Multi-Level Marketing

Dear Dr. Per Cap: 

The other day a friend sent me a Zoom invite for a meeting that was advertised as a “financial opportunity”.  What unfolded was something that appeared to be a pitch to get me to sign on as a financial services agent.  Everyone in the meeting was Native and many said they’ve made a lot of money helping other Native people realize their financial dreams using indexed accounts.  It all felt really sketch.  Is this a scam?


Tired of Zoom

I don’t know off hand but it sounds shady as an oak tree.  What you experienced was most likely a solicitation from a multi-level marketing business aka MLM.

Dear Tired of Zoom:

MLM’s have been around for years.  You’re probably familiar with companies like Avon, Mary Kay, Amway, Scentsy, and Herbalife that sell their products directly to consumers through sales agents or associates.  Usually the associate relies on a personal network of friends, relatives, and acquaintances as customers.  Often the products are legit but nothing special.  Like cosmetics, household products, and vitamins that you can just as easily buy in a store or online, often at a lower price too.

However, what makes an MLM very different from a traditional distributor or retail business is the sales model.  MLM’s make most of their profits by recruiting as many sales associates as possible.

So there’s always a push for MLM associates to not only sell products but also sign other people up to become associates too.  That’s why MLM’s have a reputation for being pushy to the point of predatory. For every new associate that signs up, the associate who signed them up and everyone else up the chain gets a cut of the newbie’s sales.

Think of a pyramid with a bunch of sales people at different levels.  Those on top can make money, but sadly many people who join an MLM don’t make much money for the amount of work required.  Or worse yet they lose money on all of the products they might have to buy upfront as well as fees and expenses.

Financial services are sometimes sold using an MLM model. One product they might offer is something called a variable life annuity which can be referred to as an indexed account.  What they are is a type of life insurance that can also be used as a way to save for retirement.  Unfortunately, how variable annuities actually work is often difficult to understand.   They can also be very expensive and not well suited for an average person’s insurance or investing needs.

Adding to the confusion is the fact that it’s very easy in many states to become licensed to sell life insurance.  In New Mexico for example, a person just needs to pass a test, submit fingerprints, and pay some pretty light fees.  That’s it – no actual experience working with insurance required.