Schwab: interesting failure that can cost clients $

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mkatz
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Schwab: interesting failure that can cost clients $

Post by mkatz »

Quite by accident I found today that my "Cost Basis Method" was not what I thought it was and wanted it to be. That has cost me tens of thousands of dollars in Federal Tax liabilities over that past two years. The problem occurred when I transferred assets from one of mys account into another (in this case a "family trust") account.

Schwab policy does NOT include warning clients that the process of moving assets (e.g. transferring assets from one account to another) will NOT transfer the associated Cost Basis Accounting methods! In my case, Tax Lot Optimization associated with the assets in the original accounts was replaced by the "default" FIFO method. The result: potentially significant increased Federal tax liability on sale of assets.

GRRRR! :annoyed
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Artsdoctor
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Re: Schwab: interesting failure that can cost clients $

Post by Artsdoctor »

I have to say that I'm not surprised. I once had a Schwab representative tell me that it was Schwab's policy to NOT allow specific lot ID designations! This was many years ago when I was learning about how to spend from a taxable account. I asked to speak to her supervisor for clarification then, but in retrospect, I should've reported her for giving information that was so blatantly wrong (and that could have potentially had such significant consequences for clients).

I still get periodic emails from a Schwab representative requesting time to go over my "investment goals" and even questioning my asset allocation (it's a SIMPLE IRA which I have to continue using and contains all bonds). I even took a call once to get them off my back and again was asked why my asset allocation was so conservative. I explained that my Schwab account was a small fraction of my investment portfolio which accounted for my 100% bond allocation there. The answer? "So what can we do to get you to transfer over from Vanguard and Fidelity?" I just didn't have the heart to tell her that I was transferring the SIMPLE to Vanguard as soon as I could possibly do it.

The moral of the story? Ask the representative for help, but then verify the information elsewhere once you've hung up the phone.
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mkatz
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Re: Schwab: interesting failure that can cost clients $

Post by mkatz »

Arts Doctor: I have similar experiences (and that is not to say that I believe the other houses are necessarily better. some are, some are not).

I posted because I hope that by doing so I can save others some heartbreak.

I did have a long conversation (or rant) with one of the Schwab line managers who agreed with my position and agreed to "pass it up the line".

I'd like to keep this thread alive long enough to benefit at least a few bogleheads.
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Re: Schwab: interesting failure that can cost clients $

Post by Artsdoctor »

I think your point is very "actionable" and is beneficial to us all.

My algorithm might be: (1) check the Wiki here, (2) call the representative if you have further questions, and (3) re-read the Wiki after you talk to the rep to make sure things make sense.

:D
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dmcmahon
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Re: Schwab: interesting failure that can cost clients $

Post by dmcmahon »

Schwab's system doesn't seem to be capable of doing specific lot identification via their UI. I've managed to work around this by changing the default method as needed and I always check it and/or reset it a few days before an anticipated trade. Usually I can find one of the settings that will result in the correct shares being sold.

FWIW Schwab is able to do specific lot ident if you trade through a broker, and I was told that they'd waive the fees if I had to trade this way to get around the issue. I think I availed myself of this once.

While we're on this topic, there's a similar problem with transferring assets to other institutions. I was told that I couldn't transfer specific lots, which would have complicated my careful block by block accounting.

Overall I've been pleased with the service I get from Schwab and these issues are in the nuisance category. Every broker has them in my experience.
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Re: Schwab: interesting failure that can cost clients $

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mkatz wrote:Schwab policy does NOT include warning clients that the process of moving assets (e.g. transferring assets from one account to another) will NOT transfer the associated Cost Basis Accounting methods! In my case, Tax Lot Optimization associated with the assets in the original accounts was replaced by the "default" FIFO method. The result: potentially significant increased Federal tax liability on sale of assets.
1) The cost basis accounting method means absolutely nothing until you actually sell the asset. Whether or not they carried over the "method" is a non-issue. Just change it before you sell.

2) The part of the law that required cost basis data "carry over" upon transfer has been delayed. Therefore the tax lots in the "new" account are "non-covered" and it is your responsibility to do the cost basis on your own. The new "account" broker should not report cost basis data to the IRS.
Artsdoctor wrote:I once had a Schwab representative tell me that it was Schwab's policy to NOT allow specific lot ID designations!
This is an ongoing problem. Schwab does not have specific ID as a "default" method. Regardless of that they have to comply with all IRS allowed cost basis methods. Their licensed brokers remain untrained. I just today spent 30 minutes with Schwab clarifying a gnarly cost basis/wash sale/specific ID question with Schwab. The first rep punted immediately (good for her), the second had the specific ID huh? attitude despite a note in our client file saying it was ok but nevertheless he got help (3 times) and educated both of us on the pitfalls. Issue resolved.

On the other hand Vanguard has a seamless method for the transactions but they are not updating cost adjustments on a daily basis and after some 15 months of supposed compliance on wash sale are still not getting it correct as of mid May.

So which is better? An ignorant rep or a system that is smooth but gets the wrong answer?

The problem is not so much with either broker but with the complexity of the tax regs and the new compliance rules. That's the real GRRRR! :annoyed

It's going to take all these people year's to work out all the bugs. Be aware.
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Re: Schwab: interesting failure that can cost clients $

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Schwab's system doesn't seem to be capable of doing specific lot identification via their UI.
This isn't true. I'm not sure about mutual funds since I don't own any, but it's easy to do specific lot identification when selling shares of stocks or ETFs. On the "trade" panel where you enter the symbol, action, quantity, and order type, there is an item that identifies your current cost basis method, and next to that there's a "Change" link. Click on that and it will bring up a menu of available cost basis accounting methods that will be applied to that trade, and one of those is "Specified Lots." If you choose to use that, a list of each tax lot will come up and, if I remember right, you can choose how many shares you want to sell from (one or more) of them. It's fast, easy, and there are no extra charges. Note that this selection of cost basis method only applies to that trade. It doesn't change your chosen default method.

Likewise although I certainly sympathize with the OP in this case, and it's possible that Schwab could have done more to clarify how the cost basis method of the new account would be decided, I don't think they were too far off, really. Some cost basis method has to be chosen for the new account, so in the absence of action from the customer it seems like the default is the most appropriate choice. You can just as easily see people reacting with surprise if the cost basis method were carried over from the old account. And then, the cost basis method that will be used on any given trade is clearly displayed in boldface type on the trading page every time you sell shares, so they might be forgiven for feeling that that's a clear notice to the customer. I mean... it really is right there in front of us.

But of course the reality is that expectations colour what people pay attention to, so as you say, a notice or a question during the transfer process, particularly if the transfer would result in a change of cost basis method, would have been the ideal way to go. Many thanks for the heads up!
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Re: Schwab: interesting failure that can cost clients $

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Karamatsu wrote:
Schwab's system doesn't seem to be capable of doing specific lot identification via their UI.
This isn't true. I'm not sure about mutual funds since I don't own any, but it's easy to do specific lot identification when selling shares of stocks or ETFs.
Right, it is only Schwab's mutual funds that currently require you to actually speak to a rep.
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Re: Schwab: interesting failure that can cost clients $

Post by FedGuy »

Years ago, when Schwab first started sending out the "Choose your cost basis method!" e-mails, I dutifully logged in and selected the specific lot method for my mutual fund accounts. I was therefore really annoyed when I logged in shortly after the new rules went into effect and found that my basis method had been set as "average cost." I can't remember if I called anyone or just read something on the screen somewhere, but I thought it said something about how you couldn't do "average cost" for mutual funds, and I clearly remember it saying that, once chosen, your method couldn't be changed.

I never complained, but I haven't added any money to those accounts (other than reinvesting dividends) since.
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mkatz
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Re: Schwab: interesting failure that can cost clients $

Post by mkatz »

Now one can change... which makes sense as tax implications of asset sales depends on the asset being sold rather than history of other assets being sold.
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Re: Schwab: interesting failure that can cost clients $

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FedGuy wrote: I can't remember if I called anyone or just read something on the screen somewhere, but I thought it said something about how you couldn't do "average cost" for mutual funds, and I clearly remember it saying that, once chosen, your method couldn't be changed.
This type of statement comes up a lot at more places than Schwab. The problem is a result of the brokers using average cost as the default cost basis historically and their websites reflect this.

According to the IRS there are three costs basis methods for securities: FIFO (the IRS default), Average Cost which is "allowed" for mutual funds and DRIPS (often the brokers default for mutual funds) and Specific ID (all the other other methods LIFO etc., actual fall under this last.) Brokers must accommodate all IRS approved methods. But they don't have to make it easy. Hence you have CSRs saying you "can't" when the truth is that the CSR "doesn't know how". :(
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Re: Schwab: interesting failure that can cost clients $

Post by dmcmahon »

Karamatsu wrote:
Schwab's system doesn't seem to be capable of doing specific lot identification via their UI.
This isn't true. I'm not sure about mutual funds since I don't own any, but it's easy to do specific lot identification when selling shares of stocks or ETFs. On the "trade" panel where you enter the symbol, action, quantity, and order type, there is an item that identifies your current cost basis method, and next to that there's a "Change" link. Click on that and it will bring up a menu of available cost basis accounting methods that will be applied to that trade, and one of those is "Specified Lots." If you choose to use that, a list of each tax lot will come up and, if I remember right, you can choose how many shares you want to sell from (one or more) of them. It's fast, easy, and there are no extra charges. Note that this selection of cost basis method only applies to that trade. It doesn't change your chosen default method.
Thanks, this is great news! It's been about 2 years since I made a trade there, and at that time specific lot ID was promised but with no specific delivery time.
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Re: Schwab: interesting failure that can cost clients $

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Doc wrote:
FedGuy wrote: I can't remember if I called anyone or just read something on the screen somewhere, but I thought it said something about how you couldn't do "average cost" for mutual funds, and I clearly remember it saying that, once chosen, your method couldn't be changed.
This type of statement comes up a lot at more places than Schwab. The problem is a result of the brokers using average cost as the default cost basis historically and their websites reflect this.
Vanguard still does this for non-covered shares. I have my own records of basis, so when I sold a non-covered lot last year, I sent a secure E-mail to Vanguard identifying which lot it was and how much I paid for the shares. Vanguard still got the basis wrong on the 1099, but the wrong basis was not reported to the IRS.
Artsdoctor wrote:I have to say that I'm not surprised. I once had a Schwab representative tell me that it was Schwab's policy to NOT allow specific lot ID designations!
I encountered this with Vanguard, not when selling, but when making a charitable donation; I wanted to specify which lot I donated to charity, and Vanguard said that they didn't support this. I didn't push the issue because I wanted to use FIFO for that particular donation; my oldest shares were the ones with the lowest basis, and the lowest-basis shares are the best ones for charity.

(edited to remove excess quoted material)
Last edited by grabiner on Thu Jun 19, 2014 8:26 pm, edited 1 time in total.
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Re: Schwab: interesting failure that can cost clients $

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Karamatsu wrote:This isn't true. I'm not sure about mutual funds since I don't own any, but it's easy to do specific lot identification when selling shares of stocks or ETFs. On the "trade" panel where you enter the symbol, action, quantity, and order type, there is an item that identifies your current cost basis method, and next to that there's a "Change" link.
I don't see any information about my current cost basis method, or an option to change it, when I call up information about my mutual funds.
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Re: Schwab: interesting failure that can cost clients $

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FedGuy wrote:
Karamatsu wrote:This isn't true. I'm not sure about mutual funds since I don't own any, but it's easy to do specific lot identification when selling shares of stocks or ETFs. On the "trade" panel where you enter the symbol, action, quantity, and order type, there is an item that identifies your current cost basis method, and next to that there's a "Change" link.
I don't see any information about my current cost basis method, or an option to change it, when I call up information about my mutual funds.
Vanguard doesn't give you the information if you have non-covered mutual shares, because it only kept track of average basis. Therefore, if you sell such shares, you have to send a letter or secure Email to Vanguard identifying which lots you sold; Vanguard will return an acknowledgement with the trade confirmation.
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Re: Schwab: interesting failure that can cost clients $

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grabiner wrote:Vanguard doesn't give you the information if you have non-covered mutual shares, because it only kept track of average basis. Therefore, if you sell such shares, you have to send a letter or secure Email to Vanguard identifying which lots you sold; Vanguard will return an acknowledgement with the trade confirmation.
That's too complicated. My plan/hope is to spend everything else first so I hopefully never have to touch the mutual funds in my taxable account, and let my heirs enjoy the benefits of the step-up basis upon death.
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Re: Schwab: interesting failure that can cost clients $

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I don't see any information about my current cost basis method, or an option to change it, when I call up information about my mutual funds.
Ah, so assuming we're talking about Schwab rather than Vanguard, perhaps a different procedure is needed. It might be good to send them a note and ask about that. Unfortunately I'm not able to invest in mutual funds at Schwab so I'm not sure what the options and procedures are for those.
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Re: Schwab: interesting failure that can cost clients $

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FedGuy wrote:
grabiner wrote:Vanguard doesn't give you the information if you have non-covered mutual shares, because it only kept track of average basis. Therefore, if you sell such shares, you have to send a letter or secure Email to Vanguard identifying which lots you sold; Vanguard will return an acknowledgement with the trade confirmation.
That's too complicated. My plan/hope is to spend everything else first so I hopefully never have to touch the mutual funds in my taxable account, and let my heirs enjoy the benefits of the step-up basis upon death.
If you buy any more shares in your taxable account, they will be covered shares, so you can specifically identify them easily online at Vanguard (and presumably at most other mutual fund providers). And these will be the shares you are most likely to sell, as your non-covered shares were purchased several years ago, when the market was lower.
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Re: Schwab: interesting failure that can cost clients $

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FedGuy wrote:I don't see any information about my current cost basis method, or an option to change it, when I call up information about my mutual funds.
Re: Schwab

<service> <account settings <cost basis>

Code: Select all

Account      Account Default                   Mutual Funds
Individual   First In First Out <change>       Uses Account Default
You can't change it online when you are placing the trade. You have to place the trade and then call. The broker will probably argue with you but persist and make him/her get help. You can also change your account default but it takes an extra business day to become effective and specific ID is not an option.

Specific ID is an IRS approved method. The brokers have to comply.
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Re: Schwab: interesting failure that can cost clients $

Post by Karamatsu »

FWIW I sold some ETF shares at Schwab yesterday by Specific ID, and all worked as advertised: just a click on the "Change" link for the cost basis method to shift from my default to Specific ID for that trade, then it brought up a menu listing each tax lot, number of shares, etc, and let me enter the number of shares for each lot that I wanted to sell. Easy, even though I was combining shares from several different lots. You might ask them why the same interface isn't available for mutual funds. It seems odd.
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