Cost Basis Reconciliation

Adding value through custom Axys reporting

January 1, 2011 marks an important day for the advisor/client/custodian relationship. Beginning on this date, custodians will be required to report the adjusted cost basis of sold securities, including whether the gain or loss is short- or long-term, to the IRS and taxpayers on Form 1099-B. Historically, tax lot management and portfolio accounting methods have been the domain of the advisor, and many have used specific closing methods for tax planning purposes, adding value to the advisor/client relationship.

Potential Data Conflicts?

However, now that custodians will be reporting cost basis and gains to the IRS and the client, there exists the potential for cost basis discrepancies to exist between custodian figures and advisor numbers – a potentially seriously embarrassing situation. After all, if the cost basis numbers are wrong, how can performance be correct?

FIFO vs Freedom

It’s expected that most advisors will simply defer to the custodian’s cost basis numbers and discontinue providing cost basis to their clients to completely avoid the above scenario. However, several of our clients want to maintain control over their clients’ cost basis numbers and accounting methods (most custodians default all accounts to FIFO).

Summer Intern Project?

Fortunately, some custodians have provided interfaces whereby advisory firms can now upload historical cost basis figures for every tax lot present at these custodians. Each custodian will then report back any discrepancies and give the advisor several options for handling the discrepancies, all on an account by account basis. Of course the problem becomes how do you harvest all of that data currently residing in your portfolio management software system and massage it into the format specified by each custodian.

Facing this very predicament, several of our clients using Advent Axys began asking us to produce custom reports that would do all of the heavy lifting for them. Of course these requests came within about two weeks of year end!

Custom Reporting to the Rescue

Within a few days of work, we had created custom reports for all of our clients’ major custodians that permitted them to upload properly formatted CSV files into their custodians’ back office systems for cost basis reconciliation. One of our clients uploaded a file containing over 18,000 historical tax lot line items to one of their primary custodians – it took the computer all of about 60 seconds to generate the file.

For our clients who either don’t trust their custodians’ cost basis data or simply want to provide an alternative to FIFO for certain clients, we are providing a solution to a potential operational nightmare that conceivably has already saved 100’s of man-hours.

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