SEI INVESTMENTS CO (SEIC) FY 2021 MD&A

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

(In thousands, except share and per-share data)

This discussion reviews and analyzes the consolidated financial condition at December 31, 2021 and 2020, the consolidated results of operations for the years ended December 31, 2021, 2020 and 2019, and other factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report.

Certain information contained in this discussion is or may be considered forward-looking. Forward-looking statements relate to future operations, strategies, financial results, expenditures and other uses of capital or other developments. Forward-looking statements are based upon estimates and assumptions that involve certain judgments, risks and uncertainties, many of which are beyond our control or are subject to change. Although we believe our assumptions are reasonable, they could be inaccurate. Our actual future revenues and income could differ materially from our expected results. Further information about factors that could materially affect our results of operations and financial condition include, but are not limited to, the discussion contained in Item 1A, Risk Factors, in this Annual Report on Form 10-K. We have no obligation to publicly update or revise any forward-looking statements.

Overview

Consolidated Summary

SEI is a leading global provider of technology-driven wealth and investment management solutions. We deliver comprehensive platforms, services and infrastructure–encompassing technology, operational, and investment management services–to help wealth managers, financial advisors, investment managers, family offices, institutional and private investors create and manage wealth. Investment processing fees are earned as either monthly fees for contracted services or as a percentage of the market value of our clients' assets processed on our platforms. Investment operations and investment management fees are earned as a percentage of assets under management, administration or advised assets. As of December 31, 2021, through our subsidiaries and partnerships in which we have a significant interest, we manage, advise or administer approximately $1.3 trillion in hedge, private equity, mutual fund and pooled or separately managed assets, including approximately $405.1 billion in assets under management and $911.9 billion in client assets under administration. Our affiliate, LSV Asset Management (LSV), manages $99.0 billion of assets which are included as assets under management.

Condensed Consolidated Statements of Operations for the years ended 2021, 2020 and 2019 were:

* Variances noted "NM" indicate the percent change is not meaningful.

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Significant Items Impacting Our Financial Results in 2021

Revenues increased $234.3 million, or 14%, to $1.9 billion in 2021 compared to 2020. Net income increased $99.3 million, or 22%, to $546.6 million and diluted earnings per share increased to $3.81 per share in 2021 compared to $3.00 per share in 2020. We believe the following items were significant to our business results during 2021:

•Revenue from Asset management, administration and distribution fees increased from higher average assets under administration from market appreciation and positive cash flows from new and existing clients. Average assets under administration increased $137.3 billion, or 19%, to $855.0 billion during 2021 as compared to $717.7 billion during 2020.

•Revenue from Asset management, administration and distribution fees also increased from higher assets under management. Average assets under management, excluding LSV, increased $51.1 billion, or 21%, to $293.7 billion during 2021 as compared to $242.6 billion during 2020. The increase was primarily due to market appreciation from the recovery of the capital markets during the later half of 2020 and throughout 2021. Defined benefit plan client losses in the Institutional Investors segment partially offset the increase and negatively impacted our asset-based revenues.

•Information processing and software servicing fees in the Private Banks segment increased by $32.1 million during 2021 due to higher asset balances processed on SWP.

•Earnings from LSV increased by $20.4 million, or 17%, in 2021 due to higher assets under management from market appreciation and new clients. Negative cash flows from existing clients and client losses partially offset the increase in earnings from LSV.

•Operating expenses increased primarily from direct costs related to increased revenues and higher personnel costs due to business growth and competitive labor markets.

•Stock-based compensation expense increased $14.4 million during 2021 due to a change in estimate of the timing of when stock-option vesting targets would be achieved and stock option awards granted in late 2020, net of forfeitures (See the caption "Stock-based Compensation" later in this discussion for more information).

•We capitalized $25.9 million in 2021 for SWP as compared to $22.3 million in 2020. Amortization expense related to SWP increased to $47.8 million during 2021 as compared to $43.9 million during 2020 due to additional enhancements placed into service.

•The effective tax rate during 2021 was 21.2% as compared to 21.3% during 2020.

•On November 12, 2021, we acquired all ownership interests of Novus Partners (Novus), a global portfolio intelligence platform company, to expand our capabilities for clients of the Institutional Investors segment. We borrowed $40.0 million under the credit facility to fund this acquisition. In February 2022, we made a principal payment of $10.0 million against our outstanding credit facility borrowings. The results of operations of Novus are included in the Institutional Investors segment (See Notes 6 and 14 to the Notes to Consolidated Financial Statements).

•We continued the stock repurchase program during 2021 and purchased approximately 6,747,000 shares at an average price of $61.00 per share for a total cost of $411.5 million.

Significant Items Impacting Our Financial Results in 2020

Revenues increased $34.2 million, or 2%, to $1.7 billion in 2020 compared to 2019. Net income decreased $54.1 million, or 11%, to $447.3 million and diluted earnings per share decreased to $3.00 per share in 2020 compared to $3.24 per share in 2019. We believe the following items were significant to our business results during 2020:

•Revenue from Asset management, administration and distribution fees increased primarily from higher assets under administration in the Investment Managers segment due to positive cash flows from new and existing clients and market appreciation. Average assets under administration increased $81.8 billion, or 13%, to $717.7 billion during 2020 as compared to $635.8 billion during 2019.

•Revenue from Asset management, administration and distribution fees also increased from higher assets under management. Average assets under management, excluding LSV, increased $11.6 billion, or 5%, to $242.6 billion during 2020 as compared to $231.0 billion during 2019. The increase was primarily due to market appreciation from the strong recovery of capital markets during the second half of the year after the widespread economic shutdown caused by the emergence of the COVID-19 pandemic in March 2020.

•Information processing and software servicing fees in the Private Banks segment decreased by $7.1 million during 2020 due to previously announced client losses.

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•Earnings from LSV decreased by $34.8 million, or 23%, in 2020 due to lower assets under management from negative cash flows from existing clients, lost clients and market depreciation due to the general underperformance of the value equity style favored by LSV.

•We continued to invest in new business opportunities such as the One SEI strategy and IT Services offering. The majority of these costs are recorded in the Investments in New Businesses segment and are included in Consulting, outsourcing and professional fees on the accompanying Consolidated Statements of Operations.

•Operating expenses in the Investment Managers segment increased primarily due to higher personnel costs to service new clients.

•Travel and promotional-related expenses declined during 2020 as sales and client relationship personnel adapted to COVID-19 restrictions. Travel expenses are included in Compensation, benefits and other personnel costs on the accompanying Consolidated Statements of Operations. Promotional-related expenses are included in Facilities, supplies and other costs on the accompanying Consolidated Statements of Operations.

•We capitalized $22.3 million in 2020 for SWP as compared to $33.1 million in 2019. Amortization expense related to SWP increased to $43.9 million during 2020 as compared to $42.3 million during 2019 due to continued development. The proportion of expenses related to maintenance and support of SWP, which are not capitalized, increased as compared to costs related to development and enhancements eligible for capitalization.

•The effective tax rate during 2020 was 21.3% as compared to 20.6% during 2019. The increase in the effective tax rate was primarily due to reduced tax benefits from a lower volume of stock option exercise activity and an increase in the state effective tax rate.

•We purchased approximately 8,008,000 shares under the stock repurchase program during 2020 at an average price of $53.04 per share for a total cost of $424.7 million.

Other Significant Items Impacting Our Business

Impact of COVID-19

The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic or other widespread health emergency or concerns over the possibility of such an emergency, could create economic and financial disruptions, and could lead to operational difficulties that could impair our ability to manage our business. In December 2019, a novel strain of coronavirus (COVID-19) was identified in Wuhan, China. COVID-19 quickly spread globally, leading the World Health Organization to declare the COVID-19 virus outbreak a global pandemic in March 2020. Since that time, governmental authorities have implemented numerous and varying measures to stall the spread and ameliorate the impact of COVID-19, including travel bans and restrictions, quarantines, curfews, shelter in place and safer-at-home orders, business shutdowns and closures, and have also implemented multi-step policies with the goal of re-opening domestic and global markets. Certain jurisdictions have begun re-opening only to return to restrictions in the face of increases in new COVID-19 cases. Recent developments include the phased re-opening of domestic and global markets to varying degrees.

In March 2020, we executed upon our business resiliency and contingency plans. To date, our remote capabilities have proven to be effective during the disruption caused by the COVID-19 pandemic with a majority of our workforce working remotely.

We continue to closely monitor the domestic and international landscape for changes in governmental measures both in the United States and in the locations where we rely on critical outsourced services. We continue to be in regular contact with regulators, clients and vendors to confirm the measures taken to continue operating during this crisis, taking into consideration the latest announcements from state and federal authorities. We are also in continuous communication with our workforce to provide for the health and welfare of our employees working remotely and have implemented a return plan that is available for review on our website for those employees working in our operational offices. We will monitor the ability of these individuals to work as safely as possible at our offices and make adjustments to the number of on-site personnel (either increases or decreases) accordingly. We expect that the individual circumstances of our employees regarding school, childcare, care-giving and underlying health concerns will significantly impact our ability to return staff to their primary office locations.

The majority of our revenues are based on the value of assets invested in investment products that we manage or administer which are affected by changes in the capital markets and the portfolio strategy of our clients or their customers. The strong recovery of the capital markets after the widespread economic shutdowns in response to the emergence of the pandemic has had a positive impact on our asset-based fees thereby increasing our base revenues. Any prolonged future downturns in general capital market conditions or long-term client portfolio strategies directing significant assets into lower margin products could have adverse effects on our revenues and earnings derived from assets under management and administration.

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While we have developed and implemented and continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols designed to mitigate the potentially negative impact of COVID-19 to our employees and our business, the extent of the impact of the pandemic on our business and financial results will continue to depend on numerous evolving factors that we are not able to accurately predict and which will vary by market, including the duration and scope of the pandemic, the effectiveness of vaccinations, the implications arising out of the emerging and potentially yet to be identified variants of COVID-19, global economic conditions during and after the pandemic, governmental actions that have been taken, or may be taken in the future, in response to the pandemic, the extent that critical public and private infrastructure functions upon which we rely are suspended and changes in investor and consumer behavior in response to the pandemic. The resulting market conditions may adversely affect our revenues and earnings derived from assets under management and administration (See the caption "Workplace Health and Safety" in Item 1, Business, in this Annual Report on Form 10-K for more information).

Infrastructure Investments

We believe that a critical component of our long-term success is our ability to continually improve our technology infrastructure. Accordingly, we endeavor to:

•automate previously manual processes in our operation, compliance, risk, control and other functions in order to create internal efficiencies;

•evolve our cyber-security and data privacy systems to combat known and emerging threats and meet and exceed industry and regulatory standards around the world;

•increase the resiliency and reliability of our systems; and

•create more efficient technology solutions to scale our various businesses.

We will continue to invest in improving our technology infrastructure in order to maintain the foundation that we believe enables us to best serve our clients’ needs.

One SEISM Strategy

In 2020, we invested in our One SEI strategy. The One SEI strategy is a company-wide initiative to open business opportunities across the entire company by leveraging existing and new SEI platforms and making them accessible to all types of clients, adjacent markets and other non-SEI platforms. As we execute on our strategy, we have incurred significant costs during 2020 and throughout 2021 to integrate, modularize and leverage these technologies in our service offerings for the front, middle and back-office. The majority of these costs have been recognized in the Investments in New Businesses segment. To date, we have not capitalized any software development costs related to the One SEI strategy. We expect the level of investments related to the One SEI strategy to decline in 2022.

Investment Processing and Software Servicing Fees

Investment processing and software servicing fees in our Private Banks segment primarily include application and business-process-outsourcing services, professional fees and transaction-based services. Application and business-process-outsourcing services revenues are based upon the type and number of investor accounts serviced or as a percentage of the market value of the clients’ asset processed on our platforms. Professional services revenues are earned from contracted, project-oriented services. Transaction-based revenues are primarily earned from fees earned on securities trades executed on behalf of our clients. Approximately 46% of our investment processing and software servicing fees are earned as a percentage of the market value of clients’ asset processed, primarily from SWP and our mutual fund trading solution clients.

Investment Management Platforms

Our investment management platforms include investment management programs and back-office investment processing outsourcing services and are generally offered on a bundled basis. Although we believe the breadth of our business solutions offer a competitive advantage, factors such as the underperformance of investment products that we manage relative to our competitors or to benchmarks and client preferences for passive investment products offered through an unbundled model have resulted in cash outflows and a loss of management fees primarily impacting the Investment Advisors segment.

Acquisitions and Asset Purchases in 2021

During 2021, we completed the acquisitions of Novus and Finomial which we believe will enhance our capabilities, expand our competitive market presence and enhance our growth opportunities in our markets. We also purchased a technology platform providing digital collaboration tools for financial advisors and a defined contribution master trust in the United Kingdom. Through these transactions, we acquired intangible assets related to technology, trade names and client relationships which are amortized over the estimated useful life of the assets. We expect amortization expense from the intangible assets acquired to be approximately $8.9 million in 2022 and our total amortization expense from all intangible assets to increase by approximately $7.0 million from $5.3 million in 2021 to $12.3 million in 2022.

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Amortization of Capitalized Software Development Costs

Our capitalized software development costs are amortized on a project basis using the straight-line method over the estimated economic life of the product or enhancement. The capitalization of our initial development work related to SWP began in mid-2007 when the platform was determined to be ready for its intended use. The amortization related to the initial software development costs capitalized in 2007 will end in the second quarter of 2022. As a result, we expect amortization expense related to SWP to decline by approximately $14.5 million from $47.8 million in 2021 to $33.3 million in 2022.

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Ending Asset Balances

This table presents ending asset balances of our clients, or of our clients’ customers, for which we provide management or administrative services through our subsidiaries and partnerships in which we have a significant interest.

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(A)Client assets under administration in the Investment Managers segment include $12.4 billion of assets that are at fee levels below our normal full service assets (as of December 31, 2021).

(B)    Equity and fixed-income programs include assets managed by LSV in which fees are based on performance only. The ending value of these assets as of December 31, 2021 was $2.4 billion.

(C)    Equity and fixed-income programs include $7.9 billion of assets invested in various asset allocation funds at December 31, 2021.

(D)    In addition to the numbers presented, SEI also administers an additional $14.4 billion in Funds of Funds assets (as of December 31, 2021) on which SEI does not earn an administration fee.

(E)    Platform assets under management and Platform-only assets combined are total Platform assets in the Investment Advisors segment.

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Average Asset Balances

This table presents average asset balances of our clients, or of our clients’ customers, for which we provide management or administrative services through our subsidiaries and partnerships in which we have a significant interest.

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(A)    Average client assets under administration in the Investment Managers segment for the year ended December 31, 2021 include $32.6 billion that are at fee levels below our normal full service assets.

(B)    Equity and fixed-income programs include assets managed by LSV in which fees are based on performance only. The average value of these assets for the year ended December 31, 2021 was $2.3 billion.

(C)    Equity and fixed-income programs include $7.9 billion of average assets invested in various asset allocation funds for the year ended December 31, 2021.

(D)    In addition to the numbers presented, SEI also administers an additional $13.6 billion of average assets in Funds of Funds assets for the year ended December 31, 2021 on which SEI does not earn an administration fee.

(E)    Platform assets under management and Platform-only assets combined are total Platform assets in the Investment Advisors segment.

In the preceding tables, assets under management are total assets of our clients or their customers invested in our equity and fixed-income investment programs, collective trust fund programs, and liquidity funds for which we provide asset management services through our subsidiaries and partnerships in which we have a significant interest. Advised assets include assets for which we provide advisory services through a subsidiary to the accounts but do not manage the underlying assets. Assets under administration include total assets of our clients or their customers for which we provide administrative services, including client fund balances for which we provide administration and/or distribution services through our subsidiaries and partnerships in which we have a significant interest. The assets presented in the preceding tables do not include assets processed on SWP and are not included in the accompanying Consolidated Balance Sheets because we do not own them.

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Business Segments

Revenues, Expenses and Operating profit (loss) for our business segments for the year ended 2021 compared to the year ended 2020, and for the year ended 2020 compared to the year ended 2019 were:

For additional information pertaining to our business segments, see Note 12 to the Consolidated Financial Statements.

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Private Banks

Revenues increased $38.2 million, or 8%, in 2021 compared to the prior year. Revenues during 2021 were primarily affected by:

•Increased investment processing fees from new SWP client conversions and growth from existing SWP clients, partially due to market appreciation;

•Increased investment management fees from existing international clients due to market appreciation;

•Increased non-recurring professional service fees and one-time early termination fees from existing clients; and

•The positive impact from foreign currency exchange rate fluctuations of the British pound and Canadian dollar on our foreign operations; partially offset by

•Decreased investment management fees from liquidity products; and

•Decreased investment processing fees from the loss of clients.

Revenues decreased $14.9 million, or 3%, in 2020 compared to the prior year. Revenues during 2020 were primarily affected by:

•Decreased investment processing fees from the loss of clients;

•Decreased investment management fees from existing international clients due to negative cash flows and the significant market volatility during 2020; and

•Lower recurring investment processing fees earned on our mutual fund trading solution; partially offset by

•Increased investment processing fees from new SWP client conversions and growth from existing SWP clients.

Operating margins were 6% in 2021 and 2% in 2020. Operating income increased $21.9 million, or 245%, in 2021 compared to the prior year. Operating income in 2021 was primarily affected by:

•An increase in revenues; and

•Decreased non-capitalized costs, mainly personnel and consulting costs, related to maintenance, support and client migrations to SWP; partially offset by

•Increased direct expenses associated with increased investment management fees from existing international clients;

•Increased amortization expense related to SWP; and

•Increased personnel and stock-based compensation costs.

Operating margins were 2% in 2020 and 6% in 2019. Operating income decreased $18.2 million, or 67%, in 2020 compared to the prior year. Operating income in 2020 was primarily affected by:

•A decrease in revenues; and

•Increased non-capitalized costs, mainly personnel and consulting costs, related to maintenance, support and client migrations to SWP; partially offset by

•Decreased direct expenses associated with decreased investment management fees from existing international clients; and

•Decreased promotion and travel costs due to COVID-19 restrictions.

Investment Advisors

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Revenues increased $75.4 million, or 18%, in 2021 compared to the prior year. Revenues during 2021 were primarily affected by:

•Increased separately managed account program fees from positive cash flows into our Strategist programs; and

•The positive impact to investment management fees from market appreciation; partially offset by

•Negative cash flows from SEI-sponsored mutual funds.

Revenues increased $3.8 million, or 1%, in 2020 compared to the prior year. Revenues during 2020 were primarily affected by:

•Increased separately managed account program fees from positive cash flows into new and existing SEI-sponsored programs; partially offset by

•The negative impact to investment management fees from the significant market volatility during 2020; and

•Negative cash flows from SEI-sponsored mutual funds and a decrease in average basis points earned on assets.

Operating margins were 50% in 2021 and 49% in 2020. Operating income increased $41.0 million, or 20%, in 2021 compared to the prior year. Operating income in 2021 was primarily affected by:

•An increase in revenues; partially offset by

•Increased direct expenses associated with increased assets into our separately managed account program; and

•Increased promotion costs as well as increased personnel and stock-based compensation costs.

Operating margins were 49% in 2020 and 48% in 2019. Operating income increased $6.4 million, or 3%, in 2020 compared to the prior year. Operating income in 2020 was primarily affected by:

•An increase in revenues; and

•Decreased promotion and travel costs due to COVID-19 restrictions; partially offset by

•Increased direct expenses associated with increased assets into our separately managed account program.

Institutional Investors

Revenues increased $26.2 million, or 8%, in 2021 compared to the prior year. Revenues during 2021 were primarily affected by:

•Increased investment management fees from market appreciation;

•Asset funding from new sales of our OCIO platform;

•Performance fees associated with SEI-sponsored investment products; and

•The positive impact from foreign currency exchange rate fluctuations between the U.S. dollar and the British pound on our foreign operations; partially offset by

•Defined benefit client losses.

Revenues decreased $4.4 million, or 1%, in 2020 compared to the prior year. Revenues during 2020 were primarily affected by:

•Defined benefit client losses, mainly resulting from acquisitions and plan curtailments; partially offset by

•Asset funding from new sales of our OCIO platform; and

•Increased investment management fees from market appreciation.

Operating margins were 51% in 2021 and 53% in 2020. Operating income increased slightly in 2021 compared to the prior year. Operating income during 2021 was primarily affected by:

•An increase in revenues; mostly offset by

•Increased direct expenses associated with investment management fees; and

•Increased personnel and stock-based compensation costs.

Operating margins were 53% in 2020 and 52% in 2019. Operating income decreased slightly in 2020 compared to the prior year. Operating income during 2020 was primarily affected by:

•A decrease in revenues; partially offset by

•Decreased direct expenses associated with investment management fees; and

•Decreased travel costs due to COVID-19 restrictions.

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Investment Managers

Revenues increased $91.7 million, or 19%, in 2021 compared to the prior year. Revenues during 2021 were primarily affected by:

•Higher valuations of existing client assets from market appreciation; and

•Positive cash flows into alternative, traditional and separately managed account offerings from new and existing clients; partially offset by

•Client losses and fund closures.

Revenues increased $48.7 million, or 11%, in 2020 compared to the prior year. Revenues during 2020 were primarily affected by:

•Positive cash flows into alternative, traditional and separately managed account offerings from new and existing clients; and

•Higher valuations of existing client assets from market appreciation; partially offset by

•Client losses and fund closures.

Operating margins were 40% in 2021 and 37% in 2020. Operating income increased $52.0 million, or 29%, in 2021 compared to the prior year. Operating income during 2021 was primarily affected by:

•An increase in revenues; partially offset by

•Increased costs associated with new business, primarily personnel expenses and third-party vendor costs; and

•Increased non-capitalized investment spending, mainly consulting costs.

Operating margins were 37% in 2020 and 36% in 2019. Operating income increased $21.7 million, or 14%, in 2020 compared to the prior year. Operating income during 2020 was primarily affected by:

•An increase in revenues; and

•Decreased promotion and travel costs due to COVID-19 restrictions; partially offset by

•Increased costs associated with new business, primarily personnel expenses and third-party vendor costs; and

•Increased non-capitalized investment spending, mainly consulting costs.

Other

Corporate overhead expenses

Corporate overhead expenses primarily consist of general and administrative expenses and other costs not directly attributable to a reportable business segment. Corporate overhead expenses were $91.9 million, $74.0 million and $72.2 million in 2021, 2020 and 2019, respectively. The increase in corporate overhead expenses during 2021 is primarily due to an increase in personnel costs, stock-based compensation, consulting and professional fees. The increase in corporate overhead expenses during 2020 was primarily due to an increase in personnel costs and increased professional fees related to our initiative to identify tactical and strategic improvements to our operational resiliency plans and capabilities.

Other income and expense items

Other income and expense items on the accompanying Consolidated Statements of Operations consist of:

Net (loss) gain from investments

Net losses from investments during 2021 and 2020 were primarily due to realized losses related to available-for-sale debt securities held for regulatory compliance purposes. Unrealized gains recorded in current earnings related to the investment funds sponsored by LSV, equity holdings and SEI-sponsored mutual funds partially offset the losses (See Note 5 to the Consolidated Financial Statements).

Interest and dividend income

Interest and dividend income is earned based upon the amount of cash that is invested daily. The decreases in interest and dividend income in 2021 and 2020 were due to an overall decline in interest rates.

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Equity in earnings of unconsolidated affiliates

Equity in earnings of unconsolidated affiliate reflects our 38.7% ownership interest in LSV. The table below presents the revenues and net income of LSV and our proportionate share in LSV's earnings.

The increase in earnings from LSV in 2021 was due to higher assets under management from market appreciation and new clients. Increased performance fees also positively impacted earnings from LSV. Negative cash flows from existing clients and client losses partially offset the increase in earnings. Average assets under management by LSV increased $14.5 billion to $99.6 billion during 2021 as compared to $85.0 billion during 2020, an increase of 17%. The decline in earnings from LSV in 2020 was due to lower assets under management from negative cash flows from existing clients, lost clients and market depreciation due to the general underperformance of the value equity style favored by LSV.

Income Taxes

Our effective tax rate was 21.2% for 2021, 21.3% for 2020 and 20.6% for 2019. The effective tax rate is affected by recurring items, such as the U.S. federal tax rates and tax rates in various states and foreign jurisdictions and the relative amount of income earned in those jurisdictions. The income earned by jurisdiction has been fairly consistent. The effective tax rate is also affected by discrete items that may occur in any given year, but are not consistent from year to year.

Below are the most significant recurring and discrete items (See Note 11 to the Consolidated Financial Statements for more information):

The increase in the effective rate in 2020 was primarily due to reduced tax benefits related to the lower volume of stock option exercises as compared to the prior year and an increase in the state effective tax rate partially offset by a decrease in foreign tax expense mainly related to a one time change in method for the Global Intangible Low Taxed Income (GILTI).

Stock-Based Compensation

During 2021, 2020 and 2019, we recognized approximately $41.5 million, $27.0 million and $24.6 million, respectively, in stock-based compensation expense. Options do not vest due to the passage of time but as a result of the achievement of financial vesting targets. Options granted included a service condition which requires a minimum two or four year waiting period from the grant date along with the attainment of the applicable financial vesting target. The amount of stock-based compensation expense recognized is based upon an estimate of when the financial vesting targets may be achieved. Any change in estimate could result in the remaining amount of stock-based compensation expense to be accelerated, spread out over a longer period, or reversed. This may cause volatility in the recognition of stock-based compensation expense and materially affect earnings.

During 2021, 2020 and 2019, we revised the estimates of when certain vesting targets were expected to be achieved. These changes in estimates resulted in an increase in stock-based compensation expense of $5.9 million in 2021, a decrease in stock-based compensation expense of $2.7 million in 2020, and an increase in stock-based compensation expense of $2.9 million in 2019.

There was approximately $104.8 million of unrecognized compensation cost related to unvested employee stock options at December 31, 2021 and we expect to recognize approximately $46.3 million in stock-based compensation costs in 2022. The expected increase in expense from 2021 is due to new options granted in the fourth quarter 2021. These

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amounts do not reflect any estimate of forfeitures or cancellations in future periods. Actual forfeitures and cancellations occurring in a future period will reduce stock-based compensation expense.

Fair Value Measurements

The fair value of financial assets and liabilities, except for the investment funds sponsored by LSV, is determined in accordance with the fair value hierarchy. The fair value of the investment funds sponsored by LSV is measured using the net asset value per share (NAV) as a practical expedient. The fair value of all other financial assets are determined using Level 1 or Level 2 inputs and consist mainly of investments in equity or fixed-income mutual funds that are quoted daily and Government National Mortgage Association (GNMA) and other U.S. government agency securities that are single issuer pools that are valued based on current market data of similar assets. Level 3 financial liabilities at December 31, 2021 and December 31, 2020 consist of the contingent consideration resulting from an acquisition (See Note 14 to the Consolidated Financial Statements).

Regulatory Matters

Like many firms operating within the financial services industry, we are experiencing a complex and changing regulatory environment across our markets. Our current scale and reach as a provider to the financial services industry, the introduction and implementation of new solutions for our financial services industry clients, the increased regulatory oversight of the financial services industry generally, new laws and regulations affecting the financial services industry and ever-changing regulatory interpretations of existing laws and regulations, and a greater propensity of regulators to pursue enforcement actions and other sanctions against regulated entities, have made this an increasingly challenging and costly regulatory environment in which to operate.

SEI and some of our regulated subsidiaries have undergone or been scheduled to undergo a range of periodic or thematic reviews, examinations or investigations by numerous regulatory authorities around the world, including the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Financial Conduct Authority of the United Kingdom (FCA), the Central Bank of Ireland and others. These regulatory activities typically result in the identification of matters or practices to be addressed by us or our subsidiaries and, in certain circumstances, the regulatory authorities require remediation activities or pursue enforcement proceedings against us or our subsidiaries. As described under the caption “Regulatory Considerations” in Item 1 of this report, the range of possible sanctions that are available to regulatory authorities include limitations on our ability to engage in business for specified periods of time, the revocation of registration, censures and fines. The direct and indirect costs of responding to these regulatory activities and of complying with new or modified regulations, as well as the potential financial costs and potential reputational impact against us of any enforcement proceedings that might result, is uncertain but could have a material adverse impact on our operating results or financial position.

Liquidity and Capital Resources

On April 23, 2021, we replaced our existing credit facility with a new five-year credit facility agreement which provides for borrowings up to $325.0 million. The new credit facility is a revolving line of credit with Wells Fargo Bank, N.A., and a syndicate of other lenders and is scheduled to expire in April 2026. The availability of the credit facility is subject to compliance with certain covenants set forth in the agreement. The credit facility contains covenants which restrict our ability to engage in transactions with affiliates other than wholly-owned subsidiaries or to incur liens or certain types of indebtedness as defined in the agreement. In the event of a default under the credit facility, we would also be restricted from paying dividends on, or repurchasing, our common stock. Currently, our ability to borrow from the credit facility is not limited by any covenant of the agreement (See Note 6 to the Consolidated Financial Statements).

The credit facility contains terms that utilize the London InterBank Offered Rate (LIBOR) as a potential component of the interest rate to be applied to any borrowings; however, an alternative reference rate is included under the agreement which provides for a specified replacement rate upon a LIBOR cessation event. At the time of a LIBOR cessation event,

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the replacement rate, the Secured Overnight Financing Rate (SOFR), self-executes without the need for negotiations or a formal amendment process.

As of December 31, 2021, we had outstanding letters of credit of $5.8 million which reduced the amount available under the credit facility. These letters of credit were primarily issued for the expansion of the corporate headquarters and are due to expire in 2022.

In November 2021, we borrowed $40.0 million under the credit facility for the funding of an acquisition (See Note 14 to the Consolidated Financial Statements). We made a principal payment of $10.0 million in February 2022 against the outstanding balance of the credit facility. As of February 17, 2022, the amount of the credit facility available for corporate purposes was $289.2 million.

The majority of excess cash reserves are primarily placed in accounts located in the United States that invest in SEI-sponsored money market mutual funds denominated in the U.S. dollar. We also utilize demand deposit accounts or money market accounts at several well-established financial institutions located in the United States. Accounts used to manage these excess cash reserves do not impose any restrictions or limitations that would prevent us from being able to access such cash amounts immediately. As of February 17, 2022, the amount of cash and cash equivalents considered free and immediately accessible for other general corporate purposes was $352.3 million.

Cash and cash equivalents include accounts managed by our subsidiaries that are used in their operations or to cover specific business and regulatory requirements. The availability of this cash for other purposes beyond the operations of these subsidiaries may be limited. We therefore do not include accounts of our foreign subsidiaries in the calculation of free and immediately accessible cash for other general corporate purposes. A portion of the undistributed earnings of foreign subsidiaries are deemed repatriated. Any subsequent transfer of available cash related to the repatriated earnings of foreign subsidiaries could significantly increase free and immediately accessible cash.

Cash flows from operations increased $144.4 million in 2021 compared to 2020 primarily from the increase in net income and increased repayments of advances due from our unconsolidated affiliate, LSV, related to their working capital accounts. The negative impact from the change in the Company's working capital accounts partially offset the increase. Cash flows from operations decreased $56.4 million in 2020 compared to 2019 primarily from lower distribution payments from LSV and the decrease in net income. The decline in distribution payments from LSV in 2020 was primarily due to the timing of year-end payments related to LSV's working capital accounts.

Net cash used in investing activities includes:

•Purchases, sales and maturities of marketable securities. Our purchases, sales and maturities of marketable securities during 2021, 2020 and 2019 were as follows:

See Note 5 to the Consolidated Financial Statements for more information related to marketable securities.

•The capitalization of costs incurred in developing computer software. We capitalized $26.0 million, $24.1 million and $34.1 million of software development costs in 2021, 2020 and 2019, respectively. The majority of our software development costs are related to significant enhancements for the expanded functionality of the SEI Wealth Platform.

•Capital expenditures. Capital expenditures in 2021, 2020 and 2019 primarily include purchased software and equipment for data center operations. Expenditures in 2020 also include the expansion of our corporate headquarters completed in the fourth quarter 2020. We continue to evaluate improvements to our information technology infrastructure which, if implemented, will result in additional expenditures for purchased software and equipment for data center operations.

•Cash paid for acquisitions, net of cash acquired. In October 2021, we made a net cash payment of $8.2 million to complete the acquisition of Finomial, an investor lifecycle management fintech firm. In November 2021, we made a net cash payment of $72.0 million to complete the acquisition of Novus, a global portfolio intelligence platform company (See Note 14 to the Consolidated Financial Statements).

•Other investing activities. In March 2021, we made a payment of $11.0 million to purchase a technology platform providing digital collaboration tools for financial advisors. In November 2021, we made a payment of $6.7 million to purchase a defined contribution master trust in the United Kingdom. We also received $7.6 million in proceeds from the sale of our ownership interest in a small regulatory compliance software firm during 2021.

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Net cash used in financing activities includes:

•Borrowings on revolving credit facility. In November 2021, we borrowed $40.0 million for the funding of an acquisition (See Note 14 to the Consolidated Financial Statements). We made a principal payment of $10.0 million in February 2022 against the outstanding balance and intend to repay the entire remaining balance in 2022.

•The repurchase of our common stock. The Board of Directors has authorized the repurchase of common stock through multiple authorizations. Currently, there is no expiration date for the common stock repurchase program. The following table lists information regarding repurchases of common stock during 2021, 2020 and 2019:

•Proceeds from the issuance of our common stock. We received $55.2 million, $49.4 million and $60.9 million in proceeds from the issuance of common stock during 2021, 2020 and 2019, respectively. The proceeds we receive from the issuance of common stock is directly attributable to the levels of stock option exercise activity.

•Dividend payments. Cash dividends paid during 2021, 2020 and 2019 were as follows:

The Board of Directors declared a semi-annual cash dividend of $0.40 per share on December 10, 2021. The dividend was paid on January 7, 2022 for a total of $55.5 million.

Cash Requirements

Cash requirements and liquidity needs are primarily funded through cash flow from operations and our capacity for additional borrowing. At December 31, 2021, unused sources of liquidity consisted of cash and cash equivalents and the amount available under our credit facility.

We are obligated to make payments in connection with the credit facility, operating leases, maintenance contracts and other commitments (See Notes 6, 10 and 17 to the Consolidated Financial Statements). We believe our operating cash flow, available borrowing capacity, and existing cash and cash equivalents will provide adequate funds for these obligations and ongoing operations. We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs and fund our stock repurchase program for at least the next 12 months and for the foreseeable future.

Critical Accounting Policies and Estimates

The accompanying consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted in the United States. Inherent in the application of many of these accounting policies is the need for management to make estimates which require extensive judgments in the determination of certain revenues, expenses, assets and liabilities. Materially different financial results can occur as circumstances change and additional information becomes known. We believe that the assumptions and estimates associated with computer software development costs, income taxes, stock-based compensation and the valuation of long-lived assets including goodwill and intangible assets acquired in an acquisition, when applicable, have the greatest potential to have a material impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. All of our significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements.

Computer Software Development Costs:

We utilize internally developed computer software as part of our product offerings. In the development of a new software product, substantial consideration must be given by management to determine whether costs incurred are research and development costs, or internal software development costs eligible for capitalization. Management must consider a number of different factors during their evaluation of each computer software development project that includes estimates and assumptions. Costs considered to be research and development are expensed as incurred. After meeting specific requirements, internal software development costs are capitalized as incurred. The capitalization and ongoing assessment of recoverability of software development costs requires considerable judgment by management with respect to certain

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external factors, including, but not limited to, technological and economic feasibility, and estimated economic life. Amortization of capitalized software development costs begins when the product is ready for its intended use. Capitalized software development costs are amortized on a project basis using the straight-line method over the estimated economic life of the product or enhancement.

We evaluate the carrying value of capitalized software when circumstances indicate the carrying value may not be recoverable. The review of capitalized software for impairment requires significant assumptions and estimates about operating strategies, underlying technologies utilized, and external market factors. External market factors include, but are not limited to, expected levels of competition, barriers to entry by potential competitors, stability in the target market and governmental regulations.

Income Taxes:

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset.

Assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, interpretations of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although we believe the assumptions, judgments and estimates are reasonable, changes in tax laws or interpretations of tax laws and the resolution of any future tax audits could significantly impact the amounts provided for income taxes in the consolidated financial statements.

Assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income and from which subsidiary or jurisdiction such income is expected to be realized. Actual operating results and the underlying amount and category of income in future years could render the current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause actual income tax obligations to differ from the estimates, thus materially impacting our financial position and results of operations.

Stock-Based Compensation:

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period. We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as various other assumptions. These assumptions include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. We account for forfeitures as they occur. The amount of stock-based compensation expense that is recognized in a given period is dependent upon management’s estimate of when the financial vesting targets are expected to be achieved. If this estimate proves to be inaccurate, the remaining amount of stock-based compensation expense could be accelerated, spread out over a longer period, or reversed. We currently base expectations for these assumptions from historical data and other applicable factors. These expectations are subject to change in future periods.

During 2021, 2020 and 2019, we revised our estimates of when certain vesting targets were expected to be achieved. These changes in estimates resulted in an increase in stock-based compensation expense of $5.9 million in 2021, a decrease in stock-based compensation expense of $2.7 million in 2020, and an increase in stock-based compensation expense of $2.9 million in 2019. For additional information regarding stock-based compensation, see Note 7 to the Consolidated Financial Statements.

Valuation of Assets Acquired in an Acquisition Including Goodwill and Intangible Assets:

We allocate the fair value of the total purchase price paid for acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of the purchase price consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill to reporting units based on the expected benefit from the business combination. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Allocation of the purchase price consideration to identifiable assets and liabilities affects our amortization expense, as acquired finite-lived intangible assets are amortized over the useful life, whereas any indefinite-lived intangible assets, including goodwill, are not amortized. During the measurement period,

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which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

Goodwill is tested for impairment at the reporting unit level annually or more frequently if events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying value. We have three reporting units subject to goodwill impairment testing. As of December 31, 2021, no impairment of goodwill has been identified.

Intangible assets acquired in an acquisition are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate from the use and eventual disposition. If such review indicates that the carrying amount of intangible assets is not recoverable, the carrying amount is reduced to fair value. We have not recorded any material impairment charges during the years presented.

The useful lives of our finite-lived intangible assets are determined by management when those assets are initially recognized and are routinely reviewed for the remaining estimated useful lives. The current estimate of useful lives represents management’s best estimate based on current facts and circumstances, but may differ from the actual useful lives due to changes in future circumstances such as changes to our business operations, changes in the planned use of assets, and technological advancements. When we change the estimated useful life assumption for any asset, the remaining carrying amount of the asset is accounted for prospectively and depreciated or amortized over the revised estimated useful life.

The assessment of critical accounting policies and estimates is not meant to be an all-inclusive discussion of the uncertainties to financial results that can occur from the application of the full range of our accounting policies. Materially different financial results could occur in the application of other accounting policies as well. Also, materially different results can occur upon the adoption of new accounting standards.