Beset by bad press over tax-refund-anticipation loans and a connection to an identity theft scam, H&R Block Inc. is scrambling to polish its image as a diverse purveyor of financial advice - not just the basic tax preparation services that made it famous.
Its financial advisory unit has been struggling, however. The unit reported a $55 million pretax loss for its fiscal 2002, which ended April 30, after booking $9.3 million in profits the year before.
Mark Ernst, Block's chief executive, blamed the poor economy and said he is not giving up.
The unit has been his main focus since he came to the Kansas City, Mo., company as chief operating officer in 1998. He had spent 12 years directing the distribution of American Express Corp.'s mutual funds, brokerage services, and annuities through third parties.
Mr. Ernst became Block's CEO in January 2001. To even out the revenue stream, which tends to slow down after the tax season, he has pushed the company into offering mortgages (through Option One Mortgage Corp. and H&R Block Mortgage Corp.), brokerage services, annuities, mutual funds, and individual retirement accounts.
Fifteen hundred advisers peddle these products in 188 offices. So do 631 tax preparers, in those offices and others, who also act as advisers.
Because those tax preparers have not produced as advisers, Block plans to recategorize all but 30 of them as "financial intermediaries." They will have securities licenses, which will let them give customers information about financial products and set up meetings with advisers. Their mission will be to identify sales opportunities and steer tax customers to advisory services.
"By integrating advice into our relationship with our tax clients, we [will] position ourselves to differentiate our business from … people who are simply tax preparers," Mr. Ernst told investors Jan. 7 at the company's annual presentation in New York.
Advisory customers will also be offered the option of paying a yearly fee, 1.7% of account assets, instead of commissions. That will benefit those who trade frequently, a spokeswoman said.
Last year Block was plagued with class actions involving its refund anticipation loan partnership with Household International Inc. In addition, on Jan. 2 it was reported that a former Block office manager had been arrested for allegedly taking part in an identity theft scam. The charges raised questions about the security of the company's confidential customer information.
Rachel Barnard, an analyst for Morningstar Inc., said Block's financial advisory strategy is stumbling.
"In fact, it's been a flop," she said. "I don't see a lot of optimism that they're actually going to make this profitable. We haven't seen any evidence that people want financial advice from H& R Block."
Brand identify is part of the problem. About one taxpayer in seven uses Block for preparing returns, but few think of it in other roles, Ms. Barnard said. "It's the same kind of hurdle that the insurance companies have. They're just not associated with … that financial savvy that banks automatically have."
Mr. Ernst insisted that the financial advisory unit will have better results to report - but not a profit - for the current fiscal year. "I'm encouraged by the progress we're making," he said.
Over all, Block had profits of $434.4 million in fiscal 2002.
In a research note, Morgan Stanley analyst Chris P. Gutek said Block needs to raise the revenue productivity of each adviser to $175,000 from $150,000 and to further integrate tax preparation with the advisory services.
Mr. Gutek said the unit's fixed costs could be reduced by as much as $20 million in 2004, which would help it break even.
Mr. Ernst, trying to calm investors at the Jan. 7 presentation, said the case of the alleged rogue office manager, Ivy Johnson, was an isolated instance. He asserted that Block, contrary to some press reports, had cooperated with investigators. The company's policies require it to have a subpoena before it will disclose confidential information about its clients or employees, he said.
"Unfortunately it was a big name - H&R Block - it was tax time, and it was a privacy violation," Mr. Ernst said. "Those all make for a great story, a story that probably got more play than it deserved, all those things that cumulatively create an issue of reputation risk."
Block issued a press release after Ms. Johnson's arrest outlining its security measures, including data encryption and password-protected computers. No paper copies of clients' tax returns are kept, it said, and employees must adhere to a code of ethics and conduct. The policies are reinforced through annual training programs, according to the release.
