SAN FRANCISCO — After a long, hard slog, H&R Block Financial Advisors Inc. has found its way to profitability, and it expects to stay there, but its parent company’s long-standing goal of turning millions of tax clients into brokerage clients remains elusive.
At the end of last month, H&R Block Inc., the Kansas City, Mo.-based tax giant, reported that its Detroit-based brokerage unit exceeded its own expectations by realizing profits for the last two quarters of the fiscal year ended April 30.
Block declined to break out its earnings for its advisory division, which employs 918 advisers, but the consumer financial services division of which it is a part earned $19.8 million for the fiscal year, compared with a loss of $32.8 million in fiscal 2006. Revenue of $388 million from the consumer division represented 10.3% of Block’s total of $4.02 billion for fiscal 2007.
According to the company’s earnings release, H&R Block Advisors accounted “for half” the division’s bottom-line improvement.
The company’s progress is attributable to the use of tactics such as converting customers to fee-based accounts, shedding smaller accounts while seeking wealthier clients, and hiring brokers away from wirehouses, according to Joan Cohen, president of H&R Block Financial Advisors.
“We’re very focused on recruiting,” said Ms. Cohen, who is based in Kansas City.
After spending 13 years as a broker at New York-based
Citigroup Inc.’s Smith Barney unit, Patti Grazioso was lured to Block’s Northbrook, Ill., office.
“As a half-million-dollar producer, nobody [at Smith Barney] cared for me at all,” she said.
“At Block, I’m treated as an elite adviser. Senior management has a vision” to treat smaller customers and lesser producers with respect, Ms. Grazioso said.
Chad E. Henry, a Block financial adviser in St. Charles, Ill., said that he was impressed by the company’s technology investment after coming on board from Edward D. Jones & Co. LP of St. Louis.
“They’ve made huge strides [in their back-office platform],” he said. “I think Block’s technology is second to none.”
Block has been searching for a way forward in the securities business since its purchase of Olde Discount Corp. of Detroit for $625 million in 1999. The acquired business subsequently generated losses of more than $330 million.
Considering its history, Block’s profitability is impressive, said Stephen Winks, principal of SrConsultant.com of Richmond, Va.
“The brokerage business is not their main line of business, so just getting to break-even is a major accomplishment, since they had to invent a business,” he said.
Mr. Winks said Block’s success is due to focusing on enterprise management, as opposed to making acquisitions.
“Wall Street turns their noses up a bit, but [Block] could be a competitive force [against wirehouses]” with its $33 billion of assets under advisement, he said.
The immediate improvement in profitability at Block’s brokerage business is due to realizing fatter profit margins on sweep accounts, the result of charging higher fees on smaller balances, according to Ms. Cohen. But progress in recruiting better advisers, retaining more advisers and reaping more referrals from tax clients bodes well for building on this trend toward profits, she added.
“I’d say we’re in the fifth inning,” Ms. Cohen said. “We’ve made it over some big humps.”
The adviser head count dropped to 918, from 958 in fiscal 2006 and 1,010 in fiscal 2005, Ms. Cohen said.
The overall retention rate of advisers at Block improved to 75% in fiscal 2007.
Ms. Cohen declined to specify the retention rate for fiscal 2006.
To some, those statistics suggest that Block still faces significant challenges.
“That means they’re losing 25% [of their brokers annually],” said Danny Sarch, principal of recruiting firm Leitner Sarch Consultants Ltd. of White Plains, N.Y. “That’s really high turnover.”
Still, a frustration at Block remains its largely untapped tax clientele. Adviser revenue attributable to referrals from tax preparers rose only to 16.3% in fiscal 2007, from 16.1% in fiscal 2006.
The problem is that tax preparers generate 500,000 leads annually, and the company’s 918 advisers tend to be paralyzed by this abundance, Ms. Cohen said.
“It’s a great problem to have for a short time,” she said. “We’ve had it for a long time.”
To try to break down this mass of leads into manageable bites, Block launched a pilot program this year, hiring 70 off-season tax preparers to call clients who expressed interest in financial advice, and try to qualify them for brokers.
The brokerage accounts Block held based on referrals from tax preparers to advisers fell to 386,902 in fiscal 2007, from 418,162 in fiscal 2006, the company reported last month. The new accounts opened based on these referrals fell to 13,920, from 17,072 during the comparable period.
Some of these declines resulted from a deliberate purging of smaller accounts — the average account size was $85,000 in fiscal 2007, compared with $75,000 in fiscal 2006 — and a growing reluctance to take on new accounts, Ms. Cohen said.
