10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2014

OR

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

For the transition period from               to              

Commission file number 001-13913

WADDELL & REED FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	51-0261715
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

6300 Lamar Avenue

Overland Park, Kansas  66202

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

(913) 236-2000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filerx	Accelerated filer o
Non-accelerated filer o	Smaller reporting companyo
(Do not check if a smaller reporting company)

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

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

Class	Outstanding as of July 25, 2014
Class A common stock, $.01 par value	84,460,812

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended June 30, 2014

				Page No.
Part I.	Financial Information
Item 1.			Financial Statements (unaudited)
			Consolidated Balance Sheets at June 30, 2014 and December 31, 2013	3
			Consolidated Statements of Income for the three and six months ended June 30, 2014 and June 30, 2013	4
			Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and June 30, 2013	5
			Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2014	6
			Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and June 30, 2013	7
			Notes to the Unaudited Consolidated Financial Statements	8
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.			Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.			Controls and Procedures	35
Part II.		Other Information
Item 1.			Legal Proceedings	36
Item 1A.			Risk Factors	36
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.			Exhibits	37
			Signatures	38

2

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

	June 30,
	2014			December 31,
	(unaudited)			2013
Assets:
Cash and cash equivalents	$	507,693		487,845
Cash and cash equivalents - restricted	88,962			121,419
Investment securities	217,352			201,348
Receivables:
Funds and separate accounts	38,682			36,467
Customers and other	205,204			141,763
Deferred income taxes	5,845			7,654
Income taxes receivable	5,404			419
Prepaid expenses and other current assets	14,350			9,410
Total current assets	1,083,492			1,006,325
Property and equipment, net	82,952			72,638
Deferred sales commissions, net	80,249			79,894
Goodwill and identifiable intangible assets	161,969			161,969
Deferred income taxes	3,916			3,839
Other non-current assets	24,429			12,300
Total assets	$	1,437,007		1,336,965
Liabilities:
Accounts payable	$	19,582		18,821
Payable to investment companies for securities	125,227			214,085
Payable to third party brokers	62,632			59,756
Payable to customers	115,570			8,664
Accrued compensation	65,660			58,677
Other current liabilities	48,487			59,726
Total current liabilities	437,158			419,729
Long-term debt	190,000			190,000
Accrued pension and postretirement costs	12,226			13,333
Other non-current liabilities	25,300			26,561
Total liabilities	664,684			649,623
Commitments and contingencies
Stockholders’ equity:
Preferred stock-$1.00 par value: 5,000 shares authorized; none issued	—			—
Class A Common stock-$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 84,732 shares outstanding (85,236 at December 31, 2013)	997			997
Additional paid-in capital	299,063			267,406
Retained earnings	950,660			850,600
Cost of 14,969 common shares in treasury (14,465 at December 31, 2013)	(464,641		)	(415,802	)
Accumulated other comprehensive loss	(13,756		)	(15,859	)
Total stockholders’ equity	772,323			687,342
Total liabilities and stockholders’ equity	$	1,437,007		1,336,965

See accompanying notes to the unaudited consolidated financial statements.

3

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Income

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

	For the three months					For the six months
	ended June 30,					ended June 30,
	2014			2013		2014		2013
Revenues:
Investment management fees	$	193,624		156,219		381,661		304,664
Underwriting and distribution fees	169,001			141,597		334,268		277,016
Shareholder service fees	38,009			33,890		75,121		66,581
Total	400,634			331,706		791,050		648,261
Operating expenses:
Underwriting and distribution	195,608			164,844		390,559		326,415
Compensation and related costs (including share-based compensation of $14,593, $13,330, $27,679 and $25,006, respectively)	48,589			47,376		98,598		95,531
General and administrative	27,183			26,938		50,939		43,146
Subadvisory fees	2,069			4,291		3,946		8,775
Depreciation	3,541			3,222		6,790		6,449
Total	276,990			246,671		550,832		480,316
Operating income	123,644			85,035		240,218		167,945
Investment and other income	6,100			1,002		10,000		5,379
Interest expense	(2,755		)	(2,858	)	(5,510	)	(5,712	)
Income before provision for income taxes	126,989			83,179		244,708		167,612
Provision for income taxes	44,001			31,222		86,856		61,792
Net income	$	82,988		51,957		157,852		105,820
Net income per share, basic and diluted:	$	0.98		0.61		1.86		1.23
Weighted average shares outstanding:
Basic	85,073			85,869		85,046		85,731
Diluted	85,073			85,869		85,046		85,732

See accompanying notes to the unaudited consolidated financial statements.

4

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

	For the three months				For the six months
	ended June 30,				ended June 30,
	2014		2013		2014	2013
Net income	$	82,988	51,957		157,852	105,820
Other comprehensive income:
Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $4, $(18), $2 and $(9), respectively	2,170		(3,403	)	1,471	(625	)
Pension and postretirement benefits, net of income tax expense of $167, $595, $372 and $1,153, respectively	285		592		632	1,438
Comprehensive income	$	85,443	49,146		159,955	106,633

See accompanying notes to the unaudited consolidated financial statements.

5

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 30, 2014

(Unaudited, in thousands)

										Accumulated
				Additional						Other		Total
	Common Stock			Paid-in		Retained		Treasury		Comprehensive		Stockholders’
	Shares	Amount		Capital		Earnings		Stock		Income (Loss)		Equity
Balance at December 31, 2013	99,701	$	997	267,406		850,600		(415,802	)	(15,859	)	687,342
Net income	—	—		—		157,852		—		—		157,852
Recognition of equity compensation	—	—		27,679		—		—		—		27,679
Net issuance/forfeiture of nonvested shares	—	—		(12,883	)	—		12,883		—		—
Dividends accrued, $0.68 per share	—	—		—		(57,792	)	—		—		(57,792	)
Excess tax benefits from share-based payment arrangements	—	—		16,861		—		—		—		16,861
Repurchase of common stock	—	—		—		—		(61,722	)	—		(61,722	)
Other comprehensive income	—	—		—		—		—		2,103		2,103
Balance at June 30, 2014	99,701	$	997	299,063		950,660		(464,641	)	(13,756	)	772,323

See accompanying notes to the unaudited consolidated financial statements.

6

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

	For the six months
	ended June 30,
	2014			2013
Cash flows from operating activities:
Net income	$	157,852		105,820
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	6,906			6,962
Amortization of deferred sales commissions	32,967			27,453
Share-based compensation	27,679			25,006
Excess tax benefits from share-based payment arrangements	(16,861		)	(6,285	)
Gain on sale of available for sale investment securities	(2,586		)	(5,662	)
Net purchases and sales or maturities of trading securities	(18,269		)	(27,391	)
Gain on trading securities	(5,508		)	(28	)
Loss on sale and retirement of property and equipment	1,058			132
Capital gains and dividends reinvested	(9		)	(45	)
Deferred income taxes	1,357			(3,452	)
Changes in assets and liabilities:
Cash and cash equivalents - restricted	32,457			(15,391	)
Other receivables	(63,441		)	5,426
Payable to investment companies for securities and payable to customers	18,048			2,300
Receivables from funds and separate accounts	(2,215		)	(4,480	)
Other assets	(9,743		)	(4,099	)
Deferred sales commissions	(33,322		)	(32,304	)
Accounts payable and payable to third party brokers	3,637			(1,439	)
Other liabilities	(899		)	(884	)
Net cash provided by operating activities	$	129,108		71,639
Cash flows from investing activities:
Purchases of available for sale investment securities	(52,941		)	(104,279	)
Proceeds from sales and maturities of available for sale investment securities	64,666			117,522
Additions to property and equipment	(18,161		)	(7,073	)
Disposition of companies	—			22,000
Net cash provided by (used in) investing activities	$	(6,436	)	28,170
Cash flows from financing activities:
Dividends paid	(57,963		)	(48,083	)
Repurchase of common stock	(61,722		)	(36,843	)
Exercise of stock options	—			135
Excess tax benefits from share-based payment arrangements	16,861			6,285
Net cash used in financing activities	$	(102,824	)	(78,506	)
Net increase in cash and cash equivalents	19,848			21,303
Cash and cash equivalents at beginning of period	487,845			330,330
Cash and cash equivalents at end of period	$	507,693		351,633

See accompanying notes to the unaudited consolidated financial statements.

7

WADDELL & REED FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.Description of Business and Significant Accounting Policies

Waddell & Reed Financial, Inc. and Subsidiaries

Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the “Company,” “we,” “our” and “us”) derive revenues from investment management services, investment product underwriting and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Group of Mutual Funds (the “Advisors Funds”), Ivy Funds (the “Ivy Funds”), Ivy Funds Variable Insurance Portfolios (the “Ivy Funds VIP”) and InvestEd Portfolios (“InvestEd”) (collectively, the Advisors Funds, Ivy Funds, Ivy Funds VIP and InvestEd are referred to as the “Funds”), and institutional and separately managed accounts.  The Funds and the institutional and separately managed accounts operate under various rules and regulations set forth by the United States Securities and Exchange Commission (the “SEC”).  Services to the Funds are provided under investment management agreements, underwriting agreements and shareholder servicing and accounting service agreements that set forth the fees to be charged for these services.  The majority of these agreements are subject to annual review and approval by each Fund’s board of trustees.  Our revenues are largely dependent on the total value and composition of assets under management.  Accordingly, fluctuations in financial markets and composition of assets under management can significantly impact revenues and results of operations.

Basis of Presentation

We have prepared the accompanying unaudited consolidated financial statements included herein pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented.  The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”).

The accompanying unaudited consolidated financial statements are prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements included in our 2013 Form 10-K, which include the following: use of estimates, cash and cash equivalents, disclosures about fair value of financial instruments, investment securities and investments in affiliated mutual funds, property and equipment, software developed for internal use, goodwill and identifiable intangible assets, deferred sales commissions, revenue recognition, advertising and promotion, share-based compensation and accounting for income taxes.

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at June 30, 2014, the results of operations for the three and six months ended June 30, 2014 and 2013, and cash flows for the six months ended June 30, 2014 and 2013 in conformity with accounting principles generally accepted in the United States.

2.Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and short-term investments.  We consider all highly liquid investments with maturities upon acquisition of 90 days or less to be cash equivalents.  Cash and cash equivalents — restricted represents cash held for the benefit of customers segregated in compliance with federal and other regulations.

8

3.Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”.  This ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will supersede much of the existing revenue recognition guidance in accounting principles generally accepted in the United States.  This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted.  ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method.  The Company is evaluating which transition method to apply and the estimated impact the adoption of this ASU will have on our consolidated financial statements.

4.Investment Securities

Investment securities at June 30, 2014 and December 31, 2013 are as follows:

	Amortized		Unrealized	Unrealized
June 30, 2014	cost		gains	losses		Fair value
	(in thousands)
Available for sale securities:
Corporate bonds	$	3,018	6	—		3,024
Affiliated mutual funds	116,723		6,498	(27	)	123,194
	$	119,741	6,504	(27	)	126,218
Trading securities:
Mortgage-backed securities						34
Corporate bonds						2,991
Common stock						58
Affiliated mutual funds						88,051
						91,134
Total investment securities						$	217,352

	Amortized		Unrealized	Unrealized
December 31, 2013	cost		gains	losses		Fair value
	(in thousands)
Available for sale securities:
Mortgage-backed securities	$	8	1	—		9
Corporate bonds	14,568		61	—		14,629
Affiliated mutual funds	87,710		5,899	(957	)	92,652
	$	102,286	5,961	(957	)	107,290
Trading securities:
Mortgage-backed securities						37
Municipal bonds						501
Corporate bonds						9,412
Common stock						60
Affiliated mutual funds						84,048
						94,058
Total investment securities						$	201,348

Purchases of trading securities during the six months ended June 30, 2014 were $80.5 million. Sales and maturities of trading securities were $62.3 million for the same period.

9

A summary of available for sale affiliated mutual funds with fair values below carrying values at June 30, 2014 and December 31, 2013 is as follows:

	Less than 12 months			12 months or longer			Total
June 30, 2014	Fair value		Unrealized losses	Fair value	Unrealized losses		Fair value	Unrealized losses
	(in thousands)
Affiliated mutual funds	$	—	—	1,187	(27	)	1,187	(27	)
Total temporarily impaired securities	$	—	—	1,187	(27	)	1,187	(27	)

	Less than 12 months				12 months or longer			Total
December 31, 2013	Fair value		Unrealized losses		Fair value	Unrealized losses		Fair value	Unrealized losses
	(in thousands)
Affiliated mutual funds	$	29,598	(939	)	213	(18	)	29,811	(957	)
Total temporarily impaired securities	$	29,598	(939	)	213	(18	)	29,811	(957	)

Based upon our assessment of these affiliated mutual funds, the time frame the funds have been in a loss position, and our intent to hold affiliated mutual funds until they have recovered, we determined that a write-down was not necessary at June 30, 2014.

Corporate bonds accounted for as available for sale and held as of June 30, 2014 mature as follows:

	Amortized cost		Fair value
	(in thousands)
Within one year	$	3,018	3,024
	$	3,018	3,024

Mortgage-backed securities and corporate bonds accounted for as trading and held as of June 30, 2014 mature as follows:

	Fair value
	(in thousands)
Within one year	$	2,991
After five years but within 10 years	34
	$	3,025

10

Accounting standards establish a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of the asset.  Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset.  An individual investment’s fair value measurement is assigned a level based upon the observability of the inputs that are significant to the overall valuation.  The three-level hierarchy of inputs is summarized as follows:

·Level 1 — Investments are valued using quoted prices in active markets for identical securities.

·Level 2 — Investments are valued using other significant observable inputs, including quoted prices in active markets for similar securities.

·Level 3 — Investments are valued using significant unobservable inputs, including the Company’s own assumptions in determining the fair value of investments.

Assets classified as Level 2 can have a variety of observable inputs.  These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches depending upon the specific asset to determine a value.  The fair value of municipal bonds is measured based on pricing models that take into account, among other factors, information received from market makers and broker/dealers, current trades, bid-wants lists, offerings, market movements, the callability of the bond, state of issuance and benchmark yield curves. The fair value of corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer.

Securities’ values classified as Level 3 are primarily determined through the use of a single quote (or multiple quotes) from dealers in the securities using proprietary valuation models.  These quotes involve significant unobservable inputs, and thus, the related securities are classified as Level 3 securities.

The following tables summarize our investment securities as of June 30, 2014 and December 31, 2013 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

June 30, 2014	Level 1		Level 2	Level 3	Total
	(in thousands)
Mortgage-backed securities	$	—	34	—	34
Corporate bonds	—		6,015	—	6,015
Common stock	58		—	—	58
Affiliated mutual funds	211,245		—	—	211,245
Total	$	211,303	6,049	—	217,352

December 31, 2013	Level 1		Level 2	Level 3	Total
	(in thousands)
Mortgage-backed securities	$	—	46	—	46
Municipal bonds	—		501	—	501
Corporate bonds	—		24,041	—	24,041
Common stock	60		—	—	60
Affiliated mutual funds	176,700		—	—	176,700
Total	$	176,760	24,588	—	201,348

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5.Goodwill and Identifiable Intangible Assets

Goodwill represents the excess of purchase price over the tangible assets and identifiable intangible assets of an acquired business.  Our goodwill is not deductible for tax purposes.  As of June 30, 2014, the Company’s annual impairment test indicated that goodwill and identifiable intangible assets were not impaired.  Goodwill and identifiable intangible assets (all considered indefinite lived) are as follows:

	June 30, 2014		December 31, 2013
	(in thousands)
Goodwill	$	106,970	106,970
Mutual fund management advisory contracts	38,699		38,699
Mutual fund management subadvisory contracts	16,300		16,300
Total identifiable intangible assets	54,999		54,999
Total	$	161,969	161,969

6.Indebtedness

Debt is reported at its carrying amount in the consolidated balance sheets.  The fair value of the Company’s outstanding indebtedness is approximately $210.0 million at June 30, 2014 compared to the carrying value of $190.0 million.  Fair value is calculated based on Level 2 inputs.

7.Income Tax Uncertainties

As of January 1, 2014 and June 30, 2014, the Company had unrecognized tax benefits, including penalties and interest, of $12.0 million ($8.4 million net of federal benefit) and $13.1 million ($9.1 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate.  The unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities in the accompanying consolidated balance sheets; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable.

The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes.  As of January 1, 2014, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $3.0 million ($2.5 million net of federal benefit).  The total amount of penalties and interest, net of federal benefit, related to income tax uncertainties recognized in the statement of income for the six month period ended June 30, 2014 was $0.3 million.  The total amount of accrued penalties and interest related to uncertain tax positions at June 30, 2014 of $3.4 million ($2.8 million net of federal benefit) is included in the total unrecognized tax benefits described above.

In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain.  In addition, respective tax authorities periodically audit our income tax returns.  These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions.  The 2010, 2011, 2012 and 2013 federal income tax returns are open tax years that remain subject to potential future audit.  State income tax returns for all years after 2009 and, in certain states, income tax returns prior to 2010, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.

The Company is currently being audited in various state jurisdictions.  It is reasonably possible that the Company will settle the audits in these jurisdictions within the next 12-month period.  It is estimated that the Company’s liability for unrecognized tax benefits, including penalties and interest, could decrease by up to $0.3 million (up to $0.2 million net of federal benefit) upon settlement of these audits.  Such settlements are not anticipated to have a significant impact on the results of operations.

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8.Pension Plan and Postretirement Benefits Other Than Pension

We provide a non-contributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”).  Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final 10 years of employment.  We also sponsor an unfunded defined benefit postretirement medical plan that covers retirees through the age of 65, including substantially all employees, as well as Waddell & Reed advisors who are independent contractors.  The medical plan is contributory with participant contributions adjusted annually.  The medical plan does not provide for post age 65 benefits with the exception of a small group of employees that were grandfathered when such plan was established.

The components of net periodic pension and other postretirement costs related to these plans are as follows:

	Pension Benefits					Other Postretirement Benefits			Pension Benefits				Other Postretirement Benefits
	Three months ended June 30,					Three months ended June 30,			Six months ended June 30,				Six months ended June 30,
	2014			2013		2014		2013	2014		2013		2014		2013
	(in thousands)								(in thousands)
Components of net periodic benefit cost:
Service cost	$	2,317		2,556		180		197	5,042		5,506		360		394
Interest cost	2,045			1,903		99		90	4,198		3,855		198		180
Expected return on plan assets	(3,595		)	(2,889	)	—		—	(7,008	)	(5,593	)	—		—
Actuarial (gain) loss amortization	337			1,034		(4	)	—	748		2,284		(8	)	—
Prior service cost amortization	104			139		14		14	234		278		28		28
Transition obligation amortization	1			1		—		—	2		2		—		—
Total(1)	$	1,209		2,744		289		301	3,216		6,332		578		602

(1) Approximately 60% of net periodic pension and other postretirement benefit costs are included in Compensation and related costs on the consolidated statements of income, while the remainder are included in Underwriting and distribution expense.

During the first six months of 2014, we contributed $20.0 million to the Pension Plan.  We do not expect to make additional contributions for the remainder of 2014.

13

9.Stockholders’ Equity

Earnings per Share

The components of basic and diluted earnings per share were as follows:

	Three months ended			Six months ended
	June 30,			June 30,
	2014		2013	2014	2013
	(in thousands, except per share amounts)
Net income	$	82,988	51,957	157,852	105,820
Weighted average shares outstanding - basic	85,073		85,869	85,046	85,731
Dilutive potential shares from stock options	—		—	—	1
Weighted average shares outstanding - diluted	85,073		85,869	85,046	85,732
Earnings per share basic and diluted	$	0.98	0.61	1.86	1.23

Dividends

On April 16, 2014, the Board of Directors (the “Board”) approved a dividend on our common stock in the amount of $0.34 per share to stockholders of record as of July 11, 2014 to be paid on August 1, 2014.  The total dividend to be paid is approximately $28.8 million and is included in other current liabilities in the consolidated balance sheet at June 30, 2014.

Common Stock Repurchases

The Board 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-based compensation programs.

There were 628,022 shares and 789,177 shares repurchased in the open market or privately during the three months ended June 30, 2014 and 2013, respectively, which included 423,452 shares and 464,177 shares repurchased from employees tendering shares to cover their minimum income tax withholdings with respect to vesting of stock awards during the three months ended June 30, 2014 and 2013, respectively.  There were 908,208 shares and 870,878 shares repurchased in the open market or privately during the six months ended June 30, 2014 and 2013, respectively, which included 426,119 shares and 466,778 shares repurchased from employees tendering shares to cover their minimum income tax withholdings with respect to vesting of stock awards during each of these two periods.

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Accumulated Other Comprehensive Income (Loss)

The following tables summarize other comprehensive income (loss) activity for the three and six months ended June 30, 2014 and June 30, 2013.

Three months ended June 30, 2014	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at March 31, 2014	$	2,709		552		(19,472	)	(16,211	)
Other comprehensive income before reclassification	2,253			1,317		—		3,570
Amount reclassified from accumulated other comprehensive income	(884		)	(516	)	285		(1,115	)
Net current period other comprehensive income	1,369			801		285		2,455
Balance at June 30, 2014	$	4,078		1,353		(19,187	)	(13,756	)

Three months ended June 30, 2013	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at March 31, 2013	$	3,567		1,066		(47,806	)	(43,173	)
Other comprehensive income before reclassification	(89		)	(69	)	—		(158	)
Amount reclassified from accumulated other comprehensive income	(2,047		)	(1,198	)	592		(2,653	)
Net current period other comprehensive income (loss)	(2,136		)	(1,267	)	592		(2,811	)
Balance at June 30, 2013	$	1,431		(201	)	(47,214	)	(45,984	)
Six months ended June 30, 2014	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at December 31, 2013	$	3,150		810		(19,819	)	(15,859	)
Other comprehensive income before reclassification	2,557			1,494		—		4,051
Amount reclassified from accumulated other comprehensive income	(1,629		)	(951	)	632		(1,948	)
Net current period other comprehensive income	928			543		632		2,103
Balance at June 30, 2014	$	4,078		1,353		(19,187	)	(13,756	)

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Six months ended June 30, 2013	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at December 31, 2012	$	1,823		32		(48,652	)	(46,797	)
Other comprehensive income before reclassification	3,190			1,865		—		5,055
Amount reclassified from accumulated other comprehensive income	(3,582		)	(2,098	)	1,438		(4,242	)
Net current period other comprehensive income (loss)	(392		)	(233	)	1,438		813
Balance at June 30, 2013	$	1,431		(201	)	(47,214	)	(45,984	)

Reclassifications from accumulated other comprehensive income (loss) and included in net income are summarized in the tables that follow.

	For the three months ended June 30, 2014
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	1,404		(520	)	884		Investment and other income
Valuation allowance	—			516		516		Provision for income taxes
Amortization of pension and postretirement benefits	(452		)	167		(285	)	Underwriting and distribution expense and Compensation and related costs
Total	$	952		163		1,115

	For the three months ended June 30, 2013
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	3,236		(1,189	)	2,047		Investment and other income
Valuation allowance	—			1,198		1,198		Provision for income taxes
Amortization of pension and postretirement benefits	(1,187		)	595		(592	)	Underwriting and distribution expense and Compensation and related costs
Total	$	2,049		604		2,653

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	For the six months ended June 30, 2014
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	2,586		(957	)	1,629		Investment and other income
Valuation allowance	—			951		951		Provision for income taxes
Amortization of pension and postretirement benefits	(1,004		)	372		(632	)	Underwriting and distribution expense and Compensation and related costs
Total	$	1,582		366		1,948

	For the six months ended June 30, 2013
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	5,662		(2,080	)	3,582		Investment and other income
Valuation allowance	—			2,098		2,098		Provision for income taxes
Amortization of pension and postretirement benefits	(2,591		)	1,153		(1,438	)	Underwriting and distribution expense and Compensation and related costs
Total	$	3,071		1,171		4,242

10.Share-Based Compensation

On April 2, 2014, we granted 742,141 shares of nonvested stock with a fair value of $75.96 per share under the Company’s 1998 Stock Incentive Plan, as amended and restated (the “SI Plan”).  The value of those shares at the grant date, aggregating to $56.4 million, will generally be amortized to expense over a four year vesting period.

11.Contingencies

The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate.  A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.

The Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated.  These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in light of new information.  For contingencies where an unfavorable outcome is reasonably possible and that are significant, the Company discloses the nature of the contingency and, where feasible, an estimate of the possible loss.  For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items that management believes should be disclosed.  Management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general.  These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates and the financial markets and other conditions.  These statements are generally identified by the use of such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature.  Readers are cautioned that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance.  Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below.  If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected.  Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013, which include, without limitation:

·The loss of existing distribution channels or inability to access new distribution channels;

·A reduction in assets under our management on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures;

·The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;

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

·Our inability to provide sufficient capital to support new investment products;

·The ability of mutual fund and other investors to redeem their investments without prior notice or on short notice;

·Our inability to implement new information technology and systems, or inability to complete such implementation in a timely or cost effective manner;

·Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;

·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; and

·Our inability to attract and retain senior executive management and other key personnel to conduct our broker/dealer, fund management and investment management advisory business.

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, 2013 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2014.  All forward-looking statements

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speak only as 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.

Overview

Founded in 1937, we are one of the oldest mutual fund complexes in the United States, with expertise in a broad range of investment styles and across a variety of market environments.  Our earnings and cash flows are heavily dependent on financial market conditions.  Significant increases or decreases in the various securities markets can have a material impact on our results of operations, financial condition and cash flows.

We derive our revenues from providing investment management services, investment product underwriting and distribution, and shareholder services administration to mutual funds and institutional and separately managed accounts. Investment management 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 Rule 12b-1 asset-based service and distribution fees, fees earned on fee-based asset allocation products and related advisory services, 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 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.  Our major expenses are commissions, employee compensation, field support, dealer services expense and information technology expense.

One of our distinctive qualities is that we distribute our investment products through a balanced distribution network. Our retail products are distributed through our Wholesale channel, which includes third-parties such as other broker/dealers, registered investment advisors and various retirement platforms, and through our Advisors channel sales force of independent financial advisors.  Through the Institutional channel, we serve as sub-advisor for domestic and foreign distributors of investment products and manage investments for pension funds, Taft-Hartley plans and endowments.

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Second Quarter Highlights

·In April, we launched the Ivy Emerging Markets Local Currency Debt Fund, subadvised by Pictet Asset Management.  The fund provides investors the opportunity to capture fixed income opportunities from a select group of emerging market economies.

·In May, we signed a fund adoption transaction agreement with Emerging Managers Group (“EMG”) through which Ivy Investment Management Company will take over responsibility as investment adviser and Ivy Funds Distributor, Inc. as distributor of the Selector Management Fund SICAV (collectively, Ivy Investment Management Company and Ivy Funds Distributor, Inc. are referred to as “Ivy”).  This agreement, which received regulatory approval in July and is expected to close during the third quarter, will allow Ivy to serve the non-resident customer market through national broker-dealer firms in the United States and establish a greater international distribution of Ivy’s investment management capabilities.

·Operating revenues of $400.6 million increased $68.9 million, or 21%, compared to the second quarter of 2013.

·Operating income of $123.6 million increased $38.6 million, or 45%, compared to the second quarter of 2013, and net income of $83.0 million increased $25.7 million, or 45%, over this same period, when excluding costs from the launch of the Ivy High Income Opportunities closed-end fund in 2013.

·Our operating margin was 30.9%, an improvement from 25.6% for the same period a year ago.

·Our assets under management increased 30% from $104.3 billion at June 30, 2013 to $135.6 billion at June 30, 2014.

·Company-wide sales exceeded $100.0 million for eleven investment strategies, including two investment strategies for which sales exceeded $500.0 million and two investment strategies for which sales exceeded $1.0 billion.

·Sales increased 10% to $7.5 billion for the second quarter of 2014 compared to the same period in 2013.

·Our balance sheet remains solid, and we ended the quarter with cash and investments of $725.0 million.

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Assets Under Management

Assets under management increased to $135.6 billion compared to $104.3 billion on June 30, 2013.

Change in Assets Under Management(1)

	Second Quarter 2014
	Wholesale			Advisors		Institutional		Total
	(in millions)
Beginning Assets	$	70,467		44,224		16,692		131,383
Sales(2)	4,864			1,457		1,193		7,514
Redemptions	(4,363		)	(1,098	)	(851	)	(6,312	)
Net Exchanges	(397		)	(88	)	485		—
Net Flows	104			271		827		1,202
Market Appreciation	1,100			1,302		646		3,048
Ending Assets	$	71,671		45,797		18,165		135,633
	Second Quarter 2013
	Wholesale			Advisors		Institutional		Total
	(in millions)
Beginning Assets	$	53,254		37,915		12,626		103,795
Sales(2)	5,030			1,403		379		6,812
Redemptions	(3,983		)	(1,083	)	(811	)	(5,877	)
Net Exchanges	61			(61	)	—		—
Net Flows	1,108			259		(432	)	935
Market Appreciation (Depreciation)	(502		)	(2	)	118		(386	)
Ending Assets	$	53,860		38,172		12,312		104,344

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Assets under management increased to $135.6 billion at June 30, 2014 compared to $126.5 billion on December 31, 2013 due to inflows of $5.9 billion and market appreciation of $3.2 billion.

	Year to Date 2014
	Wholesale			Advisors		Institutional		Total
	(in millions)
Beginning Assets	$	67,055		43,667		15,821		126,543
Sales(2)	11,881			2,892		2,747		17,520
Redemptions	(7,925		)	(2,204	)	(1,530	)	(11,659	)
Net Exchanges	(285		)	(200	)	485		—
Net Flows	3,671			488		1,702		5,861
Market Appreciation	945			1,642		642		3,229
Ending Assets	$	71,671		45,797		18,165		135,633

	Year to Date 2013
	Wholesale			Advisors		Institutional		Total
	(in millions)
Beginning Assets	$	48,930		35,660		11,775		96,365
Sales(2)	10,072			2,706		809		13,587
Redemptions	(7,140		)	(2,130	)	(1,280	)	(10,550	)
Net Exchanges	127			(127	)	—		—
Net Flows	3,059			449		(471	)	3,037
Market Appreciation	1,871			2,063		1,008		4,942
Ending Assets	$	53,860		38,172		12,312		104,344

(1)Includes all activity of the Funds and institutional and separate accounts, including money market funds and transactions at net asset value, accounts for which we receive no commissions.

(2)Primarily gross sales (net of sales commission), but also includes net reinvested dividends and capital gains and investment income.

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Average assets under management, which are generally more indicative of trends in revenue for providing investment management services than the quarter over quarter change in ending assets under management, are presented below.

Average Assets Under Management

	Second Quarter 2014
	Wholesale		Advisors	Institutional	Total
	(in millions)
Asset Class:
Equity	$	55,679	32,547	16,410	$	104,636
Fixed Income	14,254		9,903	785	24,942
Money Market	167		2,066	—	2,233
Total	$	70,100	44,516	17,195	$	131,811

	Second Quarter 2013
	Wholesale		Advisors	Institutional	Total
	(in millions)
Asset Class:
Equity	$	42,685	27,404	12,003	$	82,092
Fixed Income	11,236		9,700	735	21,671
Money Market	174		1,404	—	1,578
Total	$	54,095	38,508	12,738	$	105,341

	Year to Date 2014
	Wholesale		Advisors	Institutional	Total
	(in millions)
Asset Class:
Equity	$	55,367	32,498	15,975	$	103,840
Fixed Income	13,820		9,761	710	24,291
Money Market	176		1,996	—	2,172
Total	$	69,363	44,255	16,685	$	130,303

	Year to Date 2013
	Wholesale		Advisors	Institutional	Total
	(in millions)
Asset Class:
Equity	$	41,875	26,834	11,741	$	80,450
Fixed Income	10,859		9,648	766	21,273
Money Market	171		1,387	—	1,558
Total	$	52,905	37,869	12,507	$	103,281

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Results of Operations — Three and Six Months Ended June 30, 2014 as Compared with Three and Six Months Ended June 30, 2013

Net Income

	Three months ended
	June 30,
	2014			2013		Variance
Net Income	$	82,988		51,957		60	%
Earnings per share, basic and diluted	$	0.98		0.61		61	%
Operating Margin	30.9		%	25.6	%	21	%

	Six months ended
	June 30,
	2014			2013		Variance
Net Income	$	157,852		105,820		49	%
Earnings per share, basic and diluted	$	1.86		1.23		51	%
Operating Margin	30.4		%	25.9	%	17	%

Total Revenues

Total revenues increased 21% to $400.6 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 due to an increase in average assets under management of 25% and an increase in sales of 10%.  For the six months ended June 30, 2014, total revenues increased $142.8 million, or 22% compared to the same period in the prior year due to an increase in average assets under management of 26%, and an increase in sales of 29%.

	Three months ended
	June 30,
	2014		2013	Variance
	(in thousands, except percentage data)
Investment management fees	$	193,624	156,219	24	%
Underwriting and distribution fees	169,001		141,597	19	%
Shareholder service fees	38,009		33,890	12	%
Total revenues	$	400,634	331,706	21	%

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	Six months ended
	June 30,
	2014		2013	Variance
	(in thousands, except percentage data)
Investment management fees	$	381,661	304,664	25	%
Underwriting and distribution fees	334,268		277,016	21	%
Shareholder service fees	75,121		66,581	13	%
Total revenues	$	791,050	648,261	22	%

Investment Management Fee Revenues

Investment management fee revenues are earned for providing investment advisory services to the Funds and to institutional and separate accounts.  Investment management fee revenues increased $37.4 million, or 24%, from last year’s second quarter.  For the six month period ended June 30, 2014, investment management fee revenues increased $77.0 million, or 25%, compared to the same period in 2013.

Revenues from investment management services provided to our retail mutual funds, which are distributed through the Wholesale and Advisors channels, were $179.0 million for the quarter ended June 30, 2014.  Revenues increased $34.6 million, or 24%, compared to the second quarter of 2013, while the related retail average assets increased 24% to $114.6 billion. Management fee waivers of $2.8 and $2.4 million were recorded as an offset to investment management fees for the periods ending June 30, 2014 and June 30, 2013, respectively. Of the total management fee waivers recorded, $2.1 million was related to money market accounts for the second quarter of 2014 and $1.5 million was related to money market accounts for the second quarter of 2013.  For the six months ended June 30, 2014, revenues from investment management services provided to our retail mutual funds were $353.0 million.  Revenues increased $71.8 million, or 26%, compared to the first six months of 2013, while the related retail average assets increased 25% to $113.6 billion.  Management fee waivers of $5.6 and $4.6 million were recorded as an offset to investment management fees for the six months ending June 30, 2014 and June 30, 2013, respectively. Of the total management fee waivers recorded, $4.0 million was related to money market accounts for the first six months of 2014 and $2.9 million was related to money market accounts for the first six months of 2013.

Institutional account revenues were $14.6 million for the second quarter of 2014, representing an increase of $2.8 million, or 24%, from the second quarter of 2013, while average assets increased 35%.  For the six month period ended June 30, 2014, institutional account revenues were $28.7 million, an increase of 22% compared to the same period in 2013, and average assets increased 33%.  For both periods, account revenues increased less than the related average assets due to a decline in the average management fee rate.  The decline in the average management fee rate was driven by a mix-shift of assets into investment styles and account types with lower management fee rates.

Long-term redemption rates (which exclude money market fund redemptions) in the Wholesale channel were 25.1% in the second quarter of 2014 and 23.1% year-to-date, compared to 29.4% in the second quarter of 2013 and 27.1% for the first six months of 2013.  In the Advisors channel, long-term redemption rates were 7.9% for the quarter ended June 30, 2014 compared to 9.1% in the second quarter of 2013.   For the six months ended June 30, 2014, the Advisor channel’s long-term redemption rate decreased to 8.1% compared to 9.3% for the same period in 2013.  We expect the Advisors channel long-term redemption rate to remain lower than that of the industry average due to the personal and customized nature in which our financial advisors provide service to our clients by focusing on meeting their long-term financial objectives.  Long-term redemption rates for our Institutional channel were 19.9% and 25.5% for the second quarter of 2014 and 2013, respectively, and 18.5% for the six month period ended June 30, 2014 compared to 20.6% for the same period in 2013.

Our overall redemption rate of 17.5% for the first six months of 2014 compares positively to the current year to date industry average of approximately 23%, based on data from the Investment Company Institute.

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Underwriting and Distribution Fee Revenues and Expenses

The following tables summarize our underwriting and distribution fee revenues and expenses segregated by distribution method within the respective Wholesale or Advisors channel:

	Second Quarter 2014
	Wholesale			Advisors		Total
	(in thousands)
Revenue	$	60,237		108,764		169,001
Expenses - Direct	(76,834		)	(76,867	)	(153,701	)
Expenses - Indirect	(12,791		)	(29,116	)	(41,907	)
Net Distribution (Costs)/Excess	$	(29,388	)	2,781		(26,607	)

	Second Quarter 2013
	Wholesale			Advisors		Total
	(in thousands)
Revenue	$	49,846		91,751		141,597
Expenses - Direct	(64,694		)	(62,794	)	(127,488	)
Expenses - Indirect	(11,229		)	(26,127	)	(37,356	)
Net Distribution (Costs)/Excess	$	(26,077	)	2,830		(23,247	)

	Year to Date 2014
	Wholesale			Advisors		Total
	(in thousands)
Revenue	$	119,801		214,467		334,268
Expenses - Direct	(156,534		)	(151,564	)	(308,098	)
Expenses - Indirect	(24,326		)	(58,135	)	(82,461	)
Net Distribution (Costs)/Excess	$	(61,059	)	4,768		(56,291	)

	Year to Date 2013
	Wholesale			Advisors		Total
	(in thousands)
Revenue	$	98,021		178,995		277,016
Expenses - Direct	(128,242		)	(122,451	)	(250,693	)
Expenses - Indirect	(22,229		)	(53,493	)	(75,722	)
Net Distribution (Costs)/Excess	$	(52,450	)	3,051		(49,399	)

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The following tables summarize the significant components of underwriting and distribution fee revenues segregated by distribution channel:

	Second Quarter 2014
	Wholesale		Advisors	Total
	(in thousands)
Underwriting and distribution fee revenues
Rule 12b-1 service and distribution fees	$	57,712	30,200	87,912
Fee-based asset allocation product revenues	—		49,348	49,348
Sales commissions on front-end load mutual fund and variable annuity sales	1,638		17,134	18,772
Sales commissions on other products	—		6,443	6,443
Other revenues	887		5,639	6,526
Total	$	60,237	108,764	169,001

	Second Quarter 2013
	Wholesale		Advisors	Total
	(in thousands)
Underwriting and distribution fee revenues
Rule 12b-1 service and distribution fees	$	47,654	25,986	73,640
Fee-based asset allocation product revenues	—		37,042	37,042
Sales commissions on front-end load mutual fund and variable annuity sales	1,282		18,287	19,569
Sales commissions on other products	—		5,150	5,150
Other revenues	910		5,286	6,196
Total	$	49,846	91,751	141,597

	Year to Date 2014
	Wholesale		Advisors	Total
	(in thousands)
Underwriting and distribution fee revenues
Rule 12b-1 service and distribution fees	$	114,504	59,131	173,635
Fee-based asset allocation product revenues	—		96,695	96,695
Sales commissions on front-end load mutual fund and variable annuity sales	3,670		34,266	37,936
Sales commissions on other products	—		12,804	12,804
Other revenues	1,627		11,571	13,198
Total	$	119,801	214,467	334,268

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	Year to Date 2013
	Wholesale		Advisors	Total
	(in thousands)
Underwriting and distribution fee revenues
Rule 12b-1 service and distribution fees	$	93,867	50,781	144,648
Fee-based asset allocation product revenues	—		71,949	71,949
Sales commissions on front-end load mutual fund and variable annuity sales	2,406		34,967	37,373
Sales commissions on other products	—		10,796	10,796
Other revenues	1,748		10,502	12,250
Total	$	98,021	178,995	277,016

Underwriting and distribution revenues earned in the second quarter of 2014 increased by $27.4 million, or 19%, compared with the second quarter of 2013.  Rule 12b-1 asset based service and distribution fees increased $14.3 million, or 19%, quarter over quarter driven by a 20% increase in average mutual fund assets under management for which we earn revenues.  Approximately 75% of Rule 12b-1 revenues earned are a pass-through to direct underwriting and distribution expenses.  In our Advisors channel, revenues from fee-based asset allocation products continued to be a meaningful contributor to revenues, increasing to 45% of Advisor channel underwriting and distribution revenues in the second quarter of 2014 compared to 40% in the second quarter of 2013.  Fee-based asset allocation assets grew from $11.8 billion at June 30, 2013 to $16.4 billion at June 30, 2014, generating an increase of fee-based asset allocation revenue of $12.3 million, or 33%, as advisors increasingly utilize fee-based programs for their clients.

For the six months ended June 30, 2014, underwriting and distribution revenues increased $57.3 million, or 21%, compared with the six months ended June 30, 2013.  Rule 12b-1 asset based service and distribution fees increased $29.0 million, or 20%, compared to the first six months of 2013, driven by a 21% increase in average mutual fund assets under management for which we earn revenues.  In our Advisors channel, revenues from fee-based asset allocation products increased $24.7 million, or 34%, compared to the prior year.

Underwriting and distribution expenses increased by $30.8 million, or 19%, compared to the second quarter of 2013.  Direct expenses in the Wholesale channel increased by $12.1 million due to increased average wholesale assets under management year over year, which resulted in higher dealer compensation and Rule 12b-1 asset-based service and distribution expenses paid to third-party distributors.  In the Advisors channel, direct expenses grew faster than revenue due to increased advisor payouts.  Across both channels, indirect expenses increased $4.6 million, or 12%, compared to the quarter ended June 30, 2013, primarily due to increased field management compensation, computer services and software expenses and marketing expenses.

For the six months ended June 30, 2014, underwriting and distribution expenses increased by $64.1 million, or 20%, compared to the first six months of 2013.  Direct expenses in the Wholesale channel increased by $28.3 million as a result of an increase in average wholesale assets under management and higher sales volume year over year.  We incurred higher dealer compensation and Rule 12b-1 asset-based service and distribution expenses paid to third-party distributors and higher wholesaler commissions.  In the Advisors channel, direct expenses grew faster than revenue due to increased advisor payouts.  Indirect expenses, across both channels, increased $6.7 million, or 9%, compared with the first six months of 2013, primarily due to increased field management compensation, computer services and software expenses and marketing expenses.

Shareholder Service Fee Revenue

Shareholder service fee revenue primarily includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees.  Transfer agency fees and portfolio accounting and administration fees are asset-based revenues or account-based revenues, while custodian fees from retirement plan accounts are based on the number of client accounts.

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During the second quarter of 2014, shareholder service fee revenue increased $4.1 million, or 12%, over the second quarter of 2013. Asset-based fees increased $3.5 million, or 30%, for the same time period in the I, Y and R share classes. Assets in the I, Y and R share classes grew from a quarterly average of $22.7 billion at June 30, 2013 to an average of $31.1 billion at June 30, 2014, representing an increase of 37%.  Account-based fees increased $0.7 million quarter over quarter due to a 7% increase in the number of accounts compared to the second quarter in 2013.  For the six month period ended June 30, 2014, shareholder service fee revenue increased $8.5 million, or 13%, compared to the same period in 2013.  For the same time period, asset-based fees increased $7.0 million, or 31%.  Assets in the I, Y and R share classes grew from an average of $22.0 billion at June 30, 2013 to an average of $30.6 billion at June 30, 2014, representing an increase of 39%.  Account-based fees increased $1.7 million compared to the first six months of 2013 due to a 7% increase in the number of accounts compared to the same period in 2013.

Total Operating Expenses

Operating expenses increased $30.3 million, or 12%, in the second quarter of 2014 compared to the second quarter of 2013, primarily due to increased underwriting and distribution expenses.  For the six months ended June 30, 2014, operating expenses increased $70.5 million, or 15%, compared to the first six months of 2013, primarily due to increased underwriting and distribution expenses and general and administrative costs.  Underwriting and distribution expenses are discussed above.

	Three Months Ended
	June 30,
	2014		2013	Variance
	(in thousands, except percentage data)
Underwriting and distribution	$	195,608	164,844	19	%
Compensation and related costs	48,589		47,376	3	%
General and administrative	27,183		26,938	1	%
Subadvisory fees	2,069		4,291	-52	%
Depreciation	3,541		3,222	10	%
Total operating expenses	$	276,990	246,671	12	%

	Six Months Ended
	June 30,
	2014		2013	Variance
	(in thousands, except percentage data)
Underwriting and distribution	$	390,559	326,415	20	%
Compensation and related costs	98,598		95,531	3	%
General and administrative	50,939		43,146	18	%
Subadvisory fees	3,946		8,775	-55	%
Depreciation	6,790		6,449	5	%
Total operating expenses	$	550,832	480,316	15	%

Compensation and Related Costs

On April 2, 2014, we granted 742,141 shares of nonvested stock with a fair value of $75.96 per share under the SI Plan.  The value of those shares at the grant date, aggregating $56.4 million, will generally be amortized to expense over a four year vesting period.

Compensation and related costs increased $1.2 million, or 3%, compared to the second quarter of 2013.     Share-based compensation increased $1.3 million due to higher amortization expense associated with our April 2014 and December 2013 grants of nonvested stock compared to grants that became fully vested in 2013.  Adjustments to the forfeiture rate during the second quarter of 2014 partially offset the share-based compensation increase.  Base salaries and payroll taxes increased $1.4 million due to increased headcount and annual salary increases. Offsetting the increases were lower incentive compensation expense and pension expense.

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For the six months ended June 30, 2014, compensation and related costs increased $3.1 million, or 3%, compared to the first six months of 2013. Share-based compensation increased $2.7 million due to higher amortization expense associated with our April 2014 and December 2013 grants of nonvested stock compared to grants that became fully vested in 2013.  Adjustments to the forfeiture rate in 2014 partially offset the share-based compensation increase.  Base salaries and payroll taxes increased $2.4 million due to increased headcount and annual salary increases. Offsetting the increases were lower incentive compensation expense and pension expense.

General and Administrative Costs

General and administrative expenses increased $0.2 million to $27.2 million for the second quarter of 2014, compared to the second quarter of 2013.  Included in the second quarter of 2013 were one-time structuring, offering and organizational costs for the launch of the Ivy High Income Opportunities Fund in the amount of $6.6 million.  Excluding these charges in 2013, general and administrative costs increased $6.8 million.  The increase is due to increased technology consulting and computer services and software costs related to the acceleration of technology infrastructure initiatives, as well as increased dealer services costs, legal costs and temporary office staff expenses.  A majority of dealer services costs represent pass-through costs to third party dealers and are based on higher asset levels in certain share classes.

For the six months ended June 30, 2014, general and administrative expenses increased $7.8 million to $50.9 million, compared to the same period in 2013.  Excluding the items detailed above in 2013, general and administrative expenses increased $14.4 million.  The increase is primarily due to increased legal and technology consulting costs, increased dealer service costs on higher asset levels in certain share classes, increased temporary office staff expense, increased computer service and software costs and increased fund expenses.

Subadvisory Fees

Subadvisory fees represent fees paid to other asset managers for providing advisory services for certain mutual fund portfolios.  Gross management fee revenues for products subadvised by others were $3.9 million for the three months ended June 30, 2014 compared to $8.5 million for the second quarter of 2013 due to a 49% decrease in subadvised average net assets.  The decrease in subadvised average net assets is a result of internalizing the management of the Global Natural Resources funds after the portfolio manager’s retirement from Mackenzie Financial Corporation, the subadvisor, during the third quarter of 2013.  For the six months ended June 30, 2014, gross management fee revenues for products subadvised by others were $7.5 million compared to $17.4 million for the same period in 2013 due to a 51% decrease in average net assets.  Subadvisory expenses followed the same pattern of decrease compared to 2013.

Subadvised ending assets under management at June 30, 2014 were $2.1 billion compared to $4.0 billion at June 30, 2013.

Other Income and Expenses

Investment and Other Income, Interest Expense and Taxes

Investment and other income was $6.1 million for the quarter ended June 30, 2014, compared to $1.0 million in the same period a year ago.  We recorded realized gains of $1.4 million on the sale of available for sale mutual fund holdings during the current quarter compared to $3.2 million in the second quarter of 2013. In our mutual fund trading portfolio, we recorded mark-to-market gains of $3.6 million during the quarter compared to losses of $2.1 million for the three months ended June 30, 2013.  We recorded mutual fund dividend income of $0.8 million during the current quarter compared to $0.5 million in the second quarter of 2013.  We recorded losses to our investment in a limited partnership of $1.0 million in the second quarter of 2013.

For the six months ended June 30, 2014 and 2013, investment and other income was $10.0 million and $5.4 million, respectively.  We recorded realized gains of $2.6 million on the sale of available for sale mutual fund holdings during the first six months of 2014, compared to $5.7 million during the first six months of 2013.  In our mutual fund trading portfolio, we recorded mark-to-market gains of $5.5 million in

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2014, compared to gains of $0.1 million in 2013. We recorded mutual fund dividend income of $1.2 million during the first six months of 2014, compared to $0.7 million during the same period in 2013.  The first six months of 2013 included a $1.8 million loss related to the Company’s investment in a limited partnership.

Interest expense was $2.8 million and $2.9 million in the second quarter of 2014 and 2013, respectively, and $5.5 million and $5.7 million for the six month periods ended June 30, 2014 and 2013, respectively.

Our effective income tax rate was 34.6% for the second quarter of 2014, as compared to 37.5% for the second quarter of 2013.  Due to the sale of a subsidiary in 2013, the Company has deferred tax assets related to capital loss carryforwards, which are available to offset current and future capital gains.  A valuation allowance was recorded on this capital loss when realized due to the extent that this loss exceeded available capital gains. The valuation allowance was necessary due to the limited carryforward period permitted by law on losses of this character.  During the second quarter of 2014, an increase in the fair value of the Company’s trading securities portfolio and realized capital gains on securities classified as available for sale allowed for a release of the valuation allowance, thereby reducing income tax expense by $1.8 million.  Additionally, the Company initiated a transaction that recharacterized tax losses on a limited partnership investment from capital to ordinary, thereby releasing the valuation allowance and reducing income tax expense by $1.5 million.  During the second quarter of 2013, realized capital gains on securities classified as available for sale released the valuation allowance and reduced income tax expense by $0.1 million.

The second quarter 2014 and 2013 effective income tax rates, removing the effects of the valuation allowance, would have been 37.3% and 37.7%, respectively.  The adjusted effective tax rate in the second quarter of 2014 was lower primarily due to higher pretax book income, which diluted the impact of nondeductible expenses.  Additionally, the Company generated larger state tax incentives in 2014 as compared to 2013.

Our effective income tax rate was 35.5% for the six months ended June 30, 2014, as compared to 36.9% for the six months ended June 30, 2013.  During 2014, an increase in the Company’s trading securities portfolio and realized capital gains on securities classified as available for sale allowed for a release of the valuation allowance, thereby reducing income tax expense by $3.0 million.  Additionally, the Company initiated a transaction that recharacterized tax losses on a limited partnership investment from capital to ordinary, thereby releasing the valuation allowance and reducing income tax expense by $1.5 million.  During 2013, realized capital gains on the sale of securities classified as available for sale released the valuation allowance and reduced income tax expense by $1.5 million.

Removing the effects of the valuation allowance for the six months ended June 30, 2014 and 2013, the effective income tax rate would have been 37.3% and 37.8%, respectively.  The adjusted effective tax rate in 2014 was lower primarily due to higher pretax book income, which diluted the impact of nondeductible expenses.  Additionally, the Company generated larger state tax incentives in 2014 as compared to 2013.

The Company expects its future effective tax rate, exclusive of any increases or reductions to the valuation allowance, state tax incentives, unanticipated state tax legislative changes, and unanticipated fluctuations in earnings to range from 37% to 39%.

Liquidity and Capital Resources

Our operations provide much of the cash necessary to fund our priorities, as follows:

·Finance internal growth

·Pay dividends

·Repurchase our stock

Finance Internal Growth

We use cash to fund growth in our distribution channels.  Our Wholesale channel requires cash outlays for wholesaler commissions and commissions to third parties on deferred load product sales.  We continue to invest in our Advisors channel by providing additional support to our advisors through home office resources, wholesaling efforts and enhanced technology tools.

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We are currently investing in technology initiatives to modernize and optimize our technology environment.  Initiatives underway include upgrading our infrastructure, network and security, moving to distributed applications and building system architecture.

Pay Dividends

We paid quarterly dividends on our common stock that resulted in financing cash outflows of $58.0 million and $48.1 million for the first six months of 2014 and 2013, respectively.

Repurchase Our Stock

We repurchased 908,208 shares and 870,878 shares of our common stock in the open market or privately during the six months ended June 30, 2014 and 2013, respectively, resulting in cash outflows of $61.7 million and $36.8 million, respectively.

Operating Cash Flows

Cash from operations, our primary source of funds, increased $57.5 million for the six months ended June 30, 2014 compared to the previous year.  The increase is primarily due to increased net income compared to the same period in 2013.

During the first six months of 2014, we contributed $20.0 million to the Pension Plan.  We do not expect to make additional contributions for the remainder of the year.

Investing Cash Flows

Investing activities consist primarily of the purchase, sale and maturities of available for sale investment securities, as well as capital expenditures.  We expect our 2014 capital expenditures to be in the range of $25.0 to $35.0 million.  Related to the sale of a subsidiary, we received cash proceeds of $22.0 million during the first quarter of 2013.

Financing Cash Flows

As noted previously, dividends and stock repurchases accounted for a majority of our financing cash outflows in the first six months of 2014 and 2013.

Future Capital Requirements

Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund its short-term operating and capital requirements.  Expected short-term uses of cash include dividend payments, interest payments on outstanding debt, income tax payments, seed money for new products, share repurchases, payment of deferred commissions to our financial advisors and third-parties, capital expenditures and home office leasehold improvements, and could include strategic acquisitions.

Expected long-term capital requirements include indebtedness, operating leases and purchase obligations, and potential settlement of tax liabilities.  Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure and home office expansion, strategic acquisitions, payment of dividends, income tax payments, seed money for new products, payment of upfront fund commissions for Class C shares and certain fee-based asset allocation products, pension funding and repurchases of our common stock.

Critical Accounting Policies and Estimates

Management believes certain critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.  The Company’s critical accounting policies and estimates are disclosed in the “Critical Accounting Policies and Estimates” section of our 2013 Form 10-K.

Our indefinite life intangible asset balance includes $16.3 million related to our subadvisory agreement to manage certain mutual fund products for Mackenzie Financial Corporation (“MFC”) recorded in connection with our purchase of Mackenzie Investment Management, Inc. in 2002.  As part of purchase

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accounting, a deferred tax liability was established related to this identifiable intangible asset.  As of June 30, 2014, the associated deferred tax liability is $6.0 million.

The fair value of this intangible asset exceeded its carrying amount by 5% when performing our annual testing for impairment during the second quarter of 2014, which represented a decline in the percentage in which the fair value exceeded the carrying amount when compared to the previous year.  The decline can be attributed to a realignment of MFC’s fund offerings that resulted in a reduction in assets and associated cash flows from this relationship during the second quarter.  Subsequent to June 30, 2014, a mutual fund managed for MFC was fully redeemed.  It is possible that there may be plans to further reduce the assets we manage for MFC, which will require us to assess a potential writedown of the intangible asset during the next quarter.

The fair value of our other indefinite life intangible asset exceeded its carrying value by more than 100%.  Related to goodwill, the fair value of the reporting unit also exceeded its carrying value by more than 100%.

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Supplemental Information

	Second			Second				Year to			Year to
	Quarter			Quarter				Date			Date
	2014			2013		Change		2014			2013		Change
Channel highlights
Number of wholesalers	60			50		20.0	%	60			50		20.0	%
Number of advisors	1,740			1,734		0.3	%	1,740			1,734		0.3	%
Advisor productivity (in thousands)(1)	$	62.4		53.1		17.5	%	$	123.3		103.6		19.0	%
Redemption rates - long term assets
Wholesale	25.1		%	29.4	%			23.1		%	27.1	%
Advisors	7.9		%	9.1	%			8.1		%	9.3	%
Institutional	19.9		%	25.5	%			18.5		%	20.6	%
Total	18.7		%	21.7	%			17.5		%	19.9	%
Operating highlights
Organic growth annualized	3.7		%	3.6	%			9.3		%	6.3	%
Total assets under management (in millions)	$	135,633		104,344		30.0	%	$	135,633		104,344		30.0	%
Operating margin	30.9		%	25.6	%			30.4		%	25.9	%
Diversification (company total)
As % of Sales
Asset Strategy	26.3		%	28.5	%			30.3		%	31.0	%
Fixed Income	25.4		%	30.4	%			24.2		%	30.5	%
Other	48.3		%	41.1	%			45.5		%	38.5	%
As % of Assets Under Management
Asset Strategy	32.9		%	33.4	%			32.9		%	33.4	%
Fixed Income	18.7		%	19.9	%			18.7		%	19.9	%
Other	48.4		%	46.7	%			48.4		%	46.7	%
Shareholder service fees
Average assets for I, Y, and R share classes (in millions)	$	31,134		22,683		37.3	%	$	30,586		21,952		39.3	%
Number of shareholder accounts (in thousands)	4,454			4,180		6.6	%	4,454			4,180		6.6	%

(1)Advisors’ productivity is calculated by dividing underwriting and distribution revenues for the Advisors channel by the average number of advisors during the year.

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Item 3.           Quantitative and Qualitative Disclosures About Market Risk

The Company has had no significant changes in its Quantitative and Qualitative Disclosures About Market Risk from that previously reported in the Company’s 2013 Form 10-K.

Item 4.           Controls and Procedures

The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report, have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

The Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

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Part II.  Other Information

Item 1.           Legal Proceedings

The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to the business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.

Item 1A.        Risk Factors

The Company has had no material changes to its Risk Factors from those previously reported in the Company’s 2013 Form 10-K.

Item 2.           Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth certain information about the shares of common stock we repurchased during the second quarter of 2014.

Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Program
April 1 - April 30	386,165	$	75.96	386,165	n/a	(1)
May 1 - May 31	200,000	60.61		200,000	n/a	(1)
June 1 - June 30	41,857	61.92		41,857	n/a	(1)
Total	628,022	$	70.13	628,022

(1)On August 31, 1998, we announced that our Board of Directors approved a program to repurchase shares of our common stock on the open market.  Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding common stock or (ii) $50 million of our common stock.  We may repurchase our common stock through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems.  Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased.  Our Board of Directors reviewed and ratified the stock repurchase program in October 2012.  During the second quarter of 2014, all stock repurchases were made pursuant to the repurchase program and 423,452 shares, reflected in the table above, were purchased in connection with funding employee income tax withholding obligations arising from the vesting of nonvested shares.

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Item 6.           Exhibits

10.1Release of All Claims, dated June 17, 2014, by and between Daniel P. Connealy and Waddell & Reed Financial, Inc.  Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 001-13913, filed June 19, 2014 and incorporated herein by reference.*

31.1Section 302 Certification of Chief Executive Officer

31.2Section 302 Certification of Chief Financial Officer

32.1Section 906 Certification of Chief Executive Officer

32.2Section 906 Certification of Chief Financial Officer

101Materials from the Waddell & Reed Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in Extensible Business Reporting Language (XBRL):  (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) related Notes to the Unaudited Consolidated Financial Statements, tagged in detail.

*Indicates management contract or compensatory plan, contract or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 1st day of August 2014.

WADDELL & REED FINANCIAL, INC.
By:	/s/ Henry J. Herrmann
	Chief Executive Officer, Chairman of the Board and Director
	(Principal Executive Officer)
By:	/s/ Brent K. Bloss
	Senior Vice President, Chief Financial Officer
	and Treasurer
	(Principal Financial Officer)
By:	/s/ Melissa A. Clouse
	Vice President and Controller
	(Principal Accounting Officer)

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EX-31.1

Exhibit 31.1

I, Henry J. Herrmann, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Waddell & Reed Financial, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  July 31, 2014

/s/ Henry J. Herrmann

Henry J. Herrmann

Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Brent K. Bloss, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Waddell & Reed Financial, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  July 31, 2014

/s/ Brent K. Bloss

Brent K. Bloss

Senior Vice President,

Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Henry J. Herrmann, Chief Executive Officer of Waddell & Reed Financial, Inc. (the “Company”) hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (the “Act”), that:

1.The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the “Report”) dated August 1, 2014 and filed with the United States Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  July 31, 2014

/s/ Henry J. Herrmann

Henry J. Herrmann

Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Brent K. Bloss, Senior Vice President, Chief Financial Officer and Treasurer of Waddell & Reed Financial, Inc. (the “Company”) hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 (the “Act”), that:

1.The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the “Report”) dated August 1, 2014 and filed with the United States Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  July 31, 2014

/s/ Brent K. Bloss

Brent K. Bloss

Senior Vice President,

Chief Financial Officer and Treasurer

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Share-Based Compensation (Details) (Nonvested stock awards, 1998 Stock Incentive Plan ("SI Plan"), USD $) In Millions, except Share data, unless otherwise specified	0 Months Ended
	Apr. 02, 2014
Nonvested stock awards | 1998 Stock Incentive Plan ("SI Plan")
Share-Based Compensation
Number of nonvested stocks granted (in shares)	742,141
Grant date fair value (in dollars per share)	$ 75.96
Fair value of shares granted (in dollars)	$ 56.4
Vesting period of the value of shares amortized to expense	4 years

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Income Tax Uncertainties (Details 2) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014
Income Tax Uncertainties
Estimated decrease in unrecognized tax benefits within the next 12-month period, high end of range	$ 0.3
Estimated decrease in unrecognized tax benefits net of federal benefits within the next 12-month period	$ 0.2

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Pension Plan and Postretirement Benefits Other Than Pension (Tables)

6 Months Ended

Jun. 30, 2014

Pension Plan and Postretirement Benefits Other Than Pension

Schedule of components of net periodic pension and other postretirement costs

	Pension Benefits					Other Postretirement Benefits			Pension Benefits				Other Postretirement Benefits
	Three months ended June 30,					Three months ended June 30,			Six months ended June 30,				Six months ended June 30,
	2014			2013		2014		2013	2014		2013		2014		2013
	(in thousands)								(in thousands)
Components of net periodic benefit cost:
Service cost	$	2,317		2,556		180		197	5,042		5,506		360		394
Interest cost	2,045			1,903		99		90	4,198		3,855		198		180
Expected return on plan assets	(3,595		)	(2,889	)	—		—	(7,008	)	(5,593	)	—		—
Actuarial (gain) loss amortization	337			1,034		(4	)	—	748		2,284		(8	)	—
Prior service cost amortization	104			139		14		14	234		278		28		28
Transition obligation amortization	1			1		—		—	2		2		—		—
Total(1)	$	1,209		2,744		289		301	3,216		6,332		578		602

(1) Approximately 60% of net periodic pension and other postretirement benefit costs are included in Compensation and related costs on the consolidated statements of income, while the remainder are included in Underwriting and distribution expense.

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Stockholders' Equity (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Changes in other comprehensive income (loss)
Balance at the beginning of the period	$ (16,211)	$ (43,173)	$ (15,859)	$ (46,797)
Other comprehensive income before reclassification	3,570	(158)	4,051	5,055
Amount reclassified from accumulated other comprehensive income	(1,115)	(2,653)	(1,948)	(4,242)
Net current period other comprehensive income (loss)	2,455	(2,811)	2,103	813
Balance at the end of the period	(13,756)	(45,984)	(13,756)	(45,984)
Unrealized gains on investment securities
Changes in other comprehensive income (loss)
Balance at the beginning of the period	2,709	3,567	3,150	1,823
Other comprehensive income before reclassification	2,253	(89)	2,557	3,190
Amount reclassified from accumulated other comprehensive income	(884)	(2,047)	(1,629)	(3,582)
Net current period other comprehensive income (loss)	1,369	(2,136)	928	(392)
Balance at the end of the period	4,078	1,431	4,078	1,431
Change in valuation allowance for unrealized gains (losses) on investment securities
Changes in other comprehensive income (loss)
Balance at the beginning of the period	552	1,066	810	32
Other comprehensive income before reclassification	1,317	(69)	1,494	1,865
Amount reclassified from accumulated other comprehensive income	(516)	(1,198)	(951)	(2,098)
Net current period other comprehensive income (loss)	801	(1,267)	543	(233)
Balance at the end of the period	1,353	(201)	1,353	(201)
Pension and postretirement benefits
Changes in other comprehensive income (loss)
Balance at the beginning of the period	(19,472)	(47,806)	(19,819)	(48,652)
Amount reclassified from accumulated other comprehensive income	285	592	632	1,438
Net current period other comprehensive income (loss)	285	592	632	1,438
Balance at the end of the period	$ (19,187)	$ (47,214)	$ (19,187)	$ (47,214)

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Consolidated Statement of Stockholders' Equity (Parenthetical) (USD $)	0 Months Ended	6 Months Ended
	Apr. 16, 2014	Jun. 30, 2014
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Dividends accrued, per share (in dollars per share)	$ 0.34	$ 0.68

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Investment Securities (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Fair value of investments
Total investment securities	$ 217,352	$ 201,348
Level 1
Fair value of investments
Total investment securities	211,303	176,760
Level 1 | Common Stock
Fair value of investments
Total investment securities	58	60
Level 1 | Affiliated mutual funds
Fair value of investments
Total investment securities	211,245	176,700
Level 2
Fair value of investments
Total investment securities	6,049	24,588
Level 2 | Mortgage-backed securities
Fair value of investments
Total investment securities	34	46
Level 2 | Municipal bonds
Fair value of investments
Total investment securities		501
Level 2 | Corporate bonds
Fair value of investments
Total investment securities	6,015	24,041
Total | Mortgage-backed securities
Fair value of investments
Total investment securities	34	46
Total | Municipal bonds
Fair value of investments
Total investment securities		501
Total | Corporate bonds
Fair value of investments
Total investment securities	6,015	24,041
Total | Common Stock
Fair value of investments
Total investment securities	58	60
Total | Affiliated mutual funds
Fair value of investments
Total investment securities	$ 211,245	$ 176,700

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Investment Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Fair Value
Less than 12 months		$ 29,598
12 months or longer	1,187	213
Total temporarily impaired securities	1,187	29,811
Unrealized losses
Less than 12 months		(939)
12 months or longer	(27)	(18)
Total Unrealized losses on temporarily impaired securities	(27)	(957)
Fair value
Total fair value	91,134	94,058
Affiliated mutual funds
Fair Value
Less than 12 months		29,598
12 months or longer	1,187	213
Total temporarily impaired securities	1,187	29,811
Unrealized losses
Less than 12 months		(939)
12 months or longer	(27)	(18)
Total Unrealized losses on temporarily impaired securities	(27)	(957)
Fair value
Total fair value	88,051	84,048
Mortgage-Backed Securities and Bonds
Fair value
Within one year	2,991
After five years but within 10 years	34
Total fair value	3,025
Corporate bonds
Fair value
Total fair value	2,991	9,412
Amortized Cost
Within one year	3,018
Total amortized cost	3,018
Fair value
Within one year	3,024
Total fair value	$ 3,024

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Goodwill and Identifiable Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Goodwill and Identifiable Intangible Assets
Goodwill	$ 106,970	$ 106,970
Mutual fund management advisory contracts	38,699	38,699
Mutual fund management subadvisory contracts	16,300	16,300
Total identifiable intangible assets	54,999	54,999
Total goodwill and identifiable intangible assets	$ 161,969	$ 161,969

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Indebtedness (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Indebtedness
Fair value of outstanding indebtedness	$ 210,000,000
Summary of long-term debt
Total long-term debt	$ 190,000,000	$ 190,000,000

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Consolidated Statement of Stockholders' Equity (USD $) In Thousands, unless otherwise specified	Total	Common Stock	Additional Paid-in Capital	Retained Earnings	Treasury Stock	Accumulated Other Comprehensive Income (Loss)
Balance at Dec. 31, 2013	$ 687,342	$ 997	$ 267,406	$ 850,600	$ (415,802)	$ (15,859)
Balance (in shares) at Dec. 31, 2013		99,701
Increase (Decrease) in Stockholders' Equity
Net income	157,852			157,852
Recognition of equity compensation	27,679		27,679
Net issuance/forfeiture of nonvested shares			(12,883)		12,883
Dividends accrued, $0.68 per share	(57,792)			(57,792)
Excess tax benefits from share-based payment arrangements	16,861		16,861
Repurchase of common stock	(61,722)				(61,722)
Other comprehensive loss	2,103					2,103
Balance at Jun. 30, 2014	$ 772,323	$ 997	$ 299,063	$ 950,660	$ (464,641)	$ (13,756)
Balance (in shares) at Jun. 30, 2014		99,701

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Income Tax Uncertainties (Details) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Income Tax Uncertainties
Unrecognized tax benefits, including penalties and interest that if recognized would impact effective tax rate	$ 13.1	$ 12.0
Unrecognized tax benefits, including penalties and interest, net of federal tax benefit that if recognized would affect effective tax rate	9.1	8.4
Accrued interest and penalties related to uncertain tax positions	3.4	3.0
Accrued interest and penalties related to uncertain tax positions, net of federal benefit	2.8	2.5
Total expense of interest and penalties, net of federal benefit related to uncertain tax positions	$ 0.3

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Assets :
Cash and cash equivalents	$ 507,693	$ 487,845
Cash and cash equivalents - restricted	88,962	121,419
Investment securities	217,352	201,348
Receivables:
Funds and separate accounts	38,682	36,467
Customers and other	205,204	141,763
Deferred income taxes	5,845	7,654
Income taxes receivable	5,404	419
Prepaid expenses and other current assets	14,350	9,410
Total current assets	1,083,492	1,006,325
Property and equipment, net	82,952	72,638
Deferred sales commissions, net	80,249	79,894
Goodwill and identifiable intangible assets	161,969	161,969
Deferred income taxes	3,916	3,839
Other non-current assets	24,429	12,300
Total assets	1,437,007	1,336,965
Liabilities:
Accounts payable	19,582	18,821
Payable to investment companies for securities	125,227	214,085
Payable to third party brokers	62,632	59,756
Payable to customers	115,570	8,664
Accrued compensation	65,660	58,677
Other current liabilities	48,487	59,726
Total current liabilities	437,158	419,729
Long-term debt	190,000	190,000
Accrued pension and postretirement costs	12,226	13,333
Other non-current liabilities	25,300	26,561
Total liabilities	664,684	649,623
Commitments and contingencies
Stockholders' equity :
Preferred stock -$1.00 par value: 5,000 shares authorized; none issued
Class A Common stock-$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 84,732 shares outstanding (85,236 at December 31, 2013)	997	997
Additional paid-in capital	299,063	267,406
Retained earnings	950,660	850,600
Cost of 14,969 common shares in treasury (14,465 at December 31, 2013)	(464,641)	(415,802)
Accumulated other comprehensive loss	(13,756)	(15,859)
Total stockholders' equity	772,323	687,342
Total liabilities and stockholders' equity	$ 1,437,007	$ 1,336,965

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 82,988	$ 51,957	$ 157,852	$ 105,820
Other comprehensive income:
Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $4, $(18), $2 and $(9), respectively	2,170	(3,403)	1,471	(625)
Pension and postretirement benefits, net of income tax expense of $167, $595, $372 and $1,153, respectively	285	592	632	1,438
Comprehensive income	$ 85,443	$ 49,146	$ 159,955	$ 106,633

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Pension Plan and Postretirement Benefits Other Than Pension (Details 2) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Components of net periodic benefit cost:
Percentage of net periodic pension and other postretirement benefit costs included in Compensation and related costs			60.00%
Pension Benefits
Components of net periodic benefit cost:
Service cost	$ 2,317,000	$ 2,556,000	$ 5,042,000	$ 5,506,000
Interest cost	2,045,000	1,903,000	4,198,000	3,855,000
Expected return on plan assets	(3,595,000)	(2,889,000)	(7,008,000)	(5,593,000)
Actuarial (gain) loss amortization	337,000	1,034,000	748,000	2,284,000
Prior service cost amortization	104,000	139,000	234,000	278,000
Transition obligation amortization	1,000	1,000	2,000	2,000
Total	1,209,000	2,744,000	3,216,000	6,332,000
Expected benefit payments
Employer contributions			20,000,000
Other Postretirement Benefits
Components of net periodic benefit cost:
Service cost	180,000	197,000	360,000	394,000
Interest cost	99,000	90,000	198,000	180,000
Actuarial (gain) loss amortization	(4,000)		(8,000)
Prior service cost amortization	14,000	14,000	28,000	28,000
Total	$ 289,000	$ 301,000	$ 578,000	$ 602,000

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Description of Business and Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

Description of Business and Significant Accounting Policies

Basis of Presentation

Basis of Presentation

We have prepared the accompanying unaudited consolidated financial statements included herein pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented.  The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”).

The accompanying unaudited consolidated financial statements are prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements included in our 2013 Form 10-K, which include the following: use of estimates, cash and cash equivalents, disclosures about fair value of financial instruments, investment securities and investments in affiliated mutual funds, property and equipment, software developed for internal use, goodwill and identifiable intangible assets, deferred sales commissions, revenue recognition, advertising and promotion, share-based compensation and accounting for income taxes.

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at June 30, 2014, the results of operations for the three and six months ended June 30, 2014 and 2013, and cash flows for the six months ended June 30, 2014 and 2013 in conformity with accounting principles generally accepted in the United States.

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Stockholders' Equity (Details) (USD $)	0 Months Ended	3 Months Ended		6 Months Ended
	Apr. 16, 2014	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Components of basic and diluted earnings per share
Net income		$ 82,988,000	$ 51,957,000	$ 157,852,000	$ 105,820,000
Weighted average shares outstanding - basic		85,073,000	85,869,000	85,046,000	85,731,000
Dilutive potential shares from stock options					1,000
Weighted average shares outstanding - diluted		85,073,000	85,869,000	85,046,000	85,732,000
Earnings per share:
Earnings per share basic and diluted (in dollars per share)		$ 0.98	$ 0.61	$ 1.86	$ 1.23
Dividends
Dividends accrued, per share (in dollars per share)	$ 0.34			$ 0.68
Dividends to be paid		$ 28,800,000		$ 28,800,000
Common stock repurchases
Shares repurchased in the open market or privately		628,022	789,177	908,208	870,878
Common stock repurchases
Shares repurchased from employees to cover minimum income tax withholdings		423,452	464,177	426,119	466,778

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Goodwill and Identifiable Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2014

Goodwill and Identifiable Intangible Assets

Schedule of goodwill and identifiable intangible assets

	June 30, 2014		December 31, 2013
	(in thousands)
Goodwill	$	106,970	106,970
Mutual fund management advisory contracts	38,699		38,699
Mutual fund management subadvisory contracts	16,300		16,300
Total identifiable intangible assets	54,999		54,999
Total	$	161,969	161,969

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Consolidated Statements of Comprehensive Income (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unrealized appreciation (depreciation) of available for sale investment securities during the year, income tax expense (benefit)	$ 4	$ (18)	$ 2	$ (9)
Pension and postretirement benefits, income tax expense	$ 167	$ 595	$ 372	$ 1,153

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
CONSOLIDATED BALANCE SHEETS
Preferred stock-par value (in dollars per share)	$ 1.00	$ 1.00
Preferred stock-shares authorized	5,000	5,000
Preferred stock-shares issued	0	0
Class A Common stock-par value (in dollars per share)	$ 0.01	$ 0.01
Class A Common stock-shares authorized	250,000	250,000
Class A Common stock-shares issued	99,701	99,701
Class A Common stock-shares outstanding	84,732	85,236
Common shares in treasury	14,969	14,465

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Income Tax Uncertainties

6 Months Ended

Jun. 30, 2014

Income Tax Uncertainties

Income Tax Uncertainties

7. Income Tax Uncertainties

As of January 1, 2014 and June 30, 2014, the Company had unrecognized tax benefits, including penalties and interest, of $12.0 million ($8.4 million net of federal benefit) and $13.1 million ($9.1 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate.  The unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities in the accompanying consolidated balance sheets; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable.

The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes.  As of January 1, 2014, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $3.0 million ($2.5 million net of federal benefit).  The total amount of penalties and interest, net of federal benefit, related to income tax uncertainties recognized in the statement of income for the six month period ended June 30, 2014 was $0.3 million.  The total amount of accrued penalties and interest related to uncertain tax positions at June 30, 2014 of $3.4 million ($2.8 million net of federal benefit) is included in the total unrecognized tax benefits described above.

In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain.  In addition, respective tax authorities periodically audit our income tax returns.  These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions.  The 2010, 2011, 2012 and 2013 federal income tax returns are open tax years that remain subject to potential future audit.  State income tax returns for all years after 2009 and, in certain states, income tax returns prior to 2010, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.

The Company is currently being audited in various state jurisdictions.  It is reasonably possible that the Company will settle the audits in these jurisdictions within the next 12-month period.  It is estimated that the Company’s liability for unrecognized tax benefits, including penalties and interest, could decrease by up to $0.3 million (up to $0.2 million net of federal benefit) upon settlement of these audits.  Such settlements are not anticipated to have a significant impact on the results of operations.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Jul. 25, 2014
Document and Entity Information
Entity Registrant Name	WADDELL & REED FINANCIAL INC
Entity Central Index Key	0001052100
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		84,460,812
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2

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Pension Plan and Postretirement Benefits Other Than Pension

6 Months Ended

Jun. 30, 2014

Pension Plan and Postretirement Benefits Other Than Pension

Pension Plan and Postretirement Benefits Other Than Pension

8. Pension Plan and Postretirement Benefits Other Than Pension

We provide a non-contributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”).  Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final 10 years of employment.  We also sponsor an unfunded defined benefit postretirement medical plan that covers retirees through the age of 65, including substantially all employees, as well as Waddell & Reed advisors who are independent contractors.  The medical plan is contributory with participant contributions adjusted annually.  The medical plan does not provide for post age 65 benefits with the exception of a small group of employees that were grandfathered when such plan was established.

The components of net periodic pension and other postretirement costs related to these plans are as follows:

	Pension Benefits					Other Postretirement Benefits			Pension Benefits				Other Postretirement Benefits
	Three months ended June 30,					Three months ended June 30,			Six months ended June 30,				Six months ended June 30,
	2014			2013		2014		2013	2014		2013		2014		2013
	(in thousands)								(in thousands)
Components of net periodic benefit cost:
Service cost	$	2,317		2,556		180		197	5,042		5,506		360		394
Interest cost	2,045			1,903		99		90	4,198		3,855		198		180
Expected return on plan assets	(3,595		)	(2,889	)	—		—	(7,008	)	(5,593	)	—		—
Actuarial (gain) loss amortization	337			1,034		(4	)	—	748		2,284		(8	)	—
Prior service cost amortization	104			139		14		14	234		278		28		28
Transition obligation amortization	1			1		—		—	2		2		—		—
Total(1)	$	1,209		2,744		289		301	3,216		6,332		578		602

(1) Approximately 60% of net periodic pension and other postretirement benefit costs are included in Compensation and related costs on the consolidated statements of income, while the remainder are included in Underwriting and distribution expense.

During the first six months of 2014, we contributed $20.0 million to the Pension Plan.  We do not expect to make additional contributions for the remainder of 2014.

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Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Revenues:
Investment management fees	$ 193,624	$ 156,219	$ 381,661	$ 304,664
Underwriting and distribution fees	169,001	141,597	334,268	277,016
Shareholder service fees	38,009	33,890	75,121	66,581
Total	400,634	331,706	791,050	648,261
Operating expenses:
Underwriting and distribution	195,608	164,844	390,559	326,415
Compensation and related costs (including share-based compensation of $14,593, $13,330, $27,679 and $25,006, respectively)	48,589	47,376	98,598	95,531
General and administrative	27,183	26,938	50,939	43,146
Subadvisory fees	2,069	4,291	3,946	8,775
Depreciation	3,541	3,222	6,790	6,449
Total	276,990	246,671	550,832	480,316
Operating income	123,644	85,035	240,218	167,945
Investment and other income	6,100	1,002	10,000	5,379
Interest expense	(2,755)	(2,858)	(5,510)	(5,712)
Income before provision for income taxes	126,989	83,179	244,708	167,612
Provision for income taxes	44,001	31,222	86,856	61,792
Net income	$ 82,988	$ 51,957	$ 157,852	$ 105,820
Net income per share, basic and diluted (in dollars per share)	$ 0.98	$ 0.61	$ 1.86	$ 1.23
Weighted average shares outstanding:
Basic (in shares)	85,073	85,869	85,046	85,731
Diluted (in shares)	85,073	85,869	85,046	85,732

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Cash and Cash Equivalents

6 Months Ended

Jun. 30, 2014

Cash and Cash Equivalents

Cash and Cash Equivalents

2. Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and short-term investments.  We consider all highly liquid investments with maturities upon acquisition of 90 days or less to be cash equivalents.  Cash and cash equivalents — restricted represents cash held for the benefit of customers segregated in compliance with federal and other regulations.

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Description of Business and Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

Description of Business and Significant Accounting Policies

Description of Business and Significant Accounting Policies

1. Description of Business and Significant Accounting Policies

Waddell & Reed Financial, Inc. and Subsidiaries

Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the “Company,” “we,” “our” and “us”) derive revenues from investment management services, investment product underwriting and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Group of Mutual Funds (the “Advisors Funds”), Ivy Funds (the “Ivy Funds”), Ivy Funds Variable Insurance Portfolios (the “Ivy Funds VIP”) and InvestEd Portfolios (“InvestEd”) (collectively, the Advisors Funds, Ivy Funds, Ivy Funds VIP and InvestEd are referred to as the “Funds”), and institutional and separately managed accounts.  The Funds and the institutional and separately managed accounts operate under various rules and regulations set forth by the United States Securities and Exchange Commission (the “SEC”).  Services to the Funds are provided under investment management agreements, underwriting agreements and shareholder servicing and accounting service agreements that set forth the fees to be charged for these services.  The majority of these agreements are subject to annual review and approval by each Fund’s board of trustees.  Our revenues are largely dependent on the total value and composition of assets under management.  Accordingly, fluctuations in financial markets and composition of assets under management can significantly impact revenues and results of operations.

Basis of Presentation

We have prepared the accompanying unaudited consolidated financial statements included herein pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented.  The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”).

The accompanying unaudited consolidated financial statements are prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements included in our 2013 Form 10-K, which include the following: use of estimates, cash and cash equivalents, disclosures about fair value of financial instruments, investment securities and investments in affiliated mutual funds, property and equipment, software developed for internal use, goodwill and identifiable intangible assets, deferred sales commissions, revenue recognition, advertising and promotion, share-based compensation and accounting for income taxes.

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at June 30, 2014, the results of operations for the three and six months ended June 30, 2014 and 2013, and cash flows for the six months ended June 30, 2014 and 2013 in conformity with accounting principles generally accepted in the United States.

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Investment Securities (Tables)

6 Months Ended

Jun. 30, 2014

Investment Securities

Schedule of investment securities

	Amortized		Unrealized	Unrealized
June 30, 2014	cost		gains	losses		Fair value
	(in thousands)
Available for sale securities:
Corporate bonds	$	3,018	6	—		3,024
Affiliated mutual funds	116,723		6,498	(27	)	123,194
	$	119,741	6,504	(27	)	126,218
Trading securities:
Mortgage-backed securities						34
Corporate bonds						2,991
Common stock						58
Affiliated mutual funds						88,051
						91,134
Total investment securities						$	217,352

	Amortized		Unrealized	Unrealized
December 31, 2013	cost		gains	losses		Fair value
	(in thousands)
Available for sale securities:
Mortgage-backed securities	$	8	1	—		9
Corporate bonds	14,568		61	—		14,629
Affiliated mutual funds	87,710		5,899	(957	)	92,652
	$	102,286	5,961	(957	)	107,290
Trading securities:
Mortgage-backed securities						37
Municipal bonds						501
Corporate bonds						9,412
Common stock						60
Affiliated mutual funds						84,048
						94,058
Total investment securities						$	201,348

Summary of available for sale affiliated mutual funds with fair values below carrying values

	Less than 12 months			12 months or longer			Total
June 30, 2014	Fair value		Unrealized losses	Fair value	Unrealized losses		Fair value	Unrealized losses
	(in thousands)
Affiliated mutual funds	$	—	—	1,187	(27	)	1,187	(27	)
Total temporarily impaired securities	$	—	—	1,187	(27	)	1,187	(27	)

	Less than 12 months				12 months or longer			Total
December 31, 2013	Fair value		Unrealized losses		Fair value	Unrealized losses		Fair value	Unrealized losses
	(in thousands)
Affiliated mutual funds	$	29,598	(939	)	213	(18	)	29,811	(957	)
Total temporarily impaired securities	$	29,598	(939	)	213	(18	)	29,811	(957	)

Schedule of Corporate bonds accounted for available for sale securities by maturity date

Corporate bonds accounted for as available for sale and held as of June 30, 2014 mature as follows:

	Amortized cost		Fair value
	(in thousands)
Within one year	$	3,018	3,024
	$	3,018	3,024

Schedule of Mortgage-backed securities and corporate bonds accounted for trading securities by maturity date

Mortgage-backed securities and corporate bonds accounted for as trading and held as of June 30, 2014 mature as follows:

	Fair value
	(in thousands)
Within one year	$	2,991
After five years but within 10 years	34
	$	3,025

Schedule of fair value of investment securities

June 30, 2014	Level 1		Level 2	Level 3	Total
	(in thousands)
Mortgage-backed securities	$	—	34	—	34
Corporate bonds	—		6,015	—	6,015
Common stock	58		—	—	58
Affiliated mutual funds	211,245		—	—	211,245
Total	$	211,303	6,049	—	217,352

December 31, 2013	Level 1		Level 2	Level 3	Total
	(in thousands)
Mortgage-backed securities	$	—	46	—	46
Municipal bonds	—		501	—	501
Corporate bonds	—		24,041	—	24,041
Common stock	60		—	—	60
Affiliated mutual funds	176,700		—	—	176,700
Total	$	176,760	24,588	—	201,348

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Stockholders' Equity

6 Months Ended

Jun. 30, 2014

Stockholders' Equity

Stockholders' Equity

9. Stockholders’ Equity

Earnings per Share

The components of basic and diluted earnings per share were as follows:

	Three months ended			Six months ended
	June 30,			June 30,
	2014		2013	2014	2013
	(in thousands, except per share amounts)
Net income	$	82,988	51,957	157,852	105,820
Weighted average shares outstanding - basic	85,073		85,869	85,046	85,731
Dilutive potential shares from stock options	—		—	—	1
Weighted average shares outstanding - diluted	85,073		85,869	85,046	85,732
Earnings per share basic and diluted	$	0.98	0.61	1.86	1.23

Dividends

On April 16, 2014, the Board of Directors (the “Board”) approved a dividend on our common stock in the amount of $0.34 per share to stockholders of record as of July 11, 2014 to be paid on August 1, 2014.  The total dividend to be paid is approximately $28.8 million and is included in other current liabilities in the consolidated balance sheet at June 30, 2014.

Common Stock Repurchases

The Board 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-based compensation programs.

There were 628,022 shares and 789,177 shares repurchased in the open market or privately during the three months ended June 30, 2014 and 2013, respectively, which included 423,452 shares and 464,177 shares repurchased from employees tendering shares to cover their minimum income tax withholdings with respect to vesting of stock awards during the three months ended June 30, 2014 and 2013, respectively.  There were 908,208 shares and 870,878 shares repurchased in the open market or privately during the six months ended June 30, 2014 and 2013, respectively, which included 426,119 shares and 466,778 shares repurchased from employees tendering shares to cover their minimum income tax withholdings with respect to vesting of stock awards during each of these two periods.

Accumulated Other Comprehensive Income (Loss)

The following tables summarize other comprehensive income (loss) activity for the three and six months ended June 30, 2014 and June 30, 2013.

Three months ended June 30, 2014	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at March 31, 2014	$	2,709		552		(19,472	)	(16,211	)
Other comprehensive income before reclassification	2,253			1,317		—		3,570
Amount reclassified from accumulated other comprehensive income	(884		)	(516	)	285		(1,115	)
Net current period other comprehensive income	1,369			801		285		2,455
Balance at June 30, 2014	$	4,078		1,353		(19,187	)	(13,756	)

Three months ended June 30, 2013	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at March 31, 2013	$	3,567		1,066		(47,806	)	(43,173	)
Other comprehensive income before reclassification	(89		)	(69	)	—		(158	)
Amount reclassified from accumulated other comprehensive income	(2,047		)	(1,198	)	592		(2,653	)
Net current period other comprehensive income (loss)	(2,136		)	(1,267	)	592		(2,811	)
Balance at June 30, 2013	$	1,431		(201	)	(47,214	)	(45,984	)
Six months ended June 30, 2014	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at December 31, 2013	$	3,150		810		(19,819	)	(15,859	)
Other comprehensive income before reclassification	2,557			1,494		—		4,051
Amount reclassified from accumulated other comprehensive income	(1,629		)	(951	)	632		(1,948	)
Net current period other comprehensive income	928			543		632		2,103
Balance at June 30, 2014	$	4,078		1,353		(19,187	)	(13,756	)

Six months ended June 30, 2013	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at December 31, 2012	$	1,823		32		(48,652	)	(46,797	)
Other comprehensive income before reclassification	3,190			1,865		—		5,055
Amount reclassified from accumulated other comprehensive income	(3,582		)	(2,098	)	1,438		(4,242	)
Net current period other comprehensive income (loss)	(392		)	(233	)	1,438		813
Balance at June 30, 2013	$	1,431		(201	)	(47,214	)	(45,984	)

Reclassifications from accumulated other comprehensive income (loss) and included in net income are summarized in the tables that follow.

	For the three months ended June 30, 2014
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	1,404		(520	)	884		Investment and other income
Valuation allowance	—			516		516		Provision for income taxes
Amortization of pension and postretirement benefits	(452		)	167		(285	)	Underwriting and distribution expense and Compensation and related costs
Total	$	952		163		1,115

	For the three months ended June 30, 2013
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	3,236		(1,189	)	2,047		Investment and other income
Valuation allowance	—			1,198		1,198		Provision for income taxes
Amortization of pension and postretirement benefits	(1,187		)	595		(592	)	Underwriting and distribution expense and Compensation and related costs
Total	$	2,049		604		2,653

	For the six months ended June 30, 2014
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	2,586		(957	)	1,629		Investment and other income
Valuation allowance	—			951		951		Provision for income taxes
Amortization of pension and postretirement benefits	(1,004		)	372		(632	)	Underwriting and distribution expense and Compensation and related costs
Total	$	1,582		366		1,948

	For the six months ended June 30, 2013
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	5,662		(2,080	)	3,582		Investment and other income
Valuation allowance	—			2,098		2,098		Provision for income taxes
Amortization of pension and postretirement benefits	(2,591		)	1,153		(1,438	)	Underwriting and distribution expense and Compensation and related costs
Total	$	3,071		1,171		4,242

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Goodwill and Identifiable Intangible Assets

6 Months Ended

Jun. 30, 2014

Goodwill and Identifiable Intangible Assets

Goodwill and Identifiable Intangible Assets

5. Goodwill and Identifiable Intangible Assets

Goodwill represents the excess of purchase price over the tangible assets and identifiable intangible assets of an acquired business.  Our goodwill is not deductible for tax purposes.  As of June 30, 2014, the Company’s annual impairment test indicated that goodwill and identifiable intangible assets were not impaired.  Goodwill and identifiable intangible assets (all considered indefinite lived) are as follows:

	June 30, 2014		December 31, 2013
	(in thousands)
Goodwill	$	106,970	106,970
Mutual fund management advisory contracts	38,699		38,699
Mutual fund management subadvisory contracts	16,300		16,300
Total identifiable intangible assets	54,999		54,999
Total	$	161,969	161,969

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Accounting Pronouncements Not Yet Adopted

6 Months Ended

Jun. 30, 2014

Accounting Pronouncements Not Yet Adopted

Accounting Pronouncements Not Yet Adopted

3. Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”.  This ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will supersede much of the existing revenue recognition guidance in accounting principles generally accepted in the United States.  This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted.  ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method.  The Company is evaluating which transition method to apply and the estimated impact the adoption of this ASU will have on our consolidated financial statements.

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Investment Securities

6 Months Ended

Jun. 30, 2014

Investment Securities

Investment Securities

4. Investment Securities

Investment securities at June 30, 2014 and December 31, 2013 are as follows:

	Amortized		Unrealized	Unrealized
June 30, 2014	cost		gains	losses		Fair value
	(in thousands)
Available for sale securities:
Corporate bonds	$	3,018	6	—		3,024
Affiliated mutual funds	116,723		6,498	(27	)	123,194
	$	119,741	6,504	(27	)	126,218
Trading securities:
Mortgage-backed securities						34
Corporate bonds						2,991
Common stock						58
Affiliated mutual funds						88,051
						91,134
Total investment securities						$	217,352

	Amortized		Unrealized	Unrealized
December 31, 2013	cost		gains	losses		Fair value
	(in thousands)
Available for sale securities:
Mortgage-backed securities	$	8	1	—		9
Corporate bonds	14,568		61	—		14,629
Affiliated mutual funds	87,710		5,899	(957	)	92,652
	$	102,286	5,961	(957	)	107,290
Trading securities:
Mortgage-backed securities						37
Municipal bonds						501
Corporate bonds						9,412
Common stock						60
Affiliated mutual funds						84,048
						94,058
Total investment securities						$	201,348

Purchases of trading securities during the six months ended June 30, 2014 were $80.5 million. Sales and maturities of trading securities were $62.3 million for the same period.

A summary of available for sale affiliated mutual funds with fair values below carrying values at June 30, 2014 and December 31, 2013 is as follows:

	Less than 12 months			12 months or longer			Total
June 30, 2014	Fair value		Unrealized losses	Fair value	Unrealized losses		Fair value	Unrealized losses
	(in thousands)
Affiliated mutual funds	$	—	—	1,187	(27	)	1,187	(27	)
Total temporarily impaired securities	$	—	—	1,187	(27	)	1,187	(27	)

	Less than 12 months				12 months or longer			Total
December 31, 2013	Fair value		Unrealized losses		Fair value	Unrealized losses		Fair value	Unrealized losses
	(in thousands)
Affiliated mutual funds	$	29,598	(939	)	213	(18	)	29,811	(957	)
Total temporarily impaired securities	$	29,598	(939	)	213	(18	)	29,811	(957	)

Based upon our assessment of these affiliated mutual funds, the time frame the funds have been in a loss position, and our intent to hold affiliated mutual funds until they have recovered, we determined that a write-down was not necessary at June 30, 2014.

Corporate bonds accounted for as available for sale and held as of June 30, 2014 mature as follows:

	Amortized cost		Fair value
	(in thousands)
Within one year	$	3,018	3,024
	$	3,018	3,024

Mortgage-backed securities and corporate bonds accounted for as trading and held as of June 30, 2014 mature as follows:

	Fair value
	(in thousands)
Within one year	$	2,991
After five years but within 10 years	34
	$	3,025

Accounting standards establish a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of the asset.  Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset.  An individual investment’s fair value measurement is assigned a level based upon the observability of the inputs that are significant to the overall valuation.  The three-level hierarchy of inputs is summarized as follows:

· Level 1 — Investments are valued using quoted prices in active markets for identical securities.

· Level 2 — Investments are valued using other significant observable inputs, including quoted prices in active markets for similar securities.

· Level 3 — Investments are valued using significant unobservable inputs, including the Company’s own assumptions in determining the fair value of investments.

Assets classified as Level 2 can have a variety of observable inputs.  These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches depending upon the specific asset to determine a value.  The fair value of municipal bonds is measured based on pricing models that take into account, among other factors, information received from market makers and broker/dealers, current trades, bid-wants lists, offerings, market movements, the callability of the bond, state of issuance and benchmark yield curves. The fair value of corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer.

Securities’ values classified as Level 3 are primarily determined through the use of a single quote (or multiple quotes) from dealers in the securities using proprietary valuation models.  These quotes involve significant unobservable inputs, and thus, the related securities are classified as Level 3 securities.

The following tables summarize our investment securities as of June 30, 2014 and December 31, 2013 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.

June 30, 2014	Level 1		Level 2	Level 3	Total
	(in thousands)
Mortgage-backed securities	$	—	34	—	34
Corporate bonds	—		6,015	—	6,015
Common stock	58		—	—	58
Affiliated mutual funds	211,245		—	—	211,245
Total	$	211,303	6,049	—	217,352

December 31, 2013	Level 1		Level 2	Level 3	Total
	(in thousands)
Mortgage-backed securities	$	—	46	—	46
Municipal bonds	—		501	—	501
Corporate bonds	—		24,041	—	24,041
Common stock	60		—	—	60
Affiliated mutual funds	176,700		—	—	176,700
Total	$	176,760	24,588	—	201,348

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Indebtedness

6 Months Ended

Jun. 30, 2014

Indebtedness

Indebtedness

6. Indebtedness

Debt is reported at its carrying amount in the consolidated balance sheets.  The fair value of the Company’s outstanding indebtedness is approximately $210.0 million at June 30, 2014 compared to the carrying value of $190.0 million.  Fair value is calculated based on Level 2 inputs.

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Pension Plan and Postretirement Benefits Other Than Pension (Details)	6 Months Ended
	Jun. 30, 2014
Pension Benefits
Pension Plan and Postretirement Benefits Other than Pension
Final number of years of employee's compensation to determine the benefits payable	10 years
Other Postretirement Benefits
Pension Plan and Postretirement Benefits Other than Pension
Age of retirees	65 years
Age of employees after which the plan does not provide benefits	65 years

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Contingencies

6 Months Ended

Jun. 30, 2014

Contingencies

Contingencies

11. Contingencies

The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate.  A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.

The Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated.  These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in light of new information.  For contingencies where an unfavorable outcome is reasonably possible and that are significant, the Company discloses the nature of the contingency and, where feasible, an estimate of the possible loss.  For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items that management believes should be disclosed.  Management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict.

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Stockholders' Equity (Tables)

6 Months Ended

Jun. 30, 2014

Stockholders' Equity

Components of basic and diluted earnings per share

	Three months ended			Six months ended
	June 30,			June 30,
	2014		2013	2014	2013
	(in thousands, except per share amounts)
Net income	$	82,988	51,957	157,852	105,820
Weighted average shares outstanding - basic	85,073		85,869	85,046	85,731
Dilutive potential shares from stock options	—		—	—	1
Weighted average shares outstanding - diluted	85,073		85,869	85,046	85,732
Earnings per share basic and diluted	$	0.98	0.61	1.86	1.23

Summary of other comprehensive income (loss) activity

Three months ended June 30, 2014	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at March 31, 2014	$	2,709		552		(19,472	)	(16,211	)
Other comprehensive income before reclassification	2,253			1,317		—		3,570
Amount reclassified from accumulated other comprehensive income	(884		)	(516	)	285		(1,115	)
Net current period other comprehensive income	1,369			801		285		2,455
Balance at June 30, 2014	$	4,078		1,353		(19,187	)	(13,756	)

Three months ended June 30, 2013	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at March 31, 2013	$	3,567		1,066		(47,806	)	(43,173	)
Other comprehensive income before reclassification	(89		)	(69	)	—		(158	)
Amount reclassified from accumulated other comprehensive income	(2,047		)	(1,198	)	592		(2,653	)
Net current period other comprehensive income (loss)	(2,136		)	(1,267	)	592		(2,811	)
Balance at June 30, 2013	$	1,431		(201	)	(47,214	)	(45,984	)
Six months ended June 30, 2014	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at December 31, 2013	$	3,150		810		(19,819	)	(15,859	)
Other comprehensive income before reclassification	2,557			1,494		—		4,051
Amount reclassified from accumulated other comprehensive income	(1,629		)	(951	)	632		(1,948	)
Net current period other comprehensive income	928			543		632		2,103
Balance at June 30, 2014	$	4,078		1,353		(19,187	)	(13,756	)

Six months ended June 30, 2013	Unrealized gains on investment securities			Change in valuation allowance for unrealized gains (losses) on investment securities		Pension and postretirement benefits		Total accumulated other comprehensive income (loss)
	(in thousands)
Balance at December 31, 2012	$	1,823		32		(48,652	)	(46,797	)
Other comprehensive income before reclassification	3,190			1,865		—		5,055
Amount reclassified from accumulated other comprehensive income	(3,582		)	(2,098	)	1,438		(4,242	)
Net current period other comprehensive income (loss)	(392		)	(233	)	1,438		813
Balance at June 30, 2013	$	1,431		(201	)	(47,214	)	(45,984	)

Summary of reclassifications from accumulated other comprehensive income (loss) and included in net income

	For the three months ended June 30, 2014
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	1,404		(520	)	884		Investment and other income
Valuation allowance	—			516		516		Provision for income taxes
Amortization of pension and postretirement benefits	(452		)	167		(285	)	Underwriting and distribution expense and Compensation and related costs
Total	$	952		163		1,115

	For the three months ended June 30, 2013
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	3,236		(1,189	)	2,047		Investment and other income
Valuation allowance	—			1,198		1,198		Provision for income taxes
Amortization of pension and postretirement benefits	(1,187		)	595		(592	)	Underwriting and distribution expense and Compensation and related costs
Total	$	2,049		604		2,653

	For the six months ended June 30, 2014
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	2,586		(957	)	1,629		Investment and other income
Valuation allowance	—			951		951		Provision for income taxes
Amortization of pension and postretirement benefits	(1,004		)	372		(632	)	Underwriting and distribution expense and Compensation and related costs
Total	$	1,582		366		1,948

	For the six months ended June 30, 2013
	Pre-tax			Tax (expense) benefit		Net of tax		Statement of income line item
	(in thousands)
Reclassifications included in net income:
Realized gain on sale of available for sale investment securities	$	5,662		(2,080	)	3,582		Investment and other income
Valuation allowance	—			2,098		2,098		Provision for income taxes
Amortization of pension and postretirement benefits	(2,591		)	1,153		(1,438	)	Underwriting and distribution expense and Compensation and related costs
Total	$	3,071		1,171		4,242

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Consolidated Statements of Income (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
CONSOLIDATED STATEMENTS OF INCOME
Compensation and related costs, share-based compensation	$ 14,593	$ 13,330	$ 27,679	$ 25,006

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from operating activities:
Net income	$ 157,852	$ 105,820
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	6,906	6,962
Amortization of deferred sales commissions	32,967	27,453
Share-based compensation	27,679	25,006
Excess tax benefits from share-based payment arrangements	(16,861)	(6,285)
Gain on sale of available for sale investment securities	(2,586)	(5,662)
Net purchases and sales or maturities of trading securities	(18,269)	(27,391)
Gain on trading securities	(5,508)	(28)
Loss on sale and retirement of property and equipment	1,058	132
Capital gains and dividends reinvested	(9)	(45)
Deferred income taxes	1,357	(3,452)
Changes in assets and liabilities:
Cash and cash equivalents - restricted	32,457	(15,391)
Other receivables	(63,441)	5,426
Payable to investment companies for securities and payable to customers	18,048	2,300
Receivables from funds and separate accounts	(2,215)	(4,480)
Other assets	(9,743)	(4,099)
Deferred sales commissions	(33,322)	(32,304)
Accounts payable and payable to third party brokers	3,637	(1,439)
Other liabilities	(899)	(884)
Net cash provided by operating activities	129,108	71,639
Cash flows from investing activities:
Purchases of available for sale investment securities	(52,941)	(104,279)
Proceeds from sales and maturities of available for sale investment securities	64,666	117,522
Additions to property and equipment	(18,161)	(7,073)
Disposition of companies		22,000
Net cash provided by (used in) investing activities	(6,436)	28,170
Cash flows from financing activities:
Dividends paid	(57,963)	(48,083)
Repurchase of common stock	(61,722)	(36,843)
Exercise of stock options		135
Excess tax benefits from share-based payment arrangements	16,861	6,285
Net cash used in financing activities	(102,824)	(78,506)
Net increase in cash and cash equivalents	19,848	21,303
Cash and cash equivalents at beginning of period	487,845	330,330
Cash and cash equivalents at end of period	$ 507,693	$ 351,633

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Investment Securities (Details) (USD $)	6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Available for sale securities:
Amortized cost	$ 119,741,000	$ 102,286,000
Unrealized gains	6,504,000	5,961,000
Unrealized losses	(27,000)	(957,000)
Fair value	126,218,000	107,290,000
Trading securities:
Fair value	91,134,000	94,058,000
Investment securities	217,352,000	201,348,000
Purchases of trading securities	80,500,000
Sales and maturities of trading securities	62,300,000
Mortgage-backed securities
Available for sale securities:
Amortized cost		8,000
Unrealized gains		1,000
Fair value		9,000
Trading securities:
Fair value	34,000	37,000
Municipal bonds
Trading securities:
Fair value		501,000
Corporate bonds
Available for sale securities:
Amortized cost	3,018,000	14,568,000
Unrealized gains	6,000	61,000
Fair value	3,024,000	14,629,000
Trading securities:
Fair value	2,991,000	9,412,000
Common Stock
Trading securities:
Fair value	58,000	60,000
Affiliated mutual funds
Available for sale securities:
Amortized cost	116,723,000	87,710,000
Unrealized gains	6,498,000	5,899,000
Unrealized losses	(27,000)	(957,000)
Fair value	123,194,000	92,652,000
Trading securities:
Fair value	$ 88,051,000	$ 84,048,000

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Stockholders' Equity (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Reclassifications included in net income:
Net of tax	$ 1,115	$ 2,653	$ 1,948	$ 4,242
Reclassifications from accumulated other comprehensive income
Reclassifications included in net income:
Pre-tax	952	2,049	1,582	3,071
Tax (expense) benefit	163	604	366	1,171
Net of tax	1,115	2,653	1,948	4,242
Realized gain on sale of available for sale investment securities
Reclassifications included in net income:
Net of tax	884	2,047	1,629	3,582
Realized gain on sale of available for sale investment securities | Investment and other income | Reclassifications from accumulated other comprehensive income
Reclassifications included in net income:
Pre-tax	1,404	3,236	2,586	5,662
Tax (expense) benefit	(520)	(1,189)	(957)	(2,080)
Net of tax	884	2,047	1,629	3,582
Valuation allowance
Reclassifications included in net income:
Net of tax	516	1,198	951	2,098
Valuation allowance | Provision for income taxes | Reclassifications from accumulated other comprehensive income
Reclassifications included in net income:
Tax (expense) benefit	516	1,198	951	2,098
Net of tax	516	1,198	951	2,098
Amortization of pension and postretirement benefits
Reclassifications included in net income:
Net of tax	(285)	(592)	(632)	(1,438)
Amortization of pension and postretirement benefits | Underwriting and distribution expense and Compensation and related costs | Reclassifications from accumulated other comprehensive income
Reclassifications included in net income:
Pre-tax	(452)	(1,187)	(1,004)	(2,591)
Tax (expense) benefit	167	595	372	1,153
Net of tax	$ (285)	$ (592)	$ (632)	$ (1,438)

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Share-Based Compensation

6 Months Ended

Jun. 30, 2014

Share-Based Compensation

Share-Based Compensation

10. Share-Based Compensation

On April 2, 2014, we granted 742,141 shares of nonvested stock with a fair value of $75.96 per share under the Company’s 1998 Stock Incentive Plan, as amended and restated (the “SI Plan”).  The value of those shares at the grant date, aggregating to $56.4 million, will generally be amortized to expense over a four year vesting period.