2.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments. We consider all highly liquid investments with maturities upon acquisition of 90 days or less to be cash equivalents. Cash and cash equivalents - restricted represents cash held for the benefit of customers segregated in compliance with federal and other regulations.
3.
New Accounting Guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “
Revenue from Contracts with Customers,
” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard also specifies the accounting for certain costs to obtain or fulfill a contract with a customer. This ASU will supersede much of the existing revenue recognition guidance in accounting principles generally accepted in the United States and is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period; early application is permitted for the first interim period within annual reporting periods beginning after December 15, 2016. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We have evaluated our population of contracts and concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, “
Recognition and Measurement of Financial Assets and Financial Liabilities,
” which provides updated guidance on the recognition, measurement, presentation and disclosure of certain financial assets and financial liabilities. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “
Leases,
” which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU will be presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early application permitted. We are evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-07,“
Simplifying the Transition to the Equity Method of Accounting.
” The amendments in this ASU eliminate the requirement that when an investment qualifies for the use of equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 also requires that an entity that has an available for sale equity security that becomes qualified for the equity method recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. ASU 2016-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, “
Improvements to Employee Share-Based Payment Accounting,
” which requires recognition of all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and classification of excess tax benefits along with other income tax cash flows as an operating activity; allows an entity to either estimate the number of awards that are expected to vest or account for forfeitures when they occur; and permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. Upon adoption of this standard on January 1, 2017, the Company will account for forfeitures when they occur. We do not expect a material impact on our consolidated financial statements and related disclosures upon adoption of this ASU. However, after the adoption date, recognition of excess tax benefits as income tax benefit and tax deficiencies as income tax expense in the income statement may result in increased volatility in our provision for income taxes and effective tax rate.
8.
Income Tax Uncertainties
As of January 1, 2016 and September 30, 2016, the Company had unrecognized tax benefits, including penalties and interest, of $11.9 million ($8.7 million net of federal benefit) and $11.9 million ($8.5 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate. In the accompanying consolidated balance sheet, unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable; unrecognized tax benefits that reduce a net operating loss, similar tax loss, or tax credit carryforward are presented as a reduction to noncurrent deferred income taxes.
The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes. As of January 1, 2016, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $3.4 million ($2.8 million net of federal benefit). The total amount of penalties and interest, net of federal benefit, related to income tax uncertainties recognized in the statement of income for the nine month period ended September 30, 2016 was $0.3 million. The total amount of accrued penalties and interest related to uncertain tax positions at September 30, 2016 of $3.8 million ($3.1 million net of federal benefit) is included in the total unrecognized tax benefits described above.
In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. The Company is currently under federal audit for the 2014 tax year. The 2013 and 2015 federal income tax returns are open tax years that remain subject to potential future audit. State income tax returns for all years after 2011 and, in certain states, income tax returns for 2011, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.
9.
Pension Plan and Postretirement Benefits Other Than Pension
We provide a noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”). Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final 10 years of employment.
We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all employees, as well as our advisors, who are independent contractors. The medical plan is contributory with participant contributions adjusted annually. The medical plan does not provide for post age 65 benefits with the exception of a small group of employees that were grandfathered when such plan was established. During the third quarter of 2016, the Company amended the plan to discontinue the availability of coverage for any individuals who retire after December 31, 2016. Qualified employees who retire on or before December 31, 2016 may continue to participate in retiree coverage under the plan. The plan amendment resulted in an $8.5 million curtailment gain, recorded as part of net other postretirement benefit costs, summarized in the table below.
The following table details a rollforward of redeemable noncontrolling interests in consolidated sponsored funds for the nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
September 30, 2016
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests in sponsored funds upon adoption of new consolidation accounting guidance on January 1, 2016
|
|
$
|
14,330
|
|
|
Redeemable noncontrolling interests in sponsored funds consolidated during the period
|
|
|
18,249
|
|
|
Redeemable noncontrolling interests ownership change during the period
|
|
|
20,672
|
|
|
Redeemable noncontrolling interests deconsolidation
|
|
|
(44,234)
|
|
|
Net income attributable to redeemable noncontrolling interests
|
|
|
1,355
|
|
|
Ending balance of redeemable noncontrolling interest in consolidated sponsored funds
|
|
$
|
10,372
|
|
12.
Contingencies
The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.
The Company establishes reserves for litigation and similar matters when those matters present material loss contingencies that management determines to be both probable and reasonably estimable in accordance with ASC 450,
"Contingencies."
These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in light of new information. The Company discloses the nature of the contingency when management believes it is reasonably possible the outcome may be significant to the Company’s consolidated financial statements and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items that management believes should be disclosed. Management’s judgment is required related to contingent liabilities because the outcomes are difficult to predict.
In an action filed on February 18, 2016 in the United States District Court for the District of Kansas, Saket Kapor [sic], Peter Brockett and Hieu Phan v. Ivy Investment Management Company, et. al. (Case No. 2:16-cv-02106-JWL-TJJ), the Company's registered investment advisor subsidiaries, the trustees of two of the Company’s affiliated mutual funds, and an officer of a Company subsidiary were sued in a putative derivative action by three mutual fund shareholders alleging breach of fiduciary duty and breach of contract claims relating to investments held in the affiliated mutual funds. On behalf of the mutual funds, the plaintiffs seek monetary damages and demand a jury trial. On April 18, 2016, the plaintiffs dismissed the complaint in the United States District Court for the District of Kansas and filed a similar complaint against the same defendants, regarding the same substantive allegations and causes of action, in the District Court of Johnson County, Kansas (Case No. I6CV02338 Div.4). On April 25, 2016, the plaintiffs voluntarily dismissed the officer of a Company subsidiary as a defendant. On June 30, 2016, all remaining defendants filed separate motions to dismiss the complaint. On August 22, 2016, the plaintiffs filed an amended complaint that removed Saket Kapor [sic] and Peter Brockett as plaintiffs and in their stead added Audrey Ohman as a named plaintiff, but otherwise did not change the substantive allegations raised in the initial complaint. On September 14, 2016, all remaining defendants filed separate motions to dismiss the amended complaint. Oral arguments in the matter are scheduled for November 10, 2016. To date, no discovery has taken place.
In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. Given the preliminary nature of the proceedings and the Company's dispute over the merits of the claims, the Company is unable to estimate a range of reasonably possible loss, if any, that such matter may represent. While the ultimate resolution of this matter is uncertain, an adverse determination against the Company could have a material adverse impact on our business, financial condition and results of operations.
The Company has reviewed all other legal and regulatory matters and as a result of such process provided an aggregate accrual for such matters in the amount of $3.0 million at September 30, 2016.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited consolidated financial statements and notes to the unaudited consolidated financial statements included elsewhere in this report. Unless otherwise indicated or the context otherwise requires all references to the “Company,” “we,” “our” or “is” refer to Waddell & Reed Financial, Inc. and its consolidated subsidiaries.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates and the financial markets and other conditions. These statements are generally identified by the use of such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by us or on our behalf is not a guarantee of future performance. Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below. If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015, which include, without limitation:
|
|
·
|
|
The loss of existing distribution channels or inability to access new distribution channels;
|
|
|
·
|
|
A reduction in assets under our management on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures;
|
|
|
·
|
|
The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;
|
|
|
·
|
|
The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;
|
|
|
·
|
|
A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds;
|
|
|
·
|
|
The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;
|
|
|
·
|
|
Our inability to reduce expenses rapidly enough to align with declines in our revenues, the level of our assets under management or our business environment;
|
|
|
·
|
|
Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;
|
|
|
·
|
|
Our inability to attract and retain senior executive management and other key personnel to conduct our broker-dealer, fund management and investment management advisory business;
|
|
|
·
|
|
A failure in, or breach of, our operational or security systems or our technology infrastructure, or those of third parties on which we rely; and
|
|
|
·
|
|
Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner.
|
The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission (the “SEC”), including the information in Item 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10-K for the year ended December 31, 2015 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2016. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.
Overview
Founded in 1937, we are one of the oldest mutual fund and asset management firms in the country, with expertise in a broad range of investment styles and across a variety of market environments. Our earnings and cash flows are heavily dependent on financial market conditions. Significant increases or decreases in the various securities markets can have a material impact on our results of operations, financial condition and cash flows.
We derive our revenues from providing investment management and advisory services, investment product underwriting and distribution, and shareholder services administration to the Funds, the IGI Funds, and institutional and separately managed accounts. Investment management and/or advisory fees are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of fees earned on fee-based asset allocation products and related advisory services, Rule 12b-1 asset-based service and distribution fees, distribution fees on certain variable products, and commissions derived from sales of investment and insurance products. The products sold have various commission structures and the revenues received from those sales vary based on the type and dollar amount sold. Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts and portfolio accounting and administration fees, and is earned based on assets under management or number of client accounts. Our major expenses are for commissions, employee compensation, field support, dealer services and information technology.
One of our distinctive qualities is that we distribute our investment products through a balanced distribution network. Our retail products are distributed through our retail unaffiliated distribution channel, which includes third parties such as other broker-dealers, registered investment advisors and various retirement platforms, or through our retail broker-dealer channel sales force of independent financial advisors. Through our institutional channel, we distribute a variety of investment styles for a variety of types of institutions.
Company Developments
|
|
·
|
|
In October 2016, we launched the Ivy California Municipal High Income Fund, a fixed income product seeking a high level of income that is exempt from federal and California income taxes. Additionally, we introduced three Ivy NextShares funds as part of a planned lineup of NextShares exchange-traded managed funds. Ivy Energy NextShares™ invests primarily in securities of companies within all aspects of the energy sector. Ivy Focused Growth NextShares™ invests primarily in a portfolio of common stock issued by large capitalization, growth-oriented companies that the portfolio manager believes have the ability to sustain growth over the long-term. Ivy Focused Value NextShares™ invests primarily in the common stocks of companies that the portfolio manager believes are undervalued, trading at a significant discount relative to the intrinsic value of the Company as estimated by Ivy Investment Management Company and/or are out of favor in financial markets but have a favorable outlook for capital appreciation.
|
|
|
·
|
|
We continue to make progress on modernization of our brokerage and product platform and in July 2016 completed the restructuring of our share classes for advisory products. We believe that these initiatives, referred to internally as “Project E,” position the retail broker-dealer channel for long-term competitiveness. These initiatives move us from a paper-based, labor intensive environment to one utilizing innovative brokerage platform technology, including significant enhancements to our investment advisory programs, financial planning capabilities and client experience.
|
|
|
·
|
|
In April 2016, the U.S. Department of Labor released its final rule that, among other things, expands the scope of a “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended, and Section 4975 of the Internal Revenue Code of 1986, as amended. The final rule has a phased implementation from April 10, 2017 through January 1, 2018. We are in the process of reviewing the final rule to determine its impact on our business.
|
|
|
·
|
|
Our assets under management decreased 20% from $106.2 billion at September 30, 2015 to $85.1 billion at September 30, 2016 driven by net outflows of $25.9 billion offset by market appreciation of $4.8 billion. Our average assets under management decreased 24% from $114.8 billion for the quarter ended September 30, 2015 to $86.8 billion for the quarter ended September 30, 2016.
|
|
|
·
|
|
During the third quarter of 2016, the Company amended the defined postretirement medical plan to discontinue the availability of coverage for any individuals who retire after December 31, 2016. Qualified employees who retire on or before December 31, 2016 may continue to participate in retiree coverage under the plan. The plan amendment resulted in an $8.5 million curtailment gain.
|
|
|
·
|
|
We recorded an intangible asset impairment charge of $5.7 million ($3.6 million net of taxes) related to a subadvisory agreement to manage certain mutual funds products.
|
|
|
·
|
|
During the third quarter of 2016, we returned $38.6 million of capital to shareholders through dividends and share repurchases, compared to $69.3 million in the same period in 2015.
|
|
|
·
|
|
Our balance sheet remains solid, and we ended the third quarter of 2016 with cash and investments of $838.7 million, excluding redeemable noncontrolling interests in consolidated sponsored funds.
|
Assets Under Management
During the third quarter of 2016, assets under management decreased 2% to $85.1 billion from $86.5 billion at June 30, 2016 due to net outflows of $4.9 billion, partially offset by market appreciation of $3.5 billion.
Change in Assets Under Management
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2016
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker
|
|
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Institutional
|
|
Total
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
35,197
|
|
42,261
|
|
8,993
|
|
86,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales (2)
|
|
|
1,320
|
|
1,024
|
|
180
|
|
2,524
|
|
|
Redemptions
|
|
|
(4,824)
|
|
(1,542)
|
|
(1,051)
|
|
(7,417)
|
|
|
Net Exchanges
|
|
|
161
|
|
(194)
|
|
33
|
|
—
|
|
|
Net Flows
|
|
|
(3,343)
|
|
(712)
|
|
(838)
|
|
(4,893)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Action
|
|
|
1,436
|
|
1,621
|
|
440
|
|
3,497
|
|
|
Ending Assets
|
|
$
|
33,290
|
|
43,170
|
|
8,595
|
|
85,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2015
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker
|
|
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Institutional
|
|
Total
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
57,545
|
|
45,947
|
|
17,214
|
|
120,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales (2)
|
|
|
2,768
|
|
1,238
|
|
465
|
|
4,471
|
|
|
Redemptions
|
|
|
(5,569)
|
|
(1,242)
|
|
(1,817)
|
|
(8,628)
|
|
|
Net Exchanges
|
|
|
265
|
|
(265)
|
|
—
|
|
—
|
|
|
Net Flows
|
|
|
(2,536)
|
|
(269)
|
|
(1,352)
|
|
(4,157)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Action
|
|
|
(5,689)
|
|
(3,463)
|
|
(1,205)
|
|
(10,357)
|
|
|
Ending Assets
|
|
$
|
49,320
|
|
42,215
|
|
14,657
|
|
106,192
|
|
Assets under management decreased to $85.1 billion at September 30, 2016 compared to $104.4 billion at December 31, 2015 due to net outflows of $20.9 billion, slightly offset by market appreciation of $1.6 billion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date 2016
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker
|
|
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Institutional
|
|
Total
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
45,641
|
|
43,344
|
|
15,414
|
|
104,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales (2)
|
|
|
4,990
|
|
3,186
|
|
823
|
|
8,999
|
|
|
Redemptions
|
|
|
(18,047)
|
|
(4,068)
|
|
(7,818)
|
|
(29,933)
|
|
|
Net Exchanges
|
|
|
446
|
|
(529)
|
|
83
|
|
—
|
|
|
Net Flows
|
|
|
(12,611)
|
|
(1,411)
|
|
(6,912)
|
|
(20,934)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Action
|
|
|
260
|
|
1,237
|
|
93
|
|
1,590
|
|
|
Ending Assets
|
|
$
|
33,290
|
|
43,170
|
|
8,595
|
|
85,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date 2015
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker
|
|
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Institutional
|
|
Total
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
60,335
|
|
45,517
|
|
17,798
|
|
123,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales (2)
|
|
|
9,877
|
|
3,856
|
|
1,968
|
|
15,701
|
|
|
Redemptions
|
|
|
(16,386)
|
|
(3,800)
|
|
(4,280)
|
|
(24,466)
|
|
|
Net Exchanges
|
|
|
633
|
|
(633)
|
|
—
|
|
—
|
|
|
Net Flows
|
|
|
(5,876)
|
|
(577)
|
|
(2,312)
|
|
(8,765)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Action
|
|
|
(5,139)
|
|
(2,725)
|
|
(829)
|
|
(8,693)
|
|
|
Ending Assets
|
|
$
|
49,320
|
|
42,215
|
|
14,657
|
|
106,192
|
|
|
|
(1)
|
|
Includes all activity of the Funds, the IGI Funds and institutional and separate accounts, including money market funds and transactions at net asset value, accounts for which we receive no commissions.
|
|
|
(2)
|
|
Primarily gross sales (net of sales commission), but also includes net reinvested dividends and capital gains and investment income.
|
Average assets under management, which are generally more indicative of trends in revenue for providing investment management services than the quarter over quarter change in ending assets under management, are presented below.
Average Assets Under Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2016
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker-
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Institutional
|
|
Total
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
26,732
|
|
31,408
|
|
8,521
|
|
$
|
66,661
|
|
|
Fixed Income
|
|
|
7,424
|
|
10,057
|
|
492
|
|
|
17,973
|
|
|
Money Market
|
|
|
149
|
|
1,991
|
|
—
|
|
|
2,140
|
|
|
Total
|
|
$
|
34,305
|
|
43,456
|
|
9,013
|
|
$
|
86,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2015
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker-
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Institutional
|
|
Total
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
44,286
|
|
33,271
|
|
14,730
|
|
$
|
92,287
|
|
|
Fixed Income
|
|
|
9,544
|
|
9,821
|
|
1,159
|
|
|
20,524
|
|
|
Money Market
|
|
|
156
|
|
1,876
|
|
—
|
|
|
2,032
|
|
|
Total
|
|
$
|
53,986
|
|
44,968
|
|
15,889
|
|
$
|
114,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date 2016
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker-
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Institutional
|
|
Total
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
29,464
|
|
30,683
|
|
10,828
|
|
$
|
70,975
|
|
|
Fixed Income
|
|
|
7,362
|
|
9,774
|
|
801
|
|
|
17,937
|
|
|
Money Market
|
|
|
168
|
|
2,010
|
|
—
|
|
|
2,178
|
|
|
Total
|
|
$
|
36,994
|
|
42,467
|
|
11,629
|
|
$
|
91,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date 2015
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker-
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Institutional
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
47,149
|
|
34,185
|
|
15,825
|
|
$
|
97,159
|
|
|
Fixed Income
|
|
|
10,247
|
|
10,007
|
|
1,107
|
|
|
21,361
|
|
|
Money Market
|
|
|
149
|
|
1,842
|
|
—
|
|
|
1,991
|
|
|
Total
|
|
$
|
57,545
|
|
46,034
|
|
16,932
|
|
$
|
120,511
|
|
Results of Operations — Three and Nine Months Ended September 30, 2016 as Compared with Three and Nine Months Ended September 30, 2015
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Waddell & Reed
|
|
|
|
|
|
|
|
|
|
Financial, Inc. (in thousands)
|
|
$
|
53,827
|
|
48,058
|
|
12
|
%
|
|
Earnings per share, basic and diluted
|
|
$
|
0.65
|
|
0.58
|
|
12
|
%
|
|
Operating Margin
|
|
|
24.3
|
%
|
29.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
September 30,
|
|
Variance
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Waddell & Reed
|
|
|
|
|
|
|
|
|
|
Financial, Inc. (in thousands)
|
|
$
|
124,490
|
|
182,616
|
|
(32)
|
%
|
|
Earnings per share, basic and diluted
|
|
$
|
1.51
|
|
2.18
|
|
(31)
|
%
|
|
Operating Margin
|
|
|
21.0
|
%
|
28.1
|
%
|
|
|
Total Revenues
Total revenues decreased 19% to $303.1 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due primarily to a decrease in average assets under management of 24% driven by net outflows. For the nine months ended September 30, 2016, total revenues decreased $209.4 million, or 18%, compared to the same period in the prior year due to a decrease in average assets under management of 24% driven by net outflows.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Variance
|
|
|
|
|
(in thousands)
|
|
|
|
|
Investment management fees
|
|
$
|
138,745
|
|
175,218
|
|
(21)
|
%
|
|
Underwriting and distribution fees
|
|
|
135,778
|
|
165,130
|
|
(18)
|
%
|
|
Shareholder service fees
|
|
|
28,563
|
|
35,761
|
|
(20)
|
%
|
|
Total revenues
|
|
$
|
303,086
|
|
376,109
|
|
(19)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Variance
|
|
|
|
|
(in thousands)
|
|
|
|
|
Investment management fees
|
|
$
|
424,403
|
|
543,237
|
|
(22)
|
%
|
|
Underwriting and distribution fees
|
|
|
428,748
|
|
503,616
|
|
(15)
|
%
|
|
Shareholder service fees
|
|
|
92,959
|
|
108,704
|
|
(15)
|
%
|
|
Total revenues
|
|
$
|
946,110
|
|
1,155,557
|
|
(18)
|
%
|
Investment Management Fee Revenues
Investment management fee revenues are earned by providing investment advisory services to the Funds, the IGI Funds and to institutional and separate accounts. Investment management fee revenues for the third quarter of 2016 decreased $36.5 million, or 21%, from last year’s third quarter. For the nine month period ended September 30, 2016, investment management fee revenues decreased $118.8 million, or 22%, compared to the same period in 2015. The following table summarizes investment management fee revenues, related average assets under management, fee waivers and investment management fee rates for the three and nine months ended September 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Variance
|
|
|
|
|
(in thousands, except for management fee rate and average assets)
|
|
|
|
|
|
Retail investment management fees
|
|
$
|
131,139
|
|
|
161,441
|
|
|
(19)
|
%
|
|
Retail average assets (in millions)
|
|
|
77,761
|
|
|
98,954
|
|
|
(21)
|
%
|
|
Retail management fee rate
|
|
|
0.6709
|
%
|
|
0.6473
|
%
|
|
|
|
|
Money market fee waivers
|
|
|
562
|
|
|
1,821
|
|
|
(69)
|
%
|
|
Other fee waivers
|
|
|
1,051
|
|
|
940
|
|
|
12
|
%
|
|
Total fee waivers
|
|
$
|
1,613
|
|
|
2,761
|
|
|
(42)
|
%
|
|
Institutional investment management fees
|
|
$
|
7,606
|
|
|
13,777
|
|
|
(42)
|
%
|
|
Institutional average assets (in millions)
|
|
|
9,013
|
|
|
15,889
|
|
|
(43)
|
%
|
|
Institutional management fee rate
|
|
|
0.3546
|
%
|
|
0.3440
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Variance
|
|
|
|
|
(in thousands, except for management fee rate and average assets)
|
|
|
|
|
|
Retail investment management fees
|
|
$
|
395,208
|
|
|
499,345
|
|
|
(21)
|
%
|
|
Retail average assets (in millions)
|
|
|
79,461
|
|
|
103,579
|
|
|
(23)
|
%
|
|
Retail management fee rate
|
|
|
0.6644
|
%
|
|
0.6446
|
%
|
|
|
|
|
Money market fee waivers
|
|
|
2,947
|
|
|
5,387
|
|
|
(45)
|
%
|
|
Other fee waivers
|
|
|
3,158
|
|
|
2,628
|
|
|
20
|
%
|
|
Total fee waivers
|
|
$
|
6,105
|
|
|
8,015
|
|
|
(24)
|
%
|
|
Institutional investment management fees
|
|
$
|
29,195
|
|
|
43,892
|
|
|
(31)
|
%
|
|
Institutional average assets (in millions)
|
|
|
11,629
|
|
|
16,932
|
|
|
(31)
|
%
|
|
Institutional management fee rate
|
|
|
0.3500
|
%
|
|
0.3466
|
%
|
|
|
|
Revenues from investment management services provided to our retail mutual funds, which are distributed through the retail unaffiliated distribution and retail broker-dealer channels, decreased $30.3 million in the third quarter of 2016, compared to the third quarter of 2015. For the nine months ended September 30, 2016, revenues from investment management services provided to our retail mutual funds decreased $104.1 million, compared to the first nine months of 2015. For both comparative periods, investment management revenue declined less on a percentage basis than the related average assets under management due to an increase in the average management fee rate. A lower asset level in the Ivy Asset Strategy Fund has resulted in increased average management fee rates in 2016 compared to 2015, due to the fund having a management fee rate less than our average management fee rate. Fee waivers for the Funds are recorded as an offset to investment management fees up to the amount of fees earned and are down in both comparable periods due to lower money market fee waivers as a result of the federal interest rate increase effective January 2016.
Institutional account revenues in the third quarter of 2016 decreased $6.2 million, compared to the third quarter of 2015. For the nine month period ended September 30, 2016, institutional account revenues decreased $14.7 million, compared to the same period in 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized long-term redemption rates
|
|
|
|
|
(excludes money market redemptions)
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2016
|
|
2015
|
|
|
2016
|
|
2015
|
|
|
Retail Unaffiliated Distribution channel
|
|
56.2
|
%
|
41.2
|
%
|
|
65.6
|
%
|
38.3
|
%
|
|
Retail Broker-Dealer channel
|
|
12.1
|
%
|
8.9
|
%
|
|
10.7
|
%
|
9.0
|
%
|
|
Institutional channel
|
|
46.4
|
%
|
45.4
|
%
|
|
89.8
|
%
|
33.8
|
%
|
|
Total
|
|
33.3
|
%
|
29.3
|
%
|
|
43.5
|
%
|
26.6
|
%
|
The increased redemption rate in both comparative periods for the retail unaffiliated distribution channel was driven primarily by redemptions in the Asset Strategy funds. Redemptions in the Asset Strategy funds represent approximately 30% of the retail unaffiliated distribution channel’s redemptions during the third quarter of 2016 and approximately 40% of the retail unaffiliated distribution channel’s redemptions for the first nine months of 2016. Prolonged redemptions in the retail unaffiliated distribution channel could negatively affect revenues in future periods. The increased redemption rate in the nine month comparative period for the institutional channel was driven primarily by redemptions from an Asset Strategy account that we subadvise with $2.0 billion in assets under management, a $2.1 billion institutional account in our large cap growth strategy, and an $800.0 million institutional account in our municipal high income strategy.
Our overall current year-to-date redemption rate of 43.5% is higher than the current year-to-date industry average of approximately 25%, based on data from the Investment Company Institute.
Underwriting and Distribution Fee Revenues and Expenses
The following tables summarize our underwriting and distribution fee revenues and expenses segregated by distribution channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2016
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker-
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
29,991
|
|
105,787
|
|
135,778
|
|
|
Expenses - Direct
|
|
|
(39,489)
|
|
(72,276)
|
|
(111,765)
|
|
|
Expenses - Indirect
|
|
|
(10,643)
|
|
(30,591)
|
|
(41,234)
|
|
|
Net Distribution (Costs)/Excess
|
|
$
|
(20,141)
|
|
2,920
|
|
(17,221)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2015
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker-
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
47,040
|
|
118,090
|
|
165,130
|
|
|
Expenses - Direct
|
|
|
(62,117)
|
|
(84,420)
|
|
(146,537)
|
|
|
Expenses - Indirect
|
|
|
(13,329)
|
|
(29,199)
|
|
(42,528)
|
|
|
Net Distribution (Costs)/Excess
|
|
$
|
(28,406)
|
|
4,471
|
|
(23,935)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date 2016
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker-
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
98,424
|
|
330,324
|
|
428,748
|
|
|
Expenses - Direct
|
|
|
(128,787)
|
|
(240,293)
|
|
(369,080)
|
|
|
Expenses - Indirect
|
|
|
(38,931)
|
|
(100,069)
|
|
(139,000)
|
|
|
Net Distribution (Costs)/Excess
|
|
$
|
(69,294)
|
|
(10,038)
|
|
(79,332)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date 2015
|
|
|
|
|
Retail
|
|
|
|
|
|
|
|
|
Unaffiliated
|
|
Retail Broker-
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
150,950
|
|
352,666
|
|
503,616
|
|
|
Expenses - Direct
|
|
|
(197,659)
|
|
(251,619)
|
|
(449,278)
|
|
|
Expenses - Indirect
|
|
|
(41,330)
|
|
(89,639)
|
|
(130,969)
|
|
|
Net Distribution (Costs)/Excess
|
|
$
|
(88,039)
|
|
11,408
|
|
(76,631)
|
|
The following tables summarize the significant components of underwriting and distribution fee revenues segregated by distribution channel:
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2016
|
|
|
|
|
Retail
|
|
Retail
|
|
|
|
|
|
|
Unaffiliated
|
|
Broker-
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues
|
|
|
|
|
|
|
|
|
|
Rule 12b-1 service and distribution fees
|
|
$
|
29,432
|
|
19,462
|
|
48,894
|
|
|
Fee-based asset allocation product revenues
|
|
|
—
|
|
57,269
|
|
57,269
|
|
|
Sales commissions on front-end load mutual fund and variable annuity products
|
|
|
—
|
|
16,941
|
|
16,941
|
|
|
Sales commissions on other products
|
|
|
—
|
|
7,203
|
|
7,203
|
|
|
Other revenues
|
|
|
559
|
|
4,912
|
|
5,471
|
|
|
Total
|
|
$
|
29,991
|
|
105,787
|
|
135,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2015
|
|
|
|
|
Retail
|
|
Retail
|
|
|
|
|
|
|
Unaffiliated
|
|
Broker-
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues
|
|
|
|
|
|
|
|
|
|
Rule 12b-1 service and distribution fees
|
|
$
|
45,539
|
|
30,767
|
|
76,306
|
|
|
Fee-based asset allocation product revenues
|
|
|
—
|
|
56,331
|
|
56,331
|
|
|
Sales commissions on front-end load mutual fund and variable annuity products
|
|
|
597
|
|
18,275
|
|
18,872
|
|
|
Sales commissions on other products
|
|
|
—
|
|
7,048
|
|
7,048
|
|
|
Other revenues
|
|
|
904
|
|
5,669
|
|
6,573
|
|
|
Total
|
|
$
|
47,040
|
|
118,090
|
|
165,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date 2016
|
|
|
|
|
Retail
|
|
Retail
|
|
|
|
|
|
|
Unaffiliated
|
|
Broker-
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues
|
|
|
|
|
|
|
|
|
|
Rule 12b-1 service and distribution fees
|
|
$
|
95,593
|
|
74,567
|
|
170,160
|
|
|
Fee-based asset allocation product revenues
|
|
|
—
|
|
166,425
|
|
166,425
|
|
|
Sales commissions on front-end load mutual fund and variable annuity products
|
|
|
478
|
|
50,795
|
|
51,273
|
|
|
Sales commissions on other products
|
|
|
—
|
|
23,195
|
|
23,195
|
|
|
Other revenues
|
|
|
2,353
|
|
15,342
|
|
17,695
|
|
|
Total
|
|
$
|
98,424
|
|
330,324
|
|
428,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date 2015
|
|
|
|
|
Retail
|
|
Retail
|
|
|
|
|
|
|
Unaffiliated
|
|
Broker-
|
|
|
|
|
|
|
Distribution
|
|
Dealer
|
|
Total
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and distribution fee revenues
|
|
|
|
|
|
|
|
|
|
Rule 12b-1 service and distribution fees
|
|
$
|
145,281
|
|
92,532
|
|
237,813
|
|
|
Fee-based asset allocation product revenues
|
|
|
—
|
|
169,470
|
|
169,470
|
|
|
Sales commissions on front-end load mutual fund and variable annuity products
|
|
|
2,531
|
|
53,467
|
|
55,998
|
|
|
Sales commissions on other products
|
|
|
—
|
|
19,835
|
|
19,835
|
|
|
Other revenues
|
|
|
3,138
|
|
17,362
|
|
20,500
|
|
|
Total
|
|
$
|
150,950
|
|
352,666
|
|
503,616
|
|
Underwriting and distribution revenues earned in the third quarter of 2016 decreased by $29.4 million, or 18%, compared to the third quarter of 2015 primarily driven by a decrease in Rule 12b-1 asset based service and distribution fees across both channels of $27.4 million. The decrease in 12b-1 asset based service and distribution fees is due to a decrease in average mutual fund assets under management for which we earn Rule 12b-1 revenues and the share conversion from load-waived Class A shares previously offered in our advisory products to institutional share classes, which do not charge a Rule 12b-1 fee.
For the nine months ended September 30, 2016, underwriting and distribution revenues decreased $74.9 million, or 15%, compared with the nine months ended September 30, 2015 primarily driven by a decrease in Rule 12b-1 asset based service and distribution fees across both channels of $67.7 million, compared to the first nine months of 2015. The decrease in 12b-1 asset based service and distribution fees is due to a decrease in average mutual fund assets under management for which we earn Rule 12b-1 revenues and the share conversion. Additionally, in our Retail Broker-Dealer channel, revenues from fee-based asset allocation products decreased $3.0 million, or 2%, compared to the prior year due to a decrease of average fee-based asset allocation assets under management.
Underwriting and distribution expenses for the third quarter of 2016 decreased by $36.1 million, or 19%, compared to the third quarter of 2015. Approximately 75% of Rule 12b-1 revenues earned are a pass-through to direct underwriting and distribution expenses. Direct expenses in the retail unaffiliated distribution channel decreased by $22.6 million due to decreased average retail unaffiliated distribution assets under management of 36% and lower sales volume year over year, which resulted in lower dealer compensation, wholesaler commissions and Rule 12b-1 asset-based service and distribution expenses paid to third party distributors. Direct expenses in the retail broker-dealer channel decreased $12.1 million in proportion to the decline in revenue. Indirect expenses across both channels decreased $1.3 million, or 3%, compared to the third quarter of 2015, primarily due to a $4.7 million curtailment gain as a result of discontinuing the availability of coverage for any individuals who retire after December 31, 2016 in our defined benefit postretirement medical plan. The decrease was partially offset by increased computer services and software costs related to Project E implementation.
For the nine months ended September 30, 2016, underwriting and distribution expenses decreased by $72.2 million, or 12%, compared to the first nine months of 2015. Direct expenses in the retail unaffiliated distribution channel decreased by $68.9 million due to decreased average retail unaffiliated distribution assets under management of 36% and lower sales volume year over year, which resulted in lower dealer compensation, wholesaler commissions and Rule 12b-1 asset-based service and distribution expenses paid to third party distributors. Direct expenses in the retail broker-dealer channel decreased $11.3 million, including a $5.9 million write-off of deferred acquisition costs classified as prepaid and other non-current assets related to our share conversion for certain advisory products. Excluding this charge, direct expenses in the retail broker-dealer channel decreased $17.2 million due to decreased Rule 12b-1 asset-based service expenses and commissions expense. Indirect expenses, across both channels, during the nine months ended September 30, 2016 increased $8.0 million, or 6%, compared with the nine months ended September 30, 2015, primarily due to increased employee compensation and benefits of $7.1 million related to severance and related charges, computer services and software expenses and consulting expenses, partially offset by lower advertising expenses and sales meeting costs. Indirect costs in the retail broker-dealer channel included $3.9 million related to Project E implementation costs.
Shareholder Service Fee Revenue
Shareholder service fee revenue primarily includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees. Transfer agency fees are asset-based and/or account-based revenues, portfolio accounting and administration fees are asset-based revenues, and custodian fees from retirement plan accounts are based on the number of client accounts.
During the third quarter of 2016, shareholder service fee revenue decreased $7.2 million, or 20%, compared to the third quarter of 2015 primarily due to a decrease in the number of accounts causing a decrease in account-based fees. The decrease in the number of accounts is a result of the share class conversion in July of 2016 from account-based, load-waived Class A shares to asset-based, institutional share classes offered in our advisory programs. Account-based fees in the third quarter of 2016 decreased $9.1 million, or 43%, compared to the same period in 2015. Partially offsetting the decrease, asset-based fees for the I, Y, R and R6 shares classes increased $1.8 million, or 19%, compared to the third quarter of 2015. Assets in the I, Y, R and R6 share classes of the Funds increased 23% from a quarterly average of $24.5 billion at September 30, 2015 to an average of $30.2 billion at September 30, 2016.
For the nine month period ended September 30, 2016, shareholder service fee revenue decreased $15.7 million, or 15%, compared to the same period in 2015 due to a decrease in account-based fees and asset-based fees. Account-based fees during the nine months ended September 30, 2016 decreased $9.4 million, or 15%, due to a decrease in the number of accounts from the advisory programs share conversion. Asset-based fees during the nine months ended September 30, 2016 for the I, Y, R and R6 share classes of the Funds decreased $6.3 million, or 21%. Assets in the I, Y, R and R6 share classes of the Funds declined 19% from an average of $26.6 billion at September 30, 2015 to an average of $21.5 billion at September 30, 2016.
Total Operating Expenses
Operating expenses decreased $37.8 million, or 14%, in the third quarter of 2016 compared to the third quarter of 2015, primarily due to decreased underwriting and distribution expenses and compensation and related costs, partially offset by an intangible asset impairment charge. For the nine months ended September 30, 2016, operating expenses decreased $83.9 million, or 10%, compared to the first nine months of 2015, primarily due to decreased underwriting and distribution expenses and general and administrative expenses, offset by an intangible asset impairment charge. Underwriting and distribution expenses are discussed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Variance
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and distribution
|
|
$
|
152,999
|
|
189,065
|
|
(19)
|
%
|
|
Compensation and related costs
|
|
|
40,214
|
|
46,157
|
|
(13)
|
%
|
|
General and administrative
|
|
|
23,280
|
|
25,458
|
|
(9)
|
%
|
|
Subadvisory fees
|
|
|
2,566
|
|
2,305
|
|
11
|
%
|
|
Depreciation
|
|
|
4,541
|
|
4,117
|
|
10
|
%
|
|
Intangible asset impairment
|
|
|
5,700
|
|
—
|
|
NM
|
|
|
Total operating expenses
|
|
$
|
229,300
|
|
267,102
|
|
(14)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Variance
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and distribution
|
|
$
|
508,080
|
|
580,247
|
|
(12)
|
%
|
|
Compensation and related costs
|
|
|
151,495
|
|
152,481
|
|
(1)
|
%
|
|
General and administrative
|
|
|
61,708
|
|
79,033
|
|
(22)
|
%
|
|
Subadvisory fees
|
|
|
6,984
|
|
7,086
|
|
(2)
|
%
|
|
Depreciation
|
|
|
13,163
|
|
12,215
|
|
8
|
%
|
|
Intangible asset impairment
|
|
|
5,700
|
|
—
|
|
NM
|
|
|
Total operating expenses
|
|
$
|
747,130
|
|
831,062
|
|
(10)
|
%
|
Cost Reduction Efforts
As previously announced, the Company completed significant cost reduction efforts to offset the projected decrease in 2016 operating income related to lower assets under management and the implementation of Project E. Project E includes the ongoing modernization of our brokerage and product platform as well as the restructuring of our share classes completed in July 2016. We have completed the process to identify cost reductions of approximately 10% or $40.0 million on an annual run-rate basis in 2017, with approximately two-thirds of these savings projected to be realized in 2016. These reductions are expected to impact general and administrative costs, compensation costs and indirect underwriting and distribution costs. The Company’s workforce was reduced by approximately 10% during the second quarter of 2016. The Company recorded a pre-tax restructuring charge of $17.0 million in the second quarter of 2016 related to employee-termination benefits, including cash severance costs, the acceleration of stock-based compensation and outplacement services.
Compensation and Related Costs
Compensation and related costs during the third quarter of 2016 decreased $5.9 million, or 13%, compared to the third quarter of 2015. During the third quarter of 2016, the Company amended its defined benefit postretirement medical plan to discontinue the availability of coverage for any individuals who retire after December 31, 2016. The plan amendment resulted in an $8.5 million curtailment gain of which $3.8 million was included in compensation and related costs. Additionally, base salaries decreased $1.9 million, compared to the third quarter of 2015, due to a decrease in headcount.
For the nine months ended September 30, 2016, compensation and related costs decreased $1.0 million, or 1%, compared to the first nine months of 2015. Decreases of $5.5 million related to incentive compensation and other miscellaneous compensation, $3.8 million related to the defined benefit postretirement medical plan curtailment gain, and $1.7 million related to base compensation due to the decrease in headcount were the primary contributors. An increase of $9.9 million related to severance and related charges in the second quarter partially offset the decreases.
Pension Lump Sum Window
During the third quarter of 2016, the Company offered eligible terminated, vested pension plan participants an option to elect a one-time voluntary lump sum window distribution equal to the present value of the participant’s pension benefit, in settlement of all future pension benefits to which they would otherwise have been entitled. Eligible individuals have until October 31, 2016 to make their election, with settlement to occur later in the fourth quarter of 2016. This offer was made in an effort to reduce pension obligations and ongoing annual pension expense. Depending on the level of acceptance, the Company may incur a fourth quarter non-cash settlement charge of between $15 million and $30 million. The ultimate amount of the settlement charge will be actuarially determined when the election period closes due to the acceleration of the recognition of the accumulated unrecognized actuarial loss associated with the pension plan. Payments will be distributed to participants who accept the lump sum offer from the assets of the pension plan.
General and Administrative Costs
General and administrative expenses decreased $2.2 million to $23.3 million for the third quarter of 2016, compared to the third quarter of 2015. Lower dealer servicing and advertising costs drove the decrease. A majority of dealer service costs represent pass-through account servicing costs to third party dealers and are based on lower asset levels in certain share classes.
For the nine months ended September 30, 2016, general and administrative expenses decreased $17.3 million to $61.7 million, compared to the same period in 2015. The decrease was due to lower dealer service costs, computer services and software expense, advertising costs and lower money market fund reimbursements.
Intangible Asset Impairment
During the third quarter of 2016, we recorded an intangible asset impairment charge of $5.7 million related to our subadvisory agreement to manage certain mutual fund products. The impairment charge was a result of a decline in assets under management attributable to a realignment of fund offerings and additional asset reductions. It is possible that the assets we manage may decrease in the future, which would require us to assess the need for an additional write-down of the intangible asset associated with our subadvisory agreement. At September 30, 2016, the remaining balance of our subadvisory intangible asset was $2.7 million. The deferred tax liability established as a part of purchase accounting related to this intangible asset was $1.0 million as of September 30, 2016.
Subadvisory Fees
Subadvisory fees represent fees paid to other asset managers to provide advisory services for certain mutual fund portfolios. Gross management fee revenues for products subadvised by others were $4.3 million for the three months ended September 30, 2016 compared to $3.8 million for the third quarter of 2015 due to an 18% increase in subadvised average net assets under management. Gross management fee revenues for subadvised products increased at a lesser rate than the related average net assets under management due to a decrease in the average management fee rate driven by a mix-shift of assets into subadvised funds with lower management fee rates. For the nine months ended September 30, 2016, gross management fee revenues for products subadvised by others were $11.9 million compared to $12.7 million for the same period in 2015 while average net assets under management increased 2%. Gross management fee revenues for subadvised products decreased while the related average net assets under management increased due to a decrease in the average management fee rate. The decrease in the average management fee rate was driven by a mix-shift of assets into subadvised funds with lower management fee rates. Subadvisory expenses during the three and nine months ended September 30, 2016 decreased in relation to revenue when compared to the same periods in 2015 due to termination fees related to internalizing management of the Micro Cap Growth funds as of June 30, 2015.
Subadvised average assets under management were $2.6 billion at September 30, 2016 and 2015.
Investment and Other Income (Loss) and Taxes
Investment and other income was $7.9 million for the three months ended September 30, 2016, compared to investment and other losses of $16.9 million for the same period in 2015. With our hedge program implemented with respect to 100% of our investments in sponsored funds excluding investments classified as available for sale, we recognized $1.4 million of net gains related to our seed capital investments and associated hedges in the third quarter of 2016. During the third quarter of 2016, we realized $3.0 million of gains on the sales of sponsored funds held as available for sale, and dividend and interest income was $1.1 million. The third quarter of 2016 also included $2.2 million of gains attributable to consolidated sponsored funds for the period in which the Company held majority ownership. During the third quarter of 2015, we recognized $15.3 million and $2.3 million of mark-to-market losses related to our portfolio of sponsored funds held as equity method securities and trading securities, respectively. Dividend and interest income in the third quarter of 2015 was $0.7 million.
Investment and other losses were $1.7 million for the nine months ended September 30, 2016, compared to investment and other losses of $12.9 million in the same period in 2015. During the first nine months of 2016, we recognized $13.2 million of mark-to-market unrealized losses on our sponsored funds held as trading and equity method. Partially offsetting the unrealized losses on our sponsored funds, we earned $4.1 million in dividend and interest income, realized $3.5 million of gains on the sales of sponsored funds held as available for sale, and recognized $3.4 million of gains attributable to consolidated sponsored funds for the period in which the Company held majority ownership. For the nine months ended September 30, 2015, we recognized $15.3 million and $2.3 million of mark-to-market losses related to our portfolio of sponsored funds held as equity method securities and trading securities, respectively. Partially offsetting the losses, we realized $2.8 million of gains on the sales of sponsored funds held as available for sale and dividend and interest income was $1.9 million.
Our effective income tax rate was 30.5% for the third quarter of 2016, as compared to 46.2% for the third quarter of 2015. The Company has a deferred tax asset related to a capital loss carryforward that is available to offset current and future capital gains. Further, the Company has deferred tax assets for unrealized losses in investment securities. Due to the character of these losses and the limited carryforward permitted upon realization, the Company has a valuation allowance recorded against these deferred tax assets. During the third quarter of 2016, realized capital gains on investment securities as well as increases in the fair value of the Company’s investment portfolios decreased the valuation allowance, thereby reducing income tax expense by $5.1 million. During the third quarter of 2015, a decrease in the fair value of the Company’s equity method investments and trading securities portfolio increased the valuation allowance, thereby increasing income tax expense by $6.7 million.
The third quarter 2016 and 2015 effective income tax rates, removing the effects of the valuation allowance, would have been 36.9% and 38.7%, respectively. The adjusted effective tax rate in the third quarter of 2016 was lower primarily due to the recognition of tax benefits as a result of the lapse of the statute of limitations as well as adjustments to prior year estimates of tax based upon actual tax return filings.
Our effective income tax rate was 33.4% for the nine months ended September 30, 2016, as compared to 39.8% for the nine months ended September 30, 2015. During 2016, increases in the fair value of the Company’s investment portfolios as well as realized capital gains on investment securities allowed for a release of a portion of the valuation allowance, thereby reducing income tax expense by $7.9 million. During 2015, a decrease in the fair value of equity method investments increased the valuation allowance, thereby increasing income tax expense by $5.9 million.
Removing the effects of the valuation allowance for the nine months ended September 30, 2016 and 2015, the effective income tax rate would have been 37.6% and 37.9%, respectively. The adjusted effective tax rate in 2016 was lower primarily due to the recognition of tax benefits as a result of the lapse of the statute of limitations as well as adjustments to prior year estimates of tax based upon actual tax return filings.
The Company expects its future effective tax rate, exclusive of any increases or reductions to the valuation allowance, state tax incentives, unanticipated state tax legislative changes, and unanticipated fluctuations in earnings to range from 37% to 39%.
Liquidity and Capital Resources
Our operations provide much of the cash necessary to fund our priorities, as follows:
|
|
·
|
|
Finance internal growth
|
Pay Dividends
We paid quarterly dividends on our Class A common stock that resulted in financing cash outflows of $114.7 million and $108.2 million for the first nine months of 2016 and 2015, respectively. The Company’s Board of Directors approved a quarterly dividend on our Class A common stock of $0.46 per share payable on November 1, 2016 to stockholders of record as of October 11, 2016.
Finance Internal Growth
We continue to invest in our retail broker-dealer channel by providing additional support to our advisors through home office resources, wholesaling efforts and enhanced technology tools, including the modernization of our brokerage and product platform associated with Project E. We use cash to fund growth in our distribution channels. Our retail unaffiliated distribution channel requires cash outlays for wholesaler commissions and commissions to third parties on deferred load product sales. Across both channels, we provide seed money for new products.
Repurchase Our Stock
We repurchased 2,230,034 shares and 1,435,355 shares of our Class A common stock in the open market or privately during the nine months ended September 30, 2016 and 2015, respectively, resulting in cash outflows of $48.0 million and $63.3 million, respectively.
Operating Cash Flows
Cash from operations, our primary source of funds, decreased $164.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is primarily due to $69.0 million related to seeding new investment products and lower net income of $56.8 million.
The payable to investment companies for securities, payable to customers and other receivables accounts can fluctuate significantly based on trading activity at the end of a reporting period. Changes in these accounts result in variances within cash from operations on the statement of cash flows; however, there is no impact to the Company’s liquidity and operations for the variances in these accounts.
During the first quarter of 2016, we contributed $20.0 million to our pension plan. We do not expect to make additional contributions for the remainder of the year.
Investing Cash Flows
Investing activities consist primarily of the sales and purchases of sponsored funds classified as equity method and available for sale investments, as well as capital expenditures. We expect our 2016 capital expenditures to be in the range of $15.0 to $25.0 million.
Financing Cash Flows
As noted previously, dividends and stock repurchases accounted for a majority of our financing cash outflows in the first nine months of 2016 and 2015.
Future Capital Requirements
Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund its short-term operating and capital requirements during 2016. Expected short-term uses of cash include dividend payments, interest payments on outstanding debt, income tax payments, seed money for new products, capital expenditures including those related to the Project E initiatives, share repurchases, pension funding, restructuring costs and home office leasehold and building improvements, and could include strategic acquisitions.
Expected long-term capital requirements include indebtedness, operating leases and purchase obligations, and potential settlement of tax liabilities. Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, income tax payments, seed money for new products, pension funding, share repurchases and payment of upfront fund commissions for Class C shares and certain fee-based asset allocation products. We expect payment of upfront fund commissions for certain fee-based asset allocation products will decline in future years due to a change in our advisor compensation plan whereby a smaller population of advisors are eligible for upfront commissions on the sale of these products.
Critical Accounting Policies and Estimates
Management believes certain critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company’s critical accounting policies and estimates are disclosed in the “Critical Accounting Policies and Estimates” section of our Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).
Supplemental Information
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Third
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Third
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Year to
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Year to
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Quarter
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Quarter
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Date
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Date
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|
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2016
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2015
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Variance
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|
|
2016
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2015
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Variance
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|
|
|
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Asset Manager (in millions)
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Retail Unaffiliated Distribution
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AUM
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$
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33,290
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49,320
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(32.5)
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%
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|
$
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33,290
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49,320
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(32.5)
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%
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Net flows
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$
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(3,343)
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|
(2,536)
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(31.8)
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%
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$
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(12,611)
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(5,876)
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(114.6)
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%
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Organic decay annualized
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(38.0)
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%
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(17.6)
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%
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(36.8)
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%
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(13.0)
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%
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Redemption rate
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56.2
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%
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41.2
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%
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|
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65.6
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%
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38.3
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%
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Retail Broker-Dealer
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AUM
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$
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43,170
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42,215
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2.3
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%
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$
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43,170
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42,215
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2.3
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%
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Net flows
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$
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(712)
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(269)
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(164.7)
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%
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$
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(1,411)
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(577)
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(144.5)
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%
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Organic decay annualized
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(6.7)
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%
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(2.3)
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%
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(4.3)
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%
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(1.7)
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%
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Redemption rate
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12.1
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%
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8.9
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%
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10.7
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%
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9.0
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%
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Institutional
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AUM
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$
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8,595
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14,657
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(41.4)
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%
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$
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8,595
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14,657
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(41.4)
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%
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Net flows
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$
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(838)
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|
(1,352)
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(38.0)
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%
|
|
$
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(6,912)
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|
(2,312)
|
|
(199.0)
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%
|
|
Organic decay annualized
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|
|
(37.3)
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%
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(31.4)
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%
|
|
|
|
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(59.8)
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%
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(17.3)
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%
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Redemption rate
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|
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46.4
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%
|
45.4
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%
|
|
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43.5
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%
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26.6
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%
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|
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|
|
|
|
|
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|
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|
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Broker-Dealer
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AUA (1) (in billions)
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$
|
52.1
|
|
49.4
|
|
5.5
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%
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$
|
52.1
|
|
49.4
|
|
5.5
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%
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AUA fee based accounts (in billions)
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|
$
|
18.5
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|
17.0
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|
8.8
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%
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$
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18.5
|
|
17.0
|
|
8.8
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%
|
|
Number of advisors
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|
|
1,796
|
|
1,795
|
|
0.1
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%
|
|
|
1,796
|
|
1,795
|
|
0.1
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%
|
|
Advisor productivity (2) (in thousands)
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|
$
|
59.0
|
|
66.3
|
|
(11.0)
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%
|
|
$
|
183.4
|
|
200.2
|
|
(8.4)
|
%
|
|
U&D revenues (in thousands)
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|
$
|
105,787
|
|
118,090
|
|
(10.4)
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%
|
|
$
|
330,324
|
|
352,666
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|
(6.3)
|
%
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|
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(1)
|
|
Assets under administration
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|
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(2)
|
|
Advisors’ productivity is calculated by dividing underwriting and distribution revenues for the retail broker-dealer channel by the average number of advisors during the period.
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are primarily exposed to market risk associated with unfavorable movements in interest rates and securities prices. Except as described below, the Company has had no material changes in its market risk policies or its market risk sensitive instruments and positions since December 31, 2015. As further described in Note 5 to the unaudited consolidated financial statements, in January 2016, the Company implemented an economic hedge program that uses total return swap contracts to hedge market risk related to its investments in sponsored funds.
Item 4.
Controls and Procedures
The Company maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2016, have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2016.
The Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Part II.
Other Information
Item 1.
Legal Proceedings
The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to the business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations in a particular quarter or year.
In an action filed on February 18, 2016 in the United States District Court for the District of Kansas, Saket Kapor [sic], Peter Brockett and Hieu Phan v. Ivy Investment Management Company, et. al. (Case No. 2:16-cv-02106-JWL-TJJ), the Company's registered investment advisor subsidiaries, the trustees of two of the Company’s affiliated mutual funds, and an officer of a Company subsidiary were sued in a putative derivative action by three mutual fund shareholders alleging breach of fiduciary duty and breach of contract claims relating to investments held in the affiliated mutual funds. On behalf of the mutual funds, the plaintiffs seek monetary damages and demand a jury trial. On April 18, 2016, the plaintiffs dismissed the complaint in the United States District Court for the District of Kansas and filed a similar complaint against the same defendants, regarding the same substantive allegations and causes of action, in the District Court of Johnson County, Kansas (Case No. I6CV02338 Div.4). On April 25, 2016, the plaintiffs voluntarily dismissed the officer of a Company subsidiary as a defendant. On June 30, 2016, all remaining defendants filed separate motions to dismiss the complaint. On August 22, 2016, the plaintiffs filed an amended complaint that removed Saket Kapor [sic] and Peter Brockett as plaintiffs and in their stead added Audrey Ohman as a named plaintiff, but otherwise did not change the substantive allegations raised in the initial complaint. On September 14, 2016, all remaining defendants filed separate motions to dismiss the amended complaint. Oral arguments in the matter are scheduled for November 10, 2016. To date, no discovery has taken place.
In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. Given the preliminary nature of the proceedings and the Company’s dispute over the merits of the claims, the Company is unable to estimate a range of reasonably possible loss, if any, that such matter may represent. While the ultimate resolution of this matter is uncertain, an adverse determination against the Company could have a material adverse impact on our business, financial condition and results of operations.
Item 1A.
Risk Factors
The Company has had no material changes during the quarter to its Risk Factors from those previously reported in the Company’s 2015 Form 10-K, except as follows:
The Department of Labor's new fiduciary regulations could require material changes in our business model, operations and procedures, including our methods of distributing our proprietary products, which could have a material adverse effect on our results of operations.
On April 8, 2016, the U.S. Department of Labor published its final rule regarding the definition of who is an investment advice fiduciary under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and Section 4975 of the Internal Revenue Code, as amended (the “Code”), a new “best interest contract” prohibited transaction exemption regarding how such advice can be provided to retirement investors (primarily account holders in 401(k) plans and IRAs and other types of ERISA clients), a new class prohibited transaction exemption for how ERISA investment advice fiduciaries can engage in certain principal transactions with retirement investors, and certain amendments and partial revocations of pre-existing exemptions. These regulations focus in large part on conflicts of interest related to investment recommendations made by financial advisors, registered investment advisors, and other investment professionals to retirement investors, how financial advisors are able to discuss IRA rollovers, as well as how financial advisors and affiliates can transact with retirement investors. Qualified accounts, particularly IRAs, make up a significant portion of our assets under management and administration. Further, a significant portion of those retirement assets are invested in our proprietary products. We are continuing to review and analyze the potential impact of the regulations on our business model, operations, procedures, and clients and prospective clients.
Management is working diligently to assess these principles-based rules in order to make necessary changes to our distribution methods and operations, and we intend to work with, and provide guidance to, our wealth management and asset management businesses, including advisors, to make the necessary changes to effectively implement these new rules. We are likely to incur substantial compliance costs over the next year for consulting, legal and technology enhancements required to comply with the new rules.
These rules will require various changes in the wealth management industry and, among other things, our distribution methods, compensation models, product shelf, and business operations that could materially and adversely affect our marketing strategy, our fee structure, our advisor compensation model, our ability to retain advisors, and the design of our investments and services for qualified accounts, any of which could materially and adversely affect our results of operations. Similarly, various changes in the asset management industry due to the new rules may result in product rationalization and change to our share classes and fee structures, revenue sharing arrangements, and investment opportunities for certain funds we manage. The Securities and Exchange Commission is considering its own fiduciary rule proposal. Any such rule may also have a material impact on our business activities.
Legal and regulatory developments in the mutual fund and investment advisory industry could increase our regulatory burden, impose significant financial and strategic costs on our business and cause a loss of, or impact the servicing of, our clients and fund shareholders.
On July 23, 2014, the SEC adopted additional reforms regulating money market funds, with which U.S. money market funds had to comply by October 14, 2016. The reforms will require institutional non-government money market funds to operate with a floating net asset value (“NAV”) method of pricing and require all non-government money market funds to impose liquidity fees and redemption gates under certain conditions. Government and retail money market funds will continue using current pricing and accounting methods to seek to maintain a stable NAV. The SEC adopted other reforms for money market funds, including additional disclosure and reporting requirements, tightening of diversification requirements, and enhanced stress testing. These reforms could have a negative impact on the attractiveness of such funds to investors and also subject us to additional regulatory requirements and costs to comply with such requirements. The impact of the new rules with respect to money market funds remains uncertain as investors must decide which products fit their investment needs, and may impact certain investment strategies, portfolio liquidity and return potential. Future industry changes could require us to modify or curtail our investment offerings and business operations, or impact our expenses and profitability. Additionally, some regulations may not directly apply to our business but may impact the capital markets, service providers or have other indirect effects on our ability to provide services to our clients.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth certain information about the shares of Class A common stock we repurchased during the third quarter of 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
Maximum Number (or
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
Value) of Shares That
|
|
|
|
|
Total Number
|
|
Average
|
|
Part of Publicly
|
|
May Yet Be
|
|
|
|
|
of Shares
|
|
Price Paid
|
|
Announced
|
|
Purchased Under The
|
|
|
Period
|
|
Purchased (1)
|
|
per Share
|
|
Program
|
|
Program
|
|
|
July 1 - July 31
|
|
26,210
|
|
$
|
18.32
|
|
—
|
|
n/a
|
(1)
|
|
August 1
‑
August 31
|
|
49
|
|
|
18.77
|
|
—
|
|
n/a
|
(1)
|
|
September 1
‑
September 30
|
|
2,278
|
|
|
18.14
|
|
—
|
|
n/a
|
(1)
|
|
Total
|
|
28,537
|
|
$
|
18.31
|
|
—
|
|
|
|
|
|
(1)
|
|
On August 31, 1998, we announced that our Board of Directors approved a program to repurchase shares of our common stock on the open market. Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding common stock or (ii) $50 million of our common stock. We may repurchase our common stock in privately negotiated transactions or through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems. Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased. Our Board of Directors reviewed and ratified the stock repurchase program in October 2012. During the third quarter of 2016, 28,537 shares of our common stock were repurchased pursuant to the repurchase program, all of which were purchased in connection with funding employee income tax withholding obligations arising from the vesting of restricted shares.
|
Item 6.
Exhibits
|
|
|
|
|
3.1
|
|
Amended and Restated Bylaws of Waddell & Reed Financial, Inc. Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K, File No. 001-13913, filed July 26, 2016 and incorporated herein by reference.
|
|
|
|
|
|
4.1
|
|
First Amendment to Rights Agreement, dated as of July 22, 2016, between Waddell & Reed Financial, Inc. and Computershare Trust Company, N.A., as rights agent. Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-k, File No. 001-13913, filed July 2016 and incorporated herein by reference.
|
|
|
|
|
|
10.1*
|
|
Investment Management Agreement, dated September 1, 2016 by and between Ivy NextShares and Ivy Investment Management Company.
|
|
|
|
|
|
10.2*
|
|
Investment Management Agreement, dated July 29, 2016, by and between Ivy Variable Insurance Portfolios and Ivy Investment Management Company.
|
|
|
|
|
|
10.3*
|
|
Investment Management Agreement, dated July 29, 2016, by and between Ivy Variable Insurance Portfolios and Ivy Investment Management Company.
|
|
|
|
|
|
31.1*
|
|
Section 302 Certification of Chief Executive Officer
|
|
|
|
|
|
31.2*
|
|
Section 302 Certification of Chief Financial Officer
|
|
|
|
|
|
32.1**
|
|
Section 906 Certification of Chief Executive Officer
|
|
|
|
|
|
32.2**
|
|
Section 906 Certification of Chief Financial Officer
|
|
|
|
|
|
101*
|
|
Materials from the Waddell & Reed Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) related Notes to the Unaudited Consolidated Financial Statements, tagged in detail.
|
* Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 28th day of October 2016.
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|
WADDELL & REED FINANCIAL, INC.
|
|
|
|
|
|
|
By:
|
/s/ Philip J. Sanders
|
|
|
|
Chief Executive Officer and Chief Investment Officer
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
By:
|
/s/ Brent K. Bloss
|
|
|
|
Senior Vice President, Chief Financial Officer and Treasurer
|
|
|
|
(Principal Financial Officer)
|
|
|
|
|
|
|
By:
|
/s/ Benjamin R. Clouse
|
|
|
|
Vice President
|
|
|
|
(Principal Accounting Officer)
|
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