Former Merrill executive providing punch for adviser effort

If one big hitter can carry a team from the ranks of also-rans to the playoffs, then H&R Block Inc. may soon challenge the leaders in financial planning.

And major investors have noticed.

The tax preparation powerhouse, based in Kansas City, Mo., has been trying for years to make a mark in the financial advisory market, but the unlikely hiring this spring of one of Merrill Lynch & Co. Inc.’s top retail executives is finally providing the punch that’s been missing.

James G. Perilstein, senior vice president of retail distribution for H&R Block and former national sales manager at Merrill Lynch, has been on board since April, and already he’s making hard changes that will lay a foundation for long-term growth.

working overtime

Foremost, he overhauled the incentive system last month to reward long-term client relationships and to discourage high monthly commission-based sales. He is also working hard to add thousands of advisory pros in the next five years.

Mr. Perilstein says that by 2006, the firm will double its full-time advisory staff to 2,500, from 1,200, and the ranks of tax preparer financial advisers will swell to 6,000, from 430. The latter prepare taxes during tax season but switch hats the rest of the year to give financial advice.

“We’re at the beginning of a major run,” he says.

hiring binge

That potential has not escaped the attention of some of the biggest names on Wall Street.

Warren Buffett has bought an 8.43% stake in H&R Block, according to Securities and Exchange Commission documents filed Feb. 14.

The only larger investor is FMR Corp., parent of Fidelity Investments, which increased its stake to 8.83% of the firm, according to SEC documents filed the same day. H&R Block shares have risen to about $65 since February, from about $35.

Michael Hodes, an analyst at Goldman Sachs & Co., raised his earnings estimates for H&R Block, citing a quarterly statement the company released last Thursday.

It “suggests a somewhat higher base level of earnings outside of the tax businesses,” including mortgage origination and financial advice.

In preparation for the hiring binge, Mr. Perilstein is working quickly to develop a training program based on the one he once helped run at Merrill Lynch. He is aggressively recruiting trainers right now.

“I know what a planning-based culture is all about,” he says.

He has also shifted the company’s focus away from hiring kids fresh out of college in favor of “second-career people with worldly experience.”

Mr. Perilstein’s appearance on the scene is a case of opportunity meeting serendipity. The 50-year-old Merrill executive decided early this year that he wanted to retire to the Kansas City area, despite a flurry of offers from New York-based wirehouses.

A call from H&R Block CEO Mark Ernst changed his mind. Mr. Ernst, hired away from American Express Financial Advisors in May of 1998, had been promoted to CEO in January. That paved the way for a cultural reemphasis at the firm. Mr. Perilstein, he said, could take H&R Block in a different direction than Merrill Lynch.

“Merrill Lynch is going from being a highly productive collegial firm to a highly productive corporate firm,” Mr. Perilstein says. “Middle- to upper-middle America is being left with very few opportunities for advice and counsel.”

Mr. Perilstein says he believes that by keeping lower overhead his firm can earn profits by serving people with between $50,000 and $1 million of investible assets.

Before the emergence of Mr. Perilstein, H&R Block already had one prominent agent of change – Bernie Wilson. Mr. Wilson was hired just months prior to H&R Block’s 1999 purchase of Olde Discount Brokers, and he has overseen its melding and re-branding with H&R Block – a difficult task.

“They bought a transactional firm in an era when transactions were becoming passe,” Mr. Perilstein says.

Mr. Wilson says the majority of transactions from H&R Block financial advisers still derive from commission sales.

David Geschke, district manager of the Chicago-based H&R Block Financial Advisors Inc., had been with Olde for six years before it was acquired. He says Mr. Wilson’s efforts already have brought profound change.

“This year was getting us over the hump,” he says. “Now we are off to the races.”

One breakthrough that Mr. Geschke achieved was hiring two brokers, with five and six years’ experience, away from New York wirehouses. In each case, he says, the broker was hurt by the 2000 bear market and needed a way to rebuild business.

H&R Block is a dream for cold-calling brokers. Instead of hitting the Yellow Pages, they can delve into a list of pre-qualified leads from tax preparers.

Not only did the prospects request a call, but they also agreed to make their personal financial information available to the caller.

Three million of H&R Block’s 18 million customers are potential customers, according to Mr. Wilson.

Mr. Geschke says he has 8,000 leads for his 20 advisers, which is more than they can handle.

“You have more people than you can reasonably call,” he says.

Still, Jon D. Holtaway, a financial services analyst for Danielson Associates in Rockville, Md., says time will tell whether the multitude of leads are as good as they sound.

He says the old joke about H&R Block is that 80% of the customers patronize the firm because they can’t read the tax forms.

On the other hand, Mr. Perilstein says, “You’d be astounded how many of them have six-figure incomes.”

Indeed, Mr. Wilson and Mr. Perilstein say they are more concerned with having adequate products and services to meet client needs than they are with mining lucrative clientele from the tax side.

H&R Block recently added annuity products and Credit Suisse First Boston’s equity research. Most of its advisers have recently passed their Series 6 exams and now can sell life insurance.

Mr. Perilstein sacrificed his dream of an early retirement, but he says that his new job doesn’t feel like work.

“I didn’t have to do this, and now that I am, I’m having a ball,” he says.