Celent Study Identifies Ongoing Challenges with Cost Basis Reporting Compliance Ahead of Phase III

Jersey City, NJ - 10 October 2012

Compatibility of the cost basis reporting system with existing technology ranked a high priority across all industry segments

Scivantage®, an independent financial technology provider with proven expertise in online brokerage, tax and portfolio reporting and wealth management applications, and Celent released findings today from a new report titled, “Cost Basis Reporting Landscape 2012,” examining the current state of the industry as it relates to cost basis reporting readiness. The research, commissioned by Scivantage, provides an analysis on firms’ evolving cost basis reporting (CBR) priorities for technology capabilities and operational processes, and how these have changed after the first two (of three) phases of regulations have been completed. According to the study, financial services firms had challenges with the automation and transfer of data between books and records, cost basis reporting systems, and tax reporting systems. In addition, accuracy of calculations for wash sales and corporate actions were also a high priority.

According to the report, now that financial firms are through the 2012 tax reporting season and have been given until January 2014 by the IRS to implement fixed income regulations, they are taking the opportunity to assess their CBR systems to find areas of synergy with other business practices. While CBR systems are still viewed primarily as a compliance requirement, firms are exploring ways to use them to streamline processes, integrate technologies and improve communications between end-users, financial intermediaries and solution providers.

“As firms have been actively operating their CBR systems over the past two years, it has become obvious that they underestimated the amount of technology enhancements, tax knowledge and operational adjustments needed to successfully comply with IRS regulations,” said Alexander Camargo, Wealth Management Analyst at Celent. “Through our research, we found that the industry wants cost basis solutions to be integrated with other internal systems, ultimately leading to consolidated, streamlined operations.”

“As we progress further into the regulation phases, firms are increasingly looking for ways to turn cost basis into a business differentiator,” said Greg Alves, Senior Vice President, Investment Reporting, Scivantage. “Automating complex tax calculations using sophisticated data processing to provide accurate reporting is becoming increasingly important as 1099 tax reporting volume continues to grow. As complexity and sheer number of trades present a considerable CBR challenge, firms must streamline their cost basis operations to deliver a superior service experience to their clients.”

Additional key report insights include:

  • Firms using third-party vendors where overall more satisfied than those who were using a homegrown solution, with custodians being the most satisfied segment on average (3.75)
  • The majority of the firms across all segments chose to buy versus build a CBR solution
  • Brokers and prime brokers expressed the least confidence in their system to be able to handle 1099 reporting; while mutual funds, transfer agents and custodians have the least confidence for transfers processing
  • Accurate 1099 reporting has become a high priority over the past two years for respondents and investors may need to get used to corrected 1099-B forms being the new norm

To obtain the above information, Celent conducted close to 50 interviews with broker-dealers, mutual funds, transfer agents, custodians, prime brokers, and technology providers to understand the full spectrum of cost basis reporting regulation implications.

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