Transcript

Matt Heine (MH):

Hi, and welcome to this episode of Between Meetings. Today I'm delighted to have Marty Franc with us. Welcome Marty.

Martin Franc (MF):

Thanks Matt. Great to be here.

MH:

We were just saying, this is actually the inaugural podcast from our new podcasting room. So, it really is a pleasure to be here. And also, the first one I've done in person, I think, for close to two years.

MF:

Yeah. Right. And it's a great fit out. I've got to say, I'm very impressed by the office here. Yeah.

MH:

Thanks very much. It's been a labor of love for a couple of years. And anyone listening, if you're in Melbourne, please always feel free to drop in and say, "Hi." Yeah Marty, before we get started, I thought it'd be really helpful for our listeners, if you could just tell us a little bit of your background, your career, and the question I always like is why did you get into this industry?

MF:

Yeah, that's a really interesting one, Matt. So I've been in the industry 27 years now. In 94, started with Bankers Trust up in Sydney. Got into the industry, it was actually just fortunate. I was at ANU, majoring in political science, thought I wanted to have a career in the public service, in foreign affairs. And quickly realized that wasn't a path that I wanted to take. And had a couple of friends ahead of me at uni that went into funds management with the introduction of the superannuation guarantee, and told me what a great industry it was. Legislative growth can't get better and started out as a dealer at Bankers Trust on the trading desk. And actually fell into sales, it was quite accidental in many ways.

It was when Nick Leeson brought down Barings there in the mid 90s. And all of the big institutions were then worried about how derivatives were being managed in their portfolios. And the head of sales needed someone from the trading desk to go around and help explain to clients how we were trading derivatives as an organization. That was my introduction to sales, and having looked back and thankfully my careers developed. And now, here I am in the seat as the CEO of Invesco.

MH:

That's a great story. And I was just thinking as you said that, often trying to explain something like derivatives to a retail customer could be very challenging. Do you remember what your sales pitch was?

MF:

It was more built around the separation of duty. I think it was less about explaining the actual mechanics of derivatives. It was, giving clients comfort that there was a separation between the portfolio management, the settlement and the trading function. But you're right, I mean, when clients were asking about what derivatives actually were. Yeah. It was an interesting experience in taking jargon out of the explanation of financial instruments. Yeah.

MH:

That's interesting. And I guess, thinking back through your career, you've only been to a couple of institutions, which is not all that common in this industry. What was it that was so special about the first couple of roles that made you stay for so long?

MF:

Look, I think the one thing was, it was such a dynamic industry, because it's so tied into the market dynamics. And as we all know, markets change day to day, weeks and weeks. So the thing that was exciting for me was just how dynamic the industry was, and just the evolution of the industry, which we've seen a lot transpire over the last 20 years. Some good, some bad. But I think it's fair to say, that what's kept me attracted to this industry is just, there's never a dull moment. It is truly, I think, a dynamic industry, and an innovative industry, and a creative industry. Yeah.

MH:

And that's a very good point you make. Change is constant and change is always going to be a constant in this industry. When you are thinking about some of the roles that you've had and navigating teams through the constant change, what were some of the lessons that you learned or some of the things that you put in place to make that easier for staff? Because it can be very, very disconcerting and a lot of change, some people deal well with change, some people don't.

MF:

Yeah. That's a great question. I think when you break it down, it's an industry that rewards innovation, it rewards risk, it rewards creativity. And so I think within that, you need to create comfort around that risk taking. And I think as my career's developed and grown, I think, the three key aspects that I reflect on constantly. One, is around being humble and sharing success. The second one is about being empathetic. If you're going to be a risk taking entity, which we are, you need to be empathetic and no scapegoats, absorb failure as a leader. And that's effectively creating that psychological safety that fosters greater interpersonal risk taking. And then the final bit is curiosity. I think this industry rewards, as I said, curiosity, creativity and innovation.

MH:

Risk taking and financial services are not normally two words that go together. Putting the management piece to a side, how do you actually manage risk taking? Or how do you define risk taking in what is a very heavily regulated industry, and make sure that the team is actually going for the ride, but also the risk department and the board?

MF:

Yeah. And look, that's obviously Matt, with the way regulation has evolved over the years. I think the way that I reflect on risk - and risk it's got different dynamics. There's the investment risk, and then there's the corporate risk. And then there's the regulatory risk. It's ensuring that you minimise and mitigate unintended consequences around risk taking, so that risk is intentional risk rather than idiosyncratic risk, if I can put it that way, that can create the unintended consequences. So it's been, like I say, on multiple levels, really understanding the risk you're taking as a corporate and then within the corporate on the investment side, that that risk is intentional.

MH:

Which is very refreshing to hear. And it's almost a bit of a Silicon Valley growth mindset that you've brought to the industry. And tech companies often talk about failing fast, learning from your mistakes, but also never making a bet so big it's going to bring down the house, which is, I think what you've just described far more eloquently.

MF:

Yeah. Thanks Matt. But I think, as I said, you've got to live and breathe that. It's part of the culture now, which I think in investment management and advice, a lot of the culture is built around how you perceive risk and how you address it.

MH:

One of the big risks that you took was moving down to Melbourne. You're a Sydney boy, you've lived there your whole life, and you've now been in Melbourne for eight and a half years. Clearly wasn't for the weather. What was it that attracted you to Invesco when you decided to move down?

MF:

Yeah, look, it was a challenge. I'd spent 15 years of my life at Bankers Trust on the investment management side, now Pendal Group, great organization. And I just reflected on, if I was going to make a change in my career, it was going to be one that was quite a dynamic change. And I felt that I was ready to take more of a strategic leadership role. And that came up with Invesco. Invesco was in an interesting position back in 2013, it was a business that was probably in fair of stuck in a bit of no man's land. It had low assets under management. It didn't have a great deal of diversity. So frankly, I saw the risk as asymmetric. There wasn't a lot of downside, but certainly there was a lot of potential. It's a very strong global brand, very strong asset management capabilities. And what really attracted me to the role, I think, that there was frankly more upside than downside. And being able to transform a business, and really participating, yeah, in the transformation of a business.

MH:

Can you just talk a little bit about Invesco when you joined? What was the product offering, and who was the target market?

MF:

Yeah, it was very limited, Matt. We had about a billion dollars in assets under management. It was predominantly around Aussie Small Caps. We had a small team based here in Melbourne, that was roughly about 800 million of the billion of assets that we had. But the business globally really saw Australia as an important market, not surprisingly, the fourth largest or fifth largest investment management pool in the world. And they wanted to get it right and grow the business. And so, really my remit was around the path that we were going to take to grow the business. And the great thing about Invesco, was they're very patient with their capital. They're not a Wall Street firm, Atlanta headquartered, very different culture, which is very long term focused. And I felt that was very aligned with what needed to happen with the business.

And so yeah, the path then, or the journey was really one around growth, and how we were going to grow. And the beauty was we could choose that growth, because we were coming off such a low base. So it was that path to growth. But also, the second aspect was de-risking the business. It was diversifying the capability set that we were going to bring to market, which I think we've done quite successfully.

MH:

And so in the eight and a half years that you've been there, what does the business look like today?

MF:

Yeah, so the business now is 37 billion in assets under management. So we've had a great, it's been a great journey. Well, I shouldn't talk in the past tense. It still is a great journey managing across both active and passive now across alternatives, public markets and real assets. So the business is far more diversified, we've tripled revenues over the last five years. So it's really been a case where you need your share of luck, but the old adage is, luck’s where preparation meets opportunity. I think we've really put ourselves and the leadership team has played a great role alongside me in really understanding where we best position the business for growth. And like I said, we've been quite successful on that journey.

MH:

I'd say, you've been very successful. That growth is phenomenal.

MF:

Yeah. No, and hopefully looking forward, and particularly the last two years, which as you know Matt, for any leader, hasn't been an easy time. I think we managed that work from home dynamic that was catalysed by this pandemic really well in not allowing that to dislocate our path or our strategy.

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MH:

One of the questions that I'm sure everyone's getting used to hearing is, what lessons have you learned from the pandemic, and what are the things you are hoping will outlast the period that we're going through?

MF:

Yeah. I think the most important thing I've taken out from the pandemic, and I think as an organisation is, really this mission that we have as an organisation is that we exist to help people get more out of life by delivering a superior investment experience. And the key word in that is people. It's not just clients, but it's staff, it's shareholders. And I think when I reflect on our business over the last two years, I think the most important thing, again, that's really become self evident now, but the focus on talent, this is a human capital driven industry and talent is very important in what is a very competitive industry and competitive market. But also the importance of client relationships and being present, albeit it's been virtual, but being present, being transparent and being authentic in the engagement with client relationships. So I look at what has really become more evident over the last couple of years is the importance of talent and the importance of our clients, and the engagement therein.

MH:

And we're hearing a lot about that at the moment, the great resignation, I heard someone call it the great reshuffle the other day, which I think is probably a more appropriate term. Are there things that you're doing now to not only retain staff, but also to recruit staff as we go through this next period?

MF:

Yeah. Look, the big one around this is the return to new normal, which I think every leader is grappling with in some way, and how to attend to that. There is no doubt that the operating environment and operating models have now changed structurally. I think the roots of this pandemic have grown quite deep, and there's an expectation from your talent, your staff, that there is more flexibility now in the operating model. And look, I agree with that, but I think it needs to be measured. Again, this is a business that's all about relationships and contacts. And I think that interpersonal connection both internally and externally is really important and vital. So, we're working our way through what our new normal looks like. I think there's no doubt your phrase around the great resignation or the rebalance, there will be an element of that.

I don't think the new normal will necessarily satisfy everyone, and people will elect to choose different paths, maybe even different careers in different industries. That's probably a reality, but I think fundamentally as a leader, I've got to sit back and balance that new normal environment with an expectation that we need to connect. And for me, reconnection is a massive theme for 2022. That's reconnecting with our stakeholders, reconnecting with our clients and reconnecting with each other. I think that's when we work best. And that's not a slight on any lack of productivity through the work from home environment. But I think there's an efficiency that comes out through being together that creates more efficient productivity in my mind, and cultivates a stronger culture, which is very difficult to do virtually. So yeah, for me, the big thing next year is one around reconnection on multiple fronts.

MH:

It's definitely very difficult to create and maintain culture via Zoom or Teams. I think everyone agrees on that.

MF:

Yeah, totally.

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MH:

You've talked about connection a lot. And when you think about the connection that you have with your clients, it's continually morphing and changing quite significantly to how other fund managers are thinking about connection and the things that they do for their end customers or for advisers, particularly around the coaching and also the technology side. So I remember we met with IntelliFlo when we were in the UK pre-pandemic in 2019, and Invesco had just bought a large stake or maybe even 100% within IntelliFlo. Can you just talk about how the company maybe locally and globally is thinking about technology, but also some of the other programs that you are rolling out and running?

MF:

Yeah, it's a great point. And it's a real area of focus for us globally, Matt, is this evolution into FinTech. Historically, we've been just a pure investment management firm. That's all we've done, no banking, no broking, no risk. It's just been pure investment management. But we've realised that the world is evolving. And as part of that evolving world, we feel as an investment manager, it's important for us to try and get closer to our clients where it compliments our existing stakeholders, financial advisers, and institutions and IntelliFlo has really been our first step into FinTech. It's 100% owned subsidiary of Invesco.

And I think about this from a global perspective and then I'll bring it back to Australia. But I think this concept about getting closer to our clients is one that is really embedded in the organisation now, and how we do that in a way that, like I say, compliments and doesn't demarcate our existing stakeholders and clients. But I think from an Australian perspective, and I think where IntelliFlo can really forge a strong footprint down here is that, that whole tech stack and the practice management side, I think it's been a fairly captive space with IRIS and Xplan.

MF:

And for one, we can see an opportunity to compete here, and doing it in a way that doesn't conflict with our existing business. And so bringing practice management solutions, or alternative practice management solutions to advisers in the way they think about their tech stack is, I think, a proposition we feel is a good opportunity in the Australian market. But another area that we've focused on and we've brought out over the last couple of years is Invesco Consulting. And this is a group with a pure focus on working with financial advisers to provide research and actionable insights around all aspects of the advice business. So new business development, wealth management, practice management, client service. And we feel that's a really good compliment as well, in giving back to the advice community around helping advisers think about tools to grow their business and engage with clients. So yeah, it's been a great last couple of years, Matt, in thinking also around what I call adjacent services outside of just pure investment management. Thinking about those adjacent services complimenting what we're already doing here rather than conflicting or competing with what we're doing down here.

MH:

It's a fascinating strategy. And just interested when you first... The practice management, I think makes sense. And fund managers and platforms have offered practice management in various forms for many, many years. How did the market react when you came through with the technology and the FinTech angle, because it's quite divorced from where you've come from?

MF:

Yeah, it's one, and we've kept it separately branded to ensure that there is this... And it's got a separate management team, separate entity. Look, I think the market has generally embraced the FinTech opportunities we've brought out to Australia as a compliment to what we're doing. There's certainly been no negative feedback around that. In fact, I think the market broadly has welcomed the fact that there's increased competition in that space as well. Yeah.

MH:

And on the FinTech side, a couple of fund managers, Aberdeen's announced a partnership and there's other managers that are looking at more of a robo-style solution. Is that something that Invesco's investigating or has overseas?

MF:

Yeah we are, certainly in the US, I think that'll take some time down here in Australia. But look, I think when I look at the Australian landscape and the evolution of the advice landscape here in Australia. I mean, you read statistics that there is something like two and a half million non-advised Australians that will be seeking advice in the next couple of years. But then within that, you've looked at the exit from wealth from the banks post-Hayne. And you're seeing somewhat of a bifurcation of advice. i.e, You're in a good spot if you are prepared to pay a reasonable amount, you'll get everything. But then there's the lower balance investors that I think with the exit of the banks now that are trying to figure out, well, where do I source reasonable sound, cost, effective financial advice? And I think that's where the landscape of technology and the democratisation of advice will come through, is through the utilisation of technology. In longer term, that's where we see IntelliFlo playing a role, is to help facilitate this democratization of advice, particularly at the lower balance end of the advice scale.

MH:

And do you think that the advisers are actively looking for solutions to actually service that lower part of the market? Because I often question, and I don't have the answers, where's the value in it for advisers? Are they hoping that they might grow those clients into full fledged clients in the future? Or is it just around a way of maybe looking out for the next generation?

MF:

Yeah. Well, it's a bit of both. But I think I do think advisers are looking at ways to create efficiencies in their business to extend their reach. I think there's no doubt about that, because you look at the next generation, they may be low balance now, but the gen X/Y millennials are the next affluence segment. And I think there is a realisation from a lot of the advisers we've interacted with that, that's a segment that they would like to have a presence in, but it needs to be one that from a business perspective makes sense to them. And that's where I think this utilisation of technology is extremely important over this next two to three years, to facilitate that. And frankly, benefit both ends of the spectrum, benefiting those adviser businesses that can think about ways to efficiently enter that space. And also, for those Australians that are seeking advice in a cost effective way that, like I say, may be low balance now, but that younger generation, that will be the next mass affluent segment. Yeah.

MH:

It's certainly a huge trend, and it's one of the biggest ones that we are seeing. And there's definitely demand from advisers, they try and understand you. What does this look like over the next five to 10 years? What else do you think is going to have a big impact on the market moving forward? We're seeing many fund managers converting to a single unit or to an ETF or ETMF. What's next for Invesco?

MF:

Yeah. I think there's some great opportunities, Matt, looking forward that we're exploring. I think you're right, the growth of the ETF segment. We've got a big global ETF business. In fact, we're number four, Invesco, behind the big three: SSJ, iShares and Vanguard. So we're thinking right now about our go to market strategy around ETFs, and bringing that capability into the Australian market. I think the other area we are looking very closely at, and have already acted on this year with a launch of one product, is the democratisation of real assets. The advice community, historically being less willing to invest in that real asset space, just given the natural obstacles that existed there around things like liquidity and how that was effectively catered to on platforms.

But I think the democratisation of real assets is something that we've looked at. And like I say, we've launched a real estate fund, a direct real estate fund this year for the retail segment. So I think that's another big area along with the growth of the ETF segment. And I think the third one is the evolution of ESG. I think there's absolutely no doubt now. I think it's again, probably catalysed by the pandemic, but there's absolutely no doubt that investors do not want their investments contributing to climate destruction. I think there's general unity around lowering carbon intensity in investments. So I think ESG will actually facilitate more customisation going forward as well, even when you think about passive portfolios that are currently just benchmarked to cap weighted indices that have a lot of those high carbon emitters embedded within them. I think ESG will really see an evolution in the broader asset management landscape as well, which will lead to more tailoring and more customisation.

MH:

And with ESG going mainstream, and I think probably becoming the norm in the next two to three years, we're seeing a trend where advisers are looking to set up ESG models. And the counter argument to that is, why not transition your existing portfolios to more of an ESG focus? Do you have any sage words on which one may or may not be better?

MF:

Yeah. It's an interest interesting one, Matt. I think it's going to be a journey. There's also questions around ESG, really moving from just measured outcomes to responsibility as well. That ESG really, it needs to be part of your DNA, rather than just is it a material exclusion of one stock over another, or one company over another? So I think the argument or the journey will move from one around what I'd call pure ESG, which I relate more to just material exclusion of those stocks to one more around sustainability, where the thought will be more around, well hang on, I'm not automatically going to emit high cut carbon emitters from my portfolio. I'm going to be a proactive asset owner, an active asset owner. And through stewardship, proxy voting engagement, really work with those companies to lower that carbon intensity. So it's a fluid space. In some ways, ESGs quite opaque.

It's hard to define leadership in ESG. I think everyone's treading their own path in terms of how they evolve that. So your question about the moving from one dynamic to another, in terms of the ESG driven models to portfolios. I think it's going to be somewhat of a journey. And it's a hard one to predict right now, because I think that journey will be different for a lot of different constituents.

MH:

One of the things you're talking about are sounding more and more like impact. Is that a focus for invest guys at a firm to move from ESG more to having an impact of being able to measure that actual impact?

MF:

Look, I think there's an element of that, certainly. And if I look at our real estate business, as an example. We have been impacting investors for quite some time. It's not, again, not just about ESG, where we measure ourself and we do and rank quite well against the global real estate sustainability benchmarks. But also, in our actual investments, where we've got significant exposure to areas such as affordable housing. So, you're providing that social impact to correspond with a commercial focus as well. So, that's something that will increase, I think, but it's fair to say that we've already got a fairly strong legacy in impact investing across certainly our real estate franchise. Yeah.

MH:

Excellent. Marty, we're getting very close to time. But before we go, are there any good books from a management perspective, or any podcasts, or audio books that you're listening to or reading at the moment that the listeners will be interested in?

MF:

Yeah, Matt, I've read a really good book this year. No surprise, the work from home lockdown has given plenty of time to, you get a bit of Netflix overload. So gone back to some good books. And one this year, The Fearless Organization, it's a book written by Amy Edmondson from the Harvard Business School. And that book gives a really good insight into how to create psychological safety, and building a culture around psychological safety where leaders can reduce anxiety and lift performance standards by bringing purpose into being. So it's really a book that goes into fostering greater interpersonal risk taking. Acknowledging that things like input doesn't necessarily equal decision rights. But really inviting engagement, challenging norms and reducing that anxiety, which in fact, actually correlates to lifting performance standards.

So, it's not a long book, but it's one that I'd certainly suggest that people wanting to have a read. And I think it's particularly relevant to the period we've just gone through where now, as we look to this pivot back to the new normal, thinking about how to reinvigorate the organization, how to reduce anxiety. It's a really good read.

MH:

That sounds like a great read. I'll be adding that to my summer list. Marty, thanks so much. What you and the team at Invesco have done over the last eight and a half years really is incredible. So well done to you and the team, and keep up the great work.

MF:

Thanks Matt. Thanks for the opportunity to be here.