Cost-Basis Information: The Bane of the Broker's Existence

It's that most wonderful time of the year: Tax season. Wonderful for the IRS, perhaps. But for many others in the financial services industry, brokers and their clients included, tax time is often a frustrating, time-consuming and tedious exercise. The leading cause of that frustration? The gathering of cost-basis information the information needed to compute gains and losses for tax reporting purposes.

It's that most wonderful time of the year: Tax season. Wonderful for the IRS, perhaps. But for many others in the financial services industry, brokers and their clients included, tax time is often a frustrating, time-consuming and tedious exercise. The leading cause of that frustration? The gathering of cost-basis information — the information needed to compute gains and losses for tax reporting purposes.

Consider a reporter for a daily newspaper who devoted an entire column describing the wearisome and lengthy search he conducted to track down the cost-basis information resulting from a stock sale: It was like searching for a needle in a haystack. He didn't have the original sales receipt for the stock and the investor relations department of the company had no records that would help him. His broker — the person he'd normally turn to in this instance — could provide no assistance.

Why couldn't his broker help? There could be myriad of reasons. An investor may be trying to track down a cost-basis figure on stock purchased 15 or 20 years ago. Other times a company has been sold or taken over so that the original cost-basis involves a company that no longer exists. And it's very likely that the investor has changed brokers and investment firms more than once since the stock was purchased, so the cost-basis information is not in the brokerage account to begin with.

Transferring Assets

Each year millions of customer accounts worth billions of dollars are transferred from one institution to another. These transfers, more often than not, are done quickly and efficiently via the Automated Customer Account Transfer Service (ACATS), an offering of National Securities Clearing Corporation (NSCC), a subsidiary of The Depository Trust & Clearing Corporation (DTCC).

ACATS enables b/ds, banks and other financial service firms to submit, review and settle account transfers in a standardized, automated environment and it can transfer equities, corporate bonds, municipal bonds, government securities, mutual funds and cash. Since its launch in 1985, it has become the industry standard and transfers between 3.2 million and 3.5 million accounts each year. (The NYSE and NASD first mandated that ACATS be used by member firms for full account transfers in 1986. Since then, additional functions such as partial transfers and reclaims have also been made mandatory.)

But while ACATS successfully transferred millions of dollars and accounts from one firm to another, the cost-basis information was not transferred with it. And if, at a later date, the broker or bank needed to retrieve it, the information then had to be researched and entered manually. Otherwise, it would simply be lost.

“The industry was spending thousands of dollars, as well as man hours, piecing this information together. On top of that, we had to check for manual input errors once the information was fed into the account. We really needed an automated solution for transferring cost-basis information,” says one broker.

“When I started in this business 15 years ago, we kept a sheet for each client and you posted everything manually,” says Richard Dragotta, northern New Jersey branch manager for Linsco/Private Ledger (LPL). “Either you or your assistant entered each buy and sell as they occurred…it was a very, very time-consuming task.”

Required Information

Brokers need this information at their fingertips. It's one way to show that they are customer-centric professionals. “For a broker today, cost-basis information is not a perk or a luxury when you're talking to a prospective client. It's a requirement. Clients expect you to have this information,” says Dragotta.

When a broker doesn't, clients get angry. “When the industry first began looking at this issue in 2002, account transfers were the No. 1 client complaint that the SEC received,” says John Cusumano, president of the Customer Account Transfer Division of the SIA. “And cost-basis was one of the main targets of these complaints.”

The problem, Cusumano says, is that “Cost-basis information did not fit easily into the transfer process. But we knew that an electronic exchange would be ideal and that's what we set out to accomplish.”

Cost-basis was not only a b/d issue. “Cost-basis is critical to the banking world as well,” Cusumano says. “When trusts are transferred, the cost-basis information has to go with them and I think you will see many more banks using the new electronic transfer once they understand the benefits and efficiencies it brings to the process.”

In early 2002, the SIA's Customer Account Transfer Division began working with DTCC to develop a system to automate the transfer of cost-basis information from one firm to another. Together with about 40 service bureaus, brokerage firms, banks and account transfer and portfolio managers, DTCC began to map out the requirements needed to design and implement an automated cost-basis service.

Cost-Basis Reporting Service

After approximately a year-and-a-half in development, NSCC ran a pilot for the system and launched the product — called Cost-Basis Reporting Service (CBRS) — in early 2003.

CBRS enables firms to transfer original cost-basis, adjusted cost-basis or any other cost-basis information to other firms using ACATS. Once this information is recorded, it is transferred automatically from one firm to another, no matter how often a customer moves between firms.

Today the majority of brokerage firms, including Merrill Lynch, Bear Stearns, UBS Financial Services, Citigroup and Pershing use the electronic transfer service. Banks that use ACATS are becoming increasingly interested in the service and what it can do to make their transfer process more efficient.

Response to the cost-basis reporting service has been enthusiastic, especially among the b/d community.

“I think this is a big step forward,” says a rep from a major brokerage firm. “So many firms don't seem to think it's their responsibility to provide cost-basis data to former clients. Now that we have electronic transfer capabilities, there's no excuse for not forwarding the information.” And the NASD has recommended that its members have cost-basis information in electronic form use in making account transfers.

Another broker says that the portability provided by the electronic transfer service will make it much easier for b/ds to move to another firm or go independent. Traditionally, brokers were not allowed to take cost-basis information with them when they moved.

If that newspaper columnist's broker had had access to CBRS, he would have solved this problem with the click of a mouse. And it certainly would have enhanced his image as a customer-centric professional intent on providing the best possible service available.

Edlyn Meringolo is vice president, Product Marketing and Development, at The Depository Trust & Clearing Corporation and serves as an advisor to the Securities Industry Association Customer Account Transfer Division.

Report from the Front Lines

Wells Fargo Investments was one of the first firms to sign up for DTCC's Cost-Basis Reporting Service and put it into operation in June 2003.

“One of the major benefits of CBRS is that it eliminates manual entry of cost-basis data by our financial consultants and their sales associates,” says Melanie Kleinschmidt, assistant vice president/operations manager at Wells Fargo. “The cost-basis information is autopopulated which saves time for our brokers and provides better service for our customers.”

Kleinschmidt also pointed out that Wells Fargo has used the electronic service as “a recruitment tool for consultants. They can transfer entire books of business to us with cost-basis information intact, which saves them hours of time and effort, and again, helps them provide better customer service,” she says.

“One of the challenges we've faced is that system programming for cost-basis information differs among firms, and this sometimes leads to further analysis and manual entry of data,” she added. “We hope DTCC will continue to work with the industry to promote future enhancements and also to encourage participants to educate one another on how they process cost-basis information.”

Edlyn Meringolo is vice president, Product Marketing and Development, at The Depository Trust & Clearing Corporation and serves as an advisor to the Securities Industry Association Customer Account Transfer Division.

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