Understanding Multi-Level Marketing Firms

It started innocently enough, a trip to Costco to buy some tamales last summer. While trying to figure out what brand to buy, a middle-aged woman came up to me and we started talking about tamales.
Soon after, she told me she was working for a firm that was looking to hire new people. When I asked her what firm she worked for, she told me she was in the financial services industry and invited me to an ‘orientation meeting’ later that night. I was unemployed at the time and figured, what the heck, so I went to the offices in Lake Forest.
Once there, I entered a meeting room with about two-dozen well-dressed people mingling about, talking about how much they liked working for World Financial Group. After mingling around for about 20 minutes we all sat down and the ‘Field Vice Chairman’ of the OC chapter of this financial group gave us a presentation about the company.
We ‘learned’ about the earning potentials of the company, how we could help families create a stable financial figure, and as an attempt to give themselves credibility, the presentation explained that they were a unit of Aegon, a huge Dutch financial services company (who are the owners of Transamerica). All that the prospective ’employees’ (which are really classified as independent contractors) needed to do was pass a background check (required by the NASD) and undergo a few weeks of outside training.
Since I was unemployed at the time I figured, why not, I don’t have much to lose.
This was the first wrong assumption I made about WFG.
It turns out that I needed to pay $100 for the background check and processing of my application. Considering the earnings potential this did not seem like too much so I didn’t have a problem with paying the fee.
A few days later at another meeting, everyone in the room is invited to go to a conference in Las Vegas.
There goes another $75.
Soon after, I am encouraged to sign up for insurance education (through a third-party). This cost about $150, but since I paid the money directly to AD Banker (the insurance education firm), I didn’t feel bad about it. In addition, I met some talented people working for Aflac, Metlife and other reputable firms there. So here I am, taking classes, feeling good myself, when suddenly things start to get fishy.
First of all, I haven’t been given a product portfolio yet, so I don’t know what I am selling.
Second, I am pressured to recruit more people to be trainees, presumably for my ‘upstream’ (the middle-aged Costco lady) to meet some sort of quota.
Lastly, I am pressured into buying life insurance for myself as well as sell it to my close friends and family.
It was around this point that things started to fall apart. Being the discriminate consumer that I am, I knew that the products WFG offered might not be the best products for my potential client’s needs. Perhaps I was being too moralistic, but I would’ve had a serious problem with myself if I were selling poor life insurance products to friends and family members.
WFG then tried to make me attend orientation meetings and ‘spirit rallies’ where they attempted to brainwash us with promises of excessive wealth. Furthermore, the meetings were designed to make us believe we could all be successful financial advisors helping families build financial stability.
To make matters worse, it was implied that if I was not able to recruit a couple of people under me to sell the product, I would be unable to make the money that was ‘promised’ and was ‘so easy to make,’ during the initial sales pitch.
All of this I learned after being hired and buying into the background check free and the Las Vegas convention fee. Disgusted at what they expected me to do, and disgusted at myself for being pulled into this whole thing, I quit. A week later I went to work at a pizza company for the rest of the summer.
In hindsight, I realize now that at the time, I was desperately trying to get back to the level of my $20/hr corporate job that I had last summer, and in this desperation, I was blinded by many of the warning signs that I was getting suckered into a multi-level-marketing firm.
The very nature of a MLM requires it to constantly ‘hire’ new recruits in order to survive. The money from these recruits gets channeled up the line to whoever brought you in, resulting in a few people at the very top reaping huge profits from everyone below them.
More than 90 percent of people who enter into a MLM will quit within a few months. The chances of anyone making significant amounts of money after the MLM is formed are quite small. The reason for this is it is nearly impossible to form a large base of recruits under you if you join late in the game. It is these recruits that you receive commissions from, and where all of the sky-high earnings you were promised are supposed to come from.
I am writing this today because a man called me a few weeks ago (citing that a friend of mine had referred my number to him). I soon learned that my friend (a recent graduate of UCI) had become a victim of an MLM by the name of Vartec, a telecom company. He offered me a job in a ‘management position’ that offered $25 per hour. He also claimed that the two-week training was free and I would have a staff working for me.
When I asked him how my friend was doing there, he replied that he had finished the training process and was fitting in quite nicely.
Being extremely cautious after my WFG experience I called up my friend and asked him about Vartec. I learned that the man on the phone had flat-out lied to me.
While the man claimed that the training was ‘free,’ my friend had paid a $299 ‘registration fee’ to enter the program. Though the man said my friend had finished the program, I learned that my friend had just yesterday been ‘hired’ and not even started training yet. Upon further research on the Internet I learned that Vartec was yet another MLM where the ’employees’ are expected to recruit additional personnel and sell the product to friends and family in order to get any money at all.
Though making money in a MLM is possible, the odds are extremely against you. You will have better odds winning money at blackjack in Vegas after studying appropriate playing strategies.
Here are the main warning signs you are being propositioned by an MLM company:
One, the company requests money from you up front to hire you. It doesn’t matter if they call this a processing fee, background check fee or enrollment fee. Any way you slice it, this is money that will go to your ‘upstream’ and their superiors as a kickback. A real company pays for employee training.
Two, when a company puts more emphasis on recruiting more sellers than selling the actual product. The company will earn money from every recruit that pays the initiation fee. A real company would not do this because the excessive hiring would oversaturate any given market area with too many sellers. Once this happens, the only way they can survive is by continuing to recruit people that pay the initial fee.
Three, a company that strongly coerces you into buying their own product that is not right for you. Don’t be fooled by pleads to ‘meet a quota.’ If this happens, run away!
Four, a company that plays on your greed by telling you to sell their product on a commission basis to everyone you know.
Five, a focus on how much money you can make. If a company keeps promising you will make tons of money, they are only playing on your greed and trying to make tons of money off of you.
You are being exploited and your losses are being turned into company gains!
Though Vartec and WFG will claim what they are doing is new, and ‘network marketing’ (selling to friends and family) is the way to go, they are just the old Amway scam repackaged.
Watch for and know these warning signs and you can cheerfully reply to the salesperson, ‘I don’t work for MLM firms, thank you’ the next time you are given a ‘job offer.’

Hans Pang is a fourth year ICS major. Please send comments to pangh@newuniversity.org