Between rising interest rates, a shaky stock market and the threat of a trade war with the US, it’s no surprise that financial uncertainty has instilled fear in people in recent years.
And unfortunately, this financial uncertainty makes people more vulnerable to falling for get-rich-quick (or “quicker”) schemes in times of need.
More specifically, multi-level marketing (MLM) schemes have proven detrimental for many people. So, before handing money over to a financial MLM, it’s important to take a closer look at what you’re actually getting into.
What is a financial MLM scheme?
Most of us are familiar with MLM schemes (aka “direct sales” or “network marketing”). These companies rely on independent consultants (usually someone you went to school with) to push alleged immune-boosting essential oils or shakes that help you drop 20 pounds.
However, MLMs haven’t just cornered aspects of the wellness market. Now, they’re selling financial products, too — and these companies aren’t new. Some bigger financial MLMs have been selling financial products like mutual funds and annuities since the 1970s.
Like any MLM, when you buy their product, the rep receives a commission, but so does the person who recruited them and their recruiter’s recruiter, and so on.
How to spot an MLM scheme: questions to ask yourself before investing
We are not saying all MLMs are scams. Under Canadian law, if they’re selling you a product or service, then they’re considered legitimate businesses. However, there are some questions you can ask yourself before investing your money in businesses to ensure your financial security.
1. What sort of credentials does the person offering this product have?
MLMs generally rely on their existing representatives to recruit other people as part of their “downline.” This means anyone with a pulse could land themselves a position as an independent rep for a financial MLM.
Ask yourself and them what sort of credentials they have. In Canada, individuals who sell financial products, including mutual funds, securities and insurance, must meet certain educational and employment requirements to be licensed.
When buying mutual funds, you want to deal with a person who has done a Canadian Securities Course (CSC) or Investment Funds in Canada (IFC) course. While you’re at it, do a Google search on the company to see if there are any red flags, such as current or past lawsuits.
2. What are they promising you?
Before you invest in a financial product, ask what the return on investment is, then compare it to what’s available on the market. Is it on par with the return from other mutual funds? Are their rates of return two, or three times what reputable financial products deliver?
Similarly, before signing up for a digital financial scheme, ask for research or materials that prove their claims are credible. If anyone is promising things like “guaranteed high returns” with “no risk,” consider yourself forewarned.
3. Do you feel pressured to invest?
It can be especially challenging to turn down an investment opportunity when it’s a family member or good friend pushing a financial product on you. That’s because MLM recruits are usually encouraged to sell to their “warm market.” The cold hard truth is it’s your cold hard cash — you have a right to invest it how you see fit.
What to do before you sign up with an MLM
MLMs are a mixed bag. Some are reputable with long track records, while others have questionable reputations that should be noted. Protect yourself by doing your homework and taking these steps:
- Research the business. Check different websites for reviews and first-hand experiences. Look at numerous sources. Is there a common denominator? A common complaint that keeps coming up? If something seems fishy, walk away.
- Read the fine print. Know that MLMs must disclose the compensation actually received, or likely to be received, by a typical participant. If you can’t readily find this information, then walk away.
- Ask about compensation plans. With these plans, MLM companies offer a financial incentive to recruit new members. It makes your participation a money-making proposition for the person trying to get you to sign up. That makes it difficult to get unbiased answers from the recruiter.
- Inquire about stock obligations. You don’t want to get stuck with stock. Steer clear of MLMs that don’t have a reasonable buy-back guarantee or refund policy, allowing you to return your extra products when you decide to end your career with that company. If it doesn’t provide details on that policy proactively, ask to see it. Plan operators have to tell you about it.
- Be honest with yourself. Do the promises being made seem too good to be true? Don’t get taken in by the allure of “get rich quick” schemes. These plans may seem an easy way to wealth, but you’ll end up doing as much work as any other job.
The bottom line: should you consider investing in an MLM company?
You know what they say, “If it looks like a duck, swims like a duck, and quacks like a duck…”
If someone is pushing an investment opportunity on to you that sounds too good to be true, it probably is.
The key is to check out opportunities carefully. Some people do quite well when they sign on with an MLM company. Some have long track records and are credible. Others are not and leave those participating in them with less money than when they started. That underscores the importance of taking the time to carefully assess each opportunity and exercise caution and due diligence before you jump in.
This article Financial MLMs: how to spot the difference between a scheme and an actual businessoriginally appeared on Money.ca
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
