Business opportunity or pyramid scheme?

Visitors to Consumer Action's websites know that we regularly post links to consumer headline news in English, Spanish and Chinese. One of the topics that garnered much coverage over the past year—particularly in the U.S. Spanish-language press—relates to Herbalife, a multi-level marketing nutritional supplement company. Critics call Herbalife a “pyramid scheme,” while others view it as a legitimate business opportunity that employs a multilevel marketing strategy.

In multilevel marketing, individuals sell products to the public by word of mouth, direct marketing and house parties. Typically, distributors earn commissions not only for their own sales, but also for sales made by the people they recruit to sell. Amway and Avon are two examples of companies that employ multilevel marketing.

Earlier this year, Consumer Action joined the League of United Latin American Citizens (LULAC), the Hispanic Federation, the National Consumers League (NCL) and Consumers Union in calling on the FTC to investigate Herbalife’s multi-level marketing program, which is particularly popular in the Latino communities. NCL's letter to the FTC provides some background on the issues. Hispanic media have paid close attention to the matter, in part because it is reported that at least 60 percent of Herbalife's 500,000 U.S. distributors are Latino.

The FTC has not confirmed whether it is investigating Herbalife. But you don’t need to wait for FTC action to educate yourself and make informed choices about business and investment opportunities.

Both the FTC and NCL have excellent resources on avoiding pyramid schemes. And for those consumers looking for the ideal business opportunity, Consumer Action's MoneyWi$e Micro Business module is replete with resources and tips to help consumers get on the right track to starting a business.

The FTC's Multilevel Marketing fact sheet points out that not all multilevel marketing plans are legitimate. Consumers are advised to ask about the compensation structure, potential expenses, support for any claims of profits and other questions. Avoid any plan where the reward for recruiting new distributors exceeds the money to be made on sales of products. For those individuals who decide to buy into a multilevel marketing program, the FTC requires that the business’s marketing materials must be truthful and that claims must be backed by solid evidence.

NCL’s brochure, Pyramid Schemes: Don't Let One Collapse on You, covers different types of schemes, including gifting clubs, chain letters and online pyramids. It also explains that legitimate multilevel marketing plans are not pyramid schemes, and describes the difference.

Some consumers may get involved in questionable business opportunity schemes simply because they have not explored all their business start-up options. One of the best things to do is contact local sources of free, legitimate start-up advice. As described in Consumer Action's Micro Business module, trustworthy sources of this advice are the Small Business Administration (SBA) and SCORE.

Through the SBA, prospective business owners can find their local Small Business Development Center (SBDC). These centers offer workshops and one-on-one, long-term professional business advice and more—for free or at a low cost. SCORE offers free or low-cost mentoring, advice, workshops and webinars.

Finally, for those who are aren't looking to start a business but simply want to grow their money, avail yourself of basic investment education. Pyramid schemes have robbed individual investors of billions of dollars: Be wary of any get-rich quick claims.

Consumer Action's Money Management 1-2-3 series guides consumers to the Securities and Exchange Commission's investor website for an overview of the basics of investing. Money Management 1-2-3 also recommends consulting a fee-only financial advisor (rather than one who earns money from commissions) for investment advice. Two sources of fee-only advisors include the National Association of Personal Financial Advisors and the Garrett Planning Network.