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With tax professionals' understanding of financial concepts and intimate knowledge of clients' financial situations, offering financial planning is the most natural extension of a tax practice, providing the most client-centric, cost effective, and rewarding service to clients.
Acquired in 2001 by Wells Fargo and Company, H.D. Vest, Inc. is an independently run subsidiary that manages a network of tax professionals, mostly certified public accountants, who sell a variety of financial products to their clients, including mutual funds and unit investment trusts. A large number of its representatives are located in rural areas where residents have limited investment options. The Irving, Texas, business also sells insurance and offers fee-based investment consulting services to individuals and businesses. H.D. Vest operates one of the leading online tax preparation sites, a free service that it uses to attract new customers. Now with Wells Fargo as its corporate parent, the company is expected to greatly expand its network of representatives, as well as to market new products such as home equity loans.
Herb D. Vest Goes into Business in 1973
The man who founded H.D. Vest was a maverick named Herbie Darwin Vest, the son of a West Texas refinery worker. After graduating from college, he served two combat tours in Vietnam as an infantry officer. He told Forbes in a 1992 article, "I didn't want to get shot at anymore, so I sought the calmest profession I could find, and became a CPA." He started his own public accounting firm in 1973, but within a few years he found himself embroiled in a different kind of conflict. While working with clients on their tax returns, he often suggested that they consider investments to offset taxable income, plan for the future by opening IRA accounts, possibly start up college funds for their children. When asked if he could help further, all Vest could do was refer them to a banker or broker who was less knowledgeable about their individual situation. In many cases his clients would return the next tax season in the same financial condition or, even worse, had been guided into making poor investment decisions. Vest and others CPA's were prevented from selling securities by state regulations and professional guidelines set down by the American Institute of Certified Public Accountants (AICPA), which mandated that accountants could not collect commissions and were limited to a fee-based business. Such strictures made the selling of securities an unprofitable endeavor.
Deciding to challenge the system, Vest acquired a securities license and a legal opinion on the AICPA's ethics code, which he was told violated antitrust laws. In 1979, he expanded his CPA practice to include investment planning and the selling of securities on a commission basis. He also informed authorities at the Texas Board of Public Accountancy about what he was doing. "In other words," Vest told a Dallas Morning News reporter, "I turned myself in. I had a complaint against me from me." At first, through a broker, he only sold mutual funds and unit investment trusts to a narrow circle of friends and associates. When the venture proved successful, he included all of his clients, many of whom referred so much new business that his income increased dramatically.
Deciding to franchise his concept of combining tax advice with brokerage services, in 1983 Vest created H.D. Vest Investment Securities, Inc., a securities broker-dealer registered with the Securities and Exchange Commission. He funded his enterprise in large part by drawing on his personal credit cards. Vest purchased a mailing list of more than 300,000 tax specialists and began a letter campaign to recruit for his network of accountant/brokers. To take advantage of franchisees' contacts, Vest would also employ a pyramid selling arrangement that awarded three percent of the gross commissions of any recruit that a rep brought into the network. At the same time that he was launching his franchise business, Vest began to openly challenge the AICPA code and state laws prohibiting accountants from accepting commissions. While the Texas Board of Accountancy began an inquiry into his conduct, Vest initiated a campaign to change the laws in every state.
After two years Vest reported that he had signed up 1,000 representatives. He was also making progress in his fight against the ban on commissions. The Federal Trade Commission launched an investigation into AICPA regulations, during the course of which the Texas Board of Accountancy, in October 1986, voted to allow CPA's to receive commissions as long as they informed clients in advance about the amount of the commission. Eventually the Board also dropped its investigation into Vest. Several other states soon followed Texas in changing their laws; then in 1987 the FTC issued a letter of complaint against the AICPA, maintaining that the organization's ban on commissions violated federal anti-trust laws. The institute suspended its ethics investigation on Vest, pending a review of the entire issue by its governing council. In 1988, the AICPA council voted to lift the ban in agreement with the FTC position. Although Vest would continue his campaign until, state by state, the rules were changed, he had essentially prevailed.
H.D. Vest, Inc. Founded in 1986
In December 1986, Vest founded H.D. Vest, Inc. as a Texas corporation, which three months later acquired H.D. Vest Investment Securities, Inc. in a stock transaction, making it a wholly owned subsidiary. In July 1988, H.D. Vest went public, making an initial public offering of 214,787 shares of stock at $6 per share. By the end of 1988, H.D. Vest was reporting revenues in excess of $10 million and boasting of a network of affiliates that numbered 2,700. By the end of 1991, the company generated more than $20 million in revenues and posted a profit of almost $922,000, while the number of representatives approached 4,000. Nearly $2 million of that total came from seminars and the sale of educational materials to the company's reps. Most of the revenues, however, were the result of H.D. Vest's 30 percent share of the commissions received by reps on the mutual funds they sold to clients. In 1992, the company's revenues would grow to more than $35 million, yet H.D. Vest would lose nearly $3.2 million and the price of its stock would begin to slide, a situation that fueled internal strife.
During this period, Vest came into conflict with several of his executives over a number of issues, resulting in a swath of litigation. In April 1992, Vest fired Stephen A. Batman, president of the H.D. Vest Advisory Services Inc. subsidiary. Batman sued Vest a month later, alleging that he was fired because he questioned Vest's practice of donating money, as well as company labor, to the Republican Party. Batman later amended the lawsuit to include allegations of misuse of the company's stock. Batman and another H.D. Vest executive, James Ainsworth, subsequently formed Global Partners, a rival broker/dealership for tax accountants, and began to lure away dozens of H.D. Vest reps with promises of higher commissions and better training. In turn, Vest sued Batman and Ainsworth for raiding his company. Then, in July 1992, Vest fired the company's president, former Navy Admiral Warren Aut, who had been on the job for only six months. Reportedly, Aut wanted to spend more money on training representatives, while Vest wanted to devote cash to direct mail efforts to grow the network even larger. The company ultimately sued Aut over his spending practices.
In October 1992, a Forbes' article noted, "There is grumbling among reps about a conflict of interest in the arrangement that has given Herb Vest 3% of the firm's gross revenues and hence too much incentive to push growth over profit." According to critics, H.D. Vest representatives were poorly trained and that instead of earning annual commissions in a target range of $50,000, they were averaging between $11,000 and $12,000. First Global reps, on the other hand, were soon generating between $40,000 and $50,000 in annual revenues.
Aside from bad press, H.D. Vest also faced an audit from the SEC in the fall of 1992. Vest fired two more executives, who in turn sued him and the company. Not only did former strategic analyst Kenneth M. Greene allege that he was fired in retaliation for providing potentially damaging information about H.D. Vest to the SEC, the company's former legislative affairs manager, Kevin R. Greene (not related to Kenneth Greene) alleged that he was required "to find creative ways of making large political contributions to the Republican Party in an effort to achieve Herb Vest's desire to become an ambassador." Both men also maintained that they were fired in part because they refused to perjure themselves in a lawsuit against Vest, although it was unclear which litigation they were referring to. Vest's lawyer insisted that these charges were groundless and merely an attempt to gain a sweetened severance package.
Problems in 1992 Lead to Changes
The company was under enough pressure in the fall of 1992 that it instituted some cost cutting measures and other changes. It cut back its recruiting staff from ten to just three in order to focus more on training, and also cut some non-core programs and downsized its office space. In all, overhead expenses were reduced by $1 million, and recruiting costs lowered from five percent of gross revenue to just two percent. Vest also changed the way he was compensated. Instead of being paid on a percentage of revenues, he would now receive a management fee of $575,000 and 8.5 percent of net income. Moreover, he agreed to have a three-member management committee fill the role of the company's president, although he would remain as chairman and CEO.
The results for H.D. Vest improved in 1993, with revenues continuing to grow in excess of $46 million, while income increased dramatically, totaling almost $3 million. Earlier controversies, however, continued to dog the company. After litigation with Kenneth Greene concluded in early 1994, when he was awarded $135,000 in actual and punitive damages,
Through the rest of the 1990s, H.D. Vest avoided further negative publicity. In the mid-1990s the company began a gradual shift from commission-based sales to fee-based portfolio advisory services that had a temporary adverse effect on the balance sheet. While the company lost almost $369,000 on revenues of nearly $50.3 million in 1994, it posted net earnings of $1.3 million in 1995, despite revenues falling to $44.7 million. H.D. Vest then showed steady improvement through the rest of the decade. In 1998 the company exceeded $100 million in annual revenues, and it boasted 5,900 affiliates located in all 50 states. The following year that number ballooned to 8,500 and Herb Vest received Ernst & Young's Entrepreneur of The Year Award.
In 1999, H.D. Vest once again exhibited an innovative spirit when it announced that its Web site was offering free tax return preparation. While major rivals, H&R Block and Intuit, provided free tax preparation for simple returns, H.D. Vest's offer covered all tax returns, no matter how complicated. For H.D. Vest, free tax preparation was a low cost marketing effort. The service cost the company less than $1 to process each return, while providing a chance to land new investment clients. After people completed their taxes on the H.D. Vest site, they were asked by letter if they wanted to have their 1040 analyzed, with the name and telephone number of the nearest Vest representative included. The tax preparation offer proved to be extremely successful, with the company's 260,000 filings in 2000, making it the number two online tax filing firm.
In 2000, H.D. Vest took further advantage of the Internet. It introduced MyHDVEST.com, a personal Web page, described as a consumer life-planning portal. Consumers not only gained access to educational materials on investments and estate planning, they could also interact with tax professionals or investment planners offering solutions to their particular needs. In addition, H.D. Vest formed an alliance with CompuBank to offer online banking services to its clients, such as certificates of deposit and money market accounts as well as bill paying services, that were integrated with H.D. Vest's bookkeeping and tax preparation software.
H.D. Vest's online initiatives were potentially lucrative, but the company simply did not have the infrastructure in place to support them properly. While focusing on improving its back-office operations, it was unable to devote sufficient resources in other areas like training and recruiting. In order to grow to the next level, H.D. Vest found a suitable partner in Wells Fargo & Co., the giant banking chain. In March 2001, the two parties announced that Wells Fargo would acquire H.D. Vest for $127.5 million. For Wells Fargo, the acquisition was an inexpensive alternative to buying brokerages. For each of H.D. Vest's customers, the bank paid $70, less than a third the amount spent by brokerages to recruit new clients. For H.D. Vest, the deal brought enhanced technical support for its Internet initiatives, new products to sell for its reps, and the credibility of the Wells Fargo name. The new corporate parent would also be able to devote the resources needed to grow the number of representatives. With approximately 150,000 CPA's in America, there remained plenty of opportunity to expand upon the 6,000 CPA's in the H.D. Vest network. While the Wells Fargo acquisition offered much promise for the future of H.D. Vest, and rewarded Herb Vest handsomely, it also meant that its founder's role was greatly reduced. The company's president, Roger Ochs, now ran the business, while Vest, under a long-term contract, served only as a consultant.
Principal Subsidiaries: H.D. Vest Investment Securities, Inc.
Principal Competitors: FMR Corporation; The Charles Schwab Corporation; Citigroup Inc.; Merrill Lynch & Co. Inc.; The Vanguard Group Inc.
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