Waddell & Reed Financial, Inc. Reports Third Quarter Results

Rhea-AI Summary

Waddell & Reed Financial reported Q3 2020 net income of $30.5 million ($0.48/share), improving from $24.8 million in Q2 but down from $33.1 million YoY. Revenue rose 11.5% from Q2 to $267.7 million, while AUM decreased slightly by 1% from Q3 2019 to $67.9 billion. Despite net outflows of $1.8 billion, the company experienced growth in Wealth Management AUA, reaching $62.7 billion, up 10%. Shareholder returns included $56.3 million in buybacks. CEO Philip J. Sanders emphasized ongoing improvements in wealth management and asset flows.

Positive

• 11.5% increase in revenues from Q2 2020.
• AUM up 4% from the prior quarter to $67.9 billion.
• Net new Advisory AUA of $437.3 million, the 7th consecutive quarter of positive growth.
• Strong performance in Wealth Management recruiting with 32 new advisors and over $1.9 billion in AUA.
• $56.3 million returned to shareholders in Q3, including $40.1 million in share repurchases.

Negative

• Net income declined 8% YoY from $33.1 million in Q3 2019.
• Net outflows increased from $1.4 billion in Q2 to $1.8 billion in Q3 2020.
• Investment management fees decreased by $5.2 million (5%) YoY due to lower average AUM.

OVERLAND PARK, Kan.--(BUSINESS WIRE)--Waddell & Reed Financial, Inc. (NYSE: WDR) today reported third quarter 2020 net income¹ of $30.5 million, or $0.48 per diluted share, compared to net income of $24.8 million, or $0.38 per diluted share, during the prior quarter and net income of $33.1 million, or $0.46 per diluted share, during the third quarter of 2019. The third quarter of 2019 included $3.1 million in severance expense related to the outsourcing of our transfer agency transactional processing operations. Excluding the severance expense, adjusted net income for the third quarter of 2019 was $35.4 million and adjusted net income per diluted share was $0.49².

Highlights

• Strong financial performance, with 11.5% increase in revenues compared to the prior quarter due to higher average assets benefiting both Investment Management revenues and Wealth Management Advisory revenues
• Continued execution of strategic initiatives in Asset Management, with average Assets Under Management (AUM) up 10% compared to the prior quarter
  • Both sales and redemptions improved vs. the same quarter in 2019, particularly in institutional and unaffiliated
  • Continued progress in strategic pricing evaluation, with 75% of AUM at or better than competitor median fees
• Successful quarter for Wealth Management recruiting and asset growth
  • Net new Assets Under Administration³ (AUA) continue to improve, and net new Advisory AUA were positive for the 7^th consecutive quarter
  • Since January 1, 2020, 32 advisors have affiliated with Waddell & Reed with combined prior firm AUA totaling over $1.9 billion
  • $474 thousand average trailing 12-month productivity per Advisor for the third quarter of 2020 improved 2% and 12% compared to the prior quarter and the third quarter of 2019, respectively
• Robust balance sheet continued to support investment in strategic growth and meaningful capital return
  • $744.6 million in cash and investments at the end of the third quarter of 2020⁴
  • $56.3 million was returned to shareholders in the third quarter of 2020, including $40.1 million of share repurchases
• Hired two executives focused on strategic growth – one to lead the technology teams dedicated to leveraging technology as a strategic asset across the organization, and one to develop and lead strategies in support of best-in-class client and advisor experience, processes and procedures

Philip J. Sanders, Chief Executive Officer of Waddell & Reed Financial, Inc. shared, “I am pleased with the progress in transforming our wealth management business this quarter with continued recruiting success, growth in advisory assets and further advancement of our technologies. At the same time, flows within our asset management business improved compared to the prior year, and our teams are seeing solid engagement across our distribution network.” Mr. Sanders continued, “While the operating environment remains challenging, we are as focused as ever on partnering with clients to help them realize their long-term financial goals through superior investment performance, advice and client service.”

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1 Net income represents net income attributable to Waddell & Reed Financial, Inc.

2 See Non-GAAP Financial Measures section and Reconciliation of GAAP to Non-GAAP Financial Measures table

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

4 Excluding restricted cash

Consolidated Financial Results	Three Months Ended										Nine Months Ended
		Sep. 30,			Jun. 30,			Sep. 30,			Sep. 30,			Sep. 30,
		2020			2020			2019			2020			2019
GAAP basis (in thousands, except per share data):
Revenue	$	267,670		$	240,034		$	270,680		$	771,437		$	800,244
Operating expenses	$	230,035		$	216,407		$	230,656		$	670,784		$	683,417
Operating income	$	37,635		$	23,627		$	40,024		$	100,653		$	116,827
Operating margin		14.1	%		9.8	%		14.8	%		13.0	%		14.6	%
Controllable expenses1	$	101,352		$	102,034		$	104,516		$	300,516		$	312,505
Net income	$	30,523		$	24,824		$	33,054		$	77,333		$	99,056
Net income per share, basic and diluted	$	0.48		$	0.38		$	0.46		$	1.18		$	1.33
As adjusted2 (in thousands, except per share data)
Revenue	$	267,670		$	240,034		$	270,680		$	771,437		$	800,244
Operating expenses	$	230,035		$	216,407		$	227,575		$	670,784		$	680,336
Operating income	$	37,635		$	23,627		$	43,105		$	100,653		$	119,908
Operating margin		14.1	%		9.8	%		15.9	%		13.0	%		15.0	%
Controllable expenses	$	101,352		$	102,034		$	101,435		$	300,516		$	309,424
Net income	$	30,523		$	24,824		$	35,396		$	77,333		$	101,398
Net income per share, basic and diluted	$	0.48		$	0.38		$	0.49		$	1.18		$	1.36
Assets under management (in millions)	$	67,869		$	64,966		$	68,782		$	67,869		$	68,782
Average assets under management (in millions)	$	67,946		$	61,718		$	70,527		$	65,272		$	70,667
Assets under administration (in millions)	$	62,694		$	58,991		$	57,113		$	62,694		$	57,113
Average assets under administration (in millions)	$	61,400		$	55,181		$	57,411		$	58,583		$	55,770

Financial Summary

Revenues totaled $267.7 million for the quarter, an increase of $27.6 million, compared to the prior quarter and a decrease of $3.0 million compared to the third quarter of 2019. Operating expenses for the quarter of $230.0 million increased $13.6 million compared to the second quarter of 2020 and decreased $0.6 million compared to the third quarter of 2019. Adjusted operating expenses² increased $2.5 million compared to the third quarter of 2019. The operating margin was 14.1% during the current quarter, compared to 9.8% and 14.8% during the prior quarter and the third quarter of 2019, respectively. The adjusted operating margin² was 15.9% during the third quarter of 2019.

AUM ended the quarter at $67.9 billion, an increase of 4% compared to the prior quarter primarily due to market appreciation and a decrease of 1% compared to the third quarter of 2019. Average AUM were $67.9 billion during the current quarter, compared to $61.7 billion during the prior quarter and $70.5 billion during the third quarter of 2019. Net outflows of $1.8 billion during the current quarter were higher compared to net outflows of $1.4 billion in the prior quarter and were lower compared to net outflows of $2.7 billion in the third quarter of 2019. Sales of $1.8 billion during the current quarter decreased 17% compared to the prior quarter and increased 2% compared to the third quarter of 2019. Redemptions were slightly better compared to the prior quarter and were 19% better compared to the third quarter of 2019.

Wealth management AUA ended the quarter at $62.7 billion, an increase of 6% and 10%, compared to the second quarter of 2020 and the third quarter of 2019, respectively. Average AUA were $61.4 billion during the current quarter, compared to $55.2 billion during the prior quarter and $57.4 billion during the third quarter of 2019. Net new advisory AUA was $437.3 million, as advisory products continue to drive the majority of new sales. Non-advisory asset flows continue to be negative, experiencing an increase in outflows compared to the prior quarter and reduced outflows compared to the same quarter in 2019.

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1 Controllable expenses defined as compensation and benefits, general and administrative, occupancy, technology, and marketing and advertising costs

2 See Non-GAAP Financial Measures section and Reconciliation of GAAP to Non-GAAP Financial Measures table

Revenues Analysis

Investment management fees increased $10.8 million, or 11%, compared to the second quarter of 2020 due to a 10% increase in average AUM and one additional day in the quarter partially offset by additional money market fee waivers. The effective management fee rate for the current quarter was 62.4 basis points remaining consistent with the prior quarter’s rate. Compared to the third quarter of 2019, investment management fees declined $5.2 million, or 5%, primarily due to lower average AUM and a lower effective management fee rate due to targeted fee reductions made in previous periods and money market fee waivers.

Underwriting and distribution fees increased $15.8 million, or 13%, compared to the prior quarter due to higher advisory fees and higher service and distribution fees due to higher asset levels. In addition, sales commissions were $2.7 million higher compared to the prior quarter as a result of increased sales activity across insurance product lines. Compared to the same quarter in 2019, underwriting and distribution fees increased $3.7 million, or 3%, due to increased advisory fees from higher asset levels, partially offset by lower sales commissions and lower service and distribution fees from lower asset levels.

Shareholder service fees increased $1.0 million, or 5%, compared to the second quarter of 2020 primarily due to an increase in average assets and one additional day in the quarter. Compared to the third quarter of 2019, shareholder service fees declined $1.5 million, or 6%, due to a decrease in average assets and fewer accounts. There was also a reduction in fund reimbursement revenues related to the outsourcing of our transfer agency transactional processing operations which was offset by lower costs.

Operating Expenses Analysis

Controllable expenses decreased $0.7 million and $3.2 million compared to the prior quarter and the third quarter of 2019, respectively as investment in targeted growth areas of our strategy continue.

Distribution expenses increased $14.3 million, or 13%, compared to the prior quarter and increased $4.8 million, or 4%, compared to the third quarter of 2019 as a result of the increase in underwriting and distribution revenue. The expense increase compared to the third quarter of 2019 was larger than the revenue increase primarily due to an increase in the average advisor payout rate from continued increases in production.

Compensation and benefits expense increased $0.6 million, or 1%, compared to the prior quarter primarily due to an increase in base salaries and benefits expense due to an increase in headcount. These increases were partially offset by mark-to-market adjustments on equity-based compensation. Compared to the third quarter of 2019, compensation and benefits expense decreased $2.6 million, or 4%, due to severance paid related to the outsourcing of our transfer agency transactional processing operations in the third quarter of 2019, lower costs from reduced headcount and lower equity-based compensation. These decreases were partially offset by mark-to-market adjustments on deferred compensation plans.

General and administrative expenses decreased $1.4 million, or 7%, compared to the second quarter of 2020 primarily due to lower meeting costs. Compared to the same quarter in 2019, general and administrative expenses increased $2.5 million, or 15%, due to a shift of our transfer agency transactional processing operations costs from technology expenses to general and administrative expenses as a result of outsourcing and increased strategic project spending, partially offset by lower travel and meetings costs.

Technology costs were consistent with the prior quarter as higher software costs for new technologies were offset by lower technology consulting costs. Technology costs decreased $0.8 million, or 5%, compared to the third quarter of 2019 as costs related to the transfer agency transactional processing operations outsourcing were shifted to general and administrative expenses. This decrease was partially offset by increased consulting and software costs for new technologies.

Occupancy expenses decreased $0.1 million, or 3%, compared to the prior quarter and decreased $1.5 million, or 27%, compared to the third quarter of 2019. For both comparative periods, occupancy costs decreased as a result of the planned transition out of corporate field offices in our wealth manager.

Marketing and advertising expenses increased slightly compared to the prior quarter and decreased $0.8 million, or 36%, compared to the third quarter of 2019 primarily due to lower sponsorship fees in connection with the shift to virtual industry conferences.

Depreciation expense declined slightly compared to the prior quarter and declined $1.8 million, or 38%, compared to the third quarter of 2019 due to capitalized software development assets becoming fully depreciated.

Investment and Other Income

Investment and other income decreased $9.7 million compared to the prior quarter due to lower unrealized gains, net of hedging activity, on the seed and corporate investment portfolios and an increase in pension expense as a result of the pension plan liquidation in the third quarter of 2020. Compared to the third quarter of 2019, investment and other income increased slightly as higher unrealized gains, net of hedging activity, on the seed and corporate investment portfolio were offset by an increase in pension expense due to the plan liquidation and a decline in interest income for the corporate investment portfolio.

The effective tax rate was 24.8% and was consistent with the prior quarter’s rate of 25.3%. Compared to the third quarter of 2019, the rate increased slightly, primarily due to increased state taxes as a result of additional filings in the current quarter.

AUM (in millions)
		Three Months Ended
		Sep. 30,			Jun. 30,			Sep. 30,					Prior Qtr.							Year-over-Year Qtr.
		2020			2020			2019					Change			%				Change			%
Unaffiliated1
Beginning assets		$	23,724		$	20,244		$	27,545			$	3,480			17	%		$	(3,821	)		(14	)%
Sales2			1,127			1,490			999				(363	)		(24	)%			128			13	%
Redemptions			(1,977	)		(2,179	)		(2,684	)			202			9	%			707			26	%
Net exchanges			239			205			334				34			17	%			(95	)		(28	)%
Net Flows			(611	)		(484	)		(1,351	)			(127	)		(26	)%			740			55	%
Market action			1,755			3,964			(337	)			(2,209	)		(56	)%			2,092			621	%
Ending assets		$	24,868		$	23,724		$	25,857			$	1,144			5	%		$	(989	)		(4	)%
Annualized organic growth rate			(10.3	)%		(9.6	)%		(19.6	)%
Annualized redemption rate3			32.3	%		39.9	%		40.9	%
Institutional
Beginning assets		$	2,997		$	2,427		$	3,887			$	570			23	%		$	(890	)		(23	)%
Sales2			59			52			49				7			13	%			10			20	%
Redemptions			(165	)		(202	)		(230	)			37			18	%			65			28	%
Net exchanges			—			22			—				(22	)		NM				—			NM	%
Net Flows			(106	)		(128	)		(181	)			22			17	%			75			41	%
Market action			297			698			(29	)			(401	)		(57	)%			326			1,124	%
Ending assets		$	3,188		$	2,997		$	3,677			$	191			6	%		$	(489	)		(13	)%
Annualized organic growth rate			(14.1	)%		(21.1	)%		(18.6	)%
Annualized redemption rate3			20.5	%		28.6	%		23.9	%
Wealth Management
Beginning assets		$	38,245		$	33,339		$	40,444			$	4,906			15	%		$	(2,199	)		(5	)%
Sales2			634			649			744				(15	)		(2	)%			(110	)		(15	)%
Redemptions			(1,488	)		(1,259	)		(1,542	)			(229	)		(18	)%			54			4	%
Net exchanges			(239	)		(227	)		(334	)			(12	)		(5	)%			95			28	%
Net Flows			(1,093	)		(837	)		(1,132	)			(256	)		(31	)%			39			3	%
Market action			2,661			5,743			(64	)			(3,082	)		(54	)%			2,725			4,258	%
Ending assets		$	39,813		$	38,245		$	39,248			$	1,568			4	%		$	565			1	%
Annualized organic growth rate			(11.4	)%		(10.0	)%		(11.2	)%
Annualized redemption rate3			13.1	%		11.6	%		13.4	%
Consolidated Total
Beginning assets		$	64,966		$	56,010		$	71,876			$	8,956			16	%		$	(6,910	)		(10	)%
Sales2			1,820			2,191			1,792				(371	)		(17	)%			28			2	%
Redemptions			(3,630	)		(3,640	)		(4,456	)			10			—	%			826			19	%
Net exchanges			—			—			—				—			—				—			—
Net Flows			(1,810	)		(1,449	)		(2,664	)			(361	)		(25	)%			854			32	%
Market action			4,713			10,405			(430	)			(5,692	)		(55	)%			5,143			1,196	%
Ending assets		$	67,869		$	64,966		$	68,782			$	2,903			4	%		$	(913	)		(1	)%
Annualized organic growth rate			(11.1	)%		(10.3	)%		(14.8	)%
Annualized redemption rate3			20.5	%		22.6	%		24.3	%

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1	Unaffiliated includes National channel (home office and wholesale), Defined Contribution Investment Only, Registered Investment Advisor and Variable Annuity.
2	Sales consist of gross sales and includes net reinvested dividends, capital gains and investment income.
3	Excludes Money Market.

MorningStar Fund Rankings1		1 Year		3 Years		5 Years
Funds ranked in top half		49	%	49	%	39	%
Assets ranked in top half		43	%	52	%	47	%

MorningStar Ratings1		Overall		3 Years		5 Years
Funds with 4/5 stars		26	%	28	%	19	%
Assets with 4/5 stars		40	%	42	%	35	%
_____________________ 1 Based on class I share, which reflects the largest concentration of sales and assets.

 

Wealth Management		Sep. 30,			Jun. 30,			Sep. 30,				Prior Qtr.							Year-over-Year Qtr.
(in millions)		2020			2020			2019				Change			%				Change			%
AUA
Ending advisory AUA		$	29,330		$	27,155		$	25,107		$	2,175			8	%		$	4,223			17	%
Ending non-advisory AUA			33,364			31,836			32,006			1,528			5	%			1,358			4	%
Ending total AUA			62,694			58,991			57,113			3,703			6	%			5,581			10	%
Average advisory AUA 1		$	28,502		$	25,030		$	24,921		$	3,472			14	%		$	3,581			14	%
Average non-advisory AUA 1			32,898			30,151			32,490			2,747			9	%			408			1	%
Average AUA 1			61,400			55,181			57,411			6,219			11	%			3,989			7	%
Net new advisory AUA 2		$	437		$	189		$	328		$	248			131	%		$	109			33	%
Net new non-advisory AUA 2, 3			(475	)		(346	)		(720	)		(129	)		(37	)%			245			34	%
Total net new AUA 2, 3			(38	)		(157	)		(392	)		119			76	%			354			90	%
Annualized advisory AUA growth 4			6.4	%		3.3	%		5.3	%
Annualized AUA growth 4			(0.3	)%		(1.2	)%		(2.7	)%
Advisors and advisor associates			1,313			1,317			1,344			(4	)		—	%			(31	)		(2	)%
Avg. trailing 12-month revenue per advisor 5 (in thousands)		$	474		$	464		$	422		$	10			2	%		$	52			12	%

_________________________

1	Average AUA are calculated as the average of the beginning of month AUA during each reporting period.
2	Net new AUA are calculated as total client deposits and net transfers less client withdrawals. Client deposits include dividends and interest.
3	Excludes activity related to products held outside of our wealth management platform.  These assets represent less than 10% of total AUA.
4	Annualized growth is calculated as annualized quarterly net new AUA divided by beginning AUA.
5	Production per Advisor is calculated as trailing 12- month Total underwriting and distribution fees less “other” underwriting and distribution fees divided by the average number of advisors.  “Other” underwriting and distribution fees predominantly includes fees paid by advisors for programs and services.

Unaudited Consolidated Statements of Income (in thousands, except per share data and margin)
	Three Months Ended
	Sep. 30,				Jun. 30,				Sep. 30,				Prior Qtr.						Year-over-Year Qtr.
	2020				2020				2019				Change				%		Change				%
Revenues:
Investment management fees	$	106,617			$	95,824			$	111,806			$	10,793			11	%	$	(5,189	)		(5	)%
Underwriting and distribution fees		139,456				123,633				135,787				15,823			13	%		3,669			3	%
Shareholder service fees		21,597				20,577				23,087				1,020			5	%		(1,490	)		(6	)%
Total		267,670				240,034				270,680				27,636			12	%		(3,010	)		(1	)%
Operating expenses:
Distribution1		122,195				107,876				117,425				14,319			13	%		4,770			4	%
Compensation and benefits (including share-based compensation of $11,080, $12,532 and $11,580, respectively)		62,416				61,863				64,999				553			1	%		(2,583	)		(4	)%
General and administrative		19,156				20,524				16,680				(1,368	)		(7	)%		2,476			15	%
Technology		14,250				14,237				15,019				13			0	%		(769	)		(5	)%
Occupancy		4,160				4,291				5,684				(131	)		(3	)%		(1,524	)		(27	)%
Marketing and advertising		1,370				1,119				2,134				251			22	%		(764	)		(36	)%
Depreciation		2,998				3,209				4,833				(211	)		(7	)%		(1,835	)		(38	)%
Subadvisory fees		3,490				3,288				3,882				202			6	%		(392	)		(10	)%
Total		230,035				216,407				230,656				13,628			6	%		(621	)		—	%
Operating income		37,635				23,627				40,024				14,008			59	%		(2,389	)		(6	)%
Investment and other income		5,449				15,148				5,212				(9,699	)		(64	)%		237			5	%
Interest expense		(1,542	)			(1,539	)			(1,562	)			(3	)		—	%		20			1	%
Income before provision for income taxes		41,542				37,236				43,674				4,306			12	%		(2,132	)		(5	)%
Provision for income taxes		10,296				9,412				10,175				884			9	%		121			1	%
Net income		31,246				27,824				33,499				3,422			12	%		(2,253	)		(7	)%
Net income attributable to redeemable noncontrolling interests		723				3,000				445				(2,277	)		(76	)%		278			62	%
Net income attributable to Waddell & Reed Financial, Inc.	$	30,523			$	24,824			$	33,054			$	5,699			23	%	$	(2,531	)		(8	)%
Net income per share, basic and diluted:	$	0.48			$	0.38			$	0.46
Weighted average shares outstanding - basic and diluted		64,240				65,488				72,387
Operating margin		14.1	%			9.8	%			14.8	%
1Distribution expense
Unaffiliated		22,733				20,587				24,068
Wealth Management		99,462				87,289				93,357
	$	122,195			$	107,876			$	117,425

Unaudited Consolidated Statements of Income (in thousands, except per share data and margin)
		Nine Months Ended
		Sep. 30,			Sep. 30,
		2020			2019			Change				%
Revenues:
Investment management fees		$	307,660		$	334,438		$	(26,778	)		(8	)%
Underwriting and distribution fees			400,032			395,527			4,505			1	%
Shareholder service fees			63,745			70,279			(6,534	)		(9	)%
Total			771,437			800,244			(28,807	)		(4	)%
Operating expenses:
Distribution1			350,104			343,696			6,408			2	%
Compensation and benefits (including share-based compensation of $33,595 and $35,471, respectively)			182,704			191,718			(9,014	)		(5	)%
General and administrative			58,278			47,421			10,857			23	%
Technology			41,989			47,769			(5,780	)		(12	)%
Occupancy			13,160			19,100			(5,940	)		(31	)%
Marketing and advertising			4,385			6,497			(2,112	)		(33	)%
Depreciation			9,720			16,062			(6,342	)		(39	)%
Subadvisory fees			10,444			11,154			(710	)		(6	)%
Total			670,784			683,417			(12,633	)		(2	)%
Operating income			100,653			116,827			(16,174	)		(14	)%
Investment and other income			12,852			23,690			(10,838	)		(46	)%
Interest expense			(4,630	)		(4,662	)		32			1	%
Income before provision for income taxes			108,875			135,855			(26,980	)		(20	)%
Provision for income taxes			29,341			35,036			(5,695	)		(16	)%
Net income			79,534			100,819			(21,285	)		(21	)%
Net income attributable to redeemable noncontrolling interests			2,201			1,763			438			25	%
Net income attributable to Waddell & Reed Financial, Inc.		$	77,333		$	99,056		$	(21,723	)		(22	)%
Net income per share, basic and diluted:		$	1.18		$	1.33
Weighted average shares outstanding - basic and diluted			65,795			74,446
Operating margin			13.0	%		14.6	%
1Distribution expense
Unaffiliated			66,944			73,326
Wealth Management			283,160			270,370
		$	350,104		$	343,696

Underwriting and distribution fees (in thousands)
		For the three months ended Sep. 30, 2020
		Unaffiliated			Wealth Management			Total
Advisory fees		$	—		$	82,591		$	82,591
Service and distribution fees			14,623			15,305			29,928
Sales commissions			223			17,847			18,070
Other revenues			82			8,785			8,867
Total underwriting and distribution fees		$	14,928		$	124,528		$	139,456

		For the three months ended Jun. 30, 2020
		Unaffiliated			Wealth Management			Total
Advisory fees		$	—		$	72,534		$	72,534
Service and distribution fees			13,670			13,600			27,270
Sales commissions			373			15,034			15,407
Other revenues			91			8,331			8,422
Total underwriting and distribution fees		$	14,134		$	109,499		$	123,633

		For the three months ended Sep. 30, 2019
		Unaffiliated			Wealth Management			Total
Advisory fees		$	—		$	73,356		$	73,356
Service and distribution fees			16,286			16,143			32,429
Sales commissions			364			20,544			20,908
Other revenues			67			9,027			9,094
Total underwriting and distribution fees		$	16,717		$	119,070		$	135,787

		For the nine months ended Sep. 30, 2020
		Unaffiliated			Wealth Management			Total
Advisory fees		$	—		$	232,243		$	232,243
Service and distribution fees			43,569			43,494			87,063
Sales commissions			1,047			53,538			54,585
Other revenues			308			25,833			26,141
Total underwriting and distribution fees		$	44,924		$	355,108		$	400,032

		For the nine months ended Sep. 30, 2019
		Unaffiliated			Wealth Management			Total
Advisory fees		$	—		$	208,806		$	208,806
Service and distribution fees			49,366			47,589			96,955
Sales commissions			1,300			60,959			62,259
Other revenues			242			27,265			27,507
Total underwriting and distribution fees		$	50,908		$	344,619		$	395,527

Unaudited Condensed Balance Sheet (in thousands)
		Sep. 30,			Dec. 31,
		2020			2019
Assets
Cash & cash equivalents (unrestricted)		$	165,259		$	151,815
Investment securities			579,344			688,346
Other assets			207,745			245,572
Property and equipment, net			27,213			34,726
Goodwill and intangible assets			145,869			145,869
Total assets		$	1,125,430		$	1,266,328
Liabilities, redeemable noncontrolling interests and equity
Short-term notes payable		$	94,980		$	—
Long-term debt			—			94,926
Other liabilities			282,939			343,300
Redeemable noncontrolling interests			—			19,205
Total stockholders’ equity			747,511			808,897
Liabilities, redeemable noncontrolling interests and equity		$	1,125,430		$	1,266,328
Shares outstanding			62,548			68,847

Unaudited Condensed Cash Flow (in thousands)
		Three Months Ended												Nine Months Ended
		Sep. 30,				Jun. 30,				Sep. 30,				Sep. 30,				Sep. 30,
		2020				2020				2019				2020				2019
Cash provided by (used in):
Operating activities		$	63,222			$	(526	)		$	61,084			$	91,972			$	84,231
Investing activities			18,084				20,430				(14,173	)			66,208				(18,160	)
Financing activities			(55,634	)			(32,123	)			(58,591	)			(157,128	)			(171,709	)
Net change during period		$	25,672			$	(12,219	)		$	(11,680	)		$	1,052			$	(105,638	)

		Three Months Ended									Nine Months Ended
		Sep. 30,			Jun. 30,			Sep. 30,			Sep. 30,			Sep. 30,
(in thousands, except number of shares)		2020			2020			2019			2020			2019
Shares repurchased
Number of shares			2,617,108			1,468,367			2,480,019			7,892,913			6,849,238
Total cost		$	40,052		$	18,061		$	40,715		$	112,052		$	116,677
Dividend paid
Rate per share		$	0.25		$	0.25		$	0.25		$	0.75		$	0.75
Total paid		$	16,292		$	16,528		$	18,372		$	49,939		$	56,560
Capital returned to stockholders		$	56,344		$	34,589		$	59,087		$	161,991		$	173,237

Non-GAAP Financial Measures

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

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

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

		Three Months Ended											Nine Months Ended
		Sep. 30,			Jun. 30,			Sep. 30,					Sep. 30,			Sep. 30,
		2020			2020			2019					2020			2019
Net income attributable to Waddell & Reed Financial, Inc. (GAAP)	$	30,523		$	24,824		$	33,054				$	77,333		$	99,056
Adjustments
Severance		—			—			3,081					—			3,081
Tax effect of adjustments		—			—			(739	)				—			(739	)
Adjusted net income attributable to Waddell & Reed Financial, Inc. (non-GAAP)	$	30,523		$	24,824		$	35,396				$	77,333		$	101,398
Weighted average shares outstanding - basic and diluted		64,240			65,488			72,387					65,795			74,446
Adjusted net income per share, basic and diluted (non-GAAP):	$	0.48		$	0.38		$	0.49				$	1.18		$	1.36
Controllable expenses (GAAP)	$	101,352		$	102,034		$	104,516				$	300,516		$	312,505
Adjustments
Severance		—			—			(3,081	)				—			(3,081	)
Adjusted controllable expenses (non-GAAP)		101,352			102,034			101,435					300,516			309,424
Operating expenses (GAAP)	$	230,035		$	216,407		$	230,656				$	670,784		$	683,417
Adjustments
Severance		—			—			(3,081	)				—			(3,081	)
Adjusted operating expenses (non-GAAP)		230,035			216,407			227,575					670,784			680,336
Operating income (GAAP)	$	37,635		$	23,627		$	40,024				$	100,653		$	116,827
Adjustments
Severance		—			—			3,081					—			3,081
Adjusted operating income (non-GAAP)	$	37,635		$	23,627		$	43,105				$	100,653		$	119,908
Operating revenue	$	267,670		$	240,034		$	270,680				$	771,437		$	800,244
Operating margin (GAAP)		14.1	%		9.8	%		14.8	%				13.0	%		14.6	%
Adjusted operating margin (non-GAAP)		14.1	%		9.8	%		15.9	%				13.0	%		15.0	%

Earnings Conference Call

Stockholders, members of the investment community and the general public are invited to listen to a live Web cast of our earnings release conference call today at 10:00 a.m. Eastern. During this call, Philip J. Sanders, CEO, will review our quarterly results. Live access to the teleconference will be available on the “Investor Relations” section of our Web site at ir.waddell.com. A Web cast replay will be made available shortly after the conclusion of the call and accessible for seven days.

Web Site Resources

We invite you to visit the Investor Relations section of our Web site at ir.waddell.com. Under the “Investor Information” tab you will find a link to presentations as well as to data tables, which include supplemental information schedules.

Past performance is no guarantee of future results. Please invest carefully.

About the Company

Through its subsidiaries, Waddell & Reed Financial, Inc. has provided investment management and wealth management services to clients throughout the United States since 1937. Today, we distribute our investment products through the unaffiliated channel under the IVY INVESTMENTS® brand (encompassing broker/dealer, retirement, and registered investment advisors), our wealth management channel (through independent financial advisors associated with WADDELL & REED, INC.), and our institutional channel (including defined benefit plans, pension plans, endowments and subadvisory relationships). For more information, visit ir.waddell.com.

Forward-Looking Statements

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

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

• 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;

• Changes in our business model, operations and procedures, including our methods of distributing our proprietary products, as a result of evolving fiduciary standards;

• The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;

• A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds;

• Our inability to reduce expenses rapidly enough to align with declines in our revenues due to various factors, including fee pressure, the level of our assets under management 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 wealth management and investment management 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, including the information in Item 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10‑ K for the year ended December 31, 2019 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2020. 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.