For most advisors, the broader cost basis reporting rules due to take effect next year will not change their lives directly.

Normally, they provide information to clients about the adjusted cost basis of sold securities, for tax reporting purposes. 

But now that custodians like Schwab Advisor Services will have to report the same information directly to the Internal Revenue Service, Schwab is taking steps to ensure that they and their advisor clients move in lock step with each other to avoid running afoul of the IRS’s new rules. 

Schwab Advisor Services, a division of Charles Schwab [SCHW] released a report Monday called “Preparing for the New Cost Basis Regulations" that will help its affiliated advisors prepare for the pending reporting requirements under the Emergency Economic Stabilization Act of 2008.

The requirements will be phased in over three years, beginning with equities bought and sold on and after Jan. 1. Reporting on mutual funds, exchange-traded funds and dividend reinvestment plans will be required in 2012, and the following year the rule will apply to all securities, including fixed-income and futures, according to Brian Keil, director of cost basis and tax reporting for Charles Schwab. The report is part of an ongoing program of webcasts, and nationwide workshops underway this summer to help them be prepared for implementation in 2011.

“Ensuring synchronicity is critical,” Keil said. “Taxpayers will want to ensure that what the broker is … submitting is accurate. We’re deemed as the authoritative source for securities covered under this legislation.”

For instance, one of the key changes requires brokers to default to the first-in, first-out (FIFO) method to calculate gains and losses on securities that are not eligible for the average cost method. For any position not using average cost, advisors and their clients can choose lots using specific identification method, according to the report. This can be done either at the time of the trade or through a standing order. Lot selection choices can vary from broker to broker.

If the advisor wants to specify a lot to sell, or change the cost basis method for a sale, they can only do that until the time the trade is settled. After that, the method used will be final.

Schwab’s report lays out specific steps that advisors can take to help clients deal with the transition: create a communications plan, anticipate clients’ needs and evaluate the impact on your back office operations. But it heavily emphasized the importance of communicating with clients now, especially to avoid four specific and potential snags.

First, clients might not understand cost basis. They could also underestimate the dissonance that could happen if a broker uses a different default method for determining adjusted cost basis than the advisor and their client. Second, the new rules will not cover all securities beginning at implementation on Jan. 1, clients might be unsure about what is covered and what is not. Also, securities transferred from other brokers after the effective date will need to come with a transfer statement that includes cost basis information.

Clients might call with questions about whether the cost basis information was properly moved. Finally, when clients get their Form 1099-Bs in early 2012, they will see cost basis information for any equity transactions in 2011, but they won’t be able to change the cost basis method used for each trade, which might make they frustrated.

On Tuesday, Schwab Advisor Services will host a webcast “An Advisor’s Perspective on Cost Basis Legislation,” beginning at 1 p.m., PST/4 p.m., EST, the third in a series on the new rules.


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