SEI INVESTMENTS CO (SEIC) FY 2023 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, 2023 and 2022, the consolidated results of operations for the years ended December 31, 2023, 2022 and 2021, 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 delivers technology and investment solutions that connect the financial services industry. With capabilities across investment processing, operations, and asset management, SEI works with corporations, financial institutions and professionals, and ultra-high-net-worth families to help drive growth, make confident decisions, and protect futures. 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, 2023, through our subsidiaries and partnerships in which we have a significant interest, we manage, advise or administer approximately $1.4 trillion in hedge, private equity, mutual fund and pooled or separately managed assets.

Condensed Consolidated Statements of Operations for the years ended 2023, 2022 and 2021 were:

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

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Significant Items Impacting Our Financial Results in 2023

Revenues decreased $71.2 million, or 4%, to $1.9 billion in 2023 compared to 2022. Net income decreased $13.2 million, or 3%, to $462.3 million and diluted earnings per share remained unchanged at $3.46 per share in 2023 compared to 2022. We believe the following items were significant to our business results during 2023:

•Revenue from Information processing and software servicing fees decreased primarily from one-time early termination fees of $88.0 million from a significant client of the Private Banks segment recorded during the first quarter 2022. A one-time early contractual buyout fee of $10.5 million recorded during the second quarter 2023 from an investment processing client of the Private Banks segment acquired by an existing client partially offset the decline in revenues. Revenue from Information processing and software servicing fees was positively impacted by new client conversions and growth from existing SEI Wealth PlatformSM (SWP) clients during 2023.

•Revenue from Assets under management, administration, and distribution fees was favorably impacted by higher assets under administration due to new products and additional services provided to existing alternative investment clients of the Investment Managers segment. Average assets under administration increased $38.4 billion, or 5%, to $880.3 billion during 2023 as compared to $841.9 billion during 2022.

•Revenue from Asset management, administration and distribution fees was unfavorably impacted by lower assets under management in equity and fixed income programs from negative cash flows from SEI fund programs and declining average basis points earned on assets in the Investment Advisors segment and client losses in the Institutional Investors segment. The unfavorable impact was partially offset by market appreciation and positive cash flows into separately managed account programs of the Investment Advisors segment. Average assets under management in equity and fixed income programs, excluding LSV, decreased $6.5 billion, or 4%, to $168.6 billion during 2023 as compared to $175.1 billion during 2022.

•Earnings from LSV increased by $6.3 million, or 5%, in 2023 due to market appreciation and higher performance fees. Negative cash flows from existing clients and client losses partially offset the increase in earnings from LSV.

•The decline in operating expenses was primarily due to total costs of $54.8 million related to the Voluntary Separation Program (VSP) recognized during the third quarter 2022. These one-time costs are primarily included in Compensation, benefits and other personnel costs on the accompanying Consolidated Statement of Operations and are reported in corporate overhead expenses (See Note 14 to the Consolidated Financial Statements). Decreased non-capitalized consulting costs also contributed to the decline in operating expenses during 2023.

•Operational expenses unrelated to the VSP increased in 2023 due to higher personnel costs from business growth, primarily in the Investment Managers segment, competitive labor markets, and investments in compliance infrastructure to meet new regulatory requirements. The increased personnel costs were primarily related to salary and incentive compensation costs.

•Capitalized software development costs were $34.0 million in 2023, of which $18.2 million was for continued enhancements to the SEI Wealth PlatformSM (SWP). Capitalized software development costs also include $15.8 million of software development costs for a new platform for the Investment Managers segment.

•Management decided to abandon certain functionality within the platform for the Investment Managers segment due to a change in development strategy and wrote off $5.3 million of previously capitalized software development costs during the fourth quarter 2023. The expense associated with the write off is included in Facilities, supplies and other costs on the accompanying Consolidated Statement of Operations.

•Amortization expense related to SWP was $25.6 million in 2023 as compared to $35.6 million in 2022. The decline in amortization expense was due to the amortization period of the initial development costs related to SWP which ended in second-quarter 2022 (See the caption "Capitalized software development costs" later in this discussion for more information).

•Interest and dividend income was $41.0 million in 2023 as compared to $13.3 million in 2022. The increase in interest and dividend income was primarily due to an increase in market interest rates.

•The effective tax rate during 2023 was 22.3% as compared to 22.0% during 2022. The increase in the effective rate was primarily due to reduced tax benefits related to stock option exercises.

•On November 20, 2023, our wholly-owned operating subsidiary in the United Kingdom closed the acquisition of XPS Pensions (Nexus) Limited, principal employer and scheme funder of the National Pensions Trust. We paid a cash consideration of $43.9 million, net for the acquisition and recorded a contingent consideration of $3.9 million that may be earned by the seller over the two years after the closing, subject to the achievement of certain post-closing performance measurements (See Note 15 to the Notes to Consolidated Financial Statements).

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•On December 20, 2023, we acquired Altigo, a cloud-based technology platform that provides inventory, e-subscription, and reporting capabilities for alternative investments, for a cash consideration of $12.5 million (See Note 15 to the Notes to Consolidated Financial Statements).

•Cash flow from operations was $447.0 million during 2023.

•SEI repurchased 5.2 million shares of its common stock at an average price of $59.34 per share for a total cost of $310.8 million and paid $114.8 million in cash dividends to shareholders during 2023.

Significant Items Impacting Our Financial Results in 2022

Revenues increased $72.7 million, or 4%, to $2.0 billion in 2022 compared to 2021. Net income decreased $71.1 million, or 13%, to $475.5 million and diluted earnings per share decreased to $3.46 per share in 2022 compared to $3.81 per share in 2021. We believe the following items were significant to our business results during 2022:

•Revenue from Information processing and software servicing fees increased primarily from early termination fees of $88.0 million recorded during the first quarter 2022 and new client conversions.

•Revenue from Asset management, administration and distribution fees declined from lower assets under management from market depreciation during 2022 and negative cash flows from SEI fund programs due to client losses in the Investment Advisors and Institutional Investors segments. The decline was partially offset by positive cash flows into separately managed account programs of the Investment Advisors segment. Average assets under management in equity and fixed income programs, excluding LSV, decreased $22.1 billion, or 11%, to $175.1 billion during 2022 as compared to $197.2 billion during 2021.

•Revenue from Asset management, administration and distribution fees increased from existing alternative investments clients of the Investment Managers segment due to new products and additional services. Average assets under administration reflect a loss of a significant client which was not charged asset-based fees.

•Revenues from our acquisitions of SEI Novus and Atlas Master Trust were $11.3 million and $4.8 million, respectively, during 2022. SEI Novus and Atlas Master Trust were acquired during the fourth quarter of 2021 and are reported in the Institutional Investors segment.

•Earnings from LSV decreased by $16.9 million, or 12%, in 2022 due to negative cash flows from existing clients, market depreciation and client losses. Increased performance fees during 2022 partially offset the decrease in earnings from LSV.

•Operating expenses increased from higher personnel and consulting costs due to business growth and competitive labor markets. Operational expenses also increased due to personnel costs and investments in compliance infrastructure to meet new regulatory requirements. The increase was partially offset by lower direct costs related to asset management revenues and lower amortization expense.

•We initiated the VSP to long-tenured employees as part of our commitment to professional development and expanded responsibilities for current and new employees by increasing advancement opportunities. We recognized one-time costs of $54.8 million during 2022 from the program.

•The Institutional Investors segment includes personnel, professional fees, amortization and other costs related to SEI Novus and Atlas Master Trust. These expenses are primarily included in Compensation, benefits and other personnel costs, Consulting, outsourcing and professional fees, and Amortization on the accompanying Consolidated Statements of Operations.

•Capitalized software development costs were $25.7 million in 2022 for SWP as compared to $25.9 million in 2021. Amortization expense related to SWP decreased to $35.6 million during 2022 as compared to $47.8 million during 2021 due to the fully amortized initial SWP development costs.

•The effective tax rate during 2022 was 22.0% as compared to 21.2% during 2021. The increase in the effective rate was primarily due to reduced tax benefits related to a lower volume of stock option exercises and an increase in the state effective tax rate.

•Cash flow from operations was $566.1 million during 2022.

•SEI repurchased 5.9 million shares of its common stock at an average price of $57.22 per share for a total cost of $338.4 million and paid $109.8 million in cash dividends to shareholders during 2022.

Other Significant Items Impacting Our Business

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:

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•automate selected manual processes in our operational, 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.

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 43% 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 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 lower cost investment products offered through an unbundled model have resulted in cash outflows and a loss of management fees primarily impacting the Investment Advisors segment.

Sensitivity of our revenues and earnings to capital market fluctuations

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 generally favorable capital market conditions during 2023 had a positive impact on our asset-based fees thereby contributing to growth in our base revenues. Macroeconomic factors such as stagnant or recessionary economies, persistent inflationary pressures, continuation of interest rate increases, declining property markets and consumer confidence, tight labor markets and geopolitical tensions, among others, could have significant influence on capital markets in 2024 and beyond. Any prolonged future downturns in general capital market conditions could have adverse effects on our revenues and earnings derived from assets under management and administration.

SEI Integrated Cash program

In December 2023, we launched the SEI Integrated Cash program, an enhanced cash sweep program offered through SPTC's custody services utilizing an SEI-sponsored money market mutual fund for investment-related cash allocations and FDIC-insured deposit accounts through a network of independent banks. Under the terms of the program, SPTC will earn interest income based on the portion of its client’s cash balances held in the FDIC-insured accounts. We expect this program could generate significant revenue for the Investment Advisors segment in 2024 assuming interest rates remain at current levels. A decline in interest rates will significantly reduce the earnings derived from this program. The assets related to the SEI Integrated Cash program are included in Platform-only assets-deposit program of the Investment Advisors segment on the accompanying Ending Assets Balances and Average Assets Balances schedules.

Business Acquisitions

To enhance our capabilities, scale our competitive presence, or enable strategic growth, we pursue selective acquisitions. During 2023, we acquired the National Pensions Trust and Altigo. In 2021, we acquired Finomial Corporation and Novus Partners. If we are not able to successfully integrate our past and future acquisitions, or we do not fully realize the anticipated benefits, synergies or objectives of these transactions, we may incur additional costs such as impairment charges to goodwill or intangible assets recognized from acquisitions that could adversely affect our results of operations or financial condition.

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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)Collective trust fund program assets are included in assets under management since SEI is the trustee. Fees earned on this product are less than fees earned on customized asset management programs.

(B)Equity and fixed-income programs include $1.9 billion of assets managed by LSV in which fees are based solely on performance and are not calculated as an asset-based fee (as of December 31, 2023).

(C)Equity and fixed-income programs include $6.3 billion of assets invested in various asset allocation funds at December 31, 2023.

(D)    In addition to the assets presented, SEI also administers an additional $11.2 billion in Funds of Funds assets on which SEI does not earn an administration fee (as of December 31, 2023).

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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)    Collective trust fund program average assets are included in assets under management since SEI is the trustee. Fees earned on this product are less than fees earned on customized asset management programs.

(B)    Equity and fixed-income programs include assets managed by LSV in which fees are based solely on performance and are not calculated as an asset-based fee. The average value of these assets for the year ended December 31, 2023 was $2.0 billion.

(C)    Equity and fixed-income programs include $6.2 billion of average assets invested in various asset allocation funds for the year ended December 31, 2023.

(D)    In addition to the assets presented, SEI also administers an additional $11.8 billion of average assets in Funds of Funds assets for the year ended December 31, 2023 on which SEI does not earn an administration fee.

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. Platform-only assets-deposit program include assets of our clients in the SEI Integrated Cash program for which we provide custody services through our federal thrift subsidiary. 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 2023 compared to the year ended 2022, and for the year ended 2022 compared to the year ended 2021 were:

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

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Private Banks

Revenues decreased $72.3 million, or 13%, in 2023 compared to the prior year. Revenues during 2023 were primarily affected by:

•One-time early termination fees of $88.0 million from a significant investment processing client recorded during the first quarter 2022;

•A negative adjustment to fees from an investment processing client which reduced their business processed with us through divestment;

•Reduced investment processing fees earned on our mutual fund trading solution; and

•Lower investment processing fees from the recontacting of existing clients; partially offset by

•Increased investment processing fees from new client conversions;

•One-time early termination fees of $10.5 million from an investment processing client acquired by an existing client recorded in second quarter 2023;

•Increased revenues from U.K. clients on cash balances due to increased interest rates, and

•Increased investment management fees from market appreciation.

Revenues increased $82.1 million, or 17%, in 2022 compared to the prior year. Revenues during 2022 were primarily affected by:

•An increase in one-time termination fees, including an $88.0 million fee recorded during the first quarter 2022 from a significant investment processing client;

•Increased investment processing fees from new client conversions; and

•Increased revenues from U.K. clients impacted by increased interest rates; partially offset by

•Decreased investment processing fees from lost clients and market depreciation during 2022;

•Decreased investment management fees from existing international clients due to market depreciation during 2022;

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

•A negative adjustment to fees from an investment processing client which reduced their business processed through divestment.

Operating margins were 9% in 2023 and 18% in 2022. Operating income decreased $54.9 million, or 54%, in 2023 compared to the prior year. Operating income in 2023 was primarily affected by:

•A decrease in revenues;

•Increased personnel costs due to competitive labor markets; and

•Increased costs, mainly personnel costs, primarily related to maintenance, support and client migrations to SWP; partially offset by

•Decreased non-capitalized consulting costs;

•Decreased amortization expense related to SWP; and

•Decreased amortization expense related to deferred sales commissions.

Operating margins were 18% in 2022 and 6% in 2021. Operating income increased $71.6 million, or 233%, in 2022 compared to the prior year. Operating income in 2022, excluding the previously mentioned early termination fees of $88.0 million, net of direct costs of $1.9 million, would have been $16.3 million. Operating income in 2022 was primarily affected by:

•An increase in revenues; and

•Decreased direct expenses associated with lower investment management fees from existing international clients; partially offset by

•Increased personnel costs due to competitive labor markets;

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•Increased costs, mainly personnel and consulting costs, primarily related to maintenance, support and client migrations to SWP; and

•The negative impact from foreign currency exchange rate fluctuations between the U.S. dollar and the British pound on our foreign operations.

Investment Advisors

Revenues decreased $11.5 million, or 3%, in 2023 compared to the prior year. Revenues during 2023 were primarily affected by:

•Decreased investment management fees from SEI fund programs resulting from negative cash flows and a decrease in average basis points earned on assets; partially offset by

•Increased fees from separately managed account programs from positive cash flows; and

•The positive impact from market appreciation on our asset-based fees.

Revenues decreased $35.2 million, or 7%, in 2022 compared to the prior year. Revenues during 2022 were primarily affected by:

•Decreased investment management fees from SEI fund programs resulting from market depreciation and negative cash flows primarily from a significant client loss during the third-quarter 2022; partially offset by

•Increased fees from separately managed account programs from positive cash flows and market appreciation occurring during 2021.

Operating margins were 41% in 2023 and 44% in 2022. Operating income decreased $19.0 million, or 10%, in 2023 compared to the prior year. Operating income in 2023 was primarily affected by:

•A decrease in revenues;

•Increased personnel costs;

•Increased net direct expenses primarily associated with the increase in separately managed account fees; and

•Increased non-capitalized consulting costs; partially offset by;

•Decreased amortization expense related to SWP.

Operating margins were 44% in 2022 and 50% in 2021. Operating income decreased $46.5 million, or 19%, in 2022 compared to the prior year. Operating income in 2022 was primarily affected by:

•A decrease in revenues;

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

•Increased personnel and technology costs as well as increased promotion costs; partially offset by

•Decreased direct expenses related to a significant client loss during third-quarter 2022.

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Institutional Investors

Revenues decreased $33.6 million, or 10%, in 2023 compared to the prior year. Revenues during 2023 were primarily affected by:

•Decreased investment management fees from defined benefit client losses; partially offset by

•Revenues from new Outsourced Chief Investment Officer (OCIO) platform clients; and

•The positive impact from market appreciation on our asset-based fees.

Revenues decreased $20.5 million, or 6%, in 2022 compared to the prior year. Revenues during 2022 were primarily affected by:

•Decreased investment management fees from defined benefit client losses and market depreciation; and

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

•Added revenues from the acquisitions of SEI Novus and Atlas Master Trust.

Operating margins were 43% in 2023 and 47% in 2022. Operating income decreased $26.8 million, or 18%, in 2023 compared to the prior year. Operating income during 2023 was primarily affected by:

•A decrease in revenues;

•A one-time operational charge of $4.5 million related to a client reimbursement; partially offset by

•Decreased direct expenses associated with investment management fees; and

•Decreased professional fees.

Operating margins were 47% in 2022 and 51% in 2021. Operating income increased slightly in 2022 compared to the prior year. Operating income during 2022 was primarily affected by:

•A decrease in revenues;

•Increased personnel, professional fees, amortization and other costs related to the acquisitions of SEI Novus and Atlas Master Trust; partially offset by

•Decreased direct expenses associated with investment management fees.

Investment Managers

Revenues increased $45.6 million, or 7%, in 2023 compared to the prior year. Revenues during 2023 were primarily affected by:

•Increased revenues from new products launched and additional services provided to our largest alternative fund clients; and

•Positive cash flows into alternative and traditional funds from new and existing clients; partially offset by

•Client losses and fund closures.

Revenues increased $43.8 million, or 8%, in 2022 compared to the prior year. Revenues during 2022 were primarily affected by:

•Increased revenues from new products launched and additional services provided to our largest alternative fund clients; and

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

•Client losses, fund closures and the impact of market depreciation during 2022 to revenue from traditional fund clients.

Operating margins were 35% in 2023 and 2022. Operating income increased $13.2 million, or 6%, in 2023 compared to the prior year. Operating income during 2023 was primarily affected by:

•An increase in revenues; and

•Decreased non-capitalized investment spending, mainly consulting costs; partially offset by

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

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•Increased personnel costs due to competitive labor markets; and

•The write off of $5.3 million in previously capitalized software development costs.

Operating margins were 35% in 2022 and 40% in 2021. Operating income decreased $12.4 million, or 5%, in 2022 compared to the prior year. Operating income during 2022 was primarily affected by:

•Increased personnel costs due to competitive labor markets;

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

•Increased non-capitalized investment spending, mainly consulting costs; partially offset by

•An increase in revenues;

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 $132.2 million, $168.2 million and $91.9 million in 2023, 2022 and 2021, respectively. The decrease in corporate overhead expenses during 2023 is primarily due to personnel costs associated with the VSP of $54.8 million recorded in the third quarter of 2022 (See Note 14 to the Consolidated Financial Statements). Non-recurring consulting costs related to corporate strategic planning, target market review and other corporate analysis projects as well investments in upgrading and enhancing various technologies utilized by corporate overhead units partially offset the decrease in corporate overhead expenses in 2023. Additionally, personnel costs increased primarily to enhance and further build our compliance infrastructure and strategic development initiatives.

Other income and expense items

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

Equity in earnings of unconsolidated affiliates

Equity in earnings of unconsolidated affiliate reflects our 38.6% 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 2023 was primarily due to higher performance fees and market appreciation. Net negative cash flows from existing clients and client losses partially offset the increase in earnings from LSV. Average assets under management by LSV decreased $1.5 billion to $85.7 billion during 2023 as compared to $87.2 billion during 2022, a decrease of 2%. The decrease in earnings from LSV in 2022 was due to negative cash flows from existing clients, market depreciation and client losses. Increased performance fees during 2022 partially offset the decrease in earnings from LSV.

Interest and dividend income

Interest and dividend income is earned based upon the amount of cash that is invested daily. The increases in interest and dividend income in 2023 and 2022 was due to increased market interest rates.

Net gain (loss) from investments

Net gains and losses from investments during 2023 and 2022 were primarily due to realized and unrealized gains and losses recorded in current earnings related to the investment funds sponsored by LSV, equity holdings and SEI-sponsored mutual funds (See Note 5 to the Consolidated Financial Statements).

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Amortization

Amortization expense on the accompanying Consolidated Statements of Operations consists of:

Capitalized software development costs

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 the initial development work related to SWP began in mid-2007 when the platform was determined to be ready for its intended use. The amortization expense related to the initial software development costs ended in the second quarter of 2022, resulting in declines in amortization expense related to capitalized software development costs in 2023 and 2022 compared to the prior year (See Note 1 to the Consolidated Financial Statements).

Intangible assets

The increase in amortization expense related to intangible assets and asset purchases in 2022 was due to the acquisitions of Finomial, SEI Novus and Atlas Master Trust during the fourth quarter 2021. 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.

Income Taxes

Our effective tax rate was 22.3% for 2023, 22.0% for 2022 and 21.2% for 2021. 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 increases in the effective rate in 2023 and 2022 was primarily due to reduced tax benefits related to stock option exercises as compared to the prior year.

The Organization for Economic Co-operation and Development (OECD) has a framework to implement a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds (referred to as Pillar 2), with certain aspects of Pillar 2 effective January 1, 2024 and other aspects effective January 1, 2025. While it is uncertain whether the United States will enact legislation to adopt Pillar 2, certain countries in which we operate have adopted legislation, and other countries are in the process of introducing legislation to implement Pillar 2. We do not expect Pillar 2 to have a material impact on our effective tax rate or our consolidated results of operations, financial position and cash flows.

Stock-Based Compensation

During 2023, 2022 and 2021, we recognized approximately $31.3 million, $39.4 million and $41.5 million, respectively, in stock-based compensation expense. Our stock-based compensation expense in 2023 primarily consisted of $21.5 million related to stock options and $9.1 million related to restricted stock units (RSUs) which we began awarding to employees in

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2022. RSUs vest through time-based requirements and do not have performance-based vesting conditions. Stock options vest from the achievement of financial vesting targets and include a service condition which requires a minimum two or four year waiting period from the grant date. The amount of stock-based compensation expense related to stock options is recognized 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 (See Note 7 to the Consolidated Financial Statements for more information).

During 2023, 2022 and 2021, we revised the estimates of when certain vesting targets for stock options were expected to be achieved. These changes in estimates resulted in a decrease in stock-based compensation expense of $6.9 million and $4.9 million in 2023 and 2022, respectively, and an increase in stock-based compensation expense of $5.9 million in 2021.

There was approximately $89.1 million of unrecognized compensation cost related to unvested employee stock options at December 31, 2023 and we expect to recognize approximately $36.6 million in stock-based compensation costs for stock options in 2024.

There was approximately $39.9 million of unrecognized compensation cost related to RSUs at December 31, 2023 and we expect to recognize approximately $16.4 million in stock-based compensation costs for RSUs in 2024.

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, 2023 and December 31, 2022 consist of contingent considerations resulting from business acquisitions (See Note 15 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 (CBI), the Commission de Surveillance du Secteur Financier (CSSF) of the Grand Duchy of Luxembourg, 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.

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Liquidity and Capital Resources

The credit facility provides for borrowings up to $325.0 million and is scheduled to expire in April 2026. As of January 31, 2024, we had outstanding letters of credit of $4.9 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 2025. As of January 31, 2024, the amount of the credit facility available for corporate purposes was $320.1 million.

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).

On April 17, 2023, we amended the credit facility agreement with the lenders to add the Secured Overnight Financing Rate (SOFR) as an alternative reference rate for borrowings in place of LIBOR. All other terms and conditions of the original agreement remain in effect.

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 January 31, 2024, the amount of cash and cash equivalents considered free and immediately accessible for other general corporate purposes was $355.2 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 decreased $119.1 million in 2023 compared to 2022 primarily due to the decrease in net income, the increase in receivables from clients of the Investment Managers segment, and a decrease in accrued liabilities primarily from payments related to the VSP. Cash flows from operations decreased $67.0 million in 2022 compared to 2021 primarily from the decrease in net income, non-cash items and lower repayments of advances due from our unconsolidated affiliate, LSV, related to their working capital accounts. The positive impact from the change in the Company's working capital accounts partially offset the decrease.

Net cash used in investing activities includes:

•Purchases, sales and maturities of marketable securities. Our purchases, sales and maturities of marketable securities during 2023, 2022 and 2021 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 $34.0 million, $35.3 million and $26.0 million of software development costs in 2023, 2022 and 2021, respectively. The majority of our

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software development costs are related to significant enhancements for the expanded functionality of the SEI Wealth Platform. We also capitalized $15.8 million and $9.6 million of software development costs during 2023 and 2022, respectively, for a new platform for the Investment Managers segment.

•Capital expenditures. Capital expenditures in 2023, 2022 and 2021 primarily include capital outlays for purchased software and equipment for data center operations. 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 November 2023, we made a net cash payment of $43.9 million to complete the acquisition of XPS Pensions (Nexus) Limited, principal employer and scheme funder of the National Pensions Trust in the United Kingdom. In December 2023, we made a net cash payment of $12.5 million to acquire Altigo, a cloud-based technology platform that provides inventory, e-subscription, and reporting capabilities for alternative investments (See Note 15 to the Consolidated Financial Statements).

Net cash used in financing activities includes:

•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 2023, 2022 and 2021:

•Proceeds from the issuance of our common stock. We received $101.2 million, $58.2 million and $55.2 million in proceeds from the issuance of common stock during 2023, 2022 and 2021, respectively. The proceeds we receive from the issuance of common stock is directly attributable to the levels of stock option exercise activity.

•Payment of contingent consideration. In July 2023, we exercised the option to settle the contingent consideration related to the acquisition of Huntington Steele and made final payments totaling $8.0 million to the sellers. As of December 31, 2023, we no longer have any obligation for future payments to the sellers related to the acquisition of Huntington Steele.

•Dividend payments. Cash dividends paid during 2023, 2022 and 2021 were as follows:

The Board of Directors declared a semi-annual cash dividend of $0.46 per share on December 15, 2023. The dividend was paid on January 9, 2024 for a total of $61.1 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, 2023, 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 18 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

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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 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 for awards under share-based compensation plans 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 option awards. 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 for stock options 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 for stock options 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.

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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, 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, 2023, 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.