By Isabella Fonseca, Research Director, Wealth Management at Celent
Bio: Isabella Fonseca is a research director within Celent’s Wealth Management group. Mrs. Fonseca’s current research focuses on wealth management technology in both Europe and North America. Mrs. Fonseca has extensively covered topics on wealth management trends, retail brokerage, financial planning, advisor platforms, and cost basis reporting.
Celent recently conducted research which confirms that financial institutions continue to face a number of challenges that are forcing them to reconsider their overall cost basis reporting strategy. During our nearly 60 interviews with financial institutions for Cost Basis Reporting: Total Cost of Ownership, firms stated that they were neutral in their assessment of satisfaction with either third party systems or in-house systems. What we found though, is firms that decided to build in-house CBR systems have undergone significant growing pains. One of the most significant challenges has been the maintenance of the technology development, making the size and scope of CBR projects difficult to manage.
Research confirmed that the larger firms typically deploy a mix of build and buy best-in-class tools. Medium-size firms are more open to a SaaS environment due to lower costs. Smaller firms are more apt to obtain CBR functionality from back office solutions, rather than buying expensive CBR specific suites.
Ultimately it all comes down to cost, and many firms have underestimated the resources necessary to customize their requirements and keep up with on-going regulations. Since firms began to implement systems in 2010, perspectives on CBR systems cost have evolved. Developing the technology has been a larger project than previously expected; and maintaining the technology and making the necessary enhancements have proved more difficult than anticipated. This has led to higher than expected costs. During our interviews, we asked participants to express their views on cost basis reporting spending over the next year, and the majority stated that it would be higher than the previous year, as shown in the Figure below.
So in either scenario, where firms had built in-house systems, or worked with third party solutions, there are gaps and challenges to overcome on existing workflows and operations:
Consolidating and integrating systems. Firms are looking to consolidate their systems. Tighter integration of cost basis reporting solutions is one of several projects that increase operational efficiency.
Increasing collaboration across systems. There needs to be collaboration between operations and tax staff.
Client service. As more securities become covered under the cost basis reporting regulations, firms expect increased call volumes. As tax reporting season approaches, firms are gearing up by adding new staff members to handle client inquiries. This year, firms have considered adding more information to investors earlier, such as more client facing tools and email blasts.
Overall, the results from our research demonstrated that many firms have been stymied by the high costs associated with developing their own CBR solutions whereas third-party providers have used their expertise and economies of scale to optimize processes, reducing costs and enhancing client service.