Overview
This document provides a brief explanation of the process used to correct trade errors at
custodians like TD Ameritrade and Schwab. This is needed when trades are incorrectly
processed and an advisor needs to make investor clients whole for any trade commissions,
gains/losses, and dividends/interest missed as a result of the error. This is unique to the advisor
community in support of the work they do for their clients and not a function available to
individual investors. And—although each custodian might have slightly different policies and
procedures around corrections—the principles outlined here are generally applicable.
When is there an error?
The custodians typically make the trade correction process available to advisors if a trade was
successfully processed and the advisor requests corrections for those trades within 90 days.
Scenarios where trades are missed or where processing failed before execution are handled via
other means.
What happens during the correction?
The process begins with the advisor, who notifies the trading team at the custodian of the
intended trades. This includes providing side-by-side comparison of actual vs. intended tickers
and share quantities. The custodian’s trading team then makes the new trades in a separate
account for error transactions. With the intended share quantities held in the error account, the
trading team cancels the original transactions and replaces the holdings in the client account
with the positions waiting there.
How do the corrections impact tax reporting?
Only the new corrected cost basis will be kept on permanent record with the custodian; whereas
the basis as a result of the trades done in error is wiped from the record. Corrections that
happen well before the annual reporting deadline during tax season will result in a clean and
accurate report to the IRS showing only the corrected/intended transactions. NOTE: Correction
activity might remain visible in the custodial transaction history online.
Is there a cost involved?
The whole purpose of this process is to make sure that there is no cost to the investor client.
The advisor, in assuming fault for the trade error, assumes the responsibility of covering any losses.