H&R Block wants to be more than tax preparer

NEW YORK -- H&R Block, the behemoth of tax preparation firms, is branching out.

The company aims to expand its relationship with its customers beyond the annual tax-filing season by offering financial planning, home mortgages, brokerage services and even private wealth management. With more services, it hopes to keep customers coming back.

"If we help people with their financial decisions, they will be more loyal," president and chief executive Mark A. Ernst said in a recent interview. "Plus, we will be doing more than just filling out tax forms."

H&R Block, founded by brothers Henry and Richard Bloch in Kansas City, Mo., nearly 50 years ago, now has more than 9,000 offices around the nation. Its online offerings include both do-it-yourself and professional-assisted tax preparation, and its TaxCut software is a big seller.

This year, many tax filers also will get financial planning tips focused mainly on saving for their children's educations and their retirement.

Meanwhile, H&R Block Financial Advisors, the brokerage launched with the company's 1999 acquisition of Olde Discount Corp., has attracted more than 3,000 customers since the rollout of new wealth management accounts last fall.

The company's mortgage division originated $6.5 billion in loans last year. A lesser-known subsidiary, RSM McGladrey, which offers accounting and tax services to mid-sized businesses, has begun financial planning services for business owners.

Filling a gap

Tax preparation accounted for about 70 percent of 2001 profits, Ernst said. The goal in coming years is for taxes to produce about half of profits, with 25 percent coming from mortgage business and 25 percent from investment operations, he said.

Regardless of the breakdown, tax preparation will remain central to bringing in customers.

"The fundamental thing we are trying to do is fill in a gap for middle Americans," Ernst said. "People of moderate means -- people Merrill Lynch wouldn't consider working with -- need advice on saving, especially how to save for retirement. We're going to do that."

Michael Millman, an analyst at Salomon Smith Barney who watches H&R Block stock, applauds the company's new directions.

"H&R Block clients typically don't have access to sophisticated financial planning -- or any financial planning," Millman said. "Their clients look upon H&R Block preparers as their only financial contacts during the year, and they've been telling H&R Block that their greatest financial concern is the ability to save."

The company benefits, he added, "by having clients return year after year and not be tempted to go elsewhere."

H&R Block's stock has been on the rise since the spring of 2000 and currently trades at about $46 a share on the New York Stock Exchange. Millman rates the stock a "buy."

Right timing

Ernst, 43, a native of Bellevue, Iowa, who left American Express to join H&R Block in 1998, has held the chief executive post for a year. Like the Bloch brothers, he wants the company to be in the right place at the right time.

The brothers got their start after a friend suggested Henry Bloch's accounting firm consider specializing in tax preparation. He did that in mid-1950s, just as the Internal Revenue Service was phasing out its service of filling out tax returns for Americans at IRS offices.

They decided to call the company H&R Block, with a final "k" instead of the family name's final "h", to make it more recognizable and pronounceable for the public.

Henry Bloch stepped down as chairman in September 2000, but still holds the title of honorary chairman. His brother, Richard, who survived cancer in the 1970s, has been active since then in supporting cancer research.

Today, the company they founded is involved in preparing about one in seven of America's 132 million tax returns, either through its owned and franchised offices or its online and software products. Its overseas offices -- mainly in Canada, Britain and Australia -- handle an additional 2.2 million clients. It employs about 12,000 people worldwide -- a number that balloons to more than 80,000 with temporary workers at tax time.

Revenues in the fiscal year ended April 30 were $3 billion, resulting in a net profit of $281.2 million or $1.55 a share. Analysts surveyed by Thomson Financial/First Call expect that to increase to $2.22 per share this year.

A time with extra money

Ernst believes cross-selling will help expand H&R Block's non-tax business.

"The one time people stop and think about their financial situation is at tax time," Ernst said. "And for many, it's the one time they have some extra money."

After a trial run last year, H&R Block has added a half-dozen questions to the tax preparation questionnaire its clients fill out. Based on that and information on the return, H&R Block associates will give each client a "just for you" financial advice report.

A client getting a refund, for example, might be urged to divert some of that money to a tax-advantaged Individual Retirement Account, which H&R Block is marketing as an Express IRA. A family with young children will get information about college savings plans, while a renter will learn how a Roth IRA can be used to accumulate a downpayment for a home.

"We're talking about simple steps that can make a big difference in the long run to our clients," Ernst said.