WADDELL & REED FINANCIAL, INC.

INDEX TO ANNUAL REPORT ON FORM 10‑K

For the fiscal year ended December 31, 20162018

PART I

Forward‑Looking Statements

This Annual Report on Form 10‑K and the letter to stockholders containscontain “forward‑looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and the industry in general. These forward‑looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates and the financial markets and other conditions. These statements are generally identified by the use of words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward‑looking nature. Readers are cautioned that any forward‑looking information provided by or on behalf of the Company is not a guarantee of future performance. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the Item 1 “Business” and Item 1A “Risk Factors” sections of this Annual Report on Form 10‑K, which include, without limitation, the adverse effect from a decline in securities markets or in the relative investment performance of our products, our inability to pay future dividends, the loss of existing distribution channels or the inability to access new ones, a reduction of the assets we manage on short notice, and adverse results of litigation and/or arbitration. The forgoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the SEC. All forward‑looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward‑looking statements, whether as a result of new information, future events or otherwise.

ITEM 1.      Business

General

Waddell & Reed Financial, Inc. (hereinafter referred to as the “Company,” “we,” “our” or “us”) is a holding company, incorporated in the state of Delaware in 1981, that conducts business through its subsidiaries. Founded in 1937, we are one of the oldest mutual fund complexes in the United States, having introduced the Waddell & Reed Advisors group of mutual funds (the “Advisors Funds”) in 1940. Over time wewe’ve added additional mutual funds: Ivy Funds (the “Ivy Funds”); Ivy Variable Insurance Portfolios, our variable product offering (“Ivy VIP”); InvestEd Portfolios, our 529 college savings plan (“InvestEd”); Ivy High Income Opportunities Fund, a closed-end mutual fund (“IVH”); and the Ivy Global Investors Fund Société d’Investissement à Capital Variable (the “SICAV”) and its Ivy Global Investors sub‑funds (the “IGI Funds”), an undertaking for the collective investment in transferable securities (“UCITS”). In 2016, we introduced; and the Ivy NextShares® exchange-traded managed funds (“Ivy NextShares”) (collectively, the Advisors Funds, Ivy Funds, Ivy VIP, InvestEd, IVH and Ivy NextShares are referred to as the “Funds”). AsIn February 2018, we completed the merger of December 31, 2016,all Advisors Funds into Ivy Funds with substantially similar objectives and strategies. In May 2018, we had $80.5 billionstarted the process of liquidating the IGI Funds, which was substantially complete in 2018.  In addition to the Funds and IGI Funds, our assets under management.management (“AUM”) include institutional accounts managed by the Company.

We derive our revenues from providing investment management investmentand advisory services, investment product underwriting and distribution, and shareholder services administration to the Funds, institutional accounts, and the IGI Funds prior to their liquidation. We also provide brokerage services, primarily to retail clients through Waddell & Reed, Inc. (“W&R”), and institutionalindependent financial advisors associated with W&R (“Advisors”), who provide financial planning and separately managed accounts.advice to their clients. Investment management and advisory fees and certain underwriting and distribution revenues are based on the amountlevel of averageAUM and assets under managementadministration (“AUA”) and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of fees earned on fee‑based asset allocation productsprograms and related advisory services, asset‑based service and distribution fees promulgated under the 1940 Act (“Rule 12b-1”), distribution fees on certain variable products, and commissions derived from sales of investment and insurance products, and distribution fees on certain variable 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 managementclient AUM or number of client accounts.

We operate  Our major expenses are for distribution of our business through a balanced distribution network. Our retail products, are distributed through third parties such as other broker-dealers, registered investment adviserscompensation related costs, occupancy, general & administrative, and various retirement platforms (collectively, the “retail unaffiliated distribution channel”) or through associated independent contractor financial advisors (the “retail broker-dealer channel”). We also market our investment advisory services to institutional investors, either directly or through consultants (the “institutional channel”).information technology.

Our retail unaffiliated distribution channel efforts include retail fund distribution through broker-dealers (the primary method of distributing mutual funds for the industry), registered investment advisers (fee‑based financial advisors who generally sell mutual funds through financial supermarkets) and retirement and insurance platforms. Assets under management in this channel were $30.3 billion at the end of 2016.

In the retail broker-dealer channel, associated independent financial advisors focus their efforts primarily on financial planning, serving mostly middle class and mass affluent clients. We compete with smaller broker-dealers and independent financial advisors, as well as a span of other financial service providers. Assets under management in this channel were $42.3 billion at December 31, 2016.

Through our institutional channel, we serve as subadviser for domestic and foreign distributors of investment products for pension funds, Taft‑Hartley plans and endowments. Additionally, we serve as investment adviser and distributor of the IGI Funds. Assets under management in the institutional channel were $7.9 billion at December 31, 2016.

Organization

We operatedeliver our investment management advisory businessservices through our subsidiary companies, primarily Waddell & Reed Investment Management Company (“WRIMCO”), a registered investment adviser for the Advisors Funds and Ivy Investment Management Company (“IICO”), the registered investment adviser for the Ivy Funds, Ivy VIP, InvestEd, the IGI Funds, and Ivy NextSharesNextShares; and, global distributorprior to completion of the IGIAdvisors Funds mergers into Ivy Funds in 2018, Waddell & Reed Investment Management Company (“WRIMCO”), a registered investment adviser for the Advisors Funds. WRIMCO merged into IICO, effective December 31, 2018. 

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

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

Investment Management Operations

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

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

In addition to performing investment management services for the Funds, we act as an investment adviser for the IGI Funds, institutional and other private investors and we provide subadvisory services to other investment companies.  We also acted as investment advisor to the IGI Funds prior to their liquidation. Such services are provided pursuant to various written agreements, and our fees are generally based on a percentage of assets under management.

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

Our investment management team is comprised of 7889 professionals, including 3432 portfolio managers who average 23 years of industry experience and 1516 years of tenure with our firm. We have significant experience in virtually all major asset classes, several specialized asset classes and a range of investment styles. At December 31, 2016, 76% of the Company’s $80.5 billion in assets underWe continue to move towards team-based portfolio management were invested in equities, of which 79% was domesticon our funds, and 21% was international. In recent years, we have supported growth of international investments by addingfortified our research team with additional investment professionals nativeanalysts, while continuing to countries that we consider emerging markets. They, along with other members of the investment team, focus on understanding foreign markets and capturing investment opportunities. Ourfoster a collaborative culture across our investment management teamprofessionals. We also includesengage subadvisors who bring similar investment philosophies and additional expertise in specific asset classes.classes, when appropriate.

Investment Management Products

Our mutual fund families offerfunds provide a wide variety of investment options. We are the exclusive underwriter and distributor of 9083 registered open‑end mutual fund portfolios in the Funds, which includes 14 investment styles. Additionally, we have one closed‑end offering, three Ivy NextShares exchange-traded managed funds and offerDuring the IGI Funds through our institutional channel. Thefirst quarter of 2018, the remaining Advisors Funds variablemerged into Ivy Funds with substantially similar objectives and strategies. During 2018, six Ivy Funds and one Ivy VIP fund merged into Ivy Funds and an Ivy VIP fund, respectively, with generally similar investment objectives. Variable products, offering Ivy VIP and InvestEd are offered primarily through W&R financial advisorsAdvisors in the retail broker-dealer channel; in some circumstances, certain of those funds are also offered through the retail unaffiliated distribution channel. The Ivy Funds are offered through both our retail unaffiliated distribution channel and retail broker-dealer channel. The Funds’ assets under managementAUM are included in either our retail unaffiliated distribution channel or our retail broker-dealer channel depending on which channel marketed the client account or is the broker of record. As of December 31, 2018, we had $65.8 billion in AUM.

During 2016, we launched the Ivy Targeted Return Bond fund, subadvisedBroker-Dealer Products and Services

Since 1937, W&R has been committed to our client’s financial goals.  W&R offers a variety of sophisticated and personalized financial planning services to address virtually any client goal, objective or situation including retirement planning, education planning, addressing survivor needs, asset allocation, estate planning, business planning, income tax planning, disability and long-term care.  In 2017, W&R introduced a new, industry-leading financial planning platform centered around technology provided by Pictet Asset Management,eMoney Advisor.  This platform enables Advisors to better serve their client’s financial planning needs and the Ivy California Municipal High Income fund. The Ivy Targeted Return Bond fund seeksprovides clients with access to providetheir financial plan, important financial planning documents and a positive total return over the long‑term acrossholistic view of their entire financial situation all market environments by investing in any formthrough a convenient wealth management portal. 

W&R offers clients full-service brokerage services as well as a variety of debt security issued in the U.S or internationally. The Ivy California Municipal High Income fund seeks fee‑based asset allocation programs, including Managed Allocation Portfolio (“MAP”), MAP Choice, MAP Flex, MAPSelect, MAPLatitude and Strategic Portfolio Allocation (“SPA”). These programs utilize a high levelvariety of income that is exempt from federalunderlying investment options including mutual funds, individual stocks and California income taxes.  In January ofbonds and exchange traded funds. During 2017, we launched MAPNavigator, an open architecture mutual fund advisory program and enhanced the SPA program, partnering with Wilshire Associates, Inc., an independent consultant, to develop a series of taxable and tax-sensitive investment models consisting of our affiliated Ivy IG International Small CapFunds. As of December 31, 2018, clients had $21.2 billion invested in our fee‑based asset allocation programs.

Through our broker-dealer, we distribute various variable annuity products, some of which offer our affiliated Ivy VIP funds as an investment vehicle. In 2017, IICO enhanced InvestEd by lowering fees and expanding the available investment options. InvestEd offers lower sales charges, reduced minimum initial investment, an increased number of aged-based and static portfolios and individual fund subadvisedoptions, along with an expanded range of underlying funds within aged-based and static portfolios. Through our insurance agency subsidiaries, Advisors also offer clients retirement and life insurance products underwritten by IG International Management Ltd. Thisour business partners.  We offer unaffiliated mutual fund seeks smaller-capitalization companies outside North America that exhibit perceived growthproducts, other variable annuity products, and full service brokerage products and services through a third-party clearing broker-dealer. AUA were $51.3 billion at a reasonable price.

Additionally in 2016, we introduced three Ivy NextShares 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 IICO and/or are out of favor in financial markets but have a favorable outlook for capital appreciation.December 31, 2018.

Other Products

We offer our retail broker-dealer channel clients a variety of fee‑based asset allocation products, including Managed Allocation Portfolio (“MAP”), MAP Plus, MAP Choice, MAP Flex, MAP Select, MAP Latitude and Strategic Portfolio Allocation (“SPA”). These products utilize a variety of investment options including mutual funds, as well as individual stock, bond and exchange traded fund investment options. As of December 31, 2016, clients had $18.4 billion invested in our fee‑based asset allocation products, of which $15.6 billion is invested in our mutual funds and included in our mutual fund assets under management.

In our retail broker-dealer channel, we distribute various business partners’ variable annuity products, which offer Ivy VIP as an investment vehicle. We also offer our retail broker-dealer channel customers retirement and life insurance products underwritten by our business partners. Through our insurance agency subsidiary, W&R financial advisors also sell life insurance and disability products underwritten by various carriers.

Distribution Channels

WeOne of our distinctive qualities is that we distribute our investment products through thea balanced distribution network. Our distribution channels cover both retail unaffiliated distribution, retail broker-dealer and institutional channels.unaffiliated sales channels, described below, as well as our affiliated broker-dealer, W&R.

Retail Unaffiliated Distribution Channel

Our teamIn 2018, IDI leadership realigned its distribution model to respond to a changing marketplace and to reinvigorate sales using a more focused approach. The moves centered on two sales channels, National Distribution and Professional Buyers Distribution, in an effort to diversify asset flow and the AUM profile of 42 external wholesalers lead our wholesaling efforts, whichthe Company.

National Distribution, inclusive of National Accounts and National Wholesale, was enhanced to increase focus principally on distributingand drive fund sales throughout the Ivy Funds through three segments: broker-dealers (the largest method of distributing mutual funds fornationwide broker-dealer network. With the industry and for us), retirement platforms (401(k) platforms using multiple managers) and registered investment advisers (fee‑based financial advisors who generally sell mutual funds through financial supermarkets). Additionally, our National Accounts team comprisedfocused on firm home office interactions and the National Wholesale team focused on driving sales at the financial advisor level. This alignment provides a holistic, cohesive and collaborative sales and service approach to our national broker-dealer partners. National Wholesale includes 24 external wholesalers, four of 10 employees, work with ourwhich are exclusively devoted to W&R.

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

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

Retail AUM in this channel were $25.0 billion at the end of 2018.

Broker-Dealer Channel

Throughout our history, independent W&R advisors haveAdvisors sold investment products primarily to middle income and mass affluent individuals, families and businesses across the country in geographic markets of all sizes. WeAdvisors assist clients on a wide range of financial issues with a significant focus on helping them plan, generally, for long‑term investments such as retirement and education,goals and offer one‑on‑one consultations that emphasize long‑term relationships through continued service. As a result of this approach, this channel has developed a loyal customer base with clients maintaining their accounts significantly longer than the industry average.

Over the past several years, we have expanded our brokerage platform technology and offerings,product offering, while continuing to make investments that allow Advisors to simplify the way they conduct business with clients. We continued to work to transform W&R into a self-sustaining, fully competitive and profitable entity. These efforts include enhancing the compensation program for Advisors, investing in a new advisor technology platform, transitioning advisors currently leasing space in W&R offices to personal branch offices and redesigning services offered to Advisors. These additional enhancements will continue in the future and are designed to do so which enable usincrease our ability to retain and competitively recruit experienced advisors.Advisors. 

As of December 31, 2016,2018, there were 1,780 independent1,060 Advisors and 343 licensed advisor associates, for a total of 1,403 individuals associated with W&R financial advisors who operate out of offices located throughout the United States. We believe, based on industry data, that W&R financial advisors are currently one of the largest groups in the United States selling primarily mutual funds, and that W&R, our broker-dealer subsidiary, ranks among the largest independent broker-dealers. Retail broker-dealer channel underwriting and distribution fee revenues per the average number of advisors were $243 thousand, $265 thousand and $254 thousand for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016,2018, our retail broker-dealer channel had approximately 426,000380,000 mutual fund customers.clients and AUM of $37.2 billion. Assets under administration (“AUA”) includes both client assets invested in the Funds and in other companies’ products that are distributed through W&R held in brokerage accounts, within our fee-based asset allocation programs, or held directly with the funds.

Institutional Channel

Through this channel, weWe also manage assets in a variety of investment styles for a variety of types of institutions. The largest client type is other asset managers that hire us to act as subadviser;subadviser for their branded products; they are typically domestic andor foreign distributors of investment products who lack scale or the track record to manage internally, or choose to market multi‑manager styles. Over time, the institutional channel has been successful in developing subadvisory relationships, and as of December 31, 2016, subadvisory business comprised more than 60% of the institutional channel’s assets. Our diverse client list also includes the IGI Funds, pension funds, Taft‑Hartley plans and endowments.

of our products position us to compete in this environment. Second, we believe our business model targets clients seeking personal assistance from financial advisors or planners. The market for financial advice is extremely broad and fragmented. W&R financial advisorsAdvisors compete primarily with large and small broker-dealers, independent financialunaffiliated advisors, registered investment advisers, financial institutions, insurance representatives and insurance representatives.others. Finally, we compete in the institutional marketplace, working with consultants who select asset managers for various opportunities, as well as working directly with plan sponsors, foundations, endowments, sovereign funds and other asset managers who hire subadvisors.

We also face competition in attracting and retaining qualified financial advisorsemployees and employees.Advisors. To maximize our ability to compete effectively in our business, we offer competitive compensation. We are advancing our culture by focusing on our Core Values and further investing in our people through areas such as talent management, employee experiences, diversity & inclusion and total rewards.  For Advisors, we enhanced the compensation program, are investing in a new advisor technology platform and have expanded our brokerage platform technology and product offering.

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

Regulation

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

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

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

We derive a large portion of our revenues from investment management agreements. Under the Advisers Act, our investment management agreements terminate automatically if assigned without the client’s consent. Under the ICA, investment advisory agreements with registered investment companies, such as the Funds, terminate automatically upon assignment. The term “assignment” is broadly defined and includes direct assignments, as well as assignments that may be deemed to occur, under certain circumstances, upon the transfer, directly or indirectly, of a controlling interest in the Company.

The Company is also subject to federal and state laws affecting corporate governance, including the Sarbanes‑Oxley Act of 2002, as well as rules adopted by the SEC. Our report on internal controls over financial reporting for 20162018 is included in Part I, Item 9A.

As a publicly traded company, we are also subject to the rules of the New York Stock Exchange (the “NYSE”), the exchange on which our stock is listed, including the corporate governance listing standards approved by the SEC.

Two of our subsidiaries, W&R and IDI, are registered as broker-dealers with the SEC and the states. Much of the broker-dealer regulation has been delegated by the SEC to self‑regulatory organizations, principally the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority, Inc. (“FINRA”), which is the primary regulator of our broker-dealer activities. These self‑regulatory organizations adopt rules (subject to approval by the SEC)

Intellectual Property

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

classes or products are in favor with investors, our competitors may receive outsized flows compared to others in the industry.  As a result, we willmay miss the opportunity to gain the assets under managementAUM that are being invested in these assets and face the risk of our managed assets being withdrawn in favor of competitors who provide services covering these classes or products.  For example, to the extent there is a trend in the asset management business in favor of passive

funds and other investment products we manage is significantly dependent on access to third party financial intermediaries that distribute these products.  We sell a significant portion of our investment products through a variety of such intermediaries, including major wire houses, national and regional broker-dealers, defined contribution plan administrators, retirement platforms and registered investment advisers.  Assets under managementAUM in our retail unaffiliated channel at December 31, 20162018 were $30.3$25.0 billion, or 38% of total assets under management.    AUM.  It would be difficult for us to acquire or retain the management of those assets without the assistance of the intermediaries.  As third party intermediaries rationalize and reduce the number of product offerings on their platforms, including in response to the recently adopted U.S. Department of Labor (the “DOL”)new fiduciary standard regulations,standards, we cannot provide assurances that we will be able to maintain an adequate number of investment product offerings, or access to these intermediaries, which could have a material adverse effect on our business if we are unable to maintain successful distribution relationships.business.  Relying on third party intermediaries also exposes us to the risk of increasing costs of distribution, as certain intermediaries with which we conduct business charge fees (largely determined by the distributor) to maintain access to their distribution networks.  If we choose not to pay such fees, our ability to distribute through those intermediaries would be limited; significant increases in such fees will cause our distribution costs to increase, which could lower our profitability.  In addition, over time certain sectors of the financial services industry have become considerably more concentrated, as financial institutions involved in a broad range of financial services have been acquired by or merged into other firms.  The implementationIn April 2016, the U.S. Department of Labor (the “DOL”) adopted regulations that, among other things, treated as fiduciaries any person who provides investment advice or recommendations to employee benefit plans, plan fiduciaries, plan participants, plan beneficiaries, IRAs or IRA owners (the “DOL Fiduciary Rule”). Although the DOL Fiduciary Rule has been vacated by the U.S. Court of Appeals for the Fifth Circuit, other regulators have enacted or proposed other fiduciary standard is likely tostandards that could require modifications to our distribution activities and may impact our ability to service clients or engage in certain types of distribution or other business activities. The convergence of all of these activities could result in our competitors gaining greater resources, and we may experience pressure on our pricing and market share as a result, of these factors and as some of our competitors seek to increase market share by reducing prices.  If these changes continue, our distribution costs could increase as a percentage of our revenues generated.  We could experience lower sales or incur higher distribution costs or other developments, which could have an adverse effect on our results of operations if third party selling agreements are terminated or there is a change in the terms of those agreements.

A substantial amountApproximately half of our assets under management, $42.3AUM, $37.2 billion, or 53%57%, as of December 31, 2016 is2018 are held in our retail broker-dealer channel.  The investment products distributed through independent financial advisors in our retail broker-dealer channel include our affiliated mutual funds and other products, as well as products issued by unaffiliated mutual fund companies.  A majoritysignificant portion of the sales in this channel are sales of affiliated mutual funds, upon which we earn higher revenues from asset management fees as compared to the sale of unaffiliated funds.  Sales of affiliated investment products in our retail broker-dealer channel may decrease (and redemptions increase) materially with the introduction of additional unaffiliated investment products in our advisory programs.  Further, qualifiedqualified accounts, particularly IRAs, make up a significant portion of our assets under managementAUM and administrationAUA in this channel, and a significant portion of those retirement assets are invested in our affiliated products.  The introduction of additional unaffiliated products to independent financial advisors in this channel, sustained underperformance of key investment products, and the implementation of the DOLnew fiduciary standard, which has significant impacts relative to retirement assets,standards could cause us to experience lower sales of our affiliated investment products, increased redemptions, or other developments that may not be fully offset by higher distribution revenues or other benefits.  As a result, our assets under management,AUM, revenues and earnings may decline.  See “Legal, Regulatory and Tax Risks.”

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

A Significant Percentage Of Our Assets Under ManagementAUM Are Distributed Through Our Retail Unaffiliated Channel, Which Has Higher Redemption Rates Than Our Retail Broker-Dealer Channel. In recent years, we have focused on expanding distribution efforts relating to our retail unaffiliated channel.  The percentage of our assets under managementAUM in the retail unaffiliated channel has increased from 10% at December 31, 2003 towas 38% at December 31, 2016,2018, and the percentage of our total sales represented by the retail unaffiliated channel has increased from 17%was 61% for the year ended December 31, 2003 to 54% for the year ended December 31, 2016.2018.  The success of sales in

investors competing funds that are internally or externally managed, or may reduce the number of competing products on their platforms through systemic rationalization and reduction, which could limit the distribution of our products. The loss of any of these distribution channels and the inability to continue to access new distribution channels could decrease our assets under managementAUM and adversely affect our results of operations and growth.  There are no assurances that these channels and their client bases will continue to be accessible to us.  The loss or diminution of the level of business we do with those providers could have a material adverse effect on our business.  Compared to the industry average redemption rate of 25.4%24.9% and 24.7%22.9% for the years ended December 31, 20162018 and 2015,2017, respectively, the retail unaffiliated channel had redemption rates of 63.7%38.7% and 43.0%40.1% for the years ended December 31, 20162018 and 2015,2017, respectively.  Redemption rates were 11.1%13.9% and 9.1%15.6% for our retail broker-dealer channel in the same periods, reflecting the higher rate of transferability of investment assets in the retail unaffiliated channel.  However, the modernization of our brokerage and advisory platforms and products and the introduction of additional unaffiliated investment products in our advisory programs, as well as changes resulting from the DOLpossible implementation of new fiduciary standard,standards, may result in a higher redemption rate in our retail broker-dealer channel, as independent financial advisorsAdvisors may move to sell more unaffiliated products.  An increase in the sale of unaffiliated mutual funds compared to sales of the Funds in our Funds by independent financial advisorsbroker-dealer channel may reduce profits, as sales of unaffiliated mutual funds are less profitable than sales of our Funds.  See “Legal, Regulatory and Tax Risks.”

Fee Pressures Could Reduce Our Revenues And Profitability. There is an accelerating trend toward lower fees in some segments of the investment management business. The SEC has adopted rules that are designed to alter mutual fund corporate governance, which could result in further downward pressure on investment advisory fees in the mutual fund industry. Investors and clients are increasingly fee sensitive. Active management continues to experience pressure by increased flows to lower fee passive products.  This trend will resulthas resulted in pressure on active management firms to reduce fees to compete with passive products.  The DOLNew fiduciary standardstandards could increase fee pressure as financial advisors may have more fee sensitivity given their new fiduciary role.  In addition, competition could cause us to reduce the fees we charge for products and services.  In the event that competitors charge lower fees for substantially similar products, we may be forced to compete on the basis of price in order to attract and retain customers.clients.  Effective July 31, 2018, we implemented fee reductions in selected mutual funds.  The investment management agreements with the Funds continue in effect from year to year only if such continuation is approved at least annually by the Funds’ board of trustees. Periodic review of these advisory agreements could result in a reduction in investment management fee revenues received from the Funds. Accordingly, there can be no assurance that we will be able to maintain our current fee structure.  Fee reductions on existing or future new business could reduce our operating revenues and may adversely affect our business, future revenue and profitability.

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

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

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

products are sold by independent financial advisors in our retail broker-dealer channel. Our growth prospects are directly affected by the quality, quantity and productivity of financial advisors we are able to successfully recruit and who continue to manage their independent practices through their association with us.

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

There May Be Adverse Effects On Our Business Upon The Termination Of, Or Failure To Renew, Certain Agreements.  A majority of our revenues are derived from investment management agreements with the Funds that, as required by law, are terminable on 60 days’ notice. Each investment management agreement must be approved and renewed annually by the disinterested members of each Fund’s board of trustees or its shareholders, as required by law.  Additionally, our investment management agreements provide for automatic termination in the event of assignment, which includes a change of control, without the consent of our clients and, in the case of the Funds, approval of the Funds’ board of directors/trustees and shareholders to continue the agreements.  agreements.  There can be no assurances that our clients will consent to any assignment of our investment management agreements, or that those and other contracts will not be terminated or will be renewed on favorable terms, if at all, at their expiration and new agreements may not be available.  See “Item. 1 Business – Distribution Channels – Retail Unaffiliated Distribution Channel” and “Institutional Channel.”  The decrease in revenues that could result from any such event could have a material adverse effect on our business.

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

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

type could lead to a loss of confidence in similar products offered by us, irrespective of the performance of our products. Any loss of confidence in a product type could lead to redemptions in such products, which may cause the Company’s assets under managementAUM to decline and materially affect our business.

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

Regulations Restricting TheRestrictions On Our Inability To Use Of “Soft Dollars” Could Result In An Increase In Our Expenses. On behalf of our mutual fund and investment advisory clients, we make decisions to buy and sell securities for each portfolio, select broker-dealers to execute trades, and negotiate brokerage commission rates. In connection with these transactions, we may receive “soft dollar credits” from broker-dealers that we can use to defray certain of our research and brokerage expenses consistent with Section 28(e) of the Investment CompanySecurities Exchange Act of 1940,1934, as amended (the “1940 Act”). If regulations are adopted eliminating theamended. We may be limited in our ability of asset managers to use “soft dollars,”. If our use of “soft-dollars” decreases or is eliminated, including due to the adoption of regulations, our operating expenses could increase. The Markets in Financial Instruments Directive II (“MiFID II”), which was effective in Europe in January 2018, regulates the use of “soft dollars” to pay for research and other services. Although MiFID II does not apply to our investment management business in the United States, it may result in changes to industry practice that limits our use of “soft dollars”.

LEGAL, REGULATORY AND TAX RISKS

Regulatory Risk Is Substantial In Our Business And Regulatory Reforms Could Have A Material Adverse Effect On Our Business, Reputation And Prospects.    Virtually all aspects of our business, including the activities of our parent company and our investment advisory and broker-dealer subsidiaries, are heavily regulated, primarily at the federal level.  See Item 1 – “Business – Regulation.” The regulatory environment in which we operate frequently changes and has seen a significant increase in regulation in recent years. Various changes in laws and regulations have been enacted or otherwise developed in response to the crisis in the financial markets that began in 2007. Various other proposals remain under consideration by legislators, regulators, and other government officials and public policy commentators. Certain enacted provisions and certain other proposals are potentially far reaching and, depending upon their implementation,years, which could have a material adverse effect on our business.

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

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

The Department Of Labor’s New Fiduciary Regulations Could Result In Material Changes In Our Business Model, Operations And Procedures, Including Our Distribution Channels And Product Offerings, Which Could Have A Material Adverse Effect On Our Business and Results Of Operations.  On April 8, 2016, the DOL published the DOL Fiduciary Rule, 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

business, including employment-related claims.  See Item 3 – “Legal Proceedings.”  We are exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations

financial and personal information. Misconduct by our employees or by independent financial advisorsAdvisors could result in violations of law, regulatory sanctions and/or serious reputational or financial harm. Misconduct that could occur includes: (i) binding us to transactions that exceed authorized limits; (ii) hiding unauthorized or unsuccessful activities resulting in unknown and unmanaged risks or losses; (iii) improperly using, disclosing or otherwise compromising confidential information; (iv) recommending transactions that are not suitable; (v) engaging in fraudulent or otherwise improper activity, including the misappropriation of funds; (vi) engaging in unauthorized or excessive trading to the detriment of customers;clients; or (vii) otherwise not complying with laws, regulations or our control procedures.  Although we have implemented a system of internal controls to minimize the risk of misconduct, there can be no assurance that our controls or precautions to detect and prevent misconduct will be effective in all cases. Preventing and detecting misconduct among independent financial advisors,Advisors, who are not employees, presents additional challenges.  We could be liable in the event of misconduct by employees or independent financial advisorsAdvisors and we could also be subject to regulatory sanctions. Although we believe that we have adequately insured against these risks, there can be no assurance that our insurance will be maintained or that it will be adequate to meet any liability resulting from these activities.  Any damage to the trust and confidence placed in us by our clients may cause our assets under managementAUM to decline, which could adversely affect our reputation, business and prospects and lead to a material adverse effect on our business, results of operations or financial condition.

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

TECHNOLOGY AND OPERATIONAL RISKS

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

The systems upon which we rely upon to conduct our business may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other third party

service providers that we use to facilitate, or are component providers to, our brokerage operations, securities transactions and other product manufacturing and distribution activities.  Any such failure, termination or constraint could adversely

could require a substantial amount of time. During all this time we might not know the extent of the harm or how best to remediate it, and errors or omissions could be repeated or compounded before being discovered and remediated, all of which could aggravate the costs and consequences of the intrusion. Most of the software applications that we use in our business are licensed from, and supported, upgraded and maintained by, third party vendors. A suspension or termination of certain of these licenses or the related support, upgrades and maintenance could cause

particularly if they result in adverse mainstream and social media publicity, governmental investigations or litigation. Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us.

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

revenues earned from such contracts, significant changes in our business and products, material and ongoing negative industry or economic trends, or other factors specific to each asset or subsidiary being tested.  Because of the significance of goodwill and other intangibles to our consolidated balance sheets, the impairment analysis is critical. Any changes in key assumptions about our business and our prospects, or changes in market conditions or other externalities, could result in an impairment charge.  Any such charge could have a material effect on our results of operations.

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

and/or note purchase agreement, the banks could elect to declare the outstanding principal amount of the Credit Facility, all interest thereon, and all other amounts payable under the Credit Facility to be immediately due and payable, and the Company’s obligations under the senior unsecured notes could be accelerated and become due and payable, including any make-whole amount, respectively.

Our ability to meet our cash needs and satisfy our debt obligations will depend upon our future operating performance, asset values, the perception of our creditworthiness and, indirectly, the market value of our stock. These factors willmay be affected by prevailing economic, financial and business conditions and other circumstances, some of which

to provide us with cash. There can be no assurance that the current quarterly dividend level will be maintained or that we will pay any dividends in any future period. Any change in the level of our dividends or the suspension of the payment of dividends could adversely affect our stock price.  See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Provisions Of Our Organizational Documents Could Deter Takeover Attempts, Which Some Of Our Stockholders May Believe To Be In Their Best Interest. Under our Restated Certificate of Incorporation, our Board of Directors has the authority, without action by our stockholders, to fix certain terms and issue shares of our Preferred Stock,

operating results, financial condition, cash and capital requirements, compliance with covenants in the Credit Facility, note purchase agreement and such other factors as the Board of Directors deems relevant. To the extent assets are used to meet minimum net capital requirements under the Net Capital Rule, they are not available for distribution to stockholders as dividends. See Part I, Item 1. “Business—Regulation.” We anticipate that quarterly dividends will continue to be paid. See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Common Stock Repurchases

Our Board of Directors has authorized the repurchase of our common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in our stock‑basedshare-based compensation programs. During the year ended December 31, 2016,2018, we repurchased 2,320,7266,963,269 shares in the open market and privately at an aggregate cost, including commissions, of $49.8$135.9 million, including 423,726729,882 shares repurchased from employees to cover their tax withholdings from the vesting of shares granted under our stock‑share‑based compensation programs. The aggregateprograms at a cost of shares obtained from related parties during 2016 was $9.2$14.5 million. The purchase price paid by us for private repurchases of our common stock from related parties is the closing market price on the purchase date.

The following table sets forth certain information about the shares of common stock we repurchased during the fourth quarter of 2016.2018:

Total Return Performance

Comparison of Cumulative Total Return (1)

The above graph compares the cumulative total stockholder return on the Company’s common stock from December 31, 20112013 through December 31, 2016,2018 with the cumulative total return of the Standard & Poor’s 500 Stock Index and the SNL Asset Manager Index. The SNL Asset Manager Index is a composite of 4241 publicly traded asset management companies (including, among others, the companies in the peer group reviewed by the Compensation Committee for executive compensation purposes) prepared by SNL Financial, Charlottesville, Virginia.S&P Global Market Intelligence. The graph assumes the investment of $100 in the Company’s common stock and in each of the two indices on December 31, 20112013 with all dividends being reinvested. The closing price of the Company’s common stock on December 31, 20112013 was $24.77$65.12 per share. The stock price performance on the graph is not necessarily indicative of future price performance.

ITEM 6.      Selected Financial Data

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

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

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

Executive OverviewStrategic Initiatives

In 2017, we announced an actionable plan around four strategic pillars.  These pillars include (1) strengthening our investment management resources, processes and results; (2) reinvigorating our product line and sales; (3) continuing the evolution of our broker-dealer to a self-sustaining, fully competitive and profitable entity; and (4) making investments in support of our evolving business model, while improving efficiency. The following includes highlights of our progress to-date.

To strengthen our investment management resources, processes and results, we are working to align investment management resources and our philosophy toward the strongest growth opportunities, key products and new initiatives, and to fortify the foundation of our active management heritage.  Over the course of 2018, we continued to invest in our people, technology resources, and risk management capabilities.  We continue to move towards team-based portfolio management of the Funds, and have fortified our research team with additional investment analysts, while continuing to foster a collaborative culture across our investment management professionals. We are encouraged by recent performance improvements, in fact, despite market volatility in the fourth quarter of 2018, relative investment performance at year-end 2018 improved compared to the prior year across much of our complex.

To reinvigorate our product line and sales, we continue to manage the product line dynamically to respond to the competitive environment and opportunities for growth, and are directing sales activities to the best opportunities across product, channel, distributor and advisor. In 2018, we completed the merger of the remaining Advisors Funds into Ivy Funds, resulting in operational efficiency and added fund-level scale. We also announced and completed the merger of six Ivy Funds and one Ivy VIP fund into other Ivy Funds, and one Ivy VIP fund, respectively, with generally similar investment objectives, creating more economies of scale for the benefit of fund shareholders.  Finally, we implemented fee reductions in selected mutual funds, effective July 31, 2018, as we continue to focus on strategies where we feel we are best positioned to compete.  Although there are many factors at play, net outflows have slowed 9% year-over-year on a reported basis and 24% excluding the outsized impact of Institutional flows due to personnel changes.

To continue the evolution of our broker-dealer to a self-sustaining, fully competitive and profitable entity, we are improving competitiveness by evolving the platform and product offerings and moving to an industry standard compensation and services model. During 2018, we further realigned our field resources and announced plans to exit leased field real-estate, while enhancing our Advisor payout grid to what we believe is best-in-class.  We continue to direct efforts around a field services model focused on delivering robust practice development, while expanding recruiting efforts and creating a diamond service group for top Advisors. We also continue to enhance the technology platform and launched plans for an advisor technology platform that integrates all of our enterprise technology applications and provides a desktop solution where Advisors can manage all aspects of their business, allowing Advisors to work efficiently and seamlessly.

To focus investment in support of our evolving business model, while improving efficiency, we are advancing our culture by further investing in our people through talent management, while ensuring our resources are aligned in the most productive and effective manner as we build a framework for long-term success. Additionally, we introduced an enterprise project management organization (PMO) and related project processes and governance, and are driving targeted allocation and efficient utilization of corporate resources. We continue to focus on long-term controllable expenses, which includes compensation, general and administrative, technology, occupancy and marketing and advertising costs.  We’ve made considerable progress on this front, achieving our previously stated goal of adding $30 million, on a run-rate basis, to pre-tax income by the end of 2018, and having reduced controllable expenses nearly 8% since 2015, while making targeted investments in growth areas.

Operating Results

We are one of the oldest mutual fund and asset management firmsearned $1.2 billion in the country, with expertiserevenues 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 decreases2018, which was relatively unchanged as compared to 2017. Average AUM were $78.3 billion in the various securities markets can have a material impact on2018 compared to $81.0 billion in 2017. Net income attributable to Waddell & Reed Financial, Inc. increased 30% compared to 2017, while our results of operations, financial condition and cash flows.operating margin was relatively unchanged from 2017.

Revenue Sources

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, portfolio accounting and administration fees, and is earned based on assets under management or number of client accounts.

Expense Drivers

Our major expenses are for commissions, employee compensation, field services, dealer services and information technology.

Our Distribution Channels

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 advisers and various retirement platforms or through our retail broker-dealer channel and associated W&R financial advisors. Through our institutional channel, we distribute a variety of investment styles for a variety of types of institutions.

Through our retail unaffiliated distribution channel, we distribute retail mutual funds through broker-dealers, registered investment advisers and various retirement platforms through a team of external, internal and hybrid wholesalers as well as a team dedicated to national accounts.

The Ivy Funds maintain strong positions on many of the leading third party distribution platforms, and we continue efforts to diversify our sales. During 2016, we had seven funds exceed gross sales of $250 million. We expect the retail unaffiliated distribution channel to be critical in driving our organic growth rate in the coming years.

In our retail broker-dealer channel, 1,780 W&R financial advisors are spread throughout the United States, who provide financial advice for retirement, education funding, estate planning and other financial needs for our clients. A distinguishing aspect of this channel is its low redemption rate, which can be attributed to the personal and customized nature in which W&R advisors provide service to our clients by focusing on meeting their long‑term financial objectives; this, in turn, leads to a more stable asset base for the channel.

Through our institutional channel we manage assets in a variety of investment styles for a variety of types of institutions as well as the IGI Funds. The largest percentage of our clients hire us to act as subadviser for their branded products; they are typically domestic or foreign distributors of investment products who lack scale or the track record to manage internally, or choose to market multi‑manager styles. Our subadvisory relationships accounted for more than 60%

of the channel’s $7.9 billion in assets at the end of 2016. Our diverse client list also includes pension funds, Taft‑Hartley plans and endowments.

Strategic Initiatives

In 2016, we announced the modernizing of our brokerage and product platform, which included the restructuring of our share classes. This new platform moved us from a paper‑based, labor intensive environment to one utilizing innovative brokerage platform technology, which we expect to enhance both advisor and back‑office efficiency. As part of this effort, we converted load‑waived Class A shares into the more widely used institutional shares (Class I or Y) as the exclusive share classes in our investment advisory programs. This step is consistent with industry trends and will allow us to compete more effectively for investment advisory assets. The share class conversion occurred in July of 2016, and the platform launched in the fourth quarter of 2016. In 2017, we will continue the implementation of significant enhancements to our investment advisory programs and financial planning capabilities, referred to internally as “Project E.”  We believe that Project E positions the retail broker-dealer channel for long‑term competitiveness.

In 2016, operating results decreased $5.4 million due to one‑time costs associated with Project E, and a reduction of $3.9 million in our Rule 12b‑1 asset‑based service and distribution fee revenue, net of underwriting and distribution expenses following the conversion of assets under management in our investment advisory programs from load‑waived Class A shares to institutional share classes. Load‑waived Class A shares held in advisory programs have historically charged a maximum fee of 0.25% of the average daily net assets under management pursuant to the applicable Rule 12b‑1 service and distribution plan; institutional share classes do not charge a Rule 12b‑1 fee. Since the Company currently pays a large portion of the Rule 12b‑1 service and distribution fees it receives from load‑waived Class A share mutual funds held in advisory program accounts to the financial advisors servicing and distributing the shares, the impact of the loss of Rule 12b‑1 fee revenue is partially offset by the corresponding reduction in Rule 12b‑1 fee payments to be made to financial advisors.

To offset the decrease in 2016 operating income, we successfully executed a significant cost reduction effort and reduced fixed costs by 9% on an annual run‑rate basis.

On April 8, 2016, the DOL Fiduciary Rule was published. The final rule has a phased implementation from April 10, 2017 through January 1, 2018. We incurred $2.4 million in implementation costs related to this rule during 2016 and anticipate a range of $8.0 to $12.0 million in implementation costs during 2017, which includes filing a registration statement with the SEC to register five new index funds, the first passively managed funds offered by the Company.  These estimates could be impacted should the rule be delayed, withdrawn or modified. For additional discussion regarding the impact of the DOL Fiduciary Rule, please see the Legal, Regulatory and Tax risk factors included in Item 1A – “Risk Factors” in this annual report.

Operating Results

The Company ended the year with $1.2 billion in revenues. The revenue decrease of 18% relative to 2015 was reflective of a decrease in our average managed assets of 24%, partially offset by an increase in the average management fee rate. Average assets under management were $88.8 billion in 2016 compared to $117.6 billion in 2015. Net income attributable to Waddell & Reed Financial, Inc. decreased 40% compared to 2015 while our operating margin declined to 19.1% from 27.4%.

Our balance sheet remains strong, as we ended the year with cash and investments of $883.9 million. At December 31, 2016, we had$837.9 million, excluding noncontrolling interests. There were no borrowings outstanding under the Credit Facility.Facility at December 31, 2018 or at any point during the year.

Assets Under Management

Assets under managementAUM of $80.5$65.8 billion onat December 31, 20162018 decreased $23.9$15.3 billion, or 23%19%, compared to $104.4$81.1 billion onat December 31, 2015.2017. The decrease in assets under managementAUM is primarily due to net outflows of $25.3$10.4 billion and market depreciation of which $15.6 billion was in the retail unaffiliated distribution channel, partially offset by market appreciation of $1.4$4.9 billion.

Average assets under management,AUM, which are generally more indicative of trends in revenue for providingfrom investment management services than the year over year change in ending assets under management,AUM, decreased by 24%3% compared to 2015.2017.

Average Assets Under Management

The following table summarizes our five largest mutual funds as of December 31, 2018 by ending AUM and investment management fees, with the comparative positions in 2017 and 2016. The AUM and management fees of these mutual funds are presented as a percentage of our total AUM and total management fees. The increase in AUM in the Ivy Science & Technology, Ivy Mid Cap Growth and Ivy Large Cap Growth Funds is primarily due to the Advisors Fund mergers during the first quarter of 2018.

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