One Minute Treasurer!
We are often asked whether bivio can account for automatic dividend reinvesting. The answer is yes. If it is done at one of our AccountSync supported brokers, all the transactions will be read in automatically. If it is done directly through a company program, you'll need to enter them manually.
However, that is only part of the story. There are still manual adjustments that are sometimes needed to keep club records accurately. With the number of lots of stock you'll own if you do DRIP investing, the odds of making all the manual changes correctly decrease significantly.
Because of this potential to make your club accounting much more complicated, we recommend that you avoid it. It causes so many problems for club treasurers that doing it is probably the main reason investment clubs disband.
In todays world where brokerage commissions are very low or non-existent and where the IRS has a way to check cost basis details for each lot of each stock you own, it makes no sense to make your club record keeping so complicated. You can save up your dividends and invest in round lots of shares instead of buying tiny fractional lots each time you get a dividend.
For example, these are issues we've run into when working with clubs who have done dividend reinvesting for many years. The biggest problem has to do with accurate record keeping. Each purchase when you reinvest a dividend is a separate lot of stock and needs to have its cost basis tracked correctly.
Having an accurate cost basis over the years will depend on things like this:
- Accurate entry of the original purchase (There are lots of numbers that can become typos when fractional shares are being purchased.
- Complete entry of all reinvestments - We frequently see records where entries have been missed completely.
- Proper adjustments for historical reorganizations such as splits, spinoffs, mergers etc. These can get very complicated. When there are lots of lots, there are lots of things to adjust and lots of opportunities for mistakes.
- Proper adjustments for re-classification of dividends. Sometimes dividends are re-classified after the end of the year, this requires proper adjustment of cost basis for all prior purchases.
- Supporting Documentation- Clubs often ask how long they should keep records from their brokers. If you need to substantiate or check historical entries, you may need lots of old statements to justify the information you are using to calculate cost basis.
- Proper lot selection identification for prior year sales. If you've entered any sales using a different lot selection than you used at your broker, all your current sale entries will be wrong.
- Wash sales- It's easy to forget that you've just made or are about to make another purchase when you decide to sell some of your holding. Proper wash sale adjustments over multiple lots can become extremely, extremely difficult.
- Changing brokers or treasurers- If you change brokers or club treasurers, historical cost information can easily be lost.
- Cost basis method- The rules have just changed because of the new cost basis reporting rules. Average cost was not allowed for dividend reinvesting in stocks prior to 2012. It is now allowed if the dividend reinvesting is done as part of a company run DRIP program. It is not supposed to be allowed for brokerage dividend reinvesting though there seems to be some confusion about this.
In any case, if you do not stay with FIFO lot selection on sales, you will have to track cost basis for pre-2012 reinvestments differently than post 2012 reinvestments and make extra adjustments in your club accounting to handle sales.
- Extra taxes- If you can't properly substantiate the cost basis for your lots, you will have to assign them a basis of 0 and pay gains on the total proceeds you received in a sale.
Of course, any of these things done incorrectly may mean that all your historical club accounting was inaccurate. This can mean things like needing club and members to amend old tax returns, and incorrect determination of payout amounts for withdrawals paid.
- Problems paying withdrawals - If you can transfer stock that has gone up in value when paying a full withdrawal, there are tax benefits to both the withdrawing member and the club. Unfortunately, trying to transfer multiple lots that were purchased by automatic DRIP investing can quickly become a record keeping nightmare for both the club keeping the accounting and the member receiving the shares.
These are all real life issues we've run into with clubs. They all add up to a lot of potential work and responsibility for the club treasurer. It's not that you can't track all these things accurately, it just depends on how much work and attention you want to give to it.
Here's an example of what you might be up against if you'd like to see for yourself:
If you want to keep your club accounting the simplest so you can spend your time learning about investing rather than accounting, we'd recommend that you avoid automatic dividend reinvesting. Save up your dividends and make conscious decisions to purchase round lots of shares when they are at attractive prices.