Wall Street firms shouldn't think about complying with the Internal Revenue Service's new rules requiring them to calculate the cost of investors' accounts only as a burdensome operational cost.

Instead, they should think of following the new cost-basis reporting rules as a potentially profitable means of retaining and attracing new clients, says a report just issued by research firm Celent.

"Ultimately, the new cost basis regulations provide an opportunity for financial services firms to enhance client relationships and promote greater trust and transparency," wrote analysts Alexander Camergo and Isabella Fonseca from Celent who co-authored the report entitled "The Cost Basis Reporting Market: An Update."

Here are some reasons why: all firms that follow cost-basis reporting for positions in an investor's account before and after the effective dates of the IRS rules will provide an added level of service to customers.

Custodian banks, in particular, will be able to differentiate themselves to wealth mangaers by receiving and posting accurate and timely updates of corporate actions.  Financial firms can also enhance their customer relationships and communiations by preparing for customer inquiries and educating their clients on the rules. That means the ability to decide which methodology they want the firm to use when calculating the cost of their accounts. 

Beginning January 1, 2012 mutual fund companies for the first time will be required to track and report the cost of a mutual fund transaction to both the Internal Revenue Service and investors. The rule became effective for regular stock acquired on or after January 1, 2011.

Investors in both mutual funds and equity accounts can select the method of cost basis reporting they want – first in-first out accounting or specific identification approach which allows them to first sell the lots of securities that means paying the least amount of taxes.

-- This article first appeared on Securities Technology Monitor.



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