Multi-Level Marketing Firms… Legit Or Not?
By Eliseo "Jojo" Prisno, CRPC, MS
Chartered Retirement Planning Counselor
I have always advocated financial literacy and will always share my perspective on issues that concern finance, investing and the hard working Filipino-Americans. Recently I met somebody and was asked my view on Multi-level Marketing firms or MLM's and as a coincidence William Ackman of Pershing Square Capital, an investor activist wrote a 300 plus page thesis which he presented on CNBC, questioning the legitimacy of Herbalife, a 30 year old publicly listed nutritional company that distributes its products via a multi-level marketing format. Thus I'd like to share my thoughts, but before I go on further let it be known that P/E Capital Investments does not own any shares of Herbalife nor holds a short position (short position is a type of investing that investors can make money if the stock price goes down and will lose if the stock price goes up). We neither own any options positions of Herbalife shares nor speculate on it. Likewise, we neither have any affiliation with Pershing Square Capital nor use any of their investment vehicles for our clients. Though a big fan of Mr. Ackman, I normally do not advocate his views, investment prognosis, etc. I am totally independent of my views and investment recommendations. However, there is one thing that Mr. Ackman and I are passionate on and that is advocating financial literacy to Main Street.
I'm touching on this topic because I've always been invited to attend MLM meetings. I sometimes agree to go for couple reasons: I want to network with people and I'm curious of the whole fuzz. What's quite interesting with these networking meetings, Filipino-American presence are always significant. From nutritional products, beauty concoctions to bill or utilities payment consolidators or financial services, the Filipinos are always there, aspiring for the "DREAM", the lifestyle, financial freedom and the currency of time. There is nothing wrong in aspiring for these things and I believe that's what America stands for. If joining an MLM firm is the vehicle to achieve it that is perfectly fine however before committing yourself (your time, your resources and influence) make sure to do the proper due diligence.
In 2002, Dr. Peter J. Vander Nat, a senior economist of the FTC (Free Trade Council) defined a pyramid scheme as follows (and this is the official position of FTC): "If an organization sells goods and services to the public and the participants in the organization obtain monetary benefits from (1) recruiting new members and (2) selling the organization's goods and services to consumers, the organization is deemed a pyramid scheme if the participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers". This definition should be your guidance in considering an MLM you want to join in.
In Mr. Ackman's thesis about Herbalife, the revenue structure of the nutritional company he found out was bastioned on recruitment rather than the sales of its products to consumers. In a pyramid scheme, the money at the top is made from the losses of the people at the bottom of the pyramid, thus are said to be inherently fraudulent because they will eventually collapse. The modus operandi of these firms is they inflate the margins of its goods to accommodate the payout levels feeding of course the "people on top" to the detriment of the "good's competitiveness in the market place and the distributor's effectiveness to sell to non-affiliates. This inefficiency leads to "selling" the "DREAM" or "lifestyle" than the product itself thus feeding the "recruiting culture" of the organization to get to the top of the pyramid. In the long run this will collapse and the attrition on the base will be significant. In Herbalife's case, Mr. Ackman discovered that in every 10,000 recruits, less than 1 will get to the very top. A huge base for attrition and these attrition losses feeds the "lifestyles" of those on top which is so static and a de minimis fraction in the organization.
If the MLM firm spends 15 minutes explaining its products and services and 1 hour in selling the "Dream", consider this a red flag. A real saleable product or service to consumers has its real merits and the "direct selling" method just becomes the avenue (quite unfortunate that most of the MLM meetings I've attended are focused on selling the dream). Another red flag is if their compensation structure is complicated, this simply adds to more confusion and more attrition. Do not waste your money in buying their product kit or paying their "franchise" or "membership fees" if you find these red flags. If you think their product or service is something you can benefit of, try it first and see how unique it is, then bench mark the competition. If you're really convinced that it brings you the benefits, your conviction of that product or service will fuel your drive to recommend it to your sphere of influence. This is when you decide if you want to take it on as a business.
Do not buy the "Dream" or the promised lifestyle, this will simply follow if the product or service has the real merits for success. •
About the Author: Eliseo Jojo Prisno is a Chartered Retirement Planning Counselor and for over a decade has managed the wealth of select families and business owners. He founded P/E Capital Investments in 2009 and is the current Managing Director and Senior Investment Advisor of the firm. Mr. Prisno also manages a Fund of Funds Portfolio with Ameritas and runs an All Equity Growth and Income Portfolio in Separate Accounts via E-Trade Financial. If you have questions or desire a complimentary analysis of your retirement readiness, email j.prisno@PEcapitalinvestments.com or call toll free to
1-888-929-2825 or visit our page on facebook or our website: www.PEcapitalinvestments.com.