends

The declaration of dividends is subject to the discretion of the Board of Directors. We intend, from time to time, to pay cash dividends on our common stock as our Board of Directors deems appropriate, after consideration of our operating results, financial condition, cash and capital requirements, compliance with covenants in the Credit Facility, note purchase agreement and such other factors as the Board of Directors deems relevant. To the extent assets are used to meet

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minimum net capital requirements under the Net Capital Rule, they are not available for distribution to stockholders as dividends. See Part I, Item 1. “Business—Regulation.” We anticipate that quarterly dividends will continue to be paid. See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Common Stock Repurchases

Our Board of Directors has authorized the repurchase of our common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in our share-based compensation programs. During the year ended December 31, 2019, we repurchased 9,164,564 shares at an aggregate cost, including commissions, of $154.2 million, including 548,132 shares repurchased from employees to cover their tax withholdings from the vesting of shares granted under our share-based compensation programs at a cost of $9.5 million. The purchase price paid by us for repurchases of our common stock from employees is the closing market price on the vesting date.

The following table sets forth certain information about the shares of common stock we repurchased during the fourth quarter of 2019:

    

    

    

Total Number of

    

Maximum Number (or

Shares

Approximate Dollar

Purchased as

Value) of Shares That

Total Number

Average

Part of Publicly

May Yet Be

of Shares

Price Paid

Announced

Purchased Under The

Period

Purchased

per Share

Program (1)

Program (1)

October 1 - October 31

 

1,042,196

$

15.80

 

1,042,196

 

n/a

November 1 - November 30

 

650,076

 

16.55

 

650,000

 

n/a

December 1 - December 31

 

623,054

 

16.56

 

515,000

 

n/a

Total

 

2,315,326

$

16.21

 

2,207,196

(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.  

During the fourth quarter of 2019, 108,130 shares were purchased in connection with funding employee income tax withholding obligations arising from the vesting of restricted shares.

In connection with our existing capital return policy, we completed the two-year initiative to repurchase $250 million of our Class A common stock during the third quarter of 2019, which was inclusive of buybacks to offset dilution of our equity awards.  We continue to engage in an active share repurchase program.

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Total Return Performance

Comparison of Cumulative Total Return (1)

Graphic

The above graph compares the cumulative total stockholder return on the Company’s common stock from December 31, 2014 through December 31, 2019 with the cumulative total return of the Standard & Poor’s 500 Stock Index and the SNL Asset Manager Index. The SNL Asset Manager Index is a composite of 41 publicly traded asset management companies (including, among others, the companies in the peer group reviewed by the Compensation Committee for executive compensation purposes) prepared by S&P Global Market Intelligence. The graph assumes the investment of $100 in the Company’s common stock and in each of the two indices on December 31, 2014 with all dividends being reinvested. The closing price of the Company’s common stock on December 31, 2014 was $49.82 per share. The stock price performance on the graph is not necessarily indicative of future price performance.

Period Ending

 

Index

    

12/31/2014

    

12/31/2015

    

12/31/2016

    

12/31/2017

    

12/31/2018

    

12/31/2019

 

Waddell & Reed Financial, Inc.

 

100.00

 

59.86

 

44.70

 

56.39

 

47.95

 

47.08

SNL Asset Manager

 

100.00

 

85.28

 

90.22

 

119.80

 

90.38

 

125.98

S&P 500

 

100.00

 

101.38

 

113.51

 

138.29

 

132.23

 

173.86

(1)Cumulative total return assumes an initial investment of $100 on December 31, 2014, with the reinvestment of all dividends through December 31, 2019.

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ITEM 6.      Selected Financial Data

The following table sets forth our selected consolidated financial and other data as of the dates and for the periods indicated and reflects continuing operations data. Selected financial data should be read in conjunction with, and is qualified in its entirety by, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Annual Report.

For the Year Ended December 31, 

 

2019

2018

2017

2016

2015

 

(in thousands, except per share data and percentages)

 

Revenues from:

    

    

    

    

    

Investment management fees

$

445,144

507,906

531,850

557,112

709,562

Underwriting and distribution fees

 

531,836

550,010

518,699

561,670

663,998

Shareholder service fees

 

93,335

102,385

106,595

120,241

143,071

Total revenues

 

1,070,315

1,160,301

1,157,144

1,239,023

1,516,631

Net income attributable to Waddell & Reed Financial, Inc.

$

114,992

183,588

141,279

156,695

237,578

Operating margin

 

14

%  

19

%  

19

%  

21

%  

27

%

Net income per share from continuing operations, basic and diluted

$

1.57

2.28

1.69

1.90

2.85

Dividends declared per common share

$

1.00

1.00

1.63

1.84

1.75

Shares outstanding at December 31, 

 

68,847

76,790

82,687

83,118

82,850

As of December 31, 

 

2019

2018

2017

2016

2015

 

(in millions)

 

Assets under management

    

$

69,958

    

65,809

    

81,082

    

80,521

    

104,399

Balance sheet data:

Goodwill and identifiable intangible assets

$

145.9

145.9

147.1

148.6

158.1

Total assets

 

1,266.3

1,344.1

1,384.4

1,406.3

1,555.2

Long-term debt

 

94.9

94.9

94.8

189.6

189.4

Total liabilities

 

438.2

449.2

497.0

551.6

708.7

Total Waddell & Reed stockholders’ equity

 

808.9

883.5

872.9

844.0

846.5

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ITEM 7.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with the “Selected Financial Data” and our Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report.

Strategic Initiatives

For the past couple of years, we have been focusing on the foundational changes and operational improvements that were necessary for our company to improve the structural outlook for all aspects of our business.  During this time, we have added significant resources to our investment management and distribution operations, transformed our proprietary broker-dealer into a fully competitive independent wealth manager, evolved our organizational structure to ensure agility and clear lines of accountability, advanced our culture by further investing in our people through talent management, leadership development and diversity and inclusion efforts, and continued streamlining our operations resulting in meaningful cost savings.  Importantly, we have been able to do this while maintaining an exceptionally strong balance sheet and returning significant capital to shareholders by way of dividends and share repurchases.  In 2019, we returned over $228 million to shareholders and reduced our shares outstanding by over 10%.

During 2019, in our wealth management business, we continued to build on our value proposition to financial advisors through enhancements to technology, products and a leading service model. Our advisor network has largely stabilized, with over 1,300 licensed advisors and associates at year end. We have boosted our recruiting efforts nationally, and have an expanded national recruiting team in place. Our recruiting teams are working closely with wealth management field leaders and external recruiting firms to attract, build relationships with and, ultimately, add experienced financial advisors to W&R’s national network.  A core tenet of the transformation of the wealth management business is having a comprehensive product offering, specifically within fee-based advisory products. We now offer nine different advisory products, offering our financial advisors access to nearly 5,000 mutual funds from over 100 different fund families.  This also includes a wide universe of ETFs and other general securities. On the technology front, adoption of WaddellONE, our centralized advisor technology platform available to all financial advisors and associates, continues to be strong.  This new platform provides direct connectivity to several of the firm’s existing technology partners. We’re also progressing on the other key components of our Business Administration Program, including enhanced reporting, improved data analytics, and a simplified business processing model. Specifically, last month we initiated a pilot launch of a new salesforce integrated data repository, allowing seamless access to data and reports across the business.

Within our asset management business, we continued to add resources with a focus on improved investment performance and processes.  We were pleased to add the experience of Dan Hanson as Chief Investment Officer during the year and Dan has already made a notable impact both internally and externally with key partners. We expanded our analyst talent acquisition model with the introduction of an investment analyst internship program designed as a recruiting pipeline to our strong pool of fundamentally driven research investment teams. We also worked to strengthen our relationships with key industry consultants and believe we made meaningful progress during 2019. We remain committed to our strategy of expanding and diversifying our product offerings as appropriate, including offering existing strategies in additional vehicles that clients find appealing, such as model delivery, where we introduced seven strategies in 2019.  As pricing continues to narrow amid ongoing competition in our industry, we continue to review our pricing structure across our product platform to ensure we are competitive. While currently 76% of our product fees by assets are either at or below industry average, pricing is just one of the components of product competitiveness.  We know we have more opportunities in the future to build on our sales and servicing model and demonstrate our institutional-caliber investment capabilities to win in the marketplace.

From a broader enterprise standpoint, we are creating an organizational structure that allows us to conduct business in a more effective manner by focusing on our core competencies.  To that end, efforts directed toward technology and analytics, as well as culture, are essential to our long term success and remain an important area of emphasis for our company.  We believe continued investment in technology and leveraging the capabilities of data-driven insights will not only improve, but also shorten decision-making time, allowing us to improve organizational agility and compete more effectively in the marketplace.  Similarly, we will continue to advance our culture by further investing in our people through talent management, leadership development with a strong focus on diversity and inclusion initiatives.  We know these efforts are basic building blocks to developing a growth culture and will allow us to increase connectivity, collaboration and efficiency, while we push forward on our key strategic initiatives.

With much of the heavy lifting and foundational improvements behind us, we are now in a better position to sharpen our focus on growth initiatives that support our longer-term vision. Our business model has evolved and is

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somewhat unique in our industry, with both an asset management and wealth management business. With the transformation of our wealth manager, we are now in a position to grow that business for the first time in years.  We believe this represents a real opportunity for our company.  Over time, a thriving wealth management business, combined with an institutional-caliber asset manager should result in a more stable operating model with better long-term growth prospects.  As we move forward, we are focused on several key strategic enablers spanning both businesses, and our overall enterprise, that we believe will be essential to our future success:  competitive products and pricing; continued focus on strong core processes and performance metrics; the ability to leverage technology and analytics as a strategic asset across the organization; having a growth culture and a more agile organization; sharpening our brand awareness in the marketplace; and finally, 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.

Corporate Headquarters Relocation

In June 2019, we announced a comprehensive review of our future real estate needs, including evaluating options for a new corporate headquarters in the Kansas City metro area. Our goal is a workplace environment that meets the needs of the workforce of tomorrow and enables us to attract and retain top talent to accelerate our growth strategy and continue the evolution of our culture.

During January 2020, we signed a fifteen-year lease, which we expect to commence during 2022, relating to the development of a new 260,000 square foot headquarters for an innovative, distinctive and sustainably-designed building in the heart of downtown Kansas City, Missouri.  In connection with the move, we expect to receive local property tax and earnings tax abatements estimated at $29 million, which will be presented as a reduction in both the compensation and benefits and general and administrative expense lines.  In addition, we expect to receive state tax incentives estimated at $62 million to be realized in both compensation and benefits and income taxes. These estimated tax savings will be realized over various time periods and are subject to satisfaction of future obligations, including employment and compensation targets. After accounting for the various incentives, new lease terms and the other impacts related to our move, we do not expect a significant change in facility and related costs over the lease term as compared to our current headquarters estimated run rate. There are also potential future savings compared to required ongoing investments in our current campus.  

Operating Results (1)

We earned $1.1 billion in revenues in 2019, which decreased 8% as compared to 2018. Average AUM were $70.3 billion in 2019 compared to $78.3 billion in 2018. AUA increased 17% in 2019 to $60.1 billion, as compared to $51.3 billion in 2018.  

Net income attributable to Waddell & Reed Financial, Inc. of $115.0 million decreased 37% compared to $183.6 million in 2018.  Net income per diluted share was $1.57 for 2019 as compared to $2.28 for 2018. The year ended December 31, 2019 included non-cash asset impairment charges of $12.8 million in connection with certain assets held for sale, including real property related to our corporate headquarters move and the elimination of our internal aviation operations, an $11.2 million non-cash charge related to the annual revaluation of the pension plan liability and $5.4 million in severance expense related to the outsourcing of our transfer agency transactional processing operations.  Excluding these non-cash and severance expense charges, adjusted net income for 2019 was $137.4 million and adjusted net income per diluted share was $1.87.

Operating expenses of $924.6 million decreased $13.6 million compared to the prior year. Excluding non-cash asset impairment charges and severance described above, adjusted operating expenses decreased $21.6 million, or 2%, compared to adjusted 2018 operating expenses. The operating margin for 2019 was 13.6% and the adjusted operating margin was 15.3%, compared to 19.1% and 20.0% for 2018, respectively.  

Our balance sheet remains strong, as we ended the year with cash and investments of $821.2 million, excluding restricted cash and cash and investments of noncontrolling interests in consolidated sponsored funds. There were no borrowings under the Credit Facility at December 31, 2019 or at any point during the year.

(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 46 and 47.

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Assets Under Management

AUM of $70.0 billion at December 31, 2019 increased $4.2 billion, or 6%, compared to $65.8 billion at December 31, 2018. The increase in AUM is due to market appreciation of $14.3 billion, partially offset by net outflows of $10.2 billion.

Change in Assets Under Management (1)

    

    

    

    

 

Wealth

Unaffiliated (2)

Institutional

Management

Total

 

(in millions)

 

2019

    

    

    

    

Beginning Assets

$

24,977

3,655

37,177

65,809

Sales(3)

 

4,737

276

2,948

7,961

Redemptions

 

(9,933)

(1,901)

(6,311)

(18,145)

Net Exchanges

 

1,192

25

(1,217)

Net Flows

 

(4,004)

 

(1,600)

 

(4,580)

 

(10,184)

Market Action

 

5,291

1,041

8,001

14,333

Ending Assets at December 31, 2019

$

26,264

 

3,096

 

40,598

 

69,958

2018

Beginning Assets

$

31,133

6,289

43,660

81,082

Sales(3)

 

7,287

873

3,835

11,995

Redemptions

 

(11,399)

(4,108)

(6,889)

(22,396)

Net Exchanges

 

759

511

(1,270)

Net Flows

 

(3,353)

 

(2,724)

 

(4,324)

 

(10,401)

Market Action

 

(2,803)

90

(2,159)

(4,872)

Ending Assets at December 31, 2018

$

24,977

 

3,655

 

37,177

 

65,809

2017

Beginning Assets

$

30,295

 

7,904

 

42,322

 

80,521

Sales(3)

 

7,243

 

356

 

4,221

 

11,820

Redemptions

 

(11,990)

 

(3,446)

 

(7,753)

 

(23,189)

Net Exchanges

 

1,001

 

6

 

(1,007)

 

Net Flows

 

(3,746)

 

(3,084)

 

(4,539)

 

(11,369)

Market Action

 

4,584

 

1,469

 

5,877

 

11,930

Ending Assets at December 31, 2017

$

31,133

 

6,289

 

43,660

 

81,082

(1)Includes all activity of the Funds, the IGI Funds (prior to their liquidation in 2018) and institutional 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), DCIO, RIA and Variable Annuity.
(3)Sales is primarily gross sales (net of sales commission). This amount also includes net reinvested dividends and capital gains and investment income.

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Average AUM, which are generally more indicative of trends in revenue from investment management services than the change in ending AUM, decreased by 10% compared to 2018.

Average Assets Under Management

2019

2018

2017

 

Percentage

Percentage

Percentage

 

Average

of Total

Average

of Total

Average

of Total

 

(in millions, except percentage data)

 

Distribution Channel:

    

    

    

    

    

    

Unaffiliated

Equity

$

21,026

 

80

%  

24,164

 

81

%  

23,549

 

78

%  

Fixed income

 

5,177

 

20

%  

5,607

 

19

%  

6,662

 

22

%  

Money market

 

99

 

92

 

105

 

Total

$

26,302

 

100

%  

29,863

 

100

%  

30,316

 

100

%  

Institutional

Equity

$

3,719

 

100

%  

5,410

 

99

%  

6,773

 

96

%  

Fixed income

 

11

 

54

 

1

%  

298

 

4

%  

Money market

 

 

 

 

Total

$

3,730

 

100

%  

5,464

 

100

%  

7,071

 

100

%  

Wealth Management

Equity

$

29,453

 

73

%  

31,446

 

73

%  

31,485

 

72

%  

Fixed income

 

9,231

 

23

%  

9,870

 

23

%  

10,243

 

24

%  

Money market

 

1,556

 

4

%  

1,696

 

4

%  

1,862

 

4

%  

Total

$

40,240

 

100

%  

43,012

 

100

%  

43,590

 

100

%  

Total by Asset Class:

Equity

$

54,198

 

77

%  

61,020

 

78

%  

61,807

 

76

%  

Fixed income

 

14,419

 

21

%  

15,531

 

20

%  

17,203

 

21

%  

Money market

 

1,655

 

2

%  

1,788

 

2

%  

1,967

 

3

%  

Total

$

70,272

 

100

%  

78,339

 

100

%  

80,977

 

100

%  

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Table of Contents

The following table summarizes our five largest mutual funds as of December 31, 2019 by ending AUM and investment management fees, with the comparative positions in 2018 and 2017.  The AUM and management fees of these mutual funds are presented as a percentage of our total AUM and total management fees. The increase in AUM in the Ivy Science & Technology, Ivy Mid Cap Growth and Ivy Large Cap Growth Funds from 2017 to 2018 is primarily due to the Advisors Fund mergers during the first quarter of 2018.

Five Largest Mutual Funds by Ending Assets Under Management and Investment Management Fees

2019

2018

2017

 

Percentage

Percentage

Percentage

 

Ending

of Total

Ending

of Total

Ending

of Total

 

(in millions, except percentage data)

 

By AUM:

    

    

    

    

    

    

Ivy Science & Technology

$

8,143

12

%  

6,345

10

%  

4,116

 

5

%

Ivy Mid Cap Growth

5,063

7

%  

3,983

6

%  

2,377

3

%  

Ivy Large Cap Growth

 

4,762

7

%  

3,873

6

%  

1,898

 

2

%

Ivy High Income

 

4,722

7

%  

4,857

7

%  

4,180

 

5

%

Ivy Core Equity

4,268

6

%  

3,862

6

%  

4,742

 

6

%

Total

$

26,958

 

39

%  

22,920

 

35

%  

17,313

 

21

%

(in thousands, except percentage data)

By Management Fees:

Ivy Science & Technology

$

59,182

13

%  

56,997

11

%  

32,933

 

6

%

Ivy International Core Equity

34,449

8

%  

49,645

10

%  

45,017

 

8

%

Ivy Mid Cap Growth

 

32,577

7

%  

30,885

6

%  

19,198

4

%

Ivy High Income

25,914

6

%  

27,971

5

%  

23,672

 

4

%

Ivy Core Equity

 

25,751

6

%  

28,264

6

%  

11,044

2

%

Total

$

177,873

 

40

%  

193,762

 

38

%  

131,864

 

24

%

Performance

Investment performance during the fourth quarter was impacted by the market’s rotation into value, cyclical and low-quality stocks which had an outsized impact on our shorter-term performance. However, the long-term trajectory showed continued improvement in both the trailing three- and five-year performance on an equal weighted basis. Three- and five-year performance was consistent as measured by the percentage of assets ranked in the top half of their respective Morningstar universes.

The following table is a summary of Morningstar rankings and ratings as of December 31, 2019:

MorningStar Fund Rankings 1

    

1 Year

    

3 Years

    

5 Years

 

Funds ranked in top half

 

43

%  

42

%  

33

%

Assets ranked in top half

 

52

%  

62

%  

41

%

MorningStar Ratings 1

    

Overall

    

3 Years

    

5 Years

 

Funds with 4/5 stars

 

34

%  

31

%  

23

%

Assets with 4/5 stars

 

51

%  

42

%  

34

%

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

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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 brokerage accounts or within our fee-based asset allocation programs.  AUA increased 17% as compared to 2018, primarily due to strong market gains and growth in net new advisory assets, partially offset by ongoing migration away from brokerage.  Average productivity per Advisor for the year ended December 31, 2019 was $438 thousand, an increase of 16% as compared to 2018.  The decrease in Advisors, along with an increase in productivity is due to our efforts to transform W&R into a fully competitive and profitable aspect of our business model, with a focus on higher producing Advisors.

    

For the Year ended December 31,

2019

2018

2017

(in millions, except advisor data

and percentages)

AUA

Advisory assets

$

26,947

21,207

21,613

Non-advisory assets

 

33,148

30,059

35,073

Total assets under administration

$

60,095

51,266

56,686

Net new advisory assets (1)

$

970

575

471

Net new non-advisory assets (1), (2)

 

(3,333)

(3,670)

(3,573)

Total net new assets (1), (2)

$

(2,363)

(3,095)

(3,102)

Annualized advisory AUA growth (3)

4.6

%

2.7

%

2.6

%

Annualized AUA growth (3)

(4.6)

%

(5.5)

%

(5.9)

%

Advisors and advisor associates

 

1,327

1,403

1,632

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

$

438

378

256

(1)Net new assets is calculated as total client deposits and net transfers less client withdrawals.

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

(3)Annualized growth is calculated as annualized net new assets divided by beginning AUA.

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

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Table of Contents

Results of Operations

Net Income

For the Year ended

 

December 31, 

Variance

 

    

    

    

    

2019 vs.

    

2018 vs.

 

2019

2018

2017

2018

2017

 

(in thousands, except per share and percentage data)

 

Net income attributable to Waddell & Reed Financial, Inc.

$

114,992

183,588

141,279

(37)

%  

30

%

Earnings per share, basic and diluted

$

1.57

2.28

1.69

(31)

%  

35

%

Operating Margin

 

14

%  

19

%  

19

%  

(5)

%  

Total Revenues

Total revenues decreased 8% in 2019 as compared to 2018 primarily due to lower average AUM, partially offset by an increase in advisory fees due to higher AUA. While revenues were relatively consistent in 2018 compared to 2017, this was a result of a decrease in investment management fees, offset by an increase in underwriting and distribution fees. The decrease in investment management fees was primarily due to an increase in fee waivers due to fee reductions in selected mutual funds that were implemented as of July 31, 2018.  The increase in underwriting and distribution fees was primarily due to an increase in advisory fees due to higher AUA and payments received from Advisors for services.

For the Year ended

 

December 31, 

Variance

 

    

    

    

    

2019 vs.

    

2018 vs.

 

    

2019

    

2018

    

2017

    

2018

    

2017

 

(in thousands, except percentage data)

 

Investment management fees

$

445,144

 

507,906

 

531,850

 

(12)

%  

(5)

%

Underwriting and distribution fees

 

531,836

 

550,010

 

518,699

 

(3)

%  

6

%

Shareholder service fees

 

93,335

 

102,385

 

106,595

 

(9)

%  

(4)

%

Total revenues

$

1,070,315

 

1,160,301

 

1,157,144

 

(8)

%  

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Table of Contents

Investment Management Fee Revenues

Investment management fee revenues decreased $62.8 million, or 12%, in 2019 and decreased $23.9 million, or 5%, in 2018. Investment management fee revenues are based on the level of average client AUM and are affected by sales, financial market conditions, redemptions and the composition of assets. The following graph illustrates the direct relationship between average client AUM and investment management fee revenues for the years ending December 31, 2019, 2018 and 2017.

Graphic

The following table summarizes investment management fee revenues, related average AUM, fee waivers and investment management fee rates for the years ending December 31, 2019, 2018 and 2017.  Fee waivers for the Funds are recorded as an offset to investment management fees up to the amount of fees earned, with excess fee waivers recorded in general and administrative expense.

For the Year ended

 

December 31, 

Variance

 

    

    

    

    

2019 vs.

    

2018 vs.

 

2019

2018

2017

2018

2017

 

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

 

percentage data)

 

Funds investment management fees (net)

$

430,028

486,181

506,868

(12)

%  

(4)

%

Funds average assets (in millions)

 

66,543

72,875

73,906

(9)

%  

(1)

%

Funds management fee rate (net)

 

0.6462

%  

0.6671

%  

0.6858

%  

Total fee waivers

$

29,284

17,696

7,648

65

%  

131

%

Institutional investment management fees (net)

$

15,116

21,725

24,982

(30)

%  

(13)

%

Institutional average assets (in millions)

 

3,730

 

5,464

 

7,071

(32)

%  

(23)

%

Institutional management fee rate (net)

 

0.4053

%  

 

0.4057

%  

 

0.3786

%  

Revenues from investment management services provided to our retail mutual funds, which are distributed through the unaffiliated and wealth management channels, decreased $56.2 million in 2019, or 12%, compared to 2018, primarily due to a decrease in average assets and an increase in fee waivers due to fee reductions in selected mutual funds

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Table of Contents

that were implemented as of July 31, 2018.  Revenues from investment management services provided to our mutual funds decreased $20.7 million in 2018, or 4%, compared to 2017. Investment management fee revenues decreased primarily due to an increase in fee waivers due to fee reductions in selected mutual funds that were implemented as of July 31, 2018, as well as the merger of the remaining Advisors Funds into Ivy Funds.  Additionally, revenues decreased due to a slight decrease in average AUM and a shift in the mix of our AUM.

Institutional account revenues in 2019 decreased $6.6 million, or 30%, compared to 2018 due to a decrease in average AUM. Outflows in assets for 2019 in this channel were primarily due to carryover effects of prior year personnel changes at the portfolio manager level.  Institutional account revenues in 2018 decreased $3.3 million, or 13%, compared to 2017 due to a 23% decrease in average AUM, which was partially offset by an increased management fee rate. Outflows in assets for 2018 in this channel were primarily due to personnel changes at the portfolio manager level.