The Independent Investor: How to Avoid the Pitfalls of Multi-Level Marketing

So you want to be your own boss, make lots of money and do it all from the comfort of your home? It is the siren song of direct sales that has recruited legions of Americans through the years. Some make it, most do not. Here are some tips to help you in your new adventure.

Whether you want to sell jewelry, vitamins, candles, cosmetics or home products, a healthy dose of skepticism should be applied to the promises these companies make on their websites. Many reports, including those filed with the Federal Trade Commission, warn that almost 99 percent of multilevel marketing (MLM) distributors lose money. In addition, the dropout rate is upwards of 60-70 percent per year. Those are daunting statistics. Consider them well before jumping on board an MLM.

Critics argue that this style of personal retailing is a thing of the past. Retailing directly to friends and family on a one-on-one basis requires people to change their buying habits. The future wave of selling is largely internet based where convenience, price and a myriad of choices are just a keyboard away. Remember too that despite the existence of MLM companies since the Eighties; their combined market share of retail sales in the U.S. is under 1 percent.

Over the years, quite a few of these companies have gone bankrupt. In addition, disgruntled ex-recruits have waged a good many lawsuits against several of these MLM businesses. The chief complaint: that they are simply pyramid schemes or just out-and-out scams. Lawsuits allege these companies promise you the world, but only after you buy your way to success through increasing product purchases. In the end, they conclude, many victims are left with nothing to show for their efforts but a mountain of debt.

Unfortunately, accusations of deceptive marketing against these firms are hard to prove.

The legality of the MLM sector is largely based on a 1979 ruling on one company. There seems to be a lack of government legislation and oversight by state and Federal authorities, nor are they subject to the same rigorous regulations as a franchise might be. Given that many state anti-pyramid statutes are vague or weak, it could take many years and a lot of money to prove guilt.

Most supposed victims have failed to receive any satisfaction in the courts.

Armed with those facts, if you still want to embark on a career (part time or otherwise) in individual selling, there are some obvious questions you should ask before joining an MLM.

Where is this company's focus? Is it on recruiting rather than selling? If so, it is an immediate warning sign.

Are you given any training by the company? Do they provide you with actual business techniques to increase product sales? Do they offer any support, or is it all about convincing new recruits to join?

How much product inventory are you required to buy? Watch out for "fast track" purchasing deals or buying expensive business packages to pay for "extra training."

High-pressure sales pitches by your company rep should also be a warning sign. You should never have to make a decision "right now" in order to get a great deal or a special price.

Most legitimate companies allow you to discuss their proposals with family or take a few days to decide if their proposition makes sense to you.

Finally, as in most things, if it seems too good to be true, than it probably is. If you are promised outsized rewards for little effort than buyer beware. Are the products truly as good as they promise and if so, ask for proof. If you are promised back-up and support, once again ask for details.

A good dose of healthy skepticism should keep you out of trouble. Not all MLM companies are scams. Just do your homework because who knows, you may actually make a little money and have fun while you are doing it.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.