Cost Basis Reporting: Firms Must Ramp up Communication to Investors

Tax season is quickly approaching, and all financial intermediaries must send out the new 1099-B forms to investors in a few short months. These 1099-Bs will not only have new instructions, but also new boxes to accomodate cost basis reporting requirements. Once these forms are sent out, firms can expect a deluge of inquiries from customers regarding the new forms and new options regarding tax lot selection. To prevent help desks from being overwhelmed with calls, firms should be taking an aggressive stance with regards to communicating the changes that investors will see on their 1099-Bs. While the most proactive firms have been reaching out to the end-investor to discuss these changes for months, many are only beginning to reach out. Common methods of communicating changes to investors have included verbiage on Q3 paper statements. This, however, will not be sufficient to stem the expected inflow of inquiries. Those firms that are only now beginning their outreach, or have only conducted their outreach via paper statements alone, are running the risk of doing "too-little, too-late". That point in time, however, has not yet been reached. Firms still have time to ensure that end-investors remain informed on the changes for tax reporting. Heading into the fourth quarter, firms should not only print verbiage on outgoing paper statements, but should also post relevant information to their websites and send targeted email blasts to end-investors. Ultimately, the purpose of the cost basis reporting regulations was to improve transparency. Brokers, mutual fund firms, custodians, family offices, and any other firm that services retail investors have the opportunity to establish themselves as trusted partners in protecting their clients' wealth. In this post-financial crisis environment, transparency will go a long way in establishing a retail investor's trust and confidence in his or her wealth manager. For more information about cost basis reporting, please consult Celent's recent report, The Cost Basis Reporting Market: An Update.