“I do all of my business in my state, and all of my clients are here. Why should I worry about registering in other states?”

— Hypothetical question circa 1964

“I do all of my business in the U.S. and all of my clients are here. Why should I worry about international operations?”

— Hypothetical question circa 2004

Institutional finance has been increasingly international for decades, and retail brokerage appears set to follow a similar trend. Although international business will probably not become as large a proportion of U.S. retail finance as it is on the institutional side, it will nonetheless become significant for most retail firms. The factors driving this phenomenon are set to intensify over the next decade and are worthy of discussion.

One basic reason that business is becoming more international is that technology has lowered communications and transport costs. This has had some primary effects on international retail finance. A phone call that once cost a few dollars now costs a few cents. Paperwork can also be sent at costs significantly reduced from decades ago. This allows both prospecting and account maintenance to be performed internationally at reasonable costs. Finally, the Internet has become a relatively inexpensive worldwide network for transactions and marketing.

The secondary effects of technology have been more powerful. As the costs of air travel and communications have come down, so have the barriers to international travel and foreign residency. Excluding military personnel and their dependents, there are now over four million U.S. citizens living abroad. While only 250,000 or so are currently receiving Social Security benefits overseas, there is reason to believe that several times that number are in the process of retiring overseas. As the baby boomers retire, many will follow economic logic and go abroad to live. There are now many retirement communities for U.S. and European citizens in Mexico, Costa Rica, the Dominican Republic, and the Philippines.

Technology has helped to lower the costs of foreign operations, but legal changes in many countries have been extremely important as well. There have been various financial crises in the developing world over the past decade. These crises led to agreements between the stricken countries and the International Monetary Fund, which provided for increased foreign participation in their domestic financial markets. Many countries which previously had strict limitations on the ownership of financial firms have been obliged to relax or eliminate those restrictions. Capital controls have also become less common in the developing world, allowing investments to flow across borders much more easily. These changes have made it possible for many large U.S. financial institutions to set up a presence in developing countries and provide service to both U.S. and foreign nationals.

The top foreign residence for U.S. citizens is Mexico. Over one million U.S. citizens call Mexico home. That’s more U.S. citizens than are living in Montana, South Dakota, Alaska, North Dakota, Vermont and Wyoming. The country offers both easy access to the United States and low costs. In second place is Canada, with more than 680,000 U.S. citizens in residence. Costs are generally only slightly lower in Canada than in the U.S., but Canada has much lower costs for medical treatment and drugs.

It is unclear how far the trend will go. Exchange rates will obviously exert enormous influence on foreign retirement plans. The foreign retirement boom could be enhanced or derailed by a variety of legal decisions as well. While U.S. nationals can receive Social Security benefits while in foreign residence, they cannot receive Medicare. That may change soon. Retired military personnel receive medical coverage regardless of residency. If the proportion of U.S. civilians in foreign retirement ever reaches the proportion of U.S. military personnel in foreign retirement, the result would be a staggering number of U.S. citizens retiring abroad. It appears unlikely that a population shift would go this far. However, it seems clear that retirement trends have had a major effect on demography inside the United States over the years, and those trends will spill over the borders.

There are other reasons why foreign branches and/or affiliates can be useful. The world outside the United States is growing increasingly wealthier and its need to diversify into U.S. investments is as strong if not stronger than the need for U.S. investors to diversify into foreign investments. While their foreign financial firms can often provide them with U.S. investment opportunities, other countries generally lack a depth of understanding of U.S. markets. Many of the larger U.S. firms now have special services aimed at foreign-based investors. They have physical presences in several countries, but have also developed their websites to specifically accommodate investors residing in foreign countries.

There is also a need for foreign workers in the United States to have access to services for their families outside the country. As with many services which were once provided solely by banks, brokerage firms may find themselves competitive in these markets. These are not huge markets, but they are growing at a good pace and should continue expanding in the future. Few firms will need to have a presence in every country, but some firms (or some branches of some firms) will need to bolster their presence in and their understanding of key countries. Domestic migration trends began to link Florida and New York decades ago. California has also seen its ties with Washington and Nevada grow. Brokerage firms often followed those trends. Now trends are appearing internationally (e.g. Californians and Texans moving to Mexico), and brokerage firms will begin to follow these trends as well.

The future holds many opportunities and challenges for managers. Foreign expansion was previously a technical nightmare combined with a dubious profit outlook. It is now in the process of becoming a relatively easy achievement, and there are many countries offering good prospects for growth and stability. Firms and brokers who take advantage of the new opportunities will stand to profit handsomely.