THE TAXMAN COMETH: H&R BLOCK TO TACKLE FINANCE ADVICE FIELD

The tax preparer for the masses is getting the investment bug.

H&R Block Inc. quietly has registered as an investment adviser and set up prototype financial planning shops in three Ohio cities — Cleveland, Cincinnati and Columbus — and in Nashville, Tenn.

The Kansas City company, which markets tax preparation services the way McDonald’s Corp. sells hamburgers, also hopes to launch its investment advice business in numerous other U.S. cities by early next year, when tax season begins again. The first additional states likely to see H&R Block planners: Florida, Missouri, Kansas, Texas, Arizona, Colorado, Michigan, Indiana and Massachusetts.

“It’s a natural and logical fit,” says Kris Rodgers, a Procter & Gamble alum who now is H&R Block’s vice president of business development and is spearheading the venture. “We have millions of customers we assist with their taxes year after year, and there’s a great deal of trust between H&R Block and those customers.”

How many customers? Nearly 16 million in the United States used H&R Block’s H&R Block in planning push

tax services in this last tax season. Fewer than 1 million prepared their own returns and simply used H&R Block to file electronically; the rest worked with an H&R Block preparer in some fashion.

To put that in perspective, Boston-based retail investment giant Fidelity Investments has just 12 million customers, while San Francisco-based discount brokerage Charles Schwab & Co. has about 6 million, notes Chip Roame, a Belvedere, Calif., management consultant for financial services firms.

Of course, H&R Block’s client base is largely the middle-market set largely ignored by Wall Street firms and independent financial planners.

year-round activity

“I actually think (H&R Block’s) market isn’t a bad market,” says Mr. Roame, a former Schwab executive who recently launched his own firm, Investment Management Strategies. “Middle America actually has a lot of assets today. Prior to the 401(k) world, that market wouldn’t have been a good market.”

It doesn’t take much, either. If the company convinces a quarter of its customers to put just $50 a month into an investment fund, that adds up to $2.4 billion in a single year, says Alexander Paris Jr., analyst with Chicago-based investment research firm Barrington Research Associates Inc.

And, Mr. Roame adds, as those small dollars accumulate, H&R Block positions itself to handle the big prize when those investors retire or change jobs and have to invest proceeds from their 401(k) plans.

The potential, all agree, is huge, but there are risks. For instance, how qualified will the planners H&R Block attracts be to offer advice? Will handling myriad small accounts sap profitability?

One key test, Mr. Roame says: “Are they really focused on consumer needs? Or are they just getting some commissioned products and jamming them down the throats of their existing customers?”

He adds: “The thing that makes (H&R Block’s tax service) work is, a consumer could walk into a branch in Wichita, Kansas, or Wabash, Indiana, or San Francisco or wherever and get the same tax advice. They need to do that on the investment side.”

H&R Block launched its adviser unit, HRB Investments, early this year, but the four planning offices didn’t become functional until March. Today, the firm has all of 11 planners, housed in “premium” offices that operate year-round and are staffed by veteran tax preparers who handle more complex tax issues than the typical H&R Block preparer.

But as the financial planning venture matures — it currently is in a testing phase — the company intends to place advisers in its ubiquitous retail offices, often located in strip shopping malls.

These offices today are usually open only during tax season, leaving H&R Block to pay rent and other overhead the rest of the year. The financial planning initiative is part of a financial services diversification strategy aimed at enabling those offices to be productive year-round.

“We believe this is going to be a very important part of our business moving forward,” Ms. Rodgers says.

U.S. tax operations account for more than 80% of the company’s revenues from continuing operations, which rose 19% to $1.3 billion in the fiscal year ended April 30. Net earnings climbed 20% to $174.2 million, or $1.62 per share. (The stock price has been relatively flat in the low $40s this year, but has climbed from the mid-$20s over the last two years.)

H&R Block has moved in recent years to diversify into a broader financial-services provider. One example is the mortgage business, which now accounts for about 10% of revenues from continuing operations. Wanting to offer more sophisticated accounting and business consulting services, the company also recently embarked on a campaign to acquire certified public accountant firms.

As for the investment advice initiative, H&R Block planners will start out offering customers mutual funds, life insurance and annuities. Individual securities aren’t likely to figure in, Ms. Rodgers says.

Compensation is commission-based. But in the short time it’s been in the business, the company already has seen the need to offer a fee-based option and is revising its registration form with the Securities and Exchange Commission to do so.

For now, H&R Block has teamed up with Clearwater, Fla.-based brokerage InterSecurities Inc., which is functioning as its broker-dealer. Lakeville, Conn.-based National Regulatory Services Inc. is providing advice on regulatory compliance.

Longer term, H&R Block plans to establish its own broker-dealer, either by acquiring a brokerage or building from scratch, says Ms. Rodgers. Another possibility is forming a broker-dealer to pass through commissions to reps and handing off clearing services and client-account reporting to an outside firm.

InterSecurities, in fact, is teaming with two other brokerages to pitch H&R Block on that kind of structure, says John Hurley, president of the 2,000-rep brokerage subsidiary of Dutch insurance giant Aegon NV.

“There’s a great potential there with the amount of clients they have and the market they can tap into,” says Mr. Hurley, declining to identify his brokerage partners. “That close relationship (with the client) is already there to take to the next step.”

Echoes Liat Rorer, senior consultant with San Francisco-based Spectrem Group Inc.: “People are comfortable giving H&R Block all of their financial information, where most financial providers struggle to get their customers to show all of that.”

not so scary

H&R Block company has another edge: bricks and mortar. It has nearly 10,000 offices worldwide, most of those in the United States. About half are company-owned and the rest are franchises.

The infrastructure and the brand name are there, but a major challenge will be building a field force. Where will those planners come from?

Like the 11 already in place, many will have financial-services experience, Ms. Rodgers says. But the 60,000 or so preparers who work four months out of the year will provide a farm team, too.

“We think there’s a tremendous opportunity to use the preparer staff we have out there,” she says.

“That sounds scary to me,” observes Mr. Roame.

Not to worry, Ms. Rodgers says. “Certainly, we are making every effort to make sure we have the most qualified people to offer that advice. We’re making sure they have all the tools available to them.”