VALIC Financial Advisors, Inc.

Transcription

1 Item 1 Cover Page VALIC Financial Advisors, Inc. FIRM BROCHURE Part 2A of Form ADV 2929 Allen Parkway, L3-20, Houston, Texas Telephone: (866) March 30, 2018 This brochure provides information about the qualifications and business practices of VALIC Financial Advisors, Inc. ( VFA ). If you have any questions about the contents of this brochure, please contact us at The information in this brochure has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. VFA is a registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Additional information about VFA is also is available on the SEC s website at VC (03/ ) 1

2 Item 2 Material Changes VALIC Financial Advisors, Inc. ( VFA or the Firm ) will periodically update this brochure ( Firm Brochure ). For purposes of the Firm Brochure, our, us and we refer to VFA, and you and your refer to prospective and existing investment advisory clients of VFA. The following summarizes the material changes made to the Firm Brochure since our last annual update on March 31, 2017: 1. Item 4 Advisory Business This item has been revised to include information regarding the Guided Portfolio Advantage ( GPA ) Program that is available with a new variable annuity product issued by The Variable Annuity Life Insurance Company ( VALIC ), the Portfolio Director Freedom Advisor fixed and variable annuity. The GPA Program services for existing clients and the fees charged for the GPA Program have not changed; however, the Firm now limits existing GPA Program clients in other VALIC variable annuity products that utilizes the GPA Program. This item has been revised to include additional information about the Firm s financial planning services. 2. Item 5 Fees and Compensation This item has been revised to update information regarding the fees paid by advisory clients and the compensation paid to the Firm and investment advisory reps on the GPA Program for clients enrolling in the program on or after January 29, We will provide you with a summary of any material changes to this and subsequent Firm Brochures within 120 days of VFA s fiscal year end, which is December 31st. In addition, if there is a material change to the disclosures in this Firm Brochure, we will provide the necessary updates. You may obtain copies of the Firm Brochure by calling or accessing our website at com/prospectus-and-reports/vfa-form-adv-materials. VC (03/ ) 2

3 Item 3 -Table of Contents Item 1 Cover Page 1 Item 2 Material Changes...2 Item 3 Table of Contents...3 Item 4 Advisory Business...4 (1) MIP Program...4 (2) GPS Program...4 (3) GPA Program...5 (4) Financial Planning...6 Item 5 Fees and Compensation...6 (1) MIP Program...6 (2) GPS Program...7 (3) GPA Program...8 (4) Financial Planning...9 (5) Other Compensation...9 Item 6 Performance-Based Fees and Side-by-Side Management...9 Item 7 Types of Clients...9 Item 8 Methods of Analysis, Investment Strategies and Risk of Loss...10 (1) MIP Program...10 (2) GPS Program...10 (3) GPA Program...10 Item 9 Disciplinary Information...10 Item 10 Other Financial Industry Activities and Affiliations Item 11 Code of Ethics, Participation or Interest in Client Transactions and Personal Trading...12 Item 12 Brokerage Practices...12 Item 13 Review of Accounts...13 (1) MIP Program...13 (2) GPS Program...13 (3) GPA Program...14 (4) Financial Planning...14 Item 14 Client Referrals and Other Compensation...14 Item 15 Custody...14 Item 16 Investment Discretion...15 Item 17 Voting Client Securities...15 Item 18 Financial Information...15 VC (03/ ) 3

4 Item 4 - Advisory Business VALIC Financial Advisors, Inc. ( Firm or VFA ) is registered with the Securities and Exchange Commission ( SEC ) as an investment adviser. As an investment adviser, VFA provides to its clients the investment the advisory products and services described in this Firm Brochure. The Firm is also registered with the SEC as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority, Inc. ( FINRA ). As a broker-dealer, the Firm offers general securities, mutual funds, exchange-traded funds (ETFs), variable annuity and variable life insurance products, and municipal securities. The Firm is compensated through a mixture of fixed fees, commissions, or a percentage of assets under management. VFA was incorporated in Texas in 1996 and is headquartered in Houston, Texas with additional branches throughout the United States. VFA is a wholly-owned subsidiary of The Variable Annuity Life Insurance Company ( VALIC ), an indirect wholly-owned subsidiary of AIG Life Holdings, Inc. ( AIGLH ) and an indirect wholly-owned subsidiary of American International Group, Inc. ( AIG ).. VFA s investment advisory services described in this brochure are offered through its financial advisors who are also licensed investment advisory representatives or IARs. VFA offers managed account advisory services to clients in return for a fee through the Guided Portfolio Services ( GPS ) Program, the Guided Portfolio Advantage ( GPA ) Program, and the Managed Investment Program ( MIP ). While these programs are summarized below, a more complete description of these programs is included in the GPS Program and GPA Program Wrap Fee Program Brochure and the MIP Wrap Fee Program Brochure. These brochures may be obtained free-of-charge by contacting VFA at (866) or visiting our website at As of December 31, 2017, VFA managed $18,600,807,352 on a discretionary basis and $10,282,940,318 on a non-discretionary basis. (1) Managed Investment Program (MIP) The Firm offers to individuals, trusts and entities the MIP Program. MIP is a professional flexible asset management program offered in conjunction with Envestnet, Inc., ( Envestnet ), a leading provider of wealth management software and services to financial advisors and institutions. The MIP Program utilizes third party investment managers, or Strategists, including Envestnet Portfolio Solutions, Inc. ( Envestnet PMC ), Russell Investments and CLS Investments, LLC. The Strategists design and manage asset allocation models for individual portfolios that may include mutual funds, exchange-traded funds ( ETFs ), and separate account managers. VFA does not serve as the broker-dealer in connection with your MIP account. VFA and the Strategists are jointly responsible for the ongoing management of your MIP account. In connection with this arrangement, your IAR will provide assistance in the selection of the portfolio model. Factors we consider in the selection of our Strategists include, but are not limited to: our assessment of a particular Strategist; your risk tolerance, goals, objectives and restrictions, as well as investment experience; and the assets you have available for investment. The MIP Program is available in a number of different portfolios. Regardless of which portfolio you select, you retain flexibility to modify your portfolio model selection when your needs change or market conditions warrant. VFA and its shall use due diligence to obtain the essential facts regarding each client account, including identity, financial situation, objectives, time horizons, appropriateness of account and similar information in accordance with regulatory requirements. If you are interested in learning more about the MIP Program, a complete description of the programs, services, fees, payment structure and termination features are available in VFA s Form ADV Part 2A, Appendix 1 - MIP Wrap Fee Program Brochure, investment advisory agreement, and account opening documents. These documents are available upon request from your IAR or from VFA. (2) GPS Program VFA also offers the GPS Program, which is an advice and asset management program offered in connection with certain retirement plans. This service is available to participants in group retirement plan accounts with VALIC or VALIC Retirement Services Company ( VRSCO ), an affiliate of both VFA and VALIC. Your retirement account may be invested in a variable annuity issued by VALIC or may be invested primarily in mutual funds for which VRSCO provides recordkeeping, compliance and administrative services in connection with your employer s plan and your plan account. Under the GPS Program, there are two services which may be available to you in your retirement plan. Whether the two GPS Programs are available to you may depend on whether your employer has elected to make them available to you. The two services are: GPS Portfolio Advisor is a web-based program that enables you to obtain wealth forecasts, contribution rate and retirement age recommendations, asset allocation models and investment advice through Morningstar Investment Management LLC ( Morningstar ), an independent financial expert. It is then your decision whether to implement the investment advice in whole, in part, or not at all. You also retain full responsibility for the ongoing monitoring and management of assets in accounts for which you are generating advice via this program. VC (03/ ) 4

5 GPS Portfolio Manager is a program that combines the investment advice and recommendations through Morningstar described in the Portfolio Advisor program above with ongoing automated asset management services including automatic implementation of the investment advice, periodic portfolio rebalancing, automatically generated annual updates to advice and annual wealth forecasts, portfolio monitoring and special account statements. Additionally, you may also receive personalized service from VFA financial advisors in person or by telephone. In this program you will be granting VFA discretionary investment authority over the account. Morningstar is the independent financial expert of the GPS Program, consistent with the Department of Labor Advisory Opinion A, also known as the SunAmerica Opinion. Prior to June 9, 2017, the GPS Program was able to be added to VALIC variable annuity contracts that were held as individual retirement accounts, or IRAs, and non-qualified deferred annuities. Following such date, the GPS Program could not be added to these contracts. GPS Portfolio Manager will manage your investments exclusively in accordance with the retirement objectives you indicated on your GPS Client Profile, which is completed at enrollment in the Program and periodically thereafter when your retirement objectives or investment circumstances change. The investment advice and recommendations you receive in GPS will be based solely on the information disclosed to VFA in your GPS Client Profile, and on the balances/allocations of assets you may have in your VALIC plans(s)/accounts(s). The advice delivered by GPS will not consider any investment objectives, risk profiles/ preferences, or other information you may have provided or disclosed previously or in relation to other, separate products securities, or services. If you are interested in learning more about the GPS Program, a complete description of the program, services, fees, payment structure and termination features are available in VFA s Form ADV Part 2A, Appendix 1 Wrap Fee Program Brochure for GPS Program and GPA Program, investment advisory agreement, and account opening documents. These documents are available upon request from your IAR or from VFA. (3) GPA Program The Firm also offers the GPA Program. The GPA Program is an asset management program offered exclusively to clients of VALIC who purchase (1) the VALIC Portfolio Director Advantage fixed and variable annuity contract ( PD Advantage ) or (2) the VALIC Portfolio Director Freedom Advisor fixed and variable annuity contract ( PD Freedom Advisor ). The PD Advantage and PD Freedom Advisor contracts are issued by VALIC, our parent company. As of January , PD Advantage is no longer available for purchase. In addition, as of such date, existing PD Advantage contract owners were no longer permitted to newly enroll in the GPA Program but existing PD Advantage contract owners with the GPA Program can continue to utilize the service. Additionally, current PD Advantage contract owners with the GPA Program may continue to make subsequent deposits into the contract under certain circumstances. As of January 29, 2018, VFA began offering the PD Freedom Advisor contract, which is only available if you enroll in the GPA Program at the time the contract is purchased. Using objective investment advice from Morningstar, the GPA Program manages assets to a strategy that is based upon your investment/ retirement goals, risk tolerance, time horizon and liquidity needs. Also, certain PD Advantage contract owners may have purchased the IncomeLOCK or IncomeLOCK Plus living benefit as part of the PD Advantage contract, which may place additional restrictions with respect to investments selected by Morningstar. In this program you will be granting VFA discretionary investment authority over the account. Before enrolling in the GPA Program, you must first complete a GPA Client Profile and Risk Tolerance Questionnaire ( GPA Client Profile ). The GPA Client Profile will help you to determine your risk tolerance and time horizon. This will help to determine an Asset Allocation Policy and portfolio assignment, which determines how your account will be invested. If your retirement objectives or investment circumstances change, you should contact your IAR or VFA to update the information in your GPS Client Profile information. Morningstar, as the independent financial expert for GPA Program, uses a tactical asset management program that develops a set of well diversified model portfolios beginning with strategic asset allocations that are typically reviewed annually, and updated if necessary. Then, as frequently as monthly, Morningstar analyzes the performance trends of all the asset classes included in their model portfolios and adjusts allocations to asset classes in order to take advantage of these trends. However, to keep the tactical asset allocation targets consistent with each model portfolio s intended investment objectives, Morningstar does limit how much the tactical allocations are allowed to deviate from their corresponding strategic allocations. After establishing tactical asset allocation targets, Morningstar completes construction of the GP Advantage model portfolios using a mix of investment options that allows them to hit their tactical asset allocation targets. When updates to the model portfolios are implemented, the investment allocations of accounts managed by GP Advantage are reviewed and reallocated to the new targets as necessary. If you are interested in learning more about the GPA Program, a complete description of the program, services, fees, payment structure and termination features are available in VFA s Form ADV Part 2A, Appendix 1 Wrap Fee Program Brochure for GPS Program and GPA Program, investment advisory agreement, and account opening documents. These documents are available upon request from your IAR or from VFA. VC (03/ ) 5

6 (4) Financial Planning The Firm offers to its individual customers comprehensive financial planning services. Our financial planning services include a comprehensive analysis of your current and future financial situation and focuses on up to six areas, including: Retirement planning: Your IAR can help you determine the cost of the retirement you envision and make sure that you are saving enough to meet your retirement goals. Investment management. Your IAR can help address whether your current investment portfolio is allocated to your risk tolerance, time horizon and specific needs, and can help determine if your portfolio is properly diversified. Insurance needs. Your IAR can discuss various types of insurance, review your coverage and determine if your current insurance coverage is suitable for your needs. Estate planning. This section of the financial plan educates you on topics such as living trusts and introduces sophisticated estate planning strategies for you to consider with your legal counsel. Education planning: Your IAR can help you determine whether you re setting aside enough money to help your child or grandchild attend the college of his or her choice. Your advisor will also discuss the various investment plans and products available to help fund education goals. Cash flow and budgeting. Your IAR review your current financial position, including your current cash flow. We will review your net worth, cash flow, debt and investment accounts. Our IARs work with you to complete a client questionnaire, which requires information about your income, social security benefits, tax status, investment assets, other assets and savings, liabilities and current expenses, insurance policies, estate plans, tax information, risk tolerance and financial goals. Once you have met with your IAR and completed the client questionnaire, you will be presented with a written comprehensive financial plan that is designed to help you achieve your financial goals and objectives. You may then determine whether or not to implement the financial plan. If you decide to implement any of the recommendations in the financial plan, you should work closely with your attorney, tax advisor and accountant, and insurance agent. Our IARs do not make recommendations concerning the purchase or sale of specific securities or insurance products when preparing a financial plan. If a client requests that the IAR assist with the implementation of the financial plan, the IAR may assist with the purchase or sale of certain products since the IAR is also a broker-dealer registered representative. However, the products that your representative may offer are limited to those approved by the Firm. Typically, the Firm delivers the written report within 30 days following the completion of all elements of the client questionnaire. Following delivery of the report, the IAR will attempt to meet with you to discuss the contents of the financial plan. VFA s financial planning services utilizes the financial planning software provided by VALIC s Acumen group. The financial strategies presented in the financial plan are intended only as a guide. Any analysis of tax, financial, or accounting issues relating to your situation is for discussion purposes only and not intended to be tax or legal advice. Item 5 - Fees and Compensation (For additional information, see Item 12, Brokerage Practices, in this brochure.) (1) MIP Program Program Fee: The Firm charges a Program Fee that covers the provision of initial and ongoing investment services and the execution of securities transactions. The Program Fee includes the fees and costs for services provided by your IAR, VFA, Envestnet, the Strategists, and National Financial Services LLC ( NFS ). The Program Fee does not cover custodial fees for the account that will be established with a custodian to hold the assets in your account, nor does the fee cover mark-up or markdown charges on transactions in over-the-counter securities transacted in your account (Selected Manager Investor and Integrated Manager Investor Accounts only). The Program Fee is payable on each MIP portfolio model is calculated as a percentage of assets in your account. A minimum fee may apply for certain MIP portfolio models. The Program Fee also does not cover costs for any securities transactions you request involving assets or securities not in a program account. For information about custodial fees and charges for over-the-counter transactions, please talk to your IAR. If a client opens multiple Managed Investment Program accounts, in some situations the value of the accounts may be combined for the purpose of reducing total Program Fees. Please contact your IAR for more details. The Program Fee is calculated as a percentage of assets in your account based on a schedule that is provided in your advisory agreement. These fees range up to 3.00%. With respect to the Managed Investor Account: AIG Funds Portfolio, the Firm is affiliated with the investment advisor to the AIG mutual funds, SAAMCo. In addition to your Program Fee noted above, you pay the total expenses/fees of the funds, which includes investment advisory fees paid to SAAMCo. Information regarding the investment advisory fees paid by the AIG Funds to SAAMCo is VC (03/ ) 6

7 included in the funds prospectuses. Affiliates of the Firm provide other services to the AIG Funds for which they receive compensation, such as transfer agency, administrative, accounting and printing services, as described in the funds prospectuses or Statements of Additional Information. With respect to the Selected Manager Investor Account and the Integrated Manager Investor Account, you will pay additional fees to the separate account managers to compensate them for managing the assets in your account. These fees typically range from 0.25% to 0.50% of assets. The Program Fee may be negotiated by your IAR. The Program Fee may be more or less costly to you than paying for the services separately, depending upon the investment advisory fees charged, the type of account, the amount of assets in the account, time and services provided, the number of transactions for the account, the level of brokerage and other fees that would be payable if you obtained the services available under the program individually. The Program Fee is calculated quarterly, in arrears, based on the average daily value of your account during the quarter. The fee is tiered based on the account balance. If there are cash amounts in an account, the Program Fee is charged on the entire account, including such cash amounts. The fee is debited from the account at the beginning of the following quarter. If cash or cash equivalent funds in your account are not sufficient to pay the Program Fee or any of the other fees charged in connection with your account or transactions for your account, investments in your account may be liquidated in order to pay the outstanding fees. If your account is managed for only a portion of a quarter, the Program Fee will be prorated accordingly. Part of the Program Fee collected by the Firm is paid to Envestnet as compensation for the software tools and other services provided under the program and to Strategists for investment advisory and related services provided under the program. These fees range up to 0.10% on all mutual fund models and up to 1.00% on models containing individual securities. Envestnet in turn re-allows a portion of the fee received to the program s custodian, National Financial Services LLC ( NFS ), pursuant to the Firm s custodian agreement with NFS. The fee payable to Envestnet is reduced when assets under management reach incrementally higher levels. Under the Firm s policies, a portion of the Program Fee is collected by the Firm is shared with the IARs for introducing and servicing your advisory accounts. Compensation received by IARs may or may not be more than what the IARs would receive from the Firm if you paid the Firm separately for brokerage and other services. If the amount would be more than what an IAR would receive if a client participated in other programs of the Firm or paid separately for investment advice, brokerage and other services, the IAR has a financial incentive to recommend this advice program over other programs or services. The Firm and its IARs do not offer investment advisory services outside of the MIP Program, the GPS/GPA Programs or general financial planning services described herein. Other Charges: Your investments in a MIP account may also be subject to other fees and charges imposed by other third parties, such as: in the case of mutual fund investments, mutual fund investment management fees, 12b-l fees, administrative servicing fees and short term redemption fees; in the case of purchases made in connection with an individual retirement account or other qualified plan, various IRA and qualified retirement plan fees including annual custodial fees; and, in the case of all investments, clearing, custody and other transaction charges and service fees. Other parties will receive a portion of these third party fees. Within the MIP program, mutual fund recommendations will be limited to classes of shares that are not subject to a front-end sales load or that qualify for a waiver of the load. Mutual fund shares subject to a sales load that were purchased and transferred into the Managed Investment Program are subject to all fees and charges that are normally charged on mutual fund shares held within the program, including the advisory fee and 12b-l fees. 12b-1 fees paid to VFA for mutual fund assets held in your program account are credited back to your account from which the fee was earned. The program bundles together several service providers - an investment adviser, a broker/dealer, a clearing firm and a custodian - and offers most of these services for a single advisory fee. Some clients like having the various services packaged together; others prefer to select their own providers for the various services needed to manage their investment portfolios. Similarly, some clients like a fee structure that converts trading costs into an asset-based fee calculated on the same basis as advisory fees; others prefer trading costs to be assessed on a per-trade basis. Depending on a number of factors, such as the number, size and nature of the securities transactions in an advisory account, the overall fees and charges borne by the client over time could be more or less than what these fees and charges would be if the same services were provided on a separate basis. For specific questions regarding your relative costs please contact your IAR. For more information about the fees associated with the MIP Program, see the MIP Wrap Fee Program Brochure, which are available upon request from your IAR or from VFA. (2) GPS Program Product Fees and Expenses: If your employer selected a VALIC variable annuity product to fund its retirement plan account(s), you bear the fees and expenses under your annuity contract (including possibly, surrender/withdrawal charges) and the fees and expenses of the investment options (e.g., underlying mutual funds) that are available in your contract. Please review your variable annuity product prospectus for details regarding its fees/expenses. Alternatively, if your employer has selected a mutual fund program to fund its retirement VC (03/ ) 7

8 plan with VRSCO as the plan record keeper and service provider, you bear the costs of mutual funds that you have selected in your retirement plan account and you may pay certain plan fees and expenses, such as recordkeeping fees. Advisory Fees: Participants in the GPS Portfolio Advisor Program pay a fixed annual fee in advance of up to $ We reserve the right to waive this fee. The fee is charged to your account following enrollment in the program and entitles you to use the service for one year. You may not obtain a refund of this pre-paid fee if the advisory contract is terminated before the end of the billing period. While this fee is not negotiable with respect to individual participants, we reserve the right to waive the fee for participants of specific employer-sponsored plans depending on the circumstances. Participants in the GPS Portfolio Manager Program pay an annual fee based on assets under management in the program up to 0.60%. In certain instances, we may offer a discount for certain employer-sponsored plans. The fee is calculated at each calendar quarter end, based on quarter-ending value, and is assessed within fifteen days after the end of such calendar quarter. For accounts that were established during the quarter the fees will be prorated. We will deduct the fee from your account. Of the advisory fees we receive, a portion is paid to your IAR as compensation for the services provided. In addition, a portion of the advisory fee collected by the Firm is paid to Morningstar as compensation for the advisory services provided by Morningstar under the program. The fee paid to Morningstar is up to 0.045% annually of assets under management. Compensation Received by VFA and your IAR. If your employer selected a VALIC variable annuity to fund its retirement plan, your IAR may receive a commission or other compensation for your participation in the retirement plan. Alternatively, if your employer selected a VRSCO mutual fund program to fund its retirement plan, your IAR may receive compensation in a combination of salary/fixed payments, bonus/ enrollment payments or other compensation for providing services in connection with your retirement plan account. This compensation for either the variable annuity product or mutual funds is in addition to the advisory fees you pay to VFA under the GPS Program. Such compensation creates a financial incentive for the IAR to take particular action, including the recommending your enrollment in the GPS Portfolio Manager program. The IARs that recommend this program to you receive compensation as a result of your participation. The compensation received may or may not be more than what would be received if you paid us separately for investment advice, brokerage and other services. If the amount would be more than what an IAR would receive if you participated in other programs we offer or paid separately for investment advice, brokerage and other services, the IAR may have a financial incentive to recommend this program over other programs or services. (3) GPA Program Product Fees and Expenses: As a contract owner in either PD Advantage or PD Freedom Advisor contracts, you bear the fees/expenses under your annuity contract and the fees and expenses of the investment options (e.g., underlying mutual funds) in which you are invested in the contract. In addition, distributions from the PD Advantage contract may be subject to surrender/withdrawal charges. Distributions from the PD Freedom Advisor contract are not subject to surrender/withdrawal charges. Please review your variable annuity product prospectus for details regarding its fees/expenses. Advisory Fees: The advisory fee charged for the GPA Program is assessed based on the total market value of your PD Advantage or PD Freedom Advisor account and applied by flat percentage or by asset tier per account, as stated in your advisory agreement with VFA. Fees will be calculated based on the value of assets under management at the end of the calendar quarter and the fees for assets under management for less than a full quarter may be prorated. This fee is not negotiable. We will deduct the fee from your account. For the services rendered in connection with the PD Advantage contract, you pay an annual advisory fee rate of up to 1.00% of assets under management in the contract. For services rendered in connection with the PD Freedom Advisor contract, you pay an annual advisory fee rate of up to 1.12%. Of the advisory fees we receive, a portion is paid to your IAR as compensation for the services provided. A portion of the advisory fee collected by the Firm is paid to Morningstar as compensation for the advisory services provided by Morningstar under the program. The fee paid to Morningstar is up to 0.09% annually of assets under management. Compensation paid to VFA and your IAR. VFA and its IAR s sole source of compensation in connection with deposits into the PD Advantage and PD Freedom Advisor contracts are from the advisory fees you pay under the GPA Program. Neither VFA nor its IARs receive commissions on deposits or subsequent deposits into either contract. The advisory fees charged by VFA may be similar to or higher than the fees charged by other investment advisers. The compensation received may or may not be more than what would receive if you paid us separately for investment advice, brokerage and other services. If the amount would be more than what an IAR would receive if you participated in other programs we offer or paid separately for investment advice, brokerage and other services, the IAR may have a financial incentive to recommend this program over other programs or services. VC (03/ ) 8

9 (4) Financial Planning The Firm may charge up to $1,500 for completing a comprehensive financial plan. The fee is determined based on the type of financial plan and the complexity of the client s circumstances and is negotiable. The fee is flat amount and is agreed to prior to entering into a financial planning agreement. The fee must be paid prior to the delivery of the written report. The advisory agreement may be terminated without penalty at any time prior to the delivery of the written report. Once the written report has been provided to the client, there are no continuing obligations under the agreement. (5) Other Compensation National Financial Services LLC (NFS) is the clearing firm meaning that all trades are placed through NFS and it is also the custodian of your MIP account. Pursuant to an agreement with NFS, VFA, on behalf of NFS, provides various services to our customers, such as assisting with opening customer accounts, updating client account information, answering customer questions, helping customers with using brokerage and account services, monitoring customer accounts, transmitting orders, and maintaining books and records. The Strategists are responsible for selecting the funds, including the fund share class, that are included in their respective MIP portfolio models, which may include no transaction fee (NTF) mutual funds. When such funds are held in your account, NFS receives revenue from the fund (or an affiliate of the fund), which is based on total assets invested in such fund. In turn, NFS uses a portion of those revenues to reduce the trading costs incurred by accounts holding that fund. As a result, holding these funds in your account may reduce the Program Fee on your account. For accounts established on or after January 29, 2018, this reduction in the trading costs will reduce your Program Fee and will not affect the compensation received by the Firm or its IAR. For accounts established before January 29, 2018, the reduction in trading costs does not reduce the Program Fee paid by the client but increases the portion of the Program Fee that VFA retains. opened prior to January 29, 2018, this presents a conflict of interest between VFA and its customers because VFA s compensation increases based upon the Strategists selection of an NTF fund. This creates an incentive for VFA to recommend to the Strategists that they use NTF funds over other funds. In addition, within the MIP program, VFA has an incentive to recommend an MIP portfolio model that includes NTF mutual funds over an MIP portfolio model that includes fewer or no NTF mutual funds. Item 6 - Performance-Based Fees and Side-by-Side Management Neither VFA nor its IARs accept performance-based fees. Performance-based fees are fees that are based on a share of capital gains on or capital appreciation of the assets of a client. Item 7 - Types of Clients VFA and its IARs provide advisory services to individuals, including high net worth individuals, and participants of employer-sponsored retirement plans. VFA may also provide advisory services to trusts, corporations, or other business entities depending on the advisory program. While VFA provides advisory services to participants in employer-sponsored retirement plans, it does not provide advisory services to the plan sponsors of such retirement plans. Depending on the nature of services to be provided, VFA may require a minimum dollar value of assets as a condition of maintaining an investment advisory account. VFA at its sole discretion may waive the required minimum dollar assets to maintain an account. The clients that may participate in VFA advisory programs and the minimum account size requirements for opening an account are as follows: Managed Investment Program. This service is only available to individuals, trusts, corporations and other business entities. The minimum account balance for the MIP model portfolios range from $5,000 to $250,000 depending on the portfolio model. The Firm reserves the right to lower the minimum required amount on a case-by-case basis, as well the right to terminate an account if the assets in an account fall below the minimums. See the Firm s MIP Wrap Fee Program Brochure for additional information regarding minimum account balances. GPS Program. This service is currently only available to individual participants in a retirement plan account with VALIC or VRSCO. There is no minimum account balance to participate in the program. GPA Program. This service is only available to individuals, trusts, corporations and other business entities. To enroll in this service, you must have purchased a PD Advantage or PD Freedom Advisor contract. Currently, the GPA Program is only available in connection with the PD Freedom Advisor contract. The GPA Program does not have a minimum account balance though the PD Freedom Advisor contract has a minimum initial premium payment of $25,000. The Firm s financial planning services are limited to individuals. VC (03/ ) 9

10 Item 8 - Methods of Analysis, Investment Strategies and Risk of Loss Investing in securities involves risk of loss that clients should be prepared to bear. Each of the following is a significant investment strategy or method of analysis that VFA uses, along with the material risks involved: SERVICE (1) Managed Investment Program (2) Guided Portfolio Services Program DESCRIPTION OF INVESTMENT STRATEGY OR METHOD OF ANALYSIS Third party investment managers (Strategists) provide asset allocation models and investment advice. Morningstar provides wealth forecasts, contribution rate and retirement age recommendations, asset allocation models and investment advice. (3) Guided Portfolio Advantage Morningstar provides asset allocation models and investment advice. MATERIAL RISKS It is important to note that investments in securities (e.g. mutual funds, ETFs, etc.) involve risk and will not always be profitable. Strategists do not guarantee that the results of its advice will always be profitable. An investment made in a security may differ substantially from its historical performance. Past performance is no guarantee of future results. Neither diversification nor asset allocation ensure a profit or guarantee against a loss. It is important to note that investments in securities (e.g., mutual funds) involve risk and will not always be profitable. Morningstar does not guarantee that the results of its advice will always be profitable. An investment made in a security may differ substantially from its historical performance. Past performance is no guarantee of future results. Neither diversification nor asset allocation ensure a profit or guarantee against a loss. It is important to note that investments in securities (e.g., mutual funds) involve risk and will not always be profitable. Morningstar does not guarantee that the results of its advice will always be profitable. An investment made in a security may differ substantially from its historical performance. Past performance is no guarantee of future results. Neither diversification nor asset allocation ensure a profit or guarantee against a loss. Item 9 - Disciplinary Information We are required to disclose any legal or disciplinary events that are material to our clients or our prospective client s evaluation of our investment advisory business or the integrity of our management. The following are disciplinary events relating to our firm and/or our management personnel: 1. Regarding NASD Rules 2110, 2830(K), 3010 and 3070, FINRA alleged that VFA violated the directed brokerage provisions by accepting directed brokerage commissions in exchange for providing a mutual fund company with preferred access to its sales force. The findings stated that VFA failed to report, or to timely report, disclosure events pursuant to NASD Rule The findings also stated that the firm failed to establish, maintain and enforce a system and procedures reasonably designed to achieve compliance with Federal securities laws and NASD Rule 3070 reporting requirements. Without admitting or denying the findings, VFA consented to the described sanctions and to the entry of findings and was censured and fined $250,000. This matter was resolved October In October 2015, VFA s former Chief Compliance Officer (through September 2013) consented to the settlement of alleged violations of FINRA rules that he failed to reasonably supervise the firm s processes for reporting customer complaints to FINRA and the accuracy of those complaints. Upon identification of the issues in 2013, VFA and its new Chief Compliance Officer revised its FINRA complaint reporting procedures. 3. On November 28, 2016, VFA consented to sanctions and the entry of findings that it had failed to (1) have a reasonable system or process/procedures designed to address, analyze or review the conflicts of interest in its compensation program or to ensure that balanced disclosures was provided to the investors regarding such compensation program, (2) to maintain adequate systems and procedures to supervise the sale of variable annuities to retail brokerage customers, (3) maintain supervisory procedures and training materials that provide registered representatives and principals guidance or suitability considerations for sales of different variable annuity share classes, including L-share variable annuities, (4) enforce supervisory procedures requiring the that certain s flagged by its surveillance system be reviewed by designated Firm supervisors, (5) establish a reasonable system and procedures to supervise its complaint reporting responsibilities, and (6) failed to issue account notices at account opening and then on 36-month intervals for certain brokerage customers. The sanction totaled $1,750,000. VC (03/ ) 10

11 4. On April 6, 2016, VFA filed an insurance agency application in several states through the National Insurance Produce Registry. Due to an administrative error, the application omitted disclosure regarding prior FINRA regulatory events. VFA amended its insurance agency application beginning June 3, 2016 to include the disclosures. On, June 14, 2016, the Oklahoma Insurance Department fined VFA for omitting the required disclosures in its application. VFA settled the matter and paid the $300 fine. Following amendments to its applications in other states for the purpose of including regulatory disclosures, including the Oklahoma Insurance Department fine, several other states insurance departments issued fines against VFA for omitting the FINRA regulatory disclosures and/or not timely reporting the Oklahoma Insurance Department matter. Those state insurance departments included Alaska (October 7, 2016, $100 fine), Louisiana (November 11, 2016; $500), Virginia (November 29, 2016; $500), North Carolina (January 10, 2017; $250), Maine (March 22, 2017; $50), Ohio (April 17, 2017; $500), and Tennessee (January 22, 2018; $500). Item 10 - Other Financial Industry Activities and Affiliations VFA is a wholly-owned subsidiary of VALIC, which is a Texas-domiciled insurance company and an SEC-registered investment adviser. VALIC is primarily engaged in the offering and issuance of fixed and variable annuity contracts and combinations thereof and is licensed to issue annuities in 50 states and the District of Columbia. VALIC is an indirect, wholly-owned subsidiary of AIG. In addition to being registered with the SEC as an investment adviser, VFA is registered with the SEC, FINRA and various state securities commissions as a general securities broker/dealer, and as an insurance agency. In this capacity, VFA is involved in the sale of various types of securities, including, but not limited to, stocks, bonds, variable investment products and mutual funds. VFA, its principals and financial advisors spend approximately 75% of their time selling and managing securities and insurance business and 25% of their time providing investment advice. VFA, in its capacity as a broker/dealer, and our registered representatives, may be compensated by fees or commissions. Our investment advisor representatives in their capacity as registered representatives of VFA may recommend our broker/dealer services to clients who have or are utilizing VFA s advisory services. Clients are under no obligation to purchase or sell securities through VFA. However, if they choose to do so, commissions may be higher or lower than commission rates found at other broker/dealers. VFA IARs that provide services in connection with your MIP, GPS or GPA accounts receive a portion of the investment advisory fees that are charged to your account. Our IARs, as registered representatives of a securities broker/dealer, are authorized to offer and sell variable annuity products issued by VALIC, affiliated insurance companies, and non-affiliated insurance companies. Our registered representatives are also authorized to offer and sell mutual funds, insurance products and certain general securities through our firm. Our IARs that provide investment advisory services are licensed as insurance agents, registered representatives of a securities broker-dealer and as associated persons of a registered investment adviser. These licenses and registration enable our registered representative to offer and sell securities, including variable annuities and mutual funds, insurance products, and advisory products. VFA is affiliated with VALIC, a registered investment adviser and indirect, wholly-owned subsidiary of AIGLH, a wholly-owned subsidiary of AIG. AIG Capital Services, Inc. ( AIGCS ) is a wholly-owned subsidiary of SAAMCo and an indirect subsidiary of AIGLH, a wholly-owned subsidiary of AIG and an affiliate of the Firm. In its capacity as a registered broker/dealer, AIGCS acts as principal underwriter for the offer, sales and distribution of mutual funds, variable life insurance contracts and variable annuity contracts issued by VALIC and its affiliates. SAAMCo, an SEC-registered investment adviser for AIG mutual funds and the AIG mutual funds available within the Managed Investor Account: AIG Funds Portfolio, and an affiliate of VALIC, also serves as an administrator to registered investment companies advised by VALIC and serves as investment sub-adviser to certain registered investment companies advised by VALIC. AIG Federal Savings Bank ( AIGFSB ), an affiliate of VALIC, acts as custodian for group mutual fund accounts. VFA has retained the services of Envestnet in offering the VFA Managed Investment Program, a fee-based program. Envestnet is a registered investment adviser and technology firm that designs, operates and delivers investment programs that VFA utilizes to offer its fee-based program. VFA s financial planning services utilizes financial planning software provided by VALIC s Acumen group. VFA has retained the services of Morningstar as an independent financial expert for the GPS and GPA Programs. Morningstar is a registered investment advisor and utilizes programs and technology to provide asset management services, portfolio monitoring and investment advice. The following VFA management persons are registered with FINRA: Shawn Duffy; David L. Harrison; Stephen M. Hughes; Cynthia L. Burnette; and Keith Roberts. Messrs. Duffy, Harrison, Hughes and Roberts are also IARs of VFA. Messrs. Duffy, Hughes, Harrison, Roberts and Packs are members of the Firm s Investment Group. The Investment Group meets quarterly with Envestnet to review the MIP portfolio models investment performance and investment strategists. Messrs. Harrison and Packs are officers and/or directors of certain affiliates of VFA, as noted in the following chart: VC (03/ ) 11

12 Company:* AIG Capital Services, Inc. ( AIGCS ) American General Insurance Agency, Inc. General Nature of Company s Business: Broker/dealer; exclusive distributor and principal underwriter of VALIC and American General Life Insurance Company* life and annuity products, VCI and VCII mutual funds and other mutual funds advised by SAAMCo. Insurance agency Positions held in the Company by members of VFA s Investment Group: None. Officer: Mr. Harrison SunAmerica Asset Management LLC ( SAAMCo ) The Variable Annuity Life Insurance Company ( VALIC ) VALIC Company I and VALIC Company II ( VCI and VCII ) VALIC Retirement Services Company ( VRSCO ) Mutual fund and asset management business. Investment sub adviser to the VC I and VC II mutual funds. Insurance company that issues group and individual fixed and variable annuities; SEC-registered investment adviser to VCI and VCII mutual funds. Each company is an SEC-registered open- end, management investment company. SEC-registered transfer agent for certain mutual funds advised by VALIC and SAAMCo; Record keeper/service provider for employer-sponsored mutual fund retirement plans. * These companies are affiliates, which means that they are related by common ownership or control. Item 11 - Code of Ethics, Participation or Interest in Client Transactions and Personal Trading VC (03/ ) 12 Officer: Mr. Packs None. Officer: Mr. Packs Officer: Mr. Packs VFA has adopted a Code of Ethics ( Code ), the full text of which is available to clients and prospective clients upon request by contacting us at (866) VFA has a fiduciary duty to act solely for the benefit of investment clients. The Code requires honest and ethical conduct by all our supervised persons, compliance with applicable laws and governmental rules and regulations, the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code, and accountability for adherence to the Code. Our aim is to be as reasonable as possible with respect to internal procedures, while simultaneously protecting the organization and its clients from damage that could arise from a situation involving a real or apparent conflict of interest. While it is not possible to identify all possible situations in which conflicts might arise, this Code is designed to set forth our policy regarding the conduct of our supervised persons in those situations in which conflicts are most likely to develop. All associated persons are expected to adhere strictly to these guidelines. They are also expected to follow procedures for reporting of any violations as established in the Code. In our capacity as a broker/dealer, we provide to our clients a variety of products and services for which we are compensated. To the extent that an advisory client chooses to utilize our services as a broker/dealer, VFA and our associated persons may earn compensation in the form of brokerage commissions in addition to advisory fees. Our associated persons may recommend to you the purchase or sale of investment products in which we or a related entity may have some financial interest, including, but not limited to, the receipt of compensation. Records will be maintained of all securities bought or sold by our associated persons or related entities. Such records will be available for client inspection upon request. To the extent permitted by applicable law and the investment objectives, policies and restrictions, if any, applicable to client accounts, we may recommend that an investment be made in one or several registered investment companies for which an investment advisory affiliate acts as investment adviser or sub-adviser. In certain instances, in accordance with applicable law, we will waive its fee with respect to the portion of client assets so invested. For access and advisory persons, our written supervisory procedures require prior clearance and periodic reports on all personal securities transactions, except transactions in investment company securities and/or other exempt transactions. Further, such written supervisory procedures impose certain policies and procedures concerning the use of material, non- public information that are designed to prevent insider trading by any officer or associated person of VFA. Item 12 - Brokerage Practices In placing orders for securities transactions, it is our policy to seek the best execution for your accounts. Best execution will be based on a combination of the commission rates or net price and prompt, reliable execution. When selecting a broker/ dealer, we consider, among other things, its execution capabilities, including large order positioning, financial stability, ability to maintain confidentiality, delivery