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Fund Industry Needs Security Upgrade: Gen X, Gen Y Driving Internet Trends


WASHINGTON - The mutual fund industry will need to overhaul its online service and security capabilities as U.S. investors increasingly turn to the Internet, instant messaging and other mobile devices to manage their personal finances, investment decisions and transactions.

By 2035, the average American will operate 10 Internet-enabled devices running over IP (Internet Packet) v. 6 protocol, up from today's IP v. 2. Already, said Google VP and Chief Internet Evangelist Dr. Vinton G. Cerf, Gen X'ers mostly communicate via instant messages. "E-mail is so 20th century," he said.

Cerf was speaking at the Investment Company Institute's 50th Annual General Membership Meeting here last Wednesday, as 1,500 delegates from around the country gathered for the biggest meeting of the year.

And the world wide web that Cerf help create in the 1970s as a Department of Defense (DoD) experiment, has a long way to go in terms of expanding bandwidth, storage and the capability of mining information packets rich with video and data that heretofore have not been well organized or monitored.

And that, in essence, is the beauty of the Internet, Cerf emphasized, because it permits freedom of speech for the masses that are digitally plugged in.

But "today's Internet does not have the security requirements it should," Cerf warned. "We need stronger authentication programs and better quality of cryptology in storage."

During the Internet's infancy in the '70s while working on the DoD's "secret project," Cerf recalled how two versions of the Internet diverged.

In hindsight, the WWW evangelist said, more could have been done to improve the security features of the civilian version.

As more people begin to turn to the Internet to conduct financial transactions, there is an increasing pressure to add or reengineer security into existing systems, Cerf said, including closing security loopholes in browsers and operating system software.

"The regulatory structure in the U.S. is oddly lax, compared to countries like Japan," he said. "We need a regulatory framework that encourages access to broadband" and reflects the shift of Internet service providers and Internet users to broadband features like streaming video.

It is precisely the "last mile" that American firms and regulators have, oddly, overlooked, he said.

The majority of today's Internet users are Generation X or Generation Y, and Google researchers are already seeing a generational shift in the way users look for and use information, Cerf told ICI attendees.

Today's Internet users are IM'ing or texting each other and using the Internet in devices and ways that hadn't even been dreamed of a few years ago, he said.

Customers on the Go

The next step for mutual fund companies is to reach customers while on the go, with direct, targeted, real-time messages, he suggested. From there, "The next step is getting these mobile devices to authorize transactions."

There is huge potential for online use in the financial services industry but the real advantages probably haven't been realized yet.

"We want the Internet to work on technology that hasn't been invented yet," Cerf said. The architecture of the Internet is insensitive to packets, and the packets don't recognize the difference between video, audio or text, making the network "agnostic" to applications.

Powerful Economic Driver'

"This has been a powerful economic driver for Internet start-ups, including Google, Yahoo! and eBay," Cerf said. "As soon as you begin to try to control content on the Internet, you impair all opportunities for experimentation."

Nearly 80% of U.S. adults are online, and one out of every four of them are engaged in social media that deals specifically with personal finance and investing, according to a new study by the Boston-based Cogent Research.

"Everyone talks about behavioral finance, but people don't have any clue how prevalent it is," said John Meunier, a Cogent principal and founder, speaking to MME during the ICI GMM.

While approximately 70% of the content about personal finance and investing is favorable, roughly one-third of the social networking posts by high-net-worth investors are negative, said Eric Dolan, Cogent's research director.

"Positive or negative, this is casting doubt on the traditional sources of information," Dolan said. "Once the seed of doubt is planted, it doesn't have to be true. We are finding that behaviors follow changing perceptions."

Information can spread rapidly through the Internet, and so can misinformation, he said. In fact, many large investment firms are unaware of rumors or negative information about their company being circulated on the Internet.

Most of these blogs about a company or product aren't under the company's supervision, making it very difficult for agencies to control their public image. It is especially important for companies to monitor the Web to see what other people are saying about them, Dolan said. "You can't control this, but you can go in and mitigate or add to the conversation," he said.

Dolan said 62% of high-net-worth investors changed their investment decision based on peer-generated content they found online.

"There's a danger to dismissing social media as too new, too emerging or too small to think about yet," said Christy White, a principal and chief of operations at Cogent. "HNW investors have taken to social media in big numbers, and they are listening closely to what their peers have to say. Financial services firms that fail to keep up with and engage in this emerging media are basically putting the fate of their brand into the hands of consumers."

Meunier said Cogent's research director Dolan, 29, has been a driving influence in helping the firm stay on top of emerging trends.

The average employee age at Google is 25, Cerf said. "The Google staff is so young, they don't know that you can't do that,'" he said. Technology is changing so fast, many traditional roadblocks have disappeared, he said.

"Darwin was right," Cerf said. "We have to adapt to these new technologies, or we will die."

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