H&R Block diversifies into troubled waters

KANSAS CITY, Mo. — The $250 million lawsuit accusing H&R Block Inc. of fraudulent marketing of its retirement accounts shows the perils the company faces as it continues to remake itself into something besides just the place to go every winter with your W-2.

The dustup provides yet another black eye for the tax preparation giant, which is in the midst of its busiest season as millions of Americans look for help in filing their income taxes but are increasingly looking to competitors or doing it themselves online or with store-bought software.

The suit brought by New York Attorney General Eliot Spitzer also provides another example of how the company’s attempts to add value through diversification over the last few years — Block now offers investment advice, sells mortgages, takes over back-office accounting for small businesses and will even open its own bank next month — could be drawing its focus away from its bread-and-butter tax services.

“It’s difficult to say to what extent some of these other actions have taken their toll on the tax business,” said Michael Millman, an analyst with Soleil Securities/Millman Research.

Millman has soured on Block, giving it a “sell” rating, and saying some customers could be looking elsewhere to avoid the extensive cross-selling Block tax preparers now do, hawking investment accounts while searching for deductions.

The company’s most recent figures show that Block has seen an overall decrease in the number of clients at its more than 12,000 retail offices through the first two months of the year, although higher fees have increased revenue by 2 percent.

Spitzer charged Block last week with selling low- and moderate-income customers IRAs that charged more in fees than they generated in interest, saying thousands of customers ended up losing money.

Block’s chief executive, Mark Ernst, has defended the accounts, calling Spitzer’s filing “an unfair attack” in a letter to The Wall Street Journal, and saying the prosecutor is ignoring other benefits customers saw from the accounts, including tax savings.