The free advice that cost GBP 400,000.

The buyer was UK-based, recently exited from a private equity holding, considering a first acquisition in the 35 to 40 m band. He approached a major London brokerage on the recommendation of a peer who had bought through them. The brokerage waived its buyer-side advisory fee on the basis that the firm earned its margin on the seller side and “provided buyer support as part of the relationship.” The phrasing was familiar. It is industry-standard.

The acquisition itself ran cleanly. A 38 m semi-custom motor yacht from an Italian yard was sourced over four months. The pre-purchase survey was conducted by a surveyor the broker introduced. The contract was drafted by the broker’s preferred yacht lawyer. The yacht closed at EUR 19 m, on terms slightly more favourable than the asking. The buyer felt well-served.

The introductions

Once closed, the buyer needed a management company, a paint specialist for an early refit on the bow, an insurance broker, and a senior crew. The brokerage made the introductions. Each was warm, professional, and competent.

The management company was Hill Robinson, on a EUR 5.2 m annual contract. The buyer was told, accurately, that this was a market-rate structure. He was not told that the brokerage held a referral relationship with the management company. The introductory referral on the contract, paid from the management company’s side, was approximately GBP 250,000 in year one.

The paint specialist was selected from a list of three the brokerage maintained. The chosen contractor delivered a EUR 1.8 m repaint job. A 5 percent retrocession back to the brokerage on this job was approximately EUR 90,000. The buyer paid the paint contractor in full; the GBP 80,000 of the EUR 90,000 sterling-equivalent did not appear on the buyer’s invoices.

The insurance broker was a relationship of long standing for the brokerage. Premium in year one was approximately EUR 250,000. Brokerage commission on the policy was approximately 15 percent (EUR 37,500). A back-end referral fee from the insurance broker to the introducing brokerage was approximately 10 percent of that commission, or EUR 3,750. Small, but recurring annually.

The recruitment agency that placed the new captain charged a placement fee of approximately three months of the captain’s salary, around EUR 35,000. A referral fee of around 10 percent flowed back to the brokerage. The buyer was charged the full agency fee.

The arithmetic

The buyer had “saved” an explicit advisory fee by engaging the brokerage as his de facto adviser. A typical independent adviser fee on this acquisition would have been around USD 80,000 to 120,000. He had saved approximately GBP 75,000 in explicit fees.

Across year one alone, the referral and retrocession economics flowing from his counterparties to the introducing brokerage were approximately GBP 400,000. None were illegal. None were outside industry practice. None were on the buyer’s invoices, because the buyer was not the entity invoiced.

The advice had not been free. It had been priced into the structure of the suppliers around him. The buyer had paid for the advice at a multiple of what an independent adviser would have charged, and had received advice that was, in each instance, the brokerage’s commercial preference rather than a market scan independent of those preferences.

Free advice is the most expensive advice in this industry. The buyer who pays the adviser directly is the only buyer who knows what the advice is worth.

What changed in year two

The buyer engaged an independent adviser at the end of year one for an unrelated assessment of his refit reserve planning. The adviser, on reviewing the operating arrangements, identified the referral structure. The buyer was not, in the end, particularly outraged. He understood the structure. He had simply not known about it. He renegotiated the management contract at year two with a clear understanding of the cost base, moved the insurance to a broker with no relationship to the original brokerage, and adjusted the recruitment process for future hires.

Year two operating cost, including the same suppliers but on directly negotiated terms with full disclosure, was approximately GBP 270,000 lower than year one. The buyer concluded that the structure he had been working in had cost him, conservatively, GBP 250 to 400 k per year while it was in place. He held the yacht for another four years. The arithmetic compounded.