Advisors may face new challenges from more foreign-born clients.

President Bush's proposal to grant temporary legal status to millions of undocumented workers employed in the United States may mean more advisors will be dealing with the financial needs of foreign-born clients.

The Bush administration estimates that at least 8 million undocumented people, more than half of them from Mexico, are in the United States. If these workers and their families are allowed to stay in this country, they no longer will need to fear that their actions-such as using various financial services-somehow would reveal their illegal status. And that could mean more of them will knock on the doors of financial advisors for help in managing their money.

Foreign-born workers often face double taxation and legal issues as well as investment and cultural ones. Some cultural issues may find financial advisors donning a psychologist's hat.

Jeffrey D. Hill, a CFP licensee with LPL Financial Services Inc. in Denver, says he has noticed that Latin clients tend to be cautious, compared with Americans, who are very open in disclosing their finances. In fact, he has been surprised to learn from existing Latin clients-perhaps during an asset-allocation discussion-that there really is another bank account somewhere. The surprise revelation means that a portfolio Hill had considered well diversified actually may be overweighted in cash.

"They (Latinos) just give you a little bit of information until they know you much, much better," Hill explains. "The government has taken over assets from people at different times in the past. I often say things like whenever the time is right, what I really need is to do something comprehensive. You don't have to tell me everything about where things are, but I have to have a general idea for cash flow." Or, after the relationship develops, he might say, "I think you've come to trust me now. I'm really looking at overall picture."

Rita Mansour, manager in the Toledo, Ohio branch of McDonald Financial Group, an affiliate of Cleveland-based KeyCorp, deals with a lot of Muslim clients. Many Muslims won't invest in tobacco, pornography, alcohol or usury, such as finance companies. Mansour knows of two mutual funds that follow those parameters, she says, but they don't have long-term track records. "It's important to me that we can do the proper due diligence," she says.

"One client may say, 'OK, I will buy Hilton hotels,'" she says, but stricter followers won't buy Hilton because the company sells alcohol in its bars. She might put money with private money managers, and an internal portfolio strategies group can help her with individual stock selection.

Mansour says that immigrants in the United States tend to be more conservative investors. "They have the misconception that if they come to a financial advisor, that all we're going to offer is stock solutions," she says. Instead, she works to give them anything from laddered bonds to laddered CD portfolios and conservative REITs.

Connie S. P. Chen, CFP, of Chen Planning Consultants Inc. in New York, who has found herself working with foreign clients, often as a result of marriage, finds they typically have a glaring misconception. Because they are not U.S. citizens or they lack a "green card," which guarantees them permanent residence in the United States, they believe that they needn't file U.S. taxes.

Wrong. In fact, attorneys warn that people with assets in the United States who fail to file taxes both in the United States and in the country in which they live could risk severe penalties from both countries. So Chen must explain to her clients very carefully the tax implications of living in the United States. "As long as you have any assets in the United States, it will not only be subject to income taxation, but also estate tax as well," Chen stresses.

These are just a few of the wake-up calls U.S. financial advisors can expect to give as they deal with a growing number of foreign clients. The U.S. Census Bureau says there are 56 million foreign-born and first-generation U.S. residents. This number is likely to rise as recent immigrants form families.

Other advisors are finding out that the death or illness of a foreign client brings on an entirely new set of problems. Jeanne A. Robinson, CFP, co-owner of Marshall Financial Group in Doylestown, Pa., recently returned from visiting English clients who, with a child, were transferred to the United States by an employer. In a matter of months, the mother was diagnosed with breast cancer and the father with heart disease. Both parents were rapidly deteriorating. Robinson feverishly was working to obtain guardianship documents and help the family set up a trust. The family is worried that a U.S. claim on the couple's estate could hamper their child's guardianship and financial security. "The United States doesn't like to see money leaving its shores," Robinson explained. Also, non-U.S. citizens have no unlimited marital deduction when it comes to estate taxes. For such international issues, she says she turns to the Washington, D.C.-based law firm, Shaw Pittman LLP.

Even the simplest things, such as a client's change of address, can snowball into a major problem. Robert Keats, executive vice president of Keats, Connelly and Associates Inc. in Phoenix, says to expect your client's brokerage account to be frozen once a change of address to another country is filed. That's because registration requirements for financial professionals and businesses can vary by country and state or province. Rather than comply with millions of different jurisdictional rules, many brokerages just freeze trades.

To avoid this trap, Keats says he has familiarized himself with broker policies. He uses National Advisors Trust Co. in Overland Park, Kan., for several reasons, not the least of which is that trust companies are not subject to the same rules as brokerages, he says. He also found that TD Waterhouse will continue to allow trades from outside the United States, provided that the account is through a registered investment advisor.

Meanwhile, Canadians living in the United States must traverse a number of financial minefields. Keats started in the financial planning business in Calgary, Alberta, in 1976, before building his current practice in Phoenix. He estimates that 60% to 70% of his clients have "American-Canadian" issues. "I get stunned every day," says Keats, author of the Border Guide (Self-Counsel Press). "There is a lack of sources of information to help people," he says. Also, few advisors have taken the time to use the systems of more than one country. The Financial Planning Association now has a Web site devoted to cross-border issues at www.fpanet.org. Also, the International CFP Council has issued the CFP marks to 40,000 persons outside the United States.

Yet, besides the fact that the United States may be the only major country that requires its citizens to file their world income-regardless of where they are-many American and Canadian clients risk being subject to estate planning rules in both countries, he says. Sometimes the rules are quite different, and if you're not careful, that can result in a double tax.

How to get around this? The United States has tax treaties with more than 60 other countries, which you can read yourself at www.irs.gov. "The treaty is a very good planning vehicle," Keats says. "But most advisors in the United States have never even opened up a treaty to even see what's in there."

Tax treaties trump domestic rules, overriding the IRS in almost all instances, Keats says. Also, he notes, the treaty is fairly stable. The U.S.-Canada tax treaty, for example, has changed only about six times in 60 years, while the IRS tax code changes about once every ten days. "For cross-border planning, I just love it. You learn the rules and don't have to keep relearning them every year." Keats says the IRS tends to have a standard treaty package it tries to apply to every country.

Social Security is another major issue a financial advisor must deal with if a client worked in another country as well as the United States. Keats adds that you need to monitor Social Security treaties at www.socialsecurity.gov. The 20 Social Security treaties can be found by clicking on "International" under "Resources." Sometimes, if you know in advance where to go in the treaty, you can find a way for a client who worked for a period in another country as well as the United States to claim more benefits. At the very least, you can prevent your client from losing benefits he or she otherwise might obtain.

Canadian retirement plans can present a major problem that may or may not get resolved.

Keats says that his Canadian clients are excellent savers and virtually all have registered retirement savings plans (RRSPs). "But when they come to the United States, the IRS doesn't recognize the tax deferment. Tax preparers don't know anything about it," he says. "Clients don't know. It can cause very large tax penalties." By keeping these accounts in Canada when they're living in the United States, they also can miss out on an opportunity. They risk paying close to 50% in income taxes when they take distribution, he says. "If they move it to us while they're a resident of the United States, they can take it out at a tax rate of 15% to 25%." Sometimes they can bring it down to as little as zero by recovering even more than that in the form of foreign tax credits.

Nevertheless, it's not easy to convince clients to realize these tax savings because many already have financial advisors in Canada, who dissuade them from moving the business. Keats says he will talk with the advisors and explain why it's in the client's best interest "if they sincerely want to know, but it's not always that way."

Keats says his firm has a staff of 11, including financial and tax professionals. Although they are cross-trained in Canadian and domestic work, he still uses outside firms. Unfortunately, he says, it's tough finding reliable legal and accounting help on cross-border issues-particularly if it is needed for individuals rather than businesses.

He has learned to rely on Canadian firms that have a presence in both countries. For law firms, he uses Goodman & Carr in Toronto and Olson Lemons LLP in Calgary. For international firms, he relies on some of the big firms like Bryan Cave LLP, based in St. Louis, Mo., and with offices around the world.

Estate taxes are a major issue for those born outside the United States. Hill maintains a home in Mexico City and goes back and forth. He developed a major niche working with clients with Mexican-American connections, and estimates that more than 30% of his business is with non-U.S. citizens. Once you are a resident alien (a non-U.S. citizen with permanent resident status), what you own is subject to U.S. taxes, Hill says. "Non-resident aliens (those not U.S. citizens and not permanent U.S. residents) can invest in offshore mutual funds not subject to U.S. estate taxes. ... Sometimes they erroneously think, 'I'm really a Mexican citizen, so a $2 million account in the United States is not subject to U.S. estate taxes.'"

Also, Hill says, if his clients own property in both the United States and in Mexico, there must be a will in both countries. So you need to be particularly mindful that standard legal language, indicating that a will "revokes all other wills," doesn't wind up in either the client's U.S. will or the Mexican will.

Hill says that he is under strict rules when it comes to contacting his clients about offshore investments. For example, one Mexican citizen was recently in Vail, Colo. skiing. While there, Hill says, U.S. securities laws prohibited Hill from talking to him on the phone about his Franklin Templeton Growth Fund, based in the Bahamas. However, it's fine to talk to that client in Mexico City about that same fund.

He also must help his clients determine how much of their money to keep in pesos. A hard lesson was learned in the mid-1990s when the peso devalued, and Hill recalls that even doctor-lawyer spouses suddenly found themselves eating rice and beans. Hill might suggest that a client, who is independent without much family in Mexico, keep most money in dollars. On the other hand, someone with a house in Mexico who needs to pay water, gas and servants, might need to keep more money in pesos.

John Olmstead, principal of Lau Olmstead LLC in Wilmington, Del., warns that when dealing with non-U.S. citizens there may be a myriad of combinations of residences and citizenships, and each may be subject to entirely different rules. Expect variances in regulatory exchange control and tax rules. "You have to look at the specifics of every situation," he says. Contrary to American clients, his high-net-worth foreign clients typically want to see the tax consequences and legal analysis before the risk-return analysis of an investment, he notes. Their concern in high-tax jurisdictions is whether they will file double taxes.

Another important issue for immigrant clients: Establishing credit in the United States. U.S. credit bureaus typically can't compute a credit score, necessary to qualify for virtually any form of credit, unless a credit account at least six months old shows up on a credit report. Also, a lender must have reported on the borrower's usage to a credit bureau within the prior six months.

Experts advise opening a bank account and perhaps, obtaining a secured credit card to establish credit-if credit can't be transferred from a foreign country to U.S. credit bureaus. Nevertheless, some financial services companies are beginning to recognize the importance of the immigrant segment of the population. HSBC Bank USA, Buffalo, New York, for example, recently introduced a "Premier" account, which allows an instant credit history transfer between affiliate banks in other countries for persons with deposit and investment account balances of at least $100,000. GMAC has launched a "Settle America" mortgage that allows borrowers with no credit history to prove creditworthiness through their employment status, utility and rent payment history. It also may consider income from household members.

And a Mexico City-based mortgage company, Hipotecaria Su Casita, is offering a special mortgage through its Denver affiliate, Su Casita USA (www.sucasita.com.mx), to cover property in Mexico. Payments for the mortgage, issued in pesos, may be made in U.S. dollars.