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Section 1: 10-Q (10-Q)

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Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2019

OR

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

For the transition period from                                 to                                

Commission file number 001-13913

WADDELL & REED FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Delaware

51-0261715

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification No.)

6300 Lamar Avenue

Overland Park, Kansas 66202

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

(913) 236-2000

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $.01 par value

WDR

New York Stock Exchange

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

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

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

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

Class

Outstanding as of July 26, 2019

Class A common stock, $.01 par value

73,075,318

Table of Contents

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended June 30, 2019

    

Page No.

Part I.

Financial Information

Item 1.

Financial Statements (unaudited)

Consolidated Balance Sheets at June 30, 2019 and December 31, 2018

3

Consolidated Statements of Income for the three and six months ended June 30, 2019 and June 30, 2018

4

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and June 30, 2018

5

Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests for the three and six months ended June 30, 2019 and June 30, 2018

6

Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and June 30, 2018

7

Notes to the Unaudited Consolidated Financial Statements

8

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

36

Part II.

Other Information

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 5.

Other Information

38

Item 6.

Exhibits

39

Signatures

40

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

June 30, 

2019

December 31, 

(Unaudited)

2018

Assets:

    

    

    

Cash and cash equivalents

$

168,926

 

231,997

Cash and cash equivalents - restricted

 

28,671

 

 

59,558

Investment securities

 

697,903

 

 

617,135

Receivables:

Funds and separate accounts

 

20,526

 

 

18,112

Customers and other

 

81,222

 

 

151,515

Prepaid expenses and other current assets

 

24,265

 

 

27,164

Total current assets

 

1,021,513

 

 

1,105,481

Property and equipment, net

 

54,029

 

 

63,429

Goodwill and identifiable intangible assets

 

145,869

 

 

145,869

Deferred income taxes

 

4,372

 

 

12,321

Other non-current assets

 

42,899

 

 

16,979

Total assets

$

1,268,682

 

1,344,079

Liabilities:

Accounts payable

$

19,771

 

26,253

Payable to investment companies for securities

 

40,943

 

 

100,085

Payable to third party brokers

 

19,179

 

 

19,891

Payable to customers

 

47,862

 

 

86,184

Accrued compensation

 

49,197

 

 

54,129

Other current liabilities

 

92,989

 

 

51,580

Total current liabilities

 

269,941

 

 

338,122

Long-term debt

 

94,890

 

 

94,854

Accrued pension and postretirement costs

 

814

 

 

798

Other non-current liabilities

 

31,266

 

 

15,392

Total liabilities

 

396,911

 

 

449,166

Redeemable noncontrolling interests

15,115

11,463

Stockholders’ equity:

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

 

 

 

Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 73,712 shares outstanding (76,790 at December 31, 2018)

 

997

 

 

997

Additional paid-in capital

 

294,487

 

 

311,264

Retained earnings

 

1,227,314

 

 

1,198,445

Cost of 25,989 common shares in treasury (22,911 at December 31, 2018)

 

(669,223)

 

 

(627,587)

Accumulated other comprehensive income

 

3,081

 

 

331

Total stockholders’ equity

 

856,656

 

 

883,450

Total liabilities, redeemable noncontrolling interests and stockholders’ equity

$

1,268,682

 

1,344,079

See accompanying notes to the unaudited consolidated financial statements.

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WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Income

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

For the three months ended June 30, 

For the six months ended June 30, 

2019

2018

2019

2018

Revenues:

    

    

    

    

    

    

    

Investment management fees

$

112,870

 

130,391

$

222,632

 

264,083

Underwriting and distribution fees

 

133,495

 

137,873

259,740

 

275,914

Shareholder service fees

 

23,789

 

27,074

47,192

 

52,956

Total

 

270,154

 

295,338

529,564

 

592,953

Operating expenses:

Distribution

 

116,477

 

114,315

226,271

 

228,785

Compensation and benefits (including share-based compensation of $11,199, $14,902, $23,892, and $29,670, respectively)

 

61,876

 

65,828

126,719

 

134,613

General and administrative

 

16,037

 

19,143

30,741

 

38,681

Technology

16,442

17,235

32,750

33,879

Occupancy

6,701

6,969

13,416

13,933

Marketing and advertising

2,399

2,896

4,363

5,177

Depreciation

 

5,228

 

5,819

11,229

 

11,121

Subadvisory fees

 

3,715

 

3,683

7,272

 

7,391

Intangible asset impairment

1,200

1,200

Total

 

228,875

 

237,088

452,761

 

474,780

Operating income

 

41,279

 

58,250

76,803

 

118,173

Investment and other income

 

9,025

 

841

18,478

 

3,657

Interest expense

 

(1,552)

 

(1,551)

(3,100)

 

(3,353)

Income before provision for income taxes

 

48,752

 

57,540

92,181

 

118,477

Provision for income taxes

 

14,190

 

13,284

24,861

 

28,250

Net income

34,562

 

44,256

67,320

 

90,227

Net income (loss) attributable to redeemable noncontrolling interests

614

(222)

1,318

(588)

Net income attributable to Waddell & Reed Financial, Inc.

$

33,948

44,478

$

66,002

90,815

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

$

0.45

0.55

$

0.87

1.10

Weighted average shares outstanding, basic and diluted:

 

74,694

81,449

75,492

82,275

See accompanying notes to the unaudited consolidated financial statements.

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WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

    

For the three months ended June 30, 

For the six months ended June 30, 

2019

    

2018

    

2019

    

2018

    

Net income

$

34,562

 

44,256

$

67,320

 

90,227

Other comprehensive income:

Unrealized gain (loss) on available for sale investment securities during the period, net of income tax expense (benefit) of $402, $53, $919 and $(298), respectively

 

1,281

 

 

169

 

2,939

 

 

(962)

Postretirement benefit, net of income tax benefit of $(28), $(7), $(58) and $(15), respectively

 

(95)

 

 

(23)

 

(189)

 

 

(46)

Comprehensive income

35,748

 

44,402

70,070

 

89,219

Comprehensive income (loss) attributable to redeemable noncontrolling interests

614

(222)

1,318

(588)

Comprehensive income attributable to Waddell & Reed Financial, Inc.

$

35,134

44,624

$

68,752

89,807

See accompanying notes to the unaudited consolidated financial statements.

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WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests

(Unaudited, in thousands)

Accumulated

Redeemable

Additional

Other

Total 

Non

Common Stock

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

Controlling

For the three months ended June 30, 2018

    

Shares

    

Amount

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

    

interest

Balance at March 31, 2018

 

99,701

$

997

 

283,768

 

1,118,922

 

(513,241)

 

(1,478)

 

888,968

 

18,570

Net income (loss)

 

 

 

 

44,478

 

 

 

44,478

 

(222)

Net subscription of redeemable noncontrolling interests in sponsored funds

(1,296)

Recognition of equity compensation

 

 

 

11,578

 

704

 

 

 

12,282

 

Net issuance/forfeiture of nonvested shares

 

 

 

6,798

 

 

(6,798)

 

 

 

Dividends accrued, $0.25 per share

 

 

 

 

(20,014)

 

 

(20,014)

Repurchase of common stock

 

(40,142)

 

(40,142)

 

Other comprehensive income

 

 

 

 

 

 

146

 

146

 

Balance at June 30, 2018

99,701

$

997

 

302,144

 

1,144,090

 

(560,181)

 

(1,332)

 

885,718

 

17,052

Accumulated

Redeemable

Additional

Other

Total 

Non

Common Stock

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

Controlling

For the three months ended June 30, 2019

    

Shares

    

Amount

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

    

interest

Balance at March 31, 2019

 

99,701

$

997

 

290,872

 

1,211,566

 

(636,726)

 

1,895

 

868,604

 

12,936

Net income

 

 

 

 

33,948

 

 

 

33,948

 

614

Net subscription of redeemable noncontrolling interests in sponsored funds

1,565

Recognition of equity compensation

 

 

 

7,941

 

148

 

 

 

8,089

 

Net issuance/forfeiture of nonvested shares

 

 

 

(4,326)

 

 

4,326

 

 

 

Dividends accrued, $0.25 per share

 

 

 

 

(18,348)

 

 

(18,348)

Repurchase of common stock

 

(36,823)

 

(36,823)

 

Other comprehensive income

 

 

 

 

 

 

1,186

 

1,186

 

Balance at June 30, 2019

99,701

$

997

 

294,487

 

1,227,314

 

(669,223)

 

3,081

 

856,656

 

15,115

Accumulated

Redeemable

Additional

Other

Total 

Non

Common Stock

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

Controlling

For the six months ended June 30, 2018

    

Shares

    

Amount

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

    

interest

Balance at December 31, 2017

 

99,701

$

997

 

301,410

 

1,092,394

 

(522,441)

 

524

 

872,884

 

14,509

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

812

(812)

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

 

 

 

 

36

 

 

(36)

 

 

Net income (loss)

 

 

 

 

90,815

 

 

 

90,815

 

(588)

Net subscription of redeemable noncontrolling interests in sponsored funds

3,131

Recognition of equity compensation

 

 

 

23,643

 

913

 

 

 

24,556

 

Net issuance/forfeiture of nonvested shares

 

 

 

(22,909)

 

 

22,909

 

 

 

Dividends accrued, $0.50 per share

 

 

 

 

(40,880)

 

 

(40,880)

Repurchase of common stock

 

(60,649)

 

(60,649)

 

Other comprehensive loss

 

 

 

 

 

 

(1,008)

 

(1,008)

 

Balance at June 30, 2018

99,701

$

997

 

302,144

 

1,144,090

 

(560,181)

 

(1,332)

 

885,718

 

17,052

Accumulated

Redeemable

Additional

Other

Total 

Non

Common Stock

Paid-In

Retained

Treasury

Comprehensive

Stockholders’

Controlling

 

For the six months ended June 30, 2019

    

Shares

    

Amount

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

    

interest

 

Balance at December 31, 2018

 

99,701

$

997

 

311,264

 

1,198,445

 

(627,587)

 

331

 

883,450

 

11,463

Net income

 

 

 

66,002

 

 

 

66,002

 

1,318

Net subscription of redeemable noncontrolling interests in sponsored funds

2,334

Recognition of equity compensation

 

 

17,549

 

240

 

 

 

17,789

 

Net issuance/forfeiture of nonvested shares

(34,326)

34,326

Dividends accrued, $0.50 per share

 

 

 

(37,373)

 

 

 

(37,373)

 

Repurchase of common stock

 

 

 

 

(75,962)

 

 

(75,962)

 

Other comprehensive income

 

 

 

 

 

2,750

 

2,750

 

Balance at June 30, 2019

99,701

$

997

 

294,487

 

1,227,314

 

(669,223)

 

3,081

 

856,656

 

15,115

See accompanying notes to the unaudited consolidated financial statements.

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WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

    

For the six months ended June 30, 

2019

    

2018

    

Cash flows from operating activities:

Net income

$

67,320

 

90,227

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

Depreciation and amortization

 

11,543

 

 

11,121

Write-down of impaired assets

 

 

 

1,200

Amortization of deferred sales commissions

 

1,049

 

 

1,890

Share-based compensation

 

23,892

 

 

29,670

Investments (gain) loss, net

 

(26,287)

 

 

4,536

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

 

(13,327)

 

 

(8,338)

Deferred income taxes

 

7,088

 

 

3,090

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

(8,973)

70,759

Other

588

2,092

Changes in assets and liabilities:

Customer and other receivables

 

72,615

 

 

(2,807)

Payable to investment companies for securities and payable to customers

 

(97,464)

 

 

2,679

Receivables from funds and separate accounts

 

(2,414)

 

 

2,488

Other assets

 

13,850

 

 

(1,932)

Accounts payable and payable to third party brokers

 

(7,194)

 

 

(3,706)

Other liabilities

 

(19,139)

 

 

(29,888)

Net cash provided by operating activities

$

23,147

 

 

173,081

Cash flows from investing activities:

Purchases of available for sale and equity method securities

(99,584)

(27,093)

Proceeds from sales of available for sale and equity method securities

 

19,667

 

 

Proceeds from maturities of available for sale securities

78,678

77,966

Additions to property and equipment

 

(2,748)

 

 

(1,142)

Net cash (used in) provided by investing activities

$

(3,987)

 

 

49,731

Cash flows from financing activities:

Dividends paid

 

(38,188)

 

 

(41,481)

Repurchase of common stock

 

(77,147)

 

 

(59,195)

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

(94,960)

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

2,334

3,131

Other

(117)

Net cash used in financing activities

$

(113,118)

 

 

(192,505)

Net (decrease) increase in cash and cash equivalents

 

(93,958)

 

 

30,307

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

 

291,555

 

 

235,985

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

$

197,597

 

266,292

See accompanying notes to the unaudited consolidated financial statements.

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WADDELL & REED FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.

Description of Business and Significant Accounting Policies

Waddell & Reed Financial, Inc. and Subsidiaries

Waddell & Reed Financial, Inc. (hereinafter referred to as the “Company,” “we,” “our” or “us”) is a holding company, incorporated in the state of Delaware in 1981, that conducts business through its subsidiaries. Founded in 1937, we are one of the oldest mutual fund complexes in the United States, having introduced the former Waddell & Reed Advisors group of mutual funds (the “Advisors Funds”) in 1940. Over time, we added additional mutual funds: Ivy Funds (the “Ivy Funds”); Ivy Variable Insurance Portfolios, our variable product offering (“Ivy VIP”); InvestEd Portfolios, our 529 college savings plan (“InvestEd”); and the Ivy High Income Opportunities Fund, a closed-end mutual fund (“IVH”). In 2016, we introduced the Ivy NextShares® exchange-traded managed funds (“Ivy NextShares”) (collectively, Ivy Funds, Ivy VIP, InvestEd, IVH, and Ivy NextShares are referred to as the “Funds”).  In addition to the Funds, our assets under management (“AUM”) include institutional accounts managed by the Company.  As of June 30, 2019, we had $71.9 billion in AUM.

We derive our revenues from providing investment management and advisory services, investment product underwriting and distribution, and shareholder services administration to the Funds and institutional accounts. We also provide brokerage 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 and administrative, and information technology.

Basis of Presentation

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented.  The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).  Certain amounts in the prior year’s financial statements have been reclassified for consistent presentation.

The accompanying unaudited consolidated financial statements are prepared consistent with the accounting policies described in Note 1 to the consolidated financial statements included in our 2018 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) 2016-02, “Leases” and ASU 2018-07, “Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting,” both of which became effective January 1, 2019, and ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which was early adopted during the second quarter of 2019. 

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at June 30, 2019 and the results of operations and cash flows for the three and six months ended June 30, 2019 and 2018 in conformity with accounting principles generally accepted in the United States.

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2.

New Accounting Guidance

Accounting Guidance Adopted During the Second Quarter of 2019

During the second quarter of 2019, the Company early adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements. See Note 4 – Investment Securities, for the disclosures required by this ASU.

Accounting Guidance Not Yet Adopted

In August 2018, FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We are evaluating the impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.

3.

Revenue Recognition

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

Three months ended
June 30, 2019

Three months ended
June 30, 2018

Six months ended
June 30, 2019

Six months ended
June 30, 2018

(in thousands)

(in thousands)

Investment management fees:

    

    

    

    

    

    

    

Funds

$

109,007

 

124,766

 

214,752

 

252,429

Institutional

 

3,863

 

5,625

 

7,880

 

11,654

Total investment management fees

$

112,870

 

130,391

 

222,632

 

264,083

Underwriting and distribution fees:

Unaffiliated

Rule 12b-1 service and distribution fees

$

16,329

20,051

32,511

41,027

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

488

507

926

977

Other revenues

83

148

175

333

Total unaffiliated distribution fees

$

16,900

20,706

33,612

42,337

Wealth Management

Fee-based asset allocation product revenues

$

70,220

66,580

135,450

132,097

Rule 12b-1 service and distribution fees

16,327

18,109

32,015

36,486

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

12,302

13,823

24,322

28,249

Sales commissions on other products

8,497

9,065

16,103

17,487

Other revenues

9,249

9,590

18,238

19,258

Total wealth management distribution fees

116,595

117,167

226,128

233,577

Total distribution fees

$

133,495

137,873

259,740

275,914

Shareholder service fees:

Total shareholder service fees

$

23,789

 

27,074

 

47,192

 

52,956