WealthManagement Magazine

Relieving the Cost-Basis Headache

Ron Marino remembers what it used to be like when a new broker joined UBS and had to transfer clients' cost-basis information manually. Because this was a time-consuming process, with each broker having between 300 and 2,500 accounts, we hired temp employees in our branch offices to input the cost-basis information manually, says Marino, corporate vice president and manager of the Account Transfer

Ron Marino remembers what it used to be like when a new broker joined UBS and had to transfer clients' cost-basis information manually.

“Because this was a time-consuming process, with each broker having between 300 and 2,500 accounts, we hired temp employees in our branch offices to input the cost-basis information manually,” says Marino, corporate vice president and manager of the Account Transfer Department at UBS.

Multiply that scenario by the thousands of brokers who join UBS and other firms each year and you can see why the industry rejoiced when National Securities Clearing Corporation (NSCC), a subsidiary of The Depository Trust & Clearing Corporation (DTCC), introduced its 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 DTCC's Automated Customer Account Transfer Service (ACATS). It permits the automated transfer of cost-basis information, making it quick, easy and inexpensive to obtain or provide such information for equities, corporate bonds, municipal bonds, government securities, mutual funds and cash.

In addition, CBRS eliminates the need for brokers, banks and individual investors to research and obtain such information independently, and it provides an important level of customer service that can be a key advantage in customer selection of a brokerage firm or bank

Prompt Transfer

Customer accounts and assets are transferred through ACATS, usually within six business days of the transmission of the request. On the day assets settle through ACATS, and for a period of up to 10 days, information on the cost basis for the assets transferred can be sent through CBRS.

Assets are generally reported in “tax lots” so that records can be maintained for different purchases of a single issue. If brokerage firms or banks have a portfolio management system, that system can be programmed to transfer the data automatically through CBRS.

Most brokerage firms, including Merrill Lynch, Bear Stearns, UBS, Citigroup/Smith Barney and Pershing, use the electronic transfer service. Banks that use ACATS are expressing growing interest in the service and its ability to make their transfer process more efficient.

Automated Environment

ACATS enables broker/dealers, banks and other financial service firms to submit, review and settle account transfers in a standardized, automated environment. Since its introduction 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 like 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.

As many brokers will attest, the industry was spending thousands of dollars and countless hours piecing this information together and checking for manual input errors once the information was entered into the account. The industry needed an automated solution to transfer cost-basis information quickly, efficiently and cost-effectively.

Immediate Access

Fifteen or 20 years ago, brokers kept a sheet for each client and posted everything manually. Either they or their assistants entered each buy and sell as it occurred. It was a laborious, error-prone, time-consuming task. In today's fast-paced trading environment, brokers need immediate access to cost-basis information. “Clients expect you to have this information at your fingertips,” says one branch manager.

When the industry first began looking at this issue in 2002, account transfers were the top client complaint that the SEC received, and cost basis was one of the main targets of these complaints. The problem: Cost-basis information did not fit easily into the transfer process. So the industry sought to create a seamless electronic solution.

The SIA's Customer Account Transfer Division began working with DTCC in early 2002 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.

One of the first firms to sign up for CBRS was Wells Fargo, which put the service 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,” said 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.”

“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.”

Enthusiastic Response

Response to the cost-basis reporting service has been enthusiastic, especially among the b/d community. “Our brokers are ecstatic about CBRS,” says Steve Callan, associate director with Bear Stearns. “They're constantly asking us which firms are playing in it, so they know what to expect when customers transfer in from other firms. Moreover when cost-basis information is loaded up electronically, it frees up the brokers and their assistants to focus on other critical and time sensitive issues.”

CBRS not only benefits Bear Stearns' own brokers, it also is a big plus for the large base of correspondent firms that clear through Bear Stearns. “Our correspondents range in size from four- and five-person shops to firms with 450 or 500 brokers,” says Callan. “When they join us, they're delighted to discover that we offer an automated process for transferring cost-basis information. It's a real selling point for them to their customers, especially during tax season.”

The author is managing director and general manager for Clearance and Settlement, The Depository Trust & Clearing Corporation

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