Whether your firm built an internal cost basis system or outsourced to a vendor, you’ve likely spent millions on a solution and your team dedicated significant resources to ensure compliance with the latest cost basis rules. On the surface, it all seems to be running smoothly – yet you can’t shake this nagging feeling that your system doesn’t yield much strategic value.  Or maybe in diligent fashion, it’s just time for a little self-evaluation.

Based on our work constructing and implementing cost basis systems, we naturally put a premium on compliance. Those are table stakes. However, just being compliant won’t ensure that you’re able to maximize the value from your investment. We’ve identified numerous areas in which firms can do more with cost basis than just file 1099s. Let’s take a look at the most common areas:

Automation and Accuracy – Automation is central to an efficient and accurate system.

Many firms have implemented solutions that continue to rely modestly or in some cases heavily on an army of humans supporting the system to manage data issues. Obviously, any manual component increases the likelihood of errors, from corporate action processing to transfer statement generation. And frequently, systems dependent on humans lack robust administrative tools to help manage the most common challenge in Cost Basis calculation: data cleansing.

Portfolio accounting systems that have been retro-fitted to become cost basis systems are notorious for manual work-arounds and questionable data accuracy.

But perhaps the greater issue is reprocessing. Not only are many systems rife with time intensive manual processes, but they are limited in their capability to accurately manage change because they are based on tax lots rather than transactions. As a result, it becomes necessary to reengineer the transactions downstream – a painstaking process plagued by potential inaccuracies.

Key questions to ask:

  • How large a staff does our system require? With the right system, a team of [X] should be able to run cost basis on [define the size of the firm].
  • Can we respond to unique data challenges and volume requirements in real time?
  • What level of accuracy does our system achieve? The best systems achieve 99.7% – 99.9% accuracy.

Integration – A single, integrated cost basis is the Holy Grail.

Many systems are burdened with poor integrations, resulting in discrepancies with the back office positions and problems with consistent data presentation. For example, a cost basis system that doesn’t act as an extension of the firm’s back office leads to two sets of data to reconcile. This leads to errors which leads to further client dissatisfaction and potentially a lot of resources being reallocated inefficiently. Additionally, these firms lack the flexibility to present cost basis data throughout their trading and portfolio pages, leaving them challenged to compete with firms that have already done so.

Key question to ask:

  • Does our cost basis system seamlessly integrate with our specific back office system as well as third-party or proprietary systems that you rely on?

Innovation – Don’t miss the big data opportunity.

Cost basis information is becoming an essential part of the client experience yet firms are struggling to seize on the opportunity. Cost basis calculation generates a vast amount of foundational, granular data to help service your clients better and drive insights around client segmentation and trading trends.  Many homegrown or outsourced systems lack the data analytics capabilities necessary to derive meaningful insights into trading trends, from individual holding periods to the tendencies of an entire trading desk.

Key questions to ask:

  • Is there a vision for what’s next for our cost basis data – next year? Five years from now?
  • Other than the annual regulatory updates, has there been a consistent addition of functionality over time?
  • Are we able to mine our data to glean meaningful insights?
  • Is my solution really just a black box, or does it offer the tools to give you efficient access to all the data, including original trade data, all adjustments and a full audit trail?

Data Access – Getting what you want, when you want it.

Increasingly a pain point for many firms is an inability to extract the data they need to run custom reports, feed a downstream system on demand or troubleshoot on the fly. Many systems do not store data in a processed state and are limited to creating and constantly recreating data masters as opposed to providing a continuous window into the tax lot data store. As a result, data masters must be compared to distinguish deltas, requiring an additional process and hurting efficiency while disrupting downstream functions.

In addition to the ease of access to data, consider the frequency of data updates. Daily batch is fine for 1099 reporting, but if you really want to maximize the value of your investment, you should strive for real-time cost basis updates. It won’t improve the 1099 process, but it will allow your advisors and clients to leverage the data for tax management purposes. That’s the point when you’ll stop just thinking of cost basis as a compliance cost center and more as a strategic advantage for your firm.

Key questions to ask:

  • Are we able to utilize tax lot data for downstream reporting, outside of cost basis?
  • Are we able to extract data we need to run custom reports?

Reliability — Managing cost basis is now a year-round process.

All firms are becoming increasingly dependent on the availability of accurate data 24-7 to meet clients’ needs. Cost basis reporting has moved from a peripheral service straight to the heart of tax reporting in a few short years.  Today, tax reporting is no longer a year-end event, but an integral part of daily operations driving the client experience. Many firms we have talked to expressed concern about the ability of legacy systems to perform consistently in light of these new demands.

Key question to ask:

  • Is our system able to perform to the industry’s new standards?
  • Are our uptimes on par with the best system now available?

Total Cost of Ownership

Building a system internally, especially if it requires integration with a legacy or acquired system adds layers of complexity. And the less automated the solution, the higher the cost and greater risk of inaccuracy and errors. A fully integrated, outsourced solution can lower the total cost of ownership over the long term. A robust platform like Maxit, can reduce firm resources required and allow firms to leverage a wide range of premium reconciliation services designed to support operational and strategic needs. While each firm is different, a system like Maxit has proven to provide significant savings over alternative commercial or homegrown systems by up to 50%.

Key question to ask:

  • Are we under pressure to reduce our operational or resource expenses?

Conclusion should push the reader to take a closer look at their cost basis solution and do they have just a cost basis system or a solution that adds value to both internal processes and provides a better client experience.   Do they want to turn cost basis reporting into a competitive and strategic strength by delivering an enhanced service to current clients and differentiating itself from competition when bidding for new business.