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EDELMAN FINANCIAL COMMUNICATIONS White Paper

Social Media And Financial Communications Mid-Year 2011 Report: “The Train Has Left The Station”


EXECUTIVE SUMMARY Edelman contends that after gathering momentum for three years, 2012 will be the breakthrough Year of Social Media in the financial services industry. Until now, the great mass of financial services companies – besieged by the recession and financial markets turmoil, the subsequent drop in trust, and a heavily regulated environment – generally assumed a wait-and-see attitude toward Facebook, Twitter, YouTube and other social media. But after the Financial Industry Regulatory Authority, or FINRA, published its first social media guidelines in 2010, pioneer banks, brokerage firms and credit unions dropped their reluctance to nontraditional media. Today, 90 percent of financial services executives in the U.S. and Europe say they expect to have dedicated budgets for their social media efforts by 2012. Forty percent of their financial institutions expect to invest 2 percent to 10 percent of their overall marketing budget on social media next year.1 Three-in-five of the executives, however, still view themselves as novices or beginners with social media and only eight percent claim competency with it.2 Edelman believes that four broad factors will spur financial marketers’ increased use of social media in 2012: • A more favorable regulatory environment, with greater clarity and acceptance that encourages use of social media. • Advancements in consumer and corporate technology that enable greater access and convenience and thus drive consumers’ and financial professionals’ desires for more social-and web-based financial products and services. • Consumers’ increased comfort with new technologies and channels, making them more receptive to financial messages and engagement from financial professionals. • Valuable lessons from the industry’s social media pioneers, who’ve demonstrated that social media can help build brands, connect representatives and advisors with customers and prospects, and create communities. This white paper summarizes the events that got the social media movement finally underway within financial services and the factors that will drive increased social media adoption in 2012 and beyond.

1 Aite Group survey of 166 financial executives in the U.S. and Europe, reported In Wall Street Technology on Nov. 18, 2010. 2 Ibid.

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TABLE OF CONTENTS Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Setting the Stage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 A More Encouraging Regulatory and Compliance Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Landscape . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

FINRA 10-06. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

IMSA Social Media Policy Template. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Advancements in Consumer and Corporate Technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Mobile, and Feature-Rich Applications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Retention and Risk Mitigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Increased Consumer Comfort with Channels and Technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Financial Audiences are Different . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Positive Experiences from Social Media Pioneers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 FINRA Continues to Provide Clarity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 What’s Ahead in 2012 and Beyond. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

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SETTING THE STAGE

The first glimmers of social media in financial services go back to 2009, later than in other, less-heavily regulated industries. That year, Wells Fargo introduced its corporate blogging strategy, including its innovative Wells Fargo Wachovia merger blog. Also that year, Putnam Investments’ CEO Robert Reynolds became the first mutual fund chief executive to post messages on Twitter. And LinkedFA, a social network specifically targeted to financial advisors, also launched then. In 2010, with the publication of FINRA’s guidelines, social media for financial services companies crossed the tipping point, as professionals began using social media and digital tools increasingly to communicate with stakeholders. In 2010, more companies successfully used social media for public engagement, internal collaboration, recruiting, educational campaigns and lead generation. Socialware, a leader in social media compliance, documented the trend, noting that in October 2010 it added 25 financial service companies as customers in the third quarter ended Sept. 30. “Where six months ago, financial services companies were cautious and weary of social media, now we’re seeing heavy interest in getting programs and strategies going to take advantage of this medium,” CEO Chad Bockius explained. In explaining why social media finally has caught fire with financial services marketers and will surge ahead in 2012, Edelman believes four trends – more favorable regulatory environment; advancements in consumer and corporate technology; increased consumer comfort with channels and technology; and positive experiences from social media pioneers – have converged.

More Favorable Regulatory Environment

Postive Experiences From Social Media Pioneers

Financial Services Industry Use of Social Media

Advancements in Consumer and Corporate Technology

Increased Consumer Comfort with Technology and Channels

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A More Encouraging Regulatory and Compliance Environment The Landscape In an industry under constant regulatory scrutiny, financial services companies, understandably, are gun-shy when adopting new marketing practices. This is compounded by the massive erosion of trust in the industry documented by Edelman’s 2nd Trust in U.S. Financial Services Survey, released in February 2011. Reflecting the financial market crisis and the recession, public distrust has influenced politicians to become more vigilant in creating regulations and laws meant to protect consumers. It’s no accident that 2010 saw a record $1.5 billion in aggregate fines and settlements with the SEC and FINRA. Monitoring these highly regulated standards, financial services companies at times can be wary of forms of public engagement. So while technological advances enabled engagement with and among audiences, there was also the need for updated regulations that encompassed new communication channels. In this particular era of regulation and post-economic meltdown, most financial institutions were exceptionally careful of anything that might rock the regulatory boat. But not all financial institutions were hesitant. In 2009, Putnam Investments’ foray and multichannel strategy with social media proved successful. In an interview, Mark McKenna, Putnam Managing Director of Communications told David Meerman Scott, “We need to break down the walls and provide content in lots of different places. Long gone are the days when we just put out a press release or gave an exclusive to a reporter. Now, journalists are looking for stories. So getting onto blogs, Vimeo, Flickr, Twitter, and many other sites is the way we’re going.” Through its Twitter program, retirement-focused blog and other social and digital initiatives, Putnam proved that participation in social media isn’t an impossible feat. Still, until the SEC or FINRA issued an official statement, other asset managers and securities firms were unwilling to risk possible fines. The Regulations Over the years, a number of regulations affected the ability of financial services organizations to participate in social media. More recently, regulations were prepared as a response to developing information-sharing technology. Some older regulations, which originally did not include provisions for social media activity, have been updated in recent years to include digital and social media channels as they have emerged. A few examples: DATE

REGULATION

ENTITY

DIGITAL PURPOSE/OBJECTIVE

1999

Gramm-Leach-Bliley (GLBA)

Congress

Information protection

updated 2002

Sarbanes-Oxley - SOX

Congress, SEC

Preservation of information relevant to company reporting

updated 2006

FRCP (e-discovery)

Supreme Court

Preservation of information if reasonably determined to be discoverable

2008

Red Flags Rule

FTC, et al.

Identity theft prevention

2010

PCI Data Security Standard

Payment Card Industry (PCI) Security Standards Council

Data security and preservation of information

2010 2011

Notice 10-06 Notice 11-39

FINRA

Provide guidance to firms regarding public communications through social media

Not until 2010 were guidelines developed that address the use of social media by financial services professionals. Edelman sees the promulgation of social media guidelines by the securities and insurance industries’ self-regulatory organizations as the green light that finally spurred social media experimentation by companies in these industries.

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FINRA Notice 10-06 In September 2009, FINRA – an independent, non-governmental organization overseeing member brokerage firms and exchange markets – convened a Social Networking Task Force to determine how firms and their registered representatives can use social media for business purposes while ensuring investor protection. Four months later, FINRA issued Notice 10-06, which outlined how marketing on social media platforms translated into current disclosure rules. While some argue that a fresh set of regulations should be adopted addressing social media, as opposed to retrofitting new tools into old rules, the notice went a long way to encourage advisors to participate and experiment with social media. Notice 10-06 addresses, in a Q&A format, the following public communications issues facing financial services: • Social Media Policy Development • Recordkeeping Responsibilities • Suitability Responsibilities • Types of Electronic Forums • Blogs • Social Media Sites • Third Party Posts • Supervision of Social Media Sites As a securities regulator, FINRA’s guidelines don’t apply to every financial services institution. But since its release, Notice 10-06 has served as a means of entry into social media throughout the industry. IMSA Social Media Policy Template On April 27, 2010, the Insurance Marketplace Standards Association (IMSA), an industry organization created to promote high standards of ethical conduct, released its Social Media Policy Template. Developed by the organization’s Social Media Working Group, the template made an effort to encourage carefully considered social media participation. The template was designed to guide the insurance industry through social media policy development to ensure companies address social media use for both business and personal use. The tool is available to non-IMSA members for a fee and to not-for-profit organizations, regulatory offices, or educational institutions at a discounted rate.

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Advancements in Consumer and Corporate Technology In an Aug. 13, 2010, American Banker article, Geoff Knapp, vice president of online banking & consumer insights at Fiserv, noted the power that being pervasively connected through mobile technology, such as Smartphones and tablets, provides to the financial services industry: “Always-on connectivity lets people interact with services and store their data ‘in the cloud’ rather than locally, facilitating remote management of our financial lives.” The connectivity provided by these tools, and the growth in their adoption in 2010 accelerated the financial services community’s participation in social media. Mobile, Feature-Rich Applications Not until 2010 did the U.S. see the percentage of Smartphone users enter into the “early majority” as defined by the Rogers Bell Curve. Everett Rogers’ “Diffusion of Innovation” theory posits that technology adoption typically occurs in the S curve seen here. In the early stages of the adoption curve, it can be difficult to determine whether a product will live up to the hype that commonly surrounds the introduction of a new of technology.

Q1 2010 23% Q1 2009 16% Q1 2008 10%

Innovators 2.5%

Early Adopters 13.5%

Early Majority 34%

Late Majority 34%

Laggards 16%

According to Nielson, only 10 percent of mobile users had Smartphones at the beginning of 2008. Marketshare rose to 16 percent by the beginning of 2009 but, according to the Rogers Bell Curve, that still only accounts for the earliest of technology adopters. So although consumers had been hearing about Smartphone technology for years, they were not widely used by a significant early majority in the U.S. until 2010. The growth of Smartphone users is significant for a number of reasons: • Increased access to web browsers – ComScore reported that in June 2010, 43.7 percent of U.S. mobile users browsed the web, accessed applications or downloaded content. • Increased access to social media channels – According to data from Twitter, mobile usage of the social network grew 62 percent between April and September 2010, with nearly half (46 percent) of all users at least occasionally accessing the network via mobile device. • Additional platform for services – Market research firm Data Innovation Inc. recently conducted a Mobile Money Study that found 70 percent of Smartphone owners use mobile financial services. With Smartphones, the pervasiveness of social and digital usage has amplified, making it difficult for any industry, including financial services, to ignore. With mobile apps and mobile web browsing, financial services providers more easily adapted to the latest technology trend. Previously, lack of guidance regarding customer-facing content sharing hindered them, primarily

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because it mostly only required that they adapt services and content already provided to them on the web to a new platform. While retail banks and insurers initially joined the mobile scene in 2009, last year saw these apps perfected to maximize their capabilities and value. As a result, other financial sectors got in the game, bringing real value and engagement to clients through mobile investing tools. • Vanguard – While Vanguard released its first app in October 2009, the firm significantly upgraded its capabilities in 2010 by enabling users to move money; buy, sell, or exchange within nonretirement mutual fund accounts; view account details and news; and research information on funds and ETFs. • Fidelity Investments – In February 2010, Fidelity released a mobile brokerage-trading app that allowed users to place stock, option, ETF or mutual funds trades; access up-to-the-minute news; receive real-time quotes, and compare multiple-stock performance with interactive charting capabilities. • Morgan Stanley – In November 2010, Morgan Stanley became the first Wall Street firm to create an application for Google’s Android platform. The app allows investors access to research on fixed-income markets, stocks, currencies and economics along with the firm’s daily reports as well as direct access to the analysts who write them. Retention and Risk Mitigation As if compliance issues weren’t enough, financial services companies must also consider they often deal with sensitive financial and personal data. The same technological advances enabling the new levels of access, engagement and personalization also are creating risks. In July 2010, Citigroup experienced a significant security breach from a flawed mobile banking application that saved personal information on devices that could potentially be lost or stolen. It’s been critical for financial services institutions to protect client financial data through a growing number of increasingly sophisticated platforms and tools. Citi was able to develop an upgraded app immediately and instruct users to download it before hackers were able to access any of the sensitive data. As covered in the regulatory section of the paper, more than a handful of laws require financial services firms to retain a range of digital information and communication. FINRA commented toward the end of 2010 that vendors are working to develop systems to capture social media site communications automatically, but also that it was “not certain that adequate technology currently exists” to do so. Not an encouraging sentiment from an industry regulator. Still, over the last year, vendors including Smarsh, Socialware, FaceTime and Palo Alto Networks, Inc., have developed technologies that provide network security and empower companies with control over social media usage in terms of access and approval, as well as offer effective archiving capabilities that meet current regulatory requirements. In 2010, their products facilitated increased active participation in social media by financial services firms. Another complicated issue around risk mitigation regards disclosures. How financial professionals and companies issue disclosures can vary from platform to platform, but one digital compliance company, CMP.LY, attempted last year to tackle the issue by developing an icon for financial services that applies to sites, social or otherwise, that adapt to different disclosure requirements.

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Increased Consumer Comfort with Channels and Technology Financial Audiences Are Different The previous section discussed how evolution in technology helped the financial services industry adapt more ably to the social media realm. It did that by putting more power in the audience’s hands. Whether end consumers or an intermediary, audiences have an understanding that with the emergence of new technologies they can benefit from the industry’s adaptation to new media. In 2010, once audiences understood the tools at their disposal, they began to ready themselves for financial services companies to interact with them through these tools. There’s no debating that the global population at large engages more than ever in social media through a number of channels. But how do they engage on financial topics? How do they address financial issues with each other? And how do they want to engage with financial institutions? Consumers Many financial services companies, beyond retail banks, see social media as an opportunity to build brand equity with the end consumer. It’s true that in the last few years, the financial services industry has suffered a significant decrease in trust from the general public, and that picture didn’t look any brighter in 2010. As a matter of fact, according to Edelman’s 2nd annual Trust in U.S. Financial Services survey conducted at the end of 2010, 46 percent of investors surveyed said their trust had decreased over the last year. Forty-eight percent reported their trust level stayed the same, and only five percent reported an increased level of trust.

(Don’t Know) 1%

Decreased 46%

Increased 5% Remained the Same 48%

According to comScore’s 2010 “State of Online Banking” paper, there was a steady increase in use of online banking from approximately 40 million users in 2006 to more than 58 million users in 2010. It seemed as though the best way for financial institutions like banks and insurance companies to engage consumers online was through service offerings. For a long time, social media was considered a place where people divulge too much information – comScore’s report also points out that even in 2010, 29 percent of those not enrolled in an online banking program responded that it was because of concerns about security. But when it comes to finance, online audiences have been less concerned with sharing their own information and more interested in having access to it. Smartphones have allowed financial services companies to literally be in the pocket of consumers. Through apps providing helpful tools and services, consumers began to become more receptive to messages from financial institutions and financial professionals. Data Innovation’s Mobile Money Survey even found that nearly two-thirds of respondents expressed interest in the concept of a “mobile wallet.” Edelman Financial Communications | 2010 Social Media and Financial Communications

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An AdvisorWebsites.com poll conducted in March 2010 showed 73 percent of active internet users agreed that a financial advisor who is active online would have more impact on their buying decisions. In November 2010, Nielsen reported that consumer confidence and comfort levels for mobile transactions were at an all-time high. In 2010, audiences became more receptive to financial communication through social channels – and the industry began to notice. Intermediaries Like many business-to-business organizations, a significant percentage of stakeholders in this equation are the intermediaries that trade or sell products to the end consumer. According to a 2010 survey of 175 financial executives by LederMark Communications LLC, 85 percent of financial services professionals under age 50 use social media. Further, 40 percent of professionals under age 50 surveyed said their social media activity led to doing more business. Socialware’s Advisor Survey released last year found that 60 percent of advisors employ social networks for business purposes and an additional 11 percent plan on using them in the future. All respondents reported they believe social media has a positive or neutral affect on their business’ reputation. The study didn’t reveal any negative attitudes from advisors toward the business benefits of adopting these networks. A survey conducted by Brunswick Group in 2009 found that 63 percent of U.S. analysts and institutional investors anticipated that new media such as blogs and social networking would play an increasingly important role in investment decisions. With the CBOE and CME Group at 763,030 and 759,892 Twitter followers respectively by September 2010, it was clear that analysts, investors and traders were using social media to help catch rumors, spark investment ideas and conduct initial research. In 2010, even fund managers got in on the action: SumZero, founded by Divya Narendra of Facebook fame, is a network that allows fund managers to share investment ideas. As it became more obvious that finance professionals, particularly intermediaries, were using social media, it became more important in 2010 for investment banks, insurance companies, and other financial services sectors that rely on agents and brokers, investors or advisors to communicate information through these channels as well as enable them by providing content that could be distributed easily through social platforms.

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Positive Experiences from Social Media Pioneers As we look forward into 2012, the factors favoring social media use by financial services firms show no sign of losing steam. In February, it was reported that the SEC had begun investigating registered investment advisor (RIA) use of social media and social networking. While a letter has still not been made public, those who have received the letter regarding the sweep have pegged the main themes as retention of social media documents; policies and procedures concerning social media; third-party use of social media and how it relates to firm; supervision of representative’s personal use of social media; and disciplinary actions. While the results of the sweep have not been made public, vendors have sprung up offering retention and other platform solutions designed to address the reported shortcomings. FINRA continues to provide clarity In June, Richard Ketchum, CEO of FINRA, acknowledged the need for additional guidance from the organization’s Social Media Task Force and in August, FINRA released Notice 11-39. This latest notice acts as a supplement to 10-06, released in early 2010, by responding directly to questions submitted to the agency and addressing additional considerations about: • Recordkeeping; • Supervision of employees’ use of personal devices such as smartphones, Blackberries and iPads; • Supervision of “business card” information posted on social networks, particularly when there is the potential to communicate about securities-related business; • Broader internet use concerns regarding the use of firm hyperlinks on third-party sites and the use of third-party data on firm sites; and • Necessary procedures to manage data feeds into firm sites. As we have seen, regulatory uncertainty has not stopped the early adopters. In May, while online networking sites are still largely off limits to financial advisors at work, Morgan Stanley Smith Barney became the first big name wealth manager to experiment with allowing brokers limited use of Twitter, permitting them to distribute research and content approved by the firm. One month later, JP Morgan launched “Voice of the Community” for retirement plan services clients, where they can provide feedback to sponsors and exchange experiences and ideas with one another. Other financial services companies are focused on increasing the integration of their products with other, established social networks. In July, American Express customers became able to link their cards to their Facebook accounts in order to receive deals from vendors they “like.” And everyone is focused on mobile: According to a Nielson survey conducted in May, nearly four in ten (38%) mobile users have Smartphones and in the three months prior, of the consumers who purchased phones, more than half (55%) bought a Smartphone instead of a feature phone.

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What’s Ahead in 2012 and Beyond Looking at today’s state-of-play among financial services marketers, Edelman anticipates the following will take place during this, accelerating phase of social media use by financial services firms: 1.  Structural Change Within Financial Services Firm – Over next six to eighteen months, financial institutions, unable to fully invest in digital channels most effectively in silos, will centralize their social, digital, PR and marketing arms. 2.  Influence Beyond Marketing Solutions – Social media will continue to influence financial products and strategies. The last year brought a new fund based on Twitter activity and the concept of “mirror investing.” Based on developing technology, and actions in the payment space from big players like Facebook and Google, we’ll continue to see the social world influence, and challenge, the realm of finance. 3.  Increased Investment – Financial services companies will only continue to increase spending on interactive marketing. A 2010 report from Forrester Research predicts that by 2014, the financial services industry will spend more on interactive marketing than any other industry. 4.  Increased Digital Content Development – Companies will begin to develop more digital content that can be nimble and involve more multimedia. According to a press release from Good Technology, released Nov. 15, 2010, the financial services industry had by far seen the greatest adoption of the tablet for business use, accounting for more than 36 percent of the market. With the popularity of tablet technology growing quickly in the financial services industry, it’s likely financial services marketers will begin to develop content for use across web, mobile and tablet platforms, including more video. 5.  Google+ – As Google+ gains popularity and rolls out its business pages, it’s likely that retail banks and insurance companies (the most consumer-friendly of the financial services industry) will adapt to the newest sharing network most easily. Financial advisors and wealth managers may also find the network suitable for connecting with clients on a personal level, thanks to the ability group people in the network for ease and management of distribution of investment information – which can help mitigate regulatory restrictions. 6.  Regulations – While it’s likely that major regulatory change will happen before the end of 2012 as it relates to financial services companies using social media, we expect that down the road we’ll see regulatory bodies like FINRA and SEC require filings that officially outline a company’s participation and performance in social media.

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