While we may not hear as much about pyramid schemes these days, make no mistake, they’re alive and well. Today on MoneyWise, we’ll help you spot the warning signs to avoid being a victim of these schemes.
The biggest reason folks fall for pyramid schemes is greed. It’s the desire to make a quick buck. Solomon sure knew what he was talking about when he wrote Proverbs 21:5, “Steady plodding brings prosperity; hasty speculation brings poverty.”
THE PYRAMID SCHEME
Pyramid schemes are sometimes also called “Ponzi schemes,” named after Charles Ponzi who operated in the early 1920s.
Posing as an investing expert, Ponzi guaranteed clients a 50% profit within 45 days or 100% profit within 90 days.
The first people to buy in actually received those returns, but Ponzi was actually paying those folks with the investments of later investors. As long as greedy people continued to invest, the scheme went on.
But that meant more and more investors had to be paid, and when not enough new people were lured in, the whole thing collapsed, as all pyramid schemes do. By that time, the scheme had gone on for over a year and cost investors $20 million. That would be $270 million in today’s dollars. Of course, all of this is highly illegal and Ponzi eventually served many years in prison.
Many such schemes aren’t quite as blatant or obvious as they once were, but they definitely still exist. The leopard has merely changed his spots.
LEGITIMATE MULTI-LEVEL OR PYRAMID SCHEME?
It’s almost impossible to google “pyramid scheme” without getting hits that also contain the phrase “multi-level marketing.” And that’s for good reason. Many so-called “MLMs” are actually pyramid schemes in disguise.
The Federal Trade Commission is charged with protecting the public from such scams. It defines an MLM as a company that sells products or services through person-to-person sales. Some are legitimate, but some are not.
The FTC says a pyramid scheme MLM can look a lot like the legitimate version and may even sell actual products but warns that it could cost you and the people you’re pressed to recruit a good deal of time and money that you'll never get back.
Pyramid scheme promoters will lure you with promises of how much you’ll earn. They may tell you that you can quit your job and get rich by selling the company’s products, but the FTC says that’s a lie.
They also say that most people who get taken in by a pyramid-style MLM eventually realize that they’ll never be able to sell enough product or recruit enough new victims to make any real money. In the end, they lose everything they’ve put into becoming an independent distributor for the pyramid scheme.
THE WARNING SIGNS
So how do you spot one of these pyramid MLMs? The FTC has some warning signs:
● Promoters make extravagant promises about your earning potential. Don’t be taken in. Those promises are false.
● Promoters emphasize recruiting new distributors for your sales network as the real way to make money. That’s a dead giveaway. In a legitimate MLM program, your revenue would come from selling the product, not from recruiting family and friends. And think of the damage to those relationships if loved ones are also defrauded.
● Promoters play on your emotions and pressure you to “buy-in now” or you’ll lose the opportunity of a lifetime. They’ll discourage you from taking time to study the company. The FTC says if that happens, “Leave by the nearest exit.” Any company that tries to pressure you to join is one to avoid.
● And finally, distributors buy more products than they want to use or can resell, just to stay eligible for potential … emphasis potential … rewards or bonuses. You can’t make money by selling to yourself.
Those are the warning signs of a possible pyramid-style multi-level marketing operation. Forewarned is forearmed.
On today’s program, Rob also answers listener questions:
● How do you know when you’re on track to have sufficient retirement savings?
● How do you determine when it’s time to retire?
Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to [email protected]
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