When the cost basis reconciliation tools became available with PortfolioCenter 5.2, we began learning how difficult it is to keep the cost basis in the PortfolioCenter software in sync with the broker’s cost basis. Maintaining cost basis in both systems threatens to swamp many practices. It’s a decision you may want to consider carefully before tackling.
Here are 7 commons reasons why the cost basis in PortfolioCenter may differ from the cost basis at your broker:
1) Matching Method: You and your broker may not have used the same matching method historically. This is more common than you think. Many advisors accepted their broker’s default matching methods (typically average cost for mutual funds and FIFO for everything else) when they signed up. And, they also accepted the PortfolioCenter default matching methods (FIFO for everything) when they began using the software. The problem only came to light when the cost basis reconciliation tools came online.
2) Ignorance was bliss: You ignored cost basis until 2008, so neither your broker nor PortfolioCenter has complete information. Nothing involving cost basis happens automatically in PortfolioCenter. New accounts, inherited securities, gifts to minors, splitting an account after divorce, charitable gifting, death of a spouse — all these events have cost basis implications. If you didn’t provide instructions when the event occurred, most likely the cost basis did not follow the security. If you weren’t actively working to make sure the PortfolioCenter software and your broker had complete cost basis information, chances are neither system does.
3) Corporate actions: Almost all corporate actions — such as splits, spinoffs, mergers and share class exchanges — have cost basis implications. Most brokers will update their system after corporate actions, but not all brokers do this and not for all types of actions. Since nothing involving cost basis happens automatically in PortfolioCenter, you must make manual adjustments for corporate actions to keep the cost basis in PortfolioCenter accurate.
4) Moving securities between accounts: When assets transfer from an existing account to a new account, the cost basis information does not automatically follow. If the original account came from outside PortfolioCenter, the cost basis must be entered manually. If the original account is in PortfolioCenter, you can use the transfer wizard to retain the cost basis or simply change the account number (depending on the circumstances). Again, this must be done manually because –as you may have heard– nothing involving cost basis happens automatically in PortfolioCenter.
And we recently gained the tools to identify three more issues:
5) Sell lot mismatch: Sometimes even using the same matching method, your sells may match different lots. For example, if you have 3 buys of the same fund on the same day, PortfolioCenter may match two of the three lots to a sell and your broker may match a different two of the three. Or perhaps you notified the broker to use a matching method other than your default for a particular trade but failed to update PortfolioCenter or vice-versa. Until the cost basis reconciliation report became available, we had no easy way of discovering these differences.
6) Income reclassification: At the end of the year, many mutual funds determine the tax status of their distributions (or change them). If you’ve ever received a corrected 1099 in March, you have seen this before. This reclassification must be done manually in PortfolioCenter since — you guessed it — nothing involving cost basis happens automatically in PortfolioCenter. However, it is often almost impossible to obtain the information necessary to adjust PortfolioCenter and the volume of changes make it a Herculean task.
7) Wash sells: After a wash sell, the disallowed loss is deferred and PortfolioCenter must be manually adjusted. If you have not performed the manual adjustment, PortfolioCenter cost basis will not match the broker’s since — all together now — nothing involving cost basis happens automatically in PortfolioCenter. However, as of of this writing, for all practical purposes it is not possible to adjust PortfolioCenter for some types of wash sales.