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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q 
_____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission file number: 001-35355
 _____________________________________________________________
MANNING & NAPIER, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________
Delaware
 
45-2609100
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
290 Woodcliff Drive
Fairport, New York
 
14450
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(585) 325-6880
_____________________________________________________________ 
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  ¨
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  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 
Class
  
Outstanding at May 5, 2017
Class A common stock, $0.01 par value per share
  
15,053,279
Class B common stock, $0.01 par value per share
  
1,000
 




TABLE OF CONTENTS
 
 
 
Page
Part I
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
Item 1A.
Item 6.
 
 
 
 
In this Quarterly Report on Form 10-Q, “we”, “our”, “us”, the “Company”, “Manning & Napier” and the “Registrant” refers to Manning & Napier, Inc. and, unless the context otherwise requires, its consolidated direct and indirect subsidiaries and predecessors.
 
 


i

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Manning & Napier, Inc.
Consolidated Statements of Financial Condition
(In thousands, except share data)
 
 
 
March 31, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
100,568

 
$
100,819

Accounts receivable
 
13,959

 
15,434

Accounts receivable—affiliated mutual funds
 
6,534

 
6,761

Investment securities
 
42,558

 
36,475

Investment securities - consolidated funds
 
1,061

 
995

Prepaid expenses and other assets
 
4,440

 
4,883

Total current assets
 
169,120

 
165,367

Property and equipment, net
 
5,444

 
5,680

Net deferred tax assets, non-current
 
40,856

 
41,905

Goodwill
 
4,829

 
4,829

Other long-term assets
 
2,807

 
2,818

Total assets
 
$
223,056

 
$
220,599

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
 
$
2,021

 
$
2,053

Accrued expenses and other liabilities
 
41,519

 
35,115

Deferred revenue
 
10,122

 
10,210

Total current liabilities
 
53,662

 
47,378

Other long-term liabilities
 
3,783

 
4,034

Amounts payable under tax receivable agreement, non-current
 
34,709

 
34,709

Total liabilities
 
92,154

 
86,121

Commitments and contingencies (Note 8)
 


 


Shareholders’ equity
 
 
 
 
Class A common stock, $0.01 par value; 300,000,000 shares authorized; 14,982,880 shares issued and outstanding at March 31, 2017 and December 31, 2016
 
150

 
150

Class B common stock, $0.01 par value; 2,000 shares authorized, 1,000 shares issued and outstanding at March 31, 2017 and December 31, 2016
 

 

Additional paid-in capital
 
198,435

 
200,158

Retained deficit
 
(36,685
)
 
(37,383
)
Accumulated other comprehensive income (loss)
 
(19
)
 
(13
)
Total shareholders’ equity
 
161,881

 
162,912

Noncontrolling interests
 
(30,979
)
 
(28,434
)
Total shareholders’ equity and noncontrolling interests
 
130,902

 
134,478

Total liabilities, shareholders’ equity and noncontrolling interests
 
$
223,056

 
$
220,599

The accompanying notes are an integral part of these consolidated financial statements.


1

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Operations
(In thousands, except share data)
(Unaudited)
 
 
 
Three months ended March 31,
 
 
2017
 
2016
Revenues
 
 
 
 
Investment management services revenue
 
$
55,485

 
$
62,042

Expenses
 
 
 
 
Compensation and related costs
 
23,381

 
21,967

Distribution, servicing and custody expenses
 
7,411

 
8,842

Other operating costs
 
7,978

 
8,453

Total operating expenses
 
38,770

 
39,262

Operating income
 
16,715

 
22,780

Non-operating income (loss)
 
 
 
 
Interest expense
 
(10
)
 
(106
)
Interest and dividend income
 
180

 
136

Change in liability under tax receivable agreement
 

 
(18
)
Net gains (losses) on investments
 
972

 
1,066

Total non-operating income (loss)
 
1,142

 
1,078

Income before provision for income taxes
 
17,857

 
23,858

Provision for income taxes
 
1,343

 
1,674

Net income attributable to controlling and noncontrolling interests
 
16,514

 
22,184

Less: net income attributable to noncontrolling interests
 
14,617

 
19,766

Net income attributable to Manning & Napier, Inc.
 
$
1,897

 
$
2,418

 
 
 
 
 
Net income per share available to Class A common stock
 
 
 
 
Basic
 
$
0.13

 
$
0.16

Diluted
 
$
0.13

 
$
0.16

Weighted average shares of Class A common stock outstanding
 
 
 
 
Basic
 
14,042,880

 
13,745,130

Diluted
 
14,216,988

 
14,084,903

Cash dividends declared per share of Class A common stock
 
$
0.08

 
$
0.16

The accompanying notes are an integral part of these consolidated financial statements.


2

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
 
 
Three months ended March 31,
 
 
2017
 
2016
Net income attributable to controlling and noncontrolling interests
 
$
16,514

 
$
22,184

Net unrealized holding gain (loss) on investment securities, net of tax
 
(6
)
 
3

Comprehensive income
 
$
16,508

 
$
22,187

Less: Comprehensive income attributable to noncontrolling interests
 
14,611

 
19,769

Comprehensive income attributable to Manning & Napier, Inc.
 
$
1,897

 
$
2,418

The accompanying notes are an integral part of these consolidated financial statements.


3

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Manning & Napier, Inc.
Consolidated Statements of Shareholders’ Equity
(In thousands, except share data)
(Unaudited) 
 
 
 
Common Stock –  class A
 
Common Stock – class B
 
Additional
Paid in Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Non
Controlling
Interests
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balance—December 31, 2015
 
14,755,130

 
$
148

 
1,000

 
$

 
$
205,760

 
$
(37,149
)
 
$
(3
)
 
$
(33,976
)
 
$
134,780

Net income
 

 

 

 

 

 
2,418

 

 
19,766

 
22,184

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(9,798
)
 
(9,798
)
Net changes in unrealized investment securities gains or losses
 

 

 

 

 

 

 
3

 

 
3

Common stock issued under equity compensation plan
 
(20,000
)
 
(1
)
 

 

 


 

 

 

 
(1
)
Equity-based compensation
 

 

 

 

 
214

 

 

 
1,070

 
1,284

Dividends declared on Class A common stock - $0.16 per share
 

 

 

 

 

 
(2,349
)
 

 

 
(2,349
)
Balance—March 31, 2016
 
14,735,130

 
$
147

 
1,000

 
$

 
$
205,974

 
$
(37,080
)
 
$

 
$
(22,938
)
 
$
146,103

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance—December 31, 2016
 
14,982,880

 
$
150

 
1,000

 
$

 
$
200,158

 
$
(37,383
)
 
$
(13
)
 
$
(28,434
)
 
$
134,478

Net income
 

 

 

 

 

 
1,897

 

 
14,617

 
16,514

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(9,857
)
 
(9,857
)
Net changes in unrealized investment securities gains or losses
 

 

 

 

 

 

 
(6
)
 

 
(6
)
Equity-based compensation
 

 

 

 

 
135

 

 

 
640

 
775

Dividends declared on Class A common stock - $0.08 per share
 

 

 

 

 

 
(1,199
)
 

 

 
(1,199
)
Impact of changes in ownership of Manning & Napier Group, LLC (Note 4)
 

 

 

 

 
(1,858
)
 

 

 
(7,945
)
 
(9,803
)
Balance—March 31, 2017
 
14,982,880

 
$
150

 
1,000

 
$

 
$
198,435

 
$
(36,685
)
 
$
(19
)
 
$
(30,979
)
 
$
130,902

The accompanying notes are an integral part of these consolidated financial statements.


4

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Three months ended March 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income attributable to controlling and noncontrolling interests
 
$
16,514

 
$
22,184

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
 
Equity-based compensation
 
775

 
1,284

Depreciation and amortization
 
439

 
508

Change in amounts payable under tax receivable agreement
 

 
18

Net (gains) losses on investment securities
 
(972
)
 
(1,066
)
Deferred income taxes
 
1,050

 
893

Amortization of debt issuance costs
 

 
39

(Increase) decrease in operating assets and increase (decrease) in operating liabilities:
 
 
 
 
Accounts receivable
 
1,475

 
791

Accounts receivable—affiliated mutual funds
 
227

 
1,117

Due from broker - consolidated funds
 

 
3,795

Prepaid expenses and other assets
 
442

 
350

Accounts payable
 
(32
)
 
(105
)
Accrued expenses and other liabilities
 
(12,034
)
 
(14,448
)
Deferred revenue
 
(88
)
 
128

Other long-term liabilities
 
(226
)
 
(108
)
Net cash provided by operating activities
 
7,570

 
15,380

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(191
)
 
(120
)
Sale of investments
 
3,338

 
3,541

Purchase of investments
 
(12,208
)
 
(1,222
)
Due from broker
 

 
4,019

Proceeds from maturity of investments
 
3,686

 

Net cash (used in) provided by investing activities
 
(5,375
)
 
6,218

Cash flows from financing activities:
 
 
 
 
Distributions to noncontrolling interests
 

 
(9,798
)
Dividends paid on Class A common stock
 
(2,397
)
 
(2,361
)
Payment of capital lease obligations
 
(49
)
 
(60
)
Net cash used in financing activities
 
(2,446
)
 
(12,219
)
Net (decrease) increase in cash and cash equivalents
 
(251
)
 
9,379

Cash and cash equivalents:
 
 
 
 
Beginning of period
 
100,819

 
117,591

End of period
 
$
100,568

 
$
126,970

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

Manning & Napier, Inc.
Notes to Consolidated Financial Statements

Note 1—Organization and Nature of the Business
Manning & Napier, Inc. ("Manning & Napier", or the "Company") provides a broad range of investment solutions through separately managed accounts, mutual funds, and collective investment trusts, as well as a variety of consultative services that complement its investment process. Founded in 1970, the Company offers U.S. and non-U.S. equity, fixed income and a range of blended asset portfolios, such as life cycle funds and actively-managed exchange-traded fund ("ETF")-based portfolios. Headquartered in Fairport, New York, the Company serves a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations.
The Company is the sole managing member of Manning & Napier Group, LLC and its subsidiaries ("Manning & Napier Group"), a holding company for the investment management businesses conducted by its operating subsidiaries. The diagram below depicts the Company's organization structure as of March 31, 2017.
  http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11582116&doc=12
(1)
The consolidated operating subsidiaries of Manning & Napier Group include Manning & Napier Advisors, LLC ("MNA"), Manning & Napier Alternative Opportunities, LLC, Perspective Partners LLC, Manning & Napier Information Services, LLC, Manning & Napier Benefits, LLC, Manning & Napier Investor Services, Inc., Exeter Trust Company and Rainier Investment Management, LLC.
Note 2—Summary of Significant Accounting Policies
Critical Accounting Policies
There have been no significant changes in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, these financial statements should be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2016. The financial data for the interim periods may not necessarily be indicative of results for future interim periods or for the full year.

6

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting and include all adjustments, consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from these estimates or assumptions.
Revision of Previously Reported Consolidated Statements of Operations
In the quarter ended September 30, 2016, the Company revised its treatment of payments made to certain advisory clients, in accordance with Accounting Standard Codification ("ASC") 605-50, Revenue Recognition - Customer Payments and Incentives to properly present these payments as a reduction to revenue. The Company assessed the materiality of this item on its fiscal year ended December 31, 2015, and all prior and subsequent periods, and concluded that the reclassification was not material to any such periods. The statements of operations for the three months ended March 31, 2016 included herein have been revised to reflect the proper presentation of investment management services revenue and distribution, servicing and custody expenses. The reclassification has no impact on operating income or net income. The impact is illustrated below:
 
Three months ended March 31, 2016
 
(in thousands)
Investment management services revenue, as previously reported

$
64,538

Revision
(2,496
)
Investment management services revenue, as revised
$
62,042

 
 
Distribution, servicing and custody expenses, as previously reported

$
11,338

Revision
(2,496
)
Distribution, servicing and custody expenses, as revised
$
8,842

Principles of Consolidation
The Company consolidates all majority-owned subsidiaries. In addition, as of March 31, 2017, Manning & Napier holds an economic interest of approximately 17.8% in Manning & Napier Group but, as managing member, controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statements of financial condition with respect to the remaining economic interest in Manning & Napier Group held by Manning & Napier Group Holdings, LLC (“M&N Group Holdings”) and Manning & Napier Capital Company, LLC (“MNCC”).
All material intercompany transactions have been eliminated in consolidation.
In accordance with Accounting Standards Update ("ASU") 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis, the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design, a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance, and whether a company is obligated to absorb losses or receive benefits that could potentially be significant to the entity. The standard also requires ongoing assessments of whether a company is the primary beneficiary of a variable interest entity (“VIE”). When utilizing the voting interest entity ("VOE") model, controlling financial interest in generally defined as majority ownership of voting interests.
The Company provides seed capital to its investment teams to develop new products and services for its clients. The original seed investment may be held in a separately managed account, comprised solely of the Company's investments or within a mutual fund, where the Company's investments may represent all or only a portion of the total equity investment in the mutual fund. Pursuant to U.S. GAAP, the Company evaluates its investments in mutual funds on a regular basis and consolidates such mutual funds for which it holds a controlling financial interest. When no longer deemed to hold a controlling financial interest, the Company would deconsolidate the fund and classify the remaining investment as either an equity method investment or as trading securities, as applicable.
The Company serves as the investment adviser for Manning & Napier Fund, Inc. series of mutual funds (the “Fund”), Exeter Trust Company Collective Investment Trusts (“CIT”), Rainier Investment Management Mutual Funds and Rainier Multiple Investment Trust. The Fund, CIT, Rainier Investment Management Mutual Funds and Rainier Multiple Investment

7

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Trust are legal entities, the business and affairs of which are managed by their respective boards of directors. As a result, each of these entities is a VOE. The Company holds, in limited cases, direct investments in a mutual fund (which are made on the same terms as are available to other investors) and consolidates each of these entities where it has a controlling financial interest or a majority voting interest. The Company's investments in the Fund amounted to approximately $1.4 million as of March 31, 2017 and $1.3 million as of December 31, 2016. As of March 31, 2017 and December 31, 2016, the Company maintained a controlling financial interest in one mutual fund, Manning & Napier Fund, Inc. Quality Equity Series, and consolidated the mutual fund.
Cash and Cash Equivalents
The Company generally considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are primarily held in operating accounts at major financial institutions and also in money market securities. Cash equivalents are stated at cost, which approximates market value due to the short-term maturity of these investments. The fair value of cash equivalents have been classified as Level 1 in accordance with the fair value hierarchy.
Investment Securities
Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities, and investments in mutual funds for which the Company provides advisory services. Realized and unrealized gains and losses on trading securities are recorded in net gains (losses) on investments in the consolidated statements of operations. At March 31, 2017, trading securities consist solely of investments held by the Company to provide initial cash seeding for product development purposes.
Investment securities classified as available-for-sale consist of U.S. Treasury notes and other short-term investments. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported, net of deferred income tax, as a separate component of accumulated other comprehensive income in stockholders’ equity until realized. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. If impairment is determined to be other-than-temporary, the carrying value of the security will be written down to fair value and the loss will be recognized in earnings. Realized gains and losses on sales of available-for-sale securities are computed on a specific identification basis and are recorded in net gains (losses) on investments in the consolidated statements of operations.
Property and Equipment
Property and equipment is presented net of accumulated depreciation of approximately $11.9 million and $11.6 million as of March 31, 2017 and December 31, 2016, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess cost over the fair value of the identifiable net assets of acquired companies. Identifiable intangible assets generally represent the cost of client relationships and investment management agreements acquired as well as trademarks. Goodwill and indefinite-lived assets are tested for impairment annually or more frequently if events or circumstances indicate that the carrying value may not be recoverable. Intangible assets subject to amortization are tested for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Goodwill and intangible assets require significant management estimate and judgment, including the valuation and expected life determination in connection with the initial purchase price allocation and the ongoing evaluation for impairment.
Operating Segments
The Company operates in one segment, the investment management industry.
Revenue
The majority of the Company’s revenues are based on fees charged to manage customers’ portfolios. Investment management fees are generally computed as a percentage of assets under management ("AUM") and recognized as earned. Fees for providing investment advisory services are computed and billed in accordance with the provisions of the applicable investment management agreements. For the Company’s separately managed accounts, clients either pay investment management fees in advance, typically for a semi-annual or quarterly period, or in arrears, typically for a monthly or quarterly period. When investment management fees are paid in advance, the Company defers the revenue and recognizes it over the applicable period. When investment management fees are paid in arrears, the Company estimates revenues based on AUM market values as of the most recent month end date, and adjusts to actual when billed. For mutual funds and collective investment trust vehicles, the Company’s fees are calculated and earned daily based on AUM. Investment management fees are presented net of cash rebates and fees waived pursuant to contractual expense limitations of the funds.

8

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The Company is contractually obligated to make payments to certain advisory clients with the intent of providing those clients a discounted fee. In accordance with ASC 605-50, Revenue Recognition - Customer Payments and Incentives, these payments are presented as a reduction to revenue. Incentives reported as a reduction to revenue for the three months ended March 31, 2017 and 2016 were approximately $3.3 million and $2.5 million, respectively.
The Company has agreements with third parties who provide distribution and administrative services for its mutual funds, collective investment trusts and certain separately managed accounts. Third party agreements are evaluated against ASC 605-45 Revenue Recognition - Principal Agent Considerations to determine whether revenue should be reported gross or net of payments to third-party service providers. In management's judgment there are various indicators that support gross revenue reporting, the most notable being the Company acts as primary obligor and therefore principal service provider. Based on this evaluation, investment management service revenue is recorded gross of distribution and administrative fees paid to third parties.
Advisory Agreements
The Company derives significant revenue from its role as advisor to affiliated mutual funds and collective investment trusts. Fees earned for advisory related services were approximately $24.1 million and $28.0 million for the three months ended March 31, 2017 and 2016, respectively, which represents greater than 10% of the Company's revenue in each period.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes existing accounting standards for revenue recognition and creates a single framework. The revenue standard contains principals that will be applied to determine the measurement of revenue and timing of recognition. We will adopt the new standard on its effective date of January 1, 2018. We have not yet selected whether we will adopt the standard using the retrospective approach with adjustment to each prior period or modified retrospective approach with the cumulative effect of initial application recognized at the date of initial application. We are continuing to assess the impact of adoption though early conclusions indicate the standard will not have a material impact on our financial condition and results of operations. While we have not identified material changes in the timing of revenue recognition, we continue to evaluate the presentation of certain revenue related costs on a gross versus net basis as well as the additional disclosures required by the standard.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income. ASU 2016-01 will be effective on January 1, 2018 and will result in a cumulative-effect adjustment to the balance sheet upon adoption. The Company is currently evaluating the impact that ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The new guidance will be effective for fiscal years beginning after December 15, 2018, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation - Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment award transactions. The guidance is effective for fiscal years beginning after December 15, 2016. The Company's adoption of these amendments on January 1, 2017 did not have a material impact on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, to clarify guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. The FASB issued the ASU with the intent of reducing diversity in practice regarding eight types of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company is evaluating the effect of adopting this new accounting standard.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. The ASU requires goodwill impairments to be measured on the basis of the fair value of the reporting unit relative to the reporting unit's carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. The ASU is effective for annual and interim impairment tests for periods beginning after December 15, 2019. Early adoption is allowed for annual and interim impairment tests occurring after January 1, 2017. The Company is evaluating the effect of adopting this new accounting standard.

9

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Note 3—Acquisitions
On April 30, 2016, the Company acquired a majority ownership interest in Rainier Investment Management, LLC ("Rainier”), an active investment management firm. Under the terms of the transaction, the Company initially acquired a 75% ownership interest in Rainier, with the remaining 25% ownership maintained by key professionals at Rainier. As of March 31, 2017, the Company's ownership interest in Rainier had increased to 82%, due to the forfeiture of unvested ownership interests by individuals retiring from Rainier during the fourth quarter of 2016.
Consideration transferred included an upfront cash payment on the transaction closing date of $13.0 million. Additional cash payments of up to $32.5 million over a four year period are contingent upon Rainier’s achievement of certain annual financial targets. The fair value of the liability for this contingent consideration recognized on the acquisition date was $3.5 million. As of March 31, 2017 and December 31, 2016, the fair value of the contingent liability was $0.
The transaction was accounted for by the Company using the acquisition method under ASC 805, Business Combinations. During the second quarter of 2016, the Company completed a preliminary allocation of the April 30, 2016 purchase price to the assets acquired and liabilities assumed. During the first quarter of 2017, certain adjustments were recorded to liabilities assumed and the purchase price allocation was finalized as of March 31, 2017. The final purchase price was allocated as follows (in thousands):
Assets acquired
 
Current assets
$
6,998

Property and equipment, net
783

Intangible assets
 
Client relationships
9,320

Trademarks
270

Goodwill
3,958

Total assets acquired
21,329

Liabilities assumed
 
Accounts payable and accrued expenses
4,023

Other liabilities
1,204

Total liabilities assumed
5,227

Purchase price
$
16,102

Note 4—Noncontrolling Interests
Manning & Napier holds an economic interest of approximately 17.8% in Manning & Napier Group, but as managing member controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statement of financial condition with respect to the remaining approximately 82.2% aggregate economic interest in Manning & Napier Group held by M&N Group Holdings and MNCC. Net income attributable to noncontrolling interests on the statements of operations represents the portion of earnings attributable to the economic interest in Manning & Napier Group held by the noncontrolling interests.

10

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following provides a reconciliation from “Income before provision for income taxes” to “Net income attributable to Manning & Napier, Inc.”:
 
 
 
Three months ended March 31,
 
 
2017
 
2016
 
 
(in thousands)
Income before provision for income taxes
 
$
17,857

 
$
23,858

Less: gain (loss) before provision for income taxes of Manning & Napier, Inc. (a)
 
3

 
(17
)
Income before provision for income taxes, as adjusted
 
17,854

 
23,875

Controlling interest percentage (b)
 
17.4
%
 
16.7
%
Net income attributable to controlling interest
 
3,102

 
3,979

Plus: gain (loss) before provision for income taxes of Manning & Napier, Inc. (a)
 
3

 
(17
)
Income before income taxes attributable to Manning & Napier, Inc.
 
3,105

 
3,962

Less: provision for income taxes of Manning & Napier, Inc. (c)
 
1,208

 
1,544

Net income attributable to Manning & Napier, Inc.
 
$
1,897

 
$
2,418

________________________
a)
Manning & Napier, Inc. incurs certain gains or expenses that are only attributable to it and are therefore excluded from the net income attributable to noncontrolling interests.
b)
Income before provision for income taxes is allocated to the controlling interest based on the percentage of units of Manning & Napier Group held by Manning & Napier, Inc. The amount represents the Company's weighted ownership of Manning & Napier Group for the respective periods.
c)
The consolidated provision for income taxes is equal to the sum of (i) the provision for income taxes for entities other than Manning & Napier, Inc. and (ii) the provision for income taxes of Manning & Napier, Inc. which includes all U.S. federal and state income taxes. The consolidated provision for income taxes was $1.3 million and $1.7 million for the three months ended March 31, 2017 and 2016, respectively.

As of March 31, 2017, a total of 63,941,860 units of Manning & Napier Group were held by the noncontrolling interests. Pursuant to the terms of the exchange agreement entered into at the time of the Company's initial public offering, such units may be exchangeable for shares of the Company's Class A common stock. For any units exchanged, the Company will (i) pay an amount of cash equal to the number of units exchanged multiplied by the value of one share of the Company's Class A common stock less a market discount and expected expenses, or, at the Company's election, (ii) issue shares of the Company's Class A common stock on a one-for-one basis, subject to customary adjustments. As the Company receives units of Manning & Napier Group that are exchanged, the Company's ownership of Manning & Napier Group will increase.
On March 31, 2017, M&N Group Holdings and MNCC exchanged a total of 1,842,711 Class A units of Manning & Napier Group for approximately $9.8 million in cash. Subsequent to the exchange the Class A units were retired, resulting in an increase in Manning & Napier's ownership in Manning & Napier Group. As of March 31, 2017, the cash payment was included in accrued expenses and other liabilities in the consolidated statement of financial condition. The following is the impact to the Company's equity ownership interest in Manning & Napier Group for the three months ended March 31, 2017:
 
Manning & Napier Group Class A Units Held
 
 
 

Manning & Napier
 
 
Noncontrolling Interests
 
Total
 
Manning & Napier Ownership %
As of December 31, 2016
13,826,575

 
65,784,571

 
79,611,146

 
17.4%
Class A Units exchanged

 
(1,842,711
)
 
(1,842,711
)
 
0.4%
As of March 31, 2017
13,826,575

 
63,941,860

 
77,768,435

 
17.8%
At March 31, 2017 and December 31, 2016, the Company had recorded a liability of $37.1 million representing the estimated payments due to the selling unit holders under the tax receivable agreement ("TRA") entered into between Manning & Napier and the other holders of Class A Units of Manning & Napier Group. Of these amounts, $2.4 million were included in accrued expenses and other liabilities at March 31, 2017 and December 31, 2016. The Company made no payments pursuant to the TRA during the three months ended March 31, 2017 and 2016.

11

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Obligations pursuant to the TRA are obligations of Manning & Napier. They do not impact the noncontrolling interests. These obligations are not income tax obligations. Furthermore, the TRA has no impact on the allocation of the provision for income taxes to the Company’s net income.
Note 5—Investment Securities
The following represents the Company’s investment securities holdings as of March 31, 2017 and December 31, 2016:
 
 
March 31, 2017
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury notes
 
$
7,093

 
$
9

 
$
(9
)
 
$
7,093

Short-term investments
 
22,137

 

 

 
22,137

 
 
 
 
 
 
 
 
29,230

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
5,265

Fixed income securities
 
 
 
 
 
 
 
7,758

Mutual funds
 
 
 
 
 
 
 
305

Mutual funds - consolidated funds
 
 
 
 
 
 
 
1,061

 
 
 
 
 
 
 
 
14,389

Total investment securities
 
 
 
 
 
 
 
$
43,619

 
 
December 31, 2016
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury notes
 
$
7,093

 
$
13

 
$
(6
)
 
$
7,100

Short-term investments
 
14,744

 

 

 
14,744

 
 
 
 
 
 
 
 
21,844

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
7,176

Fixed income securities
 
7,167

Mutual funds
 
 
 
 
 
 
 
288

Mutual funds - consolidated funds
 
 
 
 
 
 
 
995

 
 
 
 
 
 
 
 
15,626

Total investment securities
 
 
 
 
 
 
 
$
37,470

Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities and investments in mutual funds for which the Company provides advisory services. At March 31, 2017 and December 31, 2016, trading securities consist solely of investments held by the Company to provide initial cash seeding for product development purposes. The Company recognized approximately $0.6 million and $1.0 million of net unrealized gains related to investments classified as trading during the three months ended March 31, 2017 and 2016, respectively.
Investment securities classified as available-for-sale consist of U.S. Treasury notes and other short-term investments for compliance with certain regulatory requirements and to optimize cash management opportunities. As of March 31, 2017 and December 31, 2016, $0.6 million of these securities was considered restricted. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. No other-than-temporary impairment charges have been recognized by the Company during the three months ended March 31, 2017 and 2016.

12

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Note 6—Fair Value Measurements
Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. A fair value hierarchy is provided that gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
Level 1—observable inputs such as quoted prices in active markets for identical securities;
Level 2—other significant observable inputs (including but not limited to quoted prices for similar securities, interest rates, prepayment rates, credit risk, etc.); and
Level 3—significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
The following provides the hierarchy of inputs used to derive the fair value of the Company’s financial instruments measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016: 
 
 
March 31, 2017
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
5,265

 
$

 
$

 
$
5,265

Fixed income securities
 
1,136

 
6,622

 

 
7,758

Mutual funds
 
305

 

 

 
305

Mutual funds - consolidated funds
 
1,061

 

 

 
1,061

U.S. Treasury notes
 

 
7,093

 

 
7,093

Short-term investments
 
22,137

 

 

 
22,137

Total assets at fair value
 
$
29,904

 
$
13,715

 
$

 
$
43,619

 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$

 
$

 
$

 
$

Total liabilities at fair value
 
$

 
$

 
$

 
$

 
 
December 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
7,176

 
$

 
$

 
$
7,176

Fixed income securities
 
1,071

 
6,096

 

 
7,167

Mutual funds
 
288

 

 

 
288

Mutual funds - consolidated funds
 
995

 

 

 
995

U.S. Treasury notes
 

 
7,100

 

 
7,100

Short-term investments
 
14,744

 

 

 
14,744

Total assets at fair value
 
$
24,274

 
$
13,196

 
$

 
$
37,470

 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$

 
$

 
$

 
$

Total liabilities at fair value
 
$

 
$

 
$

 
$


Valuations of investments in fixed income securities and U.S. Treasury notes can generally be obtained through independent pricing services. For most bond types, the pricing service utilizes matrix pricing, which considers one or more of the following factors: yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type and current day trade information, as well as dealer supplied prices. These valuations are categorized as Level 2 in the hierarchy.
Contingent consideration was a component of the purchase price of Rainier (Note 3). The contingent consideration is payable over a four year period upon Rainier’s achievement of certain financial targets. The fair value of the contingent

13

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

consideration is calculated on a quarterly basis by forecasting Rainier’s adjusted earnings before interest, taxes and amortization ("EBITA") as defined by the purchase agreement over the contingency period with changes in the fair value included in other operating costs in the consolidated statements of operations.
There were no changes in contingent consideration liability measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2017. The fair value was $0 at March 31, 2017 and December 31, 2016.
The Company’s policy is to recognize transfers in and transfers out of the valuation levels as of the beginning of the reporting period. There were no transfers between Levels during the three months ended March 31, 2017.
Note 7—Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of March 31, 2017 and December 31, 2016 consisted of the following:
 
 
March 31, 2017
 
December 31, 2016
 
 
(in thousands)
Accrued bonus and sales commissions
 
$
8,559

 
$
18,342

Accrued payroll and benefits
 
2,910

 
3,430

Accrued sub-transfer agent fees
 
3,052

 
4,785

Dividends payable
 
1,199

 
2,397

Accrued distributions to noncontrolling interests
 
9,857

 

Amounts payable under tax receivable agreement
 
2,364

 
2,364

Accrued purchase of Class A units of Manning & Napier Group held by noncontrolling interests
 
9,803

 

Other accruals and liabilities
 
3,775

 
3,797

 
 
$
41,519

 
$
35,115

Note 8—Commitments and Contingencies
The Company may from time to time enter into agreements that contain certain representations and warranties and which provide general indemnifications. The Company may also serve as a guarantor of such obligations of one or more of the Manning & Napier Group entities. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects any risk of liability associated with such guarantees to be remote.
Regulation
As an investment adviser to a variety of investment products, the Company and its affiliated broker-dealer are subject to routine reviews and inspections by the SEC, Financial Industry Regulatory Authority, Inc., National Futures Association and U.S. Commodity Futures Trading Commission. From time to time, the Company may also be subject to claims, be involved in various legal proceedings arising in the ordinary course of its business and be subject to other contingencies. The Company does not believe that the outcome of any of these reviews, inspections or other legal proceedings will have a material impact on its consolidated financial statements; however, litigation is subject to many uncertainties, and the outcome of individual litigated matters is difficult to predict. The Company will establish accruals for matters that are probable, can be reasonably estimated, and may take into account any related insurance recoveries to the extent of such recoveries. As of March 31, 2017 and December 31, 2016, the Company has not accrued for any such claims, legal proceedings, or other contingencies.
Note 9—Earnings per Common Share
Basic earnings per share (“basic EPS”) is computed using the two-class method to determine net income available to Class A common stock. The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period. The Company's restricted Class A common shares granted under the 2011 Equity Compensation Plan (the "Equity Plan") have non-forfeitable dividend rights during their vesting period and are therefore considered participating securities under the two-class method. Under the two-class method, the Company's net income available to Class A common stock is reduced by the amount allocated to the unvested restricted Class A common stock. Basic EPS is calculated by dividing net income available to Class A common stock by the weighted average number of common shares outstanding during the period.
Diluted earnings per share (“diluted EPS”) is computed under the more dilutive of either the treasury method or the two-class method. For the diluted calculation, the weighted average number of common shares outstanding during the period is increased by the assumed conversion into Class A common stock of the unvested equity awards and the exchangeable units of Manning & Napier Group, to the extent that such conversion would dilute earnings per share.

14

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three months ended March 31, 2017 and 2016 under the two-class method:
 
 
Three months ended March 31,
 
 
2017
 
2016
 
 
(in thousands, except share data)
Net income attributable to controlling and noncontrolling interests
 
$
16,514

 
$
22,184

Less: net income attributable to noncontrolling interests
 
14,617

 
19,766

Net income attributable to Manning & Napier, Inc.
 
$
1,897

 
$
2,418

Less: allocation to participating securities
 
119

 
162

Net income available to Class A common stock
 
$
1,778

 
$
2,256

 
 
 
 
 
Weighted average shares of Class A common stock outstanding - basic
 
14,042,880

 
13,745,130

Dilutive effect from unvested equity awards
 
174,108

 
339,773

Weighted average shares of Class A common stock outstanding - diluted
 
14,216,988

 
14,084,903

Net income available to Class A common stock per share - basic
 
$
0.13

 
$
0.16

Net income available to Class A common stock per share - diluted
 
$
0.13

 
$
0.16

The Company’s Class B common stock represent voting interests and do not participate in the earnings of the Company. Accordingly, there is no basic or diluted EPS related to the Company’s Class B common stock.
For the three months ended March 31, 2017 and 2016, 940,000 and 1,010,000, respectively, unvested equity awards were excluded from the calculation of diluted earnings per common share because the effect would have been anti-dilutive. For the three months ended March 31, 2016, 120,919 unvested equity awards were also excluded from the calculation of diluted earnings per common share because the performance conditions associated with the vesting of such awards had not yet been satisfied.
At March 31, 2017 and 2016 there were 63,941,860 and 67,896,484 Class A Units of Manning & Napier Group outstanding, respectively, which, subject to certain restrictions, may be exchangeable for up to an equivalent number of the Company's Class A common stock. These units were not included in the calculation of diluted earnings per common share for the three months ended March 31, 2017 or for the three months ended March 31, 2016, because the effect would have been anti-dilutive.
Note 10—Equity Based Compensation
The Equity Plan was adopted by the Company's board of directors and approved by stockholders prior to the consummation of the Company's 2011 initial public offering. Under the Equity Plan, a total of 13,142,813 equity interests are authorized for issuance, and may be issued in the form of Class A common stock, restricted stock units, units of Manning & Napier Group, or certain classes of membership interests in the Company which may convert into units of Manning & Napier Group.
The following table summarizes the award activity for the three months ended March 31, 2017 under the Equity Plan:
 
 
Restricted
Stock Awards
 
Weighted Average Grant Date Fair Value
Stock awards outstanding at January 1, 2017
 
1,207,788

 
$
12.56

Granted
 

 
$

Vested
 

 
$

Forfeited
 

 
$

Stock awards outstanding at March 31, 2017
 
1,207,788

 
$
12.56

For the three months ended March 31, 2017 and 2016, the Company recorded approximately $0.8 million and $1.3 million, respectively, of compensation expense related to awards under the Equity Plan. As of March 31, 2017, there was unrecognized compensation expense related to Equity Plan awards of approximately $8.2 million, which the Company expects to recognize over a weighted average period of approximately 3.8 years.



15

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Note 11—Income Taxes
The Company is comprised of entities that have elected to be treated as either a limited liability company ("LLC") or a “C-Corporation". As such, the entities functioning as LLC’s are not liable for or able to benefit from U.S. federal and most state income taxes on their earnings, and earnings (losses) will be included in the personal income tax returns of each entity’s unit holders. The entities functioning as C-Corporations are liable for or able to benefit from U.S. federal and state and local income taxes on their earnings and losses, respectively.
The Company’s income tax provision and effective tax rate were as follows: 
 
 
Three months ended March 31,
 
 
2017
 
2016
 
 
(in thousands)
Earnings from continuing operations before income taxes
 
$
17,857

 
$
23,858

Effective tax rate
 
7.5
%
 
7.0
%
Provision for income taxes
 
1,343

 
1,674

Provision for income taxes @ statutory rate
 
6,071

 
8,350

Difference between tax at effective vs. statutory rate
 
$
(4,728
)
 
$
(6,676
)
For the three months ended March 31, 2017 and 2016, the difference between the Company’s recorded provision and the provision that would result from applying the U.S. statutory rate of 34% and 35%, respectively, is primarily attributable to the benefit resulting from the fact that a significant portion of the Company’s operations include a series of flow-through entities which are generally not subject to federal and most state income taxes. Accordingly, a portion of the Company’s earnings are not subject to corporate level taxes.
Note 12—Related Party Transactions
Transactions with noncontrolling members
From time to time, the Company may be asked to provide certain services, including accounting, legal and other administrative functions for the noncontrolling members of Manning & Napier Group. While immaterial, the Company has not received any reimbursement for such services.
The Company manages the personal funds of certain of the Company's executive officers, including William Manning. Pursuant to the respective investment management agreements, in some instances the Company waives or reduces its regular advisory fees for these accounts and personal funds utilized to incubate products. The aggregate value of the fees earned and fees waived was less than $0.1 million for the three months ended March 31, 2017 and 2016.
Affiliated fund transactions
The Company earns investment advisory fees and administrative service fees under agreements with affiliated mutual funds and collective investment trusts. The aggregate value of revenue earned was approximately $24.1 million and $28.0 million for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017 and December 31, 2016, amounts due from the affiliated mutual funds was approximately $6.5 million and $6.8 million, respectively. As of March 31, 2017 and December 31, 2016, amounts due from affiliated collective investment trusts was approximately $3.9 million and $4.5 million, respectively.
The Company incurs certain expenses on behalf of the collective investment trusts and has contractually agreed to limit its fees and reimburse expenses to limit operating expenses incurred by certain affiliated fund series. The aggregate value of fees waived and expenses reimbursed to, or incurred for, affiliated mutual funds and collective investment trusts was $1.3 million and $1.3 million for the three months ended March 31, 2017 and 2016, respectively.
Note 13—Subsequent Events
Distributions and dividends
On April 25, 2017, the Board of Directors approved a distribution from Manning & Napier Group to Manning & Napier and the noncontrolling interests of Manning & Napier Group. The amount of the distribution will be based on earnings for the quarter ended June 30, 2017, with a maximum amount of $10.0 million. Concurrently, the Board of Directors declared a $0.08 per share dividend to the holders of Class A common stock. The dividend is payable on or about August 1, 2017 to shareholders of record as of July 14, 2017.



16

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our views with respect to, among other things, our operations and financial performance. Words like "believes," "expects," "may," "estimates," "will," "should," "could," "intends," "likely," "plans," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, are used to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ materially from our expectations or beliefs are disclosed in the “Risk Factors” section, as well as other sections, of our Annual Report on Form 10-K which include, without limitation: changes in securities or financial markets or general economic conditions; a decline in the performance of our products; client sales and redemption activity; any loss of an executive officer or key personnel; changes in our business related to strategic acquisitions and other transactions; and changes of government policy or regulations. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Our Business
We are an independent investment management firm that provides a broad range of investment solutions, as well as a variety of consultative services that complement our investment process. Founded in 1970, we offer U.S. and non-U.S equity, fixed income, and a range of blended asset portfolios, such as life cycle funds and exchange-traded fund ("ETF")-based portfolios. We serve a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations. Our operations are based principally in the United States, with our headquarters located in Fairport, New York.
Market Developments
Financial markets have had and are likely to continue to have a significant impact on asset flows and the market value of our assets under management ("AUM"). Our one, three, and five year annualized returns for our key investment strategies have generally fallen short of their related benchmarks. In addition, we have experienced increased competition as a result of lower fee passive investment products which have gained popularity over the last decade, such as index and ETFs. As a result, we have seen AUM decline since 2014. We anticipate a continued decline in AUM through 2017 as our ability to improve cash flows going forward is dependent in part on our ability to achieve and sustain improved performance. Specifically, we received a cancellation notice from a retirement plan relationship that represented approximately 8% of our AUM as of March 31, 2017. Cash outflows of approximately $2.5 billion from this relationship occurred on April 3, 2017. In addition, we have received partial redemption or cancellation notices from four other large institutional relationships. Our current estimate of cash outflows from these relationships is approximately $1.5 to $2.0 billion. Though the timing is not certain, the outflows are expected to occur over the second and third quarters of 2017.
Our Products
We derive substantially all of our revenues from investment management fees earned from providing advisory services to separately managed accounts and mutual funds and collective investment trusts—including those offered by the Manning & Napier Fund, Inc., Exeter Trust Company, Rainier Investment Management Mutual Funds and Rainier Multiple Investment Trust.
Our separate accounts are primarily distributed through our Direct Channel, where our representatives form relationships with high net worth individuals, middle market institutions or large institutions that are working with a consultant. To a lesser extent, we also obtain a portion of our separate account distribution via third parties, either through our Intermediary Channel where national brokerage firm representatives or independent financial advisors select our separate account strategies for their clients, or through our Platform/Sub-Advisory Channel, where unaffiliated registered investment advisors approve our strategies for their product platforms. Our separate account products are a primary driver of our blended asset portfolios for high net worth and middle market institutional clients and financial intermediaries. In contrast, larger institutions and unaffiliated registered investment advisor platforms are a driver of our separate account equity portfolios.
Our mutual funds and collective investment trusts are distributed through financial intermediaries, including brokers, financial advisors, retirement plan advisors and platform relationships. We also distribute our mutual fund and collective investment trusts through our direct sales representatives, in particular within the defined contribution and institutional marketplace. Our mutual fund and collective investment trust products are an important driver of both our blended asset class and equity portfolios.

17

Table of Contents


Our AUM was $31.6 billion as of March 31, 2017. The composition of our AUM by vehicle and portfolio is illustrated in the table below:
 
 
March 31, 2017
AUM - by investment vehicle and portfolio
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Separately managed accounts
 
$
10,898.0

 
$
6,692.2

 
$
1,172.6

 
$
18,762.8

Mutual funds and collective investment trusts
 
8,953.8

 
3,804.2

 
108.6

 
12,866.6

Total
 
$
19,851.8

 
$
10,496.4

 
$
1,281.2

 
$
31,629.4

The composition of our separately managed accounts as of March 31, 2017, by channel and portfolio, is set forth in the table below:
 
 
March 31, 2017
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(dollars in millions)
Separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
$
8,116.0

 
$
5,198.9

 
$
1,065.7

 
$
14,380.6

Intermediary Channel
 
2,778.4

 
693.7

 
106.9

 
3,579.0

Platform/Sub-advisor Channel
 
3.6

 
799.6

 

 
803.2

Total
 
$
10,898.0

 
$
6,692.2

 
$
1,172.6

 
$
18,762.8

Percentage of separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
43
%
 
28
%
 
6
%
 
77
%
Intermediary Channel
 
15
%
 
4
%
 
0
%
 
19
%
Platform/Sub-advisor Channel
 
0
%
 
4
%
 
%
 
4
%
Total
 
58
%
 
36
%
 
6
%
 
100
%
Percentage of portfolio by channel
 
 
 
 
 
 
 
 
Direct Channel
 
74
%
 
78
%
 
91
%
 
77
%
Intermediary Channel
 
26
%
 
10
%
 
9
%
 
19
%
Platform/Sub-advisor Channel
 
0
%
 
12
%
 
%
 
4
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
Percentage of channel by portfolio
 
 
 
 
 
 
 
 
Direct Channel
 
57
%
 
36
%
 
7
%
 
100
%
Intermediary Channel
 
78
%
 
19
%
 
3
%
 
100
%
Platform/Sub-advisor Channel
 
0
%
 
100
%
 
%
 
100
%
Our separate accounts contributed 33% of our total gross client inflows for the three months ended March 31, 2017 and represented 59% of our total AUM as of March 31, 2017.
Our separate account business has historically been driven primarily by our Direct Channel, where sales representatives form a relationship with high net worth investors, middle market institutions, and large institutional clients working in conjunction with a consultant. The Direct Channel contributed 63% of the total gross client inflows for our separate account business for the three months ended March 31, 2017 and represented 77% of our total separate account AUM as of March 31, 2017. We anticipate the Direct Channel to continue to be the largest driver of new separate account business going forward, given the Direct Channel’s high net worth and middle market institutional client-type focus.
During the three months ended March 31, 2017, blended asset portfolios represented 74% of the separate account gross client inflows from the Direct Channel, while equity and fixed income portfolios represented 11% and 15% respectively. As of March 31, 2017, blended asset and equity portfolios represented 57% and 36%, respectively, of total Direct Channel separate account AUM, while our fixed income portfolios were 7%. We expect our focus on individuals and middle market institutions to continue to drive interest in our blended asset class portfolios, where we provide a comprehensive portfolio of stocks and bonds managed to a client’s specific investment objectives. Our relationships with larger institutions may also be a driver of

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growth in separately managed account equity strategies, though many of these larger institutions may seek exposure to non-U.S. equity strategies through commingled vehicles rather than separately managed accounts to limit related custody expenses.
To a lesser extent, we also obtain separate account business from third parties, including financial advisors or unaffiliated registered investment advisor programs or platforms. During the three months ended March 31, 2017, 16% of the total gross client inflows for separate accounts came from financial advisor representatives (Intermediary Channel), and an additional 21% came from registered investment advisor platforms (Platform/Sub-advisor Channel). The Intermediary and Platform/Sub-advisor Channels represented 23% of our total separate account AUM as of March 31, 2017.
New separate account business through the Intermediary Channel flowed into both our blended asset and equity portfolios, driven by advisors’ needs to identify either a one-stop solution (blended asset portfolio) or to fill a mandate within a multi-strategy portfolio. During the three months ended March 31, 2017, blended asset and equity portfolios represented 74% and 26%, respectively, of the separate account gross client inflows from the Intermediary Channel. As of March 31, 2017, 78% of our separate account AUM derived from financial advisors was allocated to blended asset portfolios, with 19% allocated to equity and 3% allocated to fixed income. We expect that equity and fixed income portfolios may see additional interest from financial advisors over time as more advisors structure a multi-strategy portfolio for their clients.
During the three months ended March 31, 2017, 100% of our separate account gross client inflows from the Platform/Sub-advisory Channel were into equity portfolios. Gross client inflows through the Platform/Sub-advisor Channel are primarily directed to our equity strategies, where we are filling a specific mandate within the investment program or platform product.
Our annualized separate account retention rate across all channels was approximately 85% during the three months ended March 31, 2017, representing the strong relationship focus that is inherent in our direct sales model, which is the primary driver of our separate account business.
The composition of our mutual fund and collective investment trust AUM as of March 31, 2017, by portfolio, is set forth in the table below:
 
 
March 31, 2017
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Mutual fund and collective investment trust AUM
 
$
8,953.8

 
$
3,804.2

 
$
108.6

 
$
12,866.6

Our mutual funds and collective investment trusts contributed 67% of our total gross client inflows for the three months ended March 31, 2017 and represented 41% of our total AUM as of March 31, 2017. As of March 31, 2017, our mutual fund and collective investment trust AUM consisted of 70% from blended asset portfolios and 29% from equity portfolios compared to 72% and 27% for blended asset and equity portfolios for the three months ended March 31, 2016. During the three months ended March 31, 2017, 78% and 20% of the gross client inflows were attributable to blended assets and equity portfolios, respectively.
Our mutual fund and collective investment trust business is driven by financial intermediaries and to a lesser extent, our direct sales representatives. Intermediary distribution of our mutual fund and collective investment trust vehicles is achieved via financial advisors, brokers and retirement plan advisors. Through our Intermediary Channel, we are focused on our blended asset life cycle fund vehicles given our emphasis on advisors who work with retirement plans. Our blended asset portfolios are also used by advisors seeking a multi-asset class solution for their retail clients. In addition, we are focused on equity and fixed income portfolios within the Intermediary Channel for intermediaries who wish to use our mutual funds as a component of a larger portfolio.
Through our Platform/Sub-advisor Channel, we have relationships with consultants and manager research teams at platforms in order to distribute our funds within advisory programs, or through placement on platforms' approved lists of funds. To facilitate our relationships with intermediaries, we currently have approximately 290 dealer relationships. These relationships are important to our retail business as well as our 401(k) life cycle and institutional business.
Our Direct Sales Representatives distribute our equity portfolios to large institutional clients with which we have direct relationships and often, the client’s consultant. Through the Direct Channel, we also form relationships with middle market and large market defined contribution plan sponsors seeking to use our life cycle mutual funds and collective investment trusts as default options on their investment menu. We expect this channel to focus on distributing blended asset and equity portfolio funds in the future.

Results of Operations
Below is a discussion of our consolidated results of operations for the three months ended March 31, 2017 and 2016.

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Components of Results of Operations
Overview
An important factor influencing inflows and outflows of our AUM is the investment performance of our various investment approaches. Our variety of stock selection strategies, absolute pricing discipline and active asset allocation management approach generally results in specific absolute and relative return characteristics in different market environments. For example, during a fundamental-driven bull market when prices are rising alongside improving fundamentals, we are likely to experience positive absolute returns and competitive relative returns. However, in a more momentum-driven bull market, when prices become disconnected from underlying fundamentals, or narrow market environment where a small handful of stocks outperform the average stock, we are likely to experience positive absolute returns but lagging relative returns. Similarly, during a valuation-driven bear market, when markets experience a period of price correction following a momentum-driven bull market, we are likely to experience negative absolute returns but strong relative returns. However, in a momentum-driven bear market, which is typically characterized by broad price declines in a highly correlated market, we are likely to experience negative absolute returns and potentially lagging relative returns. Essentially, our approach is likely to do well when markets are driven by fundamentals, but lag when markets are driven primarily by momentum.
Other components impacting our operating results include:
asset-based fee rates and changes in those rates;
the composition of our AUM among various portfolios, vehicles and client types;
changes in our variable costs, including incentive compensation and distribution, servicing and custody expenses, which are affected by our investment performance, level of our AUM and revenue; and
fixed costs, including changes to base compensation, vendor-related costs and investment spending on new products.
Assets Under Management and Investment Performance
The following table reflects the indicated components of our AUM for our investment vehicles for the three months ended March 31, 2017 and 2016:
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
 
 
(in millions)
 
 
 
 
 
 
 
 
As of December 31, 2016
$
18,801.9

 
$
12,881.1

 
$
31,683.0

 
59
%
 
41
%
 
100
%
Gross client inflows (1)
355.9

 
711.0

 
1,066.9

 
 
 
 
 
 
Gross client outflows (1)
(1,522.9
)
 
(1,504.4
)
 
(3,027.3
)
 
 
 
 
 
 
Market appreciation/(depreciation) & other (2)
1,127.9

 
778.9

 
1,906.8

 
 
 
 
 
 
As of March 31, 2017
$
18,762.8

 
$
12,866.6

 
$
31,629.4

 
59
%
 
41
%
 
100
%
Average AUM for period
$
18,982.4

 
$
12,859.6

 
$
31,842.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
$
20,735.4

 
$
14,706.8

 
$
35,442.2

 
59
%
 
41
%
 
100
%
Gross client inflows (1)
384.8

 
968.1

 
1,352.9

 
 
 
 
 
 
Gross client outflows (1)
(1,187.4
)
 
(1,542.2
)
 
(2,729.6
)
 
 
 
 
 
 
Market appreciation/(depreciation) & other (2)
356.4

 
274.5

 
630.9

 
 
 
 
 
 
As of March 31, 2016
$
20,289.2

 
$
14,407.2

 
$
34,696.4

 
58
%
 
42
%
 
100
%
Average AUM for period
$
20,242.1

 
$
14,014.8

 
$
34,256.9

 
 
 
 
 
 
________________________
(1)
Transfers of client assets between portfolios are included in gross client inflows and gross client outflows.
(2)
Market appreciation/(depreciation) and other includes investment gains/(losses) on assets under management, the impact of changes in foreign exchange rates and net flows from non-sales related activities including net reinvested dividends.

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The following table reflects the indicated components of our AUM for our portfolios for the three months ended March 31, 2017 and 2016:
 
Blended
Asset
 
Equity
 
Fixed
Income
 
Total
 
Blended
Asset
 
Equity
 
Fixed
Income
 
Total
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
$
19,909.4

 
$
10,463.9

 
$
1,309.7

 
$
31,683.0

 
63
%
 
33
%
 
4
%
 
100
%
Gross client inflows (1)
705.2

 
318.1

 
43.6

 
1,066.9

 
 
 
 
 
 
 
 
Gross client outflows (1)
(1,876.6
)
 
(1,053.2
)
 
(97.5
)
 
(3,027.3
)
 
 
 
 
 
 
 
 
Market appreciation/(depreciation) & other (2)
1,113.8

 
767.6

 
25.4

 
1,906.8

 
 
 
 
 
 
 
 
As of March 31, 2017
$
19,851.8

 
$
10,496.4

 
$
1,281.2

 
$
31,629.4

 
63
%
 
33
%
 
4
%
 
100
%
Average AUM for period
$
19,931.3

 
$
10,626.9

 
$
1,283.8

 
$
31,842.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
$
22,442.4

 
$
11,828.4

 
$
1,171.4

 
$
35,442.2

 
64
%
 
33
%
 
3
%
 
100
%
Gross client inflows (1)
938.8

 
346.1

 
68.0

 
1,352.9

 
 
 
 
 
 
 
 
Gross client outflows (1)
(1,655.5
)
 
(998.8
)
 
(75.3
)
 
(2,729.6
)
 
 
 
 
 
 
 
 
Market appreciation/(depreciation) & other (2)
310.5

 
296.5

 
23.9

 
630.9

 
 
 
 
 
 
 
 
As of March 31, 2016
$
22,036.2

 
$
11,472.2

 
$
1,188.0

 
$
34,696.4

 
64
%
 
33
%
 
3
%
 
100
%
Average AUM for period
$
21,796.8

 
$
11,279.8

 
$
1,180.3

 
$
34,256.9

 
 
 
 
 
 
 
 
________________________
(1)
Transfers of client assets between portfolios are included in gross client inflows and gross client outflows.
(2)
Market appreciation/(depreciation) and other includes investment gains/(losses) on assets under management, the impact of changes in foreign exchange rates and net flows from non-sales related activities including net reinvested dividends.


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Table of Contents

The following table summarizes the annualized returns for our key investment strategies and the relative performance of the industry benchmark over the periods indicated. Since inception and over long-term periods, these strategies have earned attractive returns on both an absolute and relative basis. These strategies are used across separate account, mutual fund and collective investment trust vehicles, and represent approximately 82% of our AUM as of March 31, 2017.
Key Strategies
AUM as of
March 31, 2017 (in millions)
Inception Date
 
Annualized Returns as of March 31, 2017 (3)
 
One Year
 
Three Year
 
Five Year
 
Ten Year
 
Market Cycle (1)
 
Inception
Long-Term Growth 30%-80% Equity Exposure

$
8,897.4

1/1/1973
 
8.9%
 
3.1%
 
6.7%
 
4.8%
 
6.3%
 
9.5%
Blended Benchmark: 55% S&P 500 Total Return / 45% Bloomberg Barclays Government/Credit Bond
 
 
 
9.5%
 
7.0%
 
8.5%
 
6.4%
 
5.3%
 
9.2%
Core Non-U.S. Equity
$
5,457.9

10/1/1996
 
5.4%
 
(2.6)%
 
2.9%
 
1.2%
 
5.4%
 
7.3%
Benchmark: ACWIxUS Index
 
 
 
13.1%
 
0.6%
 
4.4%
 
1.4%
 
3.2%
 
4.9%
Growth with Reduced Volatility 20%-60% Equity Exposure
$
4,058.3

1/1/1973
 
6.6%
 
2.4%
 
5.2%
 
4.4%
 
5.8%
 
8.8%
Blended Benchmark: 40% S&P 500 Total Return / 60% Bloomberg Barclays Government/Credit Bond
 
 
 
7.0%
 
5.9%
 
6.8%
 
5.9%
 
5.3%
 
8.8%
Equity-Oriented
$
2,635.9

1/1/1993
 
11.1%
 
3.6%
 
8.4%
 
4.8%
 
6.6%
 
9.8%
Blended Benchmark: 65% Russell 3000® / 20% ACWIxUS / 15% Bloomberg Barclays U.S. Aggregate Bond
 
 
 
14.4%
 
6.9%
 
9.8%
 
6.0%
 
4.9%
 
8.5%
Equity-Focused Blend
$
1,081.0

4/1/2000
 
10.4%
 
3.5%
 
7.6%
 
5.1%
 
6.8%
 
6.8%
Blended Benchmark: 53% Russell 3000/ 17% ACWIxUS/ 30% Bloomberg Barclays U.S. Aggregate Bond
 
 
 
11.8%
 
6.2%
 
8.5%
 
5.8%
 
5.1%
 
5.1%
Core Equity (Unrestricted) 90%-100% Equity Exposure
$
1,054.8

1/1/1995
 
13.7%
 
4.6%
 
10.2%
 
5.9%
 
7.4%
 
11.0%
Blended Benchmark: 80% Russell 3000® / 20% ACWIxUS
 
 
 
17.1%
 
7.9%
 
11.4%
 
6.3%
 
4.8%
 
8.9%
Core U.S. Equity
$
705.0

7/1/2000
 
15.7%
 
6.1%
 
11%
 
6.4%
 
N/A (2)
 
7.2%
Benchmark: Russell 3000® Index
 
 
 
18.1%
 
9.8%
 
13.2%
 
7.5%
 
5.1%
 
5.4%
Conservative Growth
$
641.4

4/1/1992
 
3.7%
 
1.8%
 
3.2%
 
3.9%
 
5.2%
 
6.0%
Blended Benchmark:15% Russell 3000/ 5% ACWIxUS/ 80% Bloomberg Barclays U.S. Intermediate Aggregate Bond
 
 
 
3.5%
 
3.4%
 
3.8%
 
4.6%
 
5.0%
 
6.2%
Aggregate Fixed Income
$
519.5

1/1/1984
 
0.8%
 
2.2%
 
2.2%
 
4.3%
 
4.9%
 
7.4%
Benchmark: Bloomberg Barclays U.S. Aggregate Bond
 
 
 
0.4%
 
2.7%
 
2.3%
 
4.3%
 
5.1%
 
7.3%
Rainier International Small Cap
$
469.3

3/28/2012
 
3.4%
 
3.9%
 
12.3%
 
N/A (2)
 
N/A (2)
 
12.3%
Benchmark: MSCI ACWIxUS Small Cap Index
 
 
 
12.3%
 
2.5%
 
6.7%
 
N/A (2)
 
N/A (2)
 
5.6%
Disciplined Value
$
448.8

11/1/2003
 
16.2%
 
8.6%
 
11.1%
 
8.8%
 
N/A (2)
 
10.7%
Benchmark: Russell 1000 Value
 
 
 
19.2%
 
8.7%
 
13.1%
 
5.9%
 
6.8%
 
8.4%
__________________________
(1)
The market cycle performance numbers are calculated from April 1, 2000 to March 31, 2017. We believe that a full market cycle time period should contain a wide range of market conditions and usually consists of a bear market, recovery and bull market stage. Our definition of the current market cycle includes the bear market that began with an abrupt decline in the technology sector (4/1/2000 - 9/30/2002), the subsequent failed recovery (10/1/2002 - 10/31/2007), the financial crisis bear market (11/1/2007 - 2/28/2009), and the current bull market (3/1/2009 - current). The period utilized in our current market cycle may differ from periods used by other investment managers.
(2)
Performance not available given the product's inception date.
(3)
Key investment strategy returns are presented net of fees. Benchmark returns do not reflect any fees or expenses.




22

Table of Contents

Revenue
Our revenues primarily consist of investment management fees earned from managing our clients’ AUM. We earn our investment management fees as a percentage of our clients’ AUM either as of a specified date or on a daily basis. Our investment management fees can fluctuate based on the average fee rate for our investment management products, which are affected by the composition of our AUM among various portfolios and investment vehicles.
The Company serves as the investment adviser for Manning & Napier Fund, Inc., Rainier Investment Management Mutual Funds, Exeter Trust Company Collective Investment Trusts and Rainier Multiple Investment Trust. The mutual funds are open-end mutual funds that primarily offer no-load share classes designed to meet the needs of a range of institutional and other investors. Exeter Trust Company, an affiliated New Hampshire-chartered trust company and Rainier Multiple Investment Trust sponsor collective investment trusts for qualified retirement plans, including 401(k) plans. These mutual funds and collective investment trusts comprised $12.9 billion, or 41%, of our AUM as of March 31, 2017. MNA and Rainier also serve as the investment advisor to all of our separately managed accounts, managing $18.8 billion, or 59%, of our AUM as of March 31, 2017, including assets managed as a sub-advisor to pooled investment vehicles and assets in client accounts invested in the Fund. For the period ended March 31, 2017 approximately 97% of our revenue was earned from clients located in the United States.
In response to industry trends and increasing fee pressure from passive strategies offered by our competitors as well as the anticipated impact of regulatory changes, management is in the process of reviewing our fund fee structures and levels. The financial impacts of any potential changes including reduced management fees and other operating expenses, could begin to occur starting in the second half of 2017.
Operating Expenses
Our largest operating expenses are employee compensation and distribution, servicing and custody expenses, discussed further below, with a significant portion of these expenses varying in a direct relationship to our absolute and relative investment management performance, as well as AUM and revenues. We review our operating expenses in relation to the investment market environment and changes in our revenues. However, we are generally willing to make expenditures as necessary even when faced with declining rates of growth in revenues in order to support our investment products, our client service levels, strategic initiatives and our long-term value.
Compensation and related costs. Employee compensation and related costs represent our largest expense, including employee salaries and benefits, incentive compensation to investment and sales professionals and equity-based compensation issued under our equity compensation plan. These costs are affected by changes in the employee headcount, the mix of existing job descriptions, competitive factors, the addition of new skill sets, variations in the level of our AUM and revenues, changes in our stock price reflected in our share-based compensation and/or the number of awards issued. In addition, incentive compensation for our research team considers the cumulative impact of both absolute and relative investment performance over the trailing one-, two- and three-year time periods, with more weight placed on the recent periods. As such, incentive compensation paid to our research team will vary based on absolute and relative investment performance.
Distribution, servicing and custody expenses. Distribution, servicing and custody expense represent amounts paid to various platforms that distribute our mutual funds and collective trust funds, as well as costs for custodial services, shareholder