Preparing for Cost Basis Regulations

By Cynthia Stephens on Wednesday, December 22nd, 2010

Tips from Chris Flynn, VP Product Management, Advent Software
New cost basis reporting requirements put an obvious burden on custodians, but they will also affect advisors who manage taxable accounts. Many RIAs will need to make process changes and put plans in place to handle discrepancies between cost basis data from the custodian and data from their portfolio accounting systems.  If you are not reconciled, your client may realize a different tax scenario than he or she envisioned. To give our readers an action plan for facing these challenges and minimizing their effects, I spoke with Advent Software VP of Product Management Chris Flynn. Chris offered three tips:

#1:
 Reconcile positions and daily closing methods Day 1 to be effective

Your first step should be reconciling current tax lots with your custodians. On an ongoing basis, Advent will provide cost basis in its standard position reconciliation report, provided the custodian can provide Advent with that information. To use this tool effectively, however, you and your custodian need to be in alignment on Day 1. Otherwise, you will not be able to distinguish a new unreconciled position that needs your attention from an older unreconciled position. You will also want to ensure that the closing method for each account (FIFO, LIFO, etc) is aligned with the closing method in your Advent applications. This will allow the standard day-to-day trades to be settled without any intervention.

Tip #2: Assess your internal process and identify potential breaking points

Review the life cycle of your trades and determine where the versus purchase will be transmitted and where it will not. If this information is not conveyed to your custodian when it receives the trade, the custodian will close the trade based on the default closing method. Assuming you have reconciled the closing methods already, you only need to be concerned with trades where you choose a different lot. You and your custodian should agree on how to communicate trades with a different lot selection from the standard. Will you fax a report to the custodian? Will you log into a custodian’s website to make the lot selection? What does the custodian prefer? It is important to note that the new rules require the custodian to lock in the lot by the settlement date, making having a plan for such trades in place all the more important.

Tip #3:  Put a communication plan in place

One of the most important steps you can take is to communicate with all interested parties:

·         Speak with your brokers to understand what changes they plan to make to support the transmission of versus purchase information on sales orders. 

·         Communicate with the custodian to ensure the end needs of the mutual customer are met. Have an effective plan for handling trades that settle differently than the default closing methodology. 

·         Communicate with end customers, who will feel the ultimate impact but are likely unaware of the new rules. You should explain the legislation, the impact to the client, and the process you are putting into place to ensure the client’s goals will be met. 

For more information on cost basis requirements visit:

For Advent customers:  http://connection.advent.com/products/costbasis/index.asp
For everyone:  http://www.advent.com/costbasis

Chris Flynn is the Vice President of Product Management for Advent’s Investment Management Group. In his role, Chris oversees the product direction and strategy for the core portfolio accounting and trading products.

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