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Hey, guys.

It's Chelsea from The Financial Diet. And if you have not already, do not forget to hit the Subscribe button and also join to join the amazing, confidential, incredibly cool, can't reveal any details here.

But we meet every third Wednesday at 2:00 in the morning at the YMCA for midnight volleyball, for those who know. And this week, we are here to talk about one of my favorite subjects to rip apart here on the old Financial Diet, which is MLMs, or Multi-Level Marketing schemes. Now I've talked about MLMs a few times on this channel, particularly how they tend to target and exploit women.

And I'll link to those videos in the description. But for those who don't know, MLMs, or multilevel marketing schemes, are strategies wherein direct sales companies encourage existing distributors to recruit new distributors. In MLM schemes, there can be hundreds or thousands of members worldwide, but relatively few earn meaningful incomes from their efforts, indicating a possible pyramid scheme.

While many MLM practices are legal, the FTC, or Federal Trade Commission, has been investigating multilevel marketing companies for decades and has found many with questionable legitimate practices, such as running pyramid schemes. Long story short, MLMs are generally sketchy because most of their members don't make any meaningful money at all. But those who do don't make the majority of their income from actually selling the product or service.

They make it from recruiting other salespeople underneath them. And often that recruiting process requires the new recruit to spend a bunch of money up front buying products or enrolling themselves in various programs. And while many of us today might associate them with social media because of the ubiquity of your sister-in-law, or that girl you went to high school with constantly pushing this miracle weight loss tool or ugly leggings, MLMs are actually nothing new.

Avon, one of the largest and most well-known MLM companies in the US, was actually founded in 1886, though it would be a few decades before it started implementing MLM-style recruiting. Long story short, bitches (LAUGHING) be scamming since the turn of the century. I'm sorry.

Just to give some background on Amway, which is one of the first MLMs and is still in existence and huge today, in 1975, the FTC accused Amway of being a pyramid scheme. But the investigation concluded in 1979 that Amway was not a pyramid scheme. The FTC did say that Amway lied about potential earnings to new recruits-- which most MLMs still do today, retail price-fixed, and allocated customers to their distributors, and they were ordered to stop all of these practices.

The FTC ruled that Amway was not a pyramid scheme because they did not charge a large investment fee to new recruits and did not require members to buy large volumes of inventory that they cannot return. Amway also required distributors to use or sell 70% of all previously purchased inventory before buying more, and the FTC viewed this as another indicator of Amway being different from a pyramid scheme. And the 70% rule became the golden rule of the MLM industry.

The 1979 ruling didn't look good for Amway, but they have survived. And the rest of the industry did with them. 40 years later, and they're stronger than ever. Over 20 million people are involved in an MLM in the US, and 5,500 new recruits join every day.

Now we have known that for some time, MLMs have not been set up to ensure that most of the people involved with the programs earn a good living, but rather optimize for only a select few to earn a lot of money. In fact, the FTC has found that up to 99% of people involved in MLMs end up losing money in the long term. But this doesn't mean that the companies themselves aren't profitable.

In 2018, the Direct Selling Association, or DSA-- not to be confused with the Democratic Socialists of America, which is a lobbying group for MLMs-- claimed that the industry produced $35.4 billion in retail sales. But we have covered some of this on TFT before, so why are we talking about it today? Well, in large part because since COVID hit, MLMs have become more effective, more ubiquitous, and more dangerous.

MLMs have been more active than ever, looking to take advantage of the millions of people who have lost their jobs, are newly working from home, have had their hours cut, et cetera. And some are even going so far as to claim that the products they sell actually can help protect you against coronavirus itself. And while not every product or service sold by an MLM is inherently snake oil, MLMs do have a long and well-established history of making dubious health and wellness claims with their products.

Nutrilite, a company that was later bought out by Amway in the 1970s, got shipments of its products seized by the FDA in 1948 because it was making unfounded claims that it cured diseases. And it was as early as April 2020 that the FTC began warning MLM companies to stop predatory practices which promised huge unlikely payoffs. In April 2020, the FTC sent letters to MLM companies that instructed them to quote, "immediately stop their distributors from telling people that they're likely to get rich by investing in the business." They also demand the companies immediately stop all claims that their products can treat or prevent COVID-19, as there is no evidence or scientific testing supporting claims that those products can help prevent or treat the disease.

According to the FTC, the MLMs' distributors posted their unsupported ads on social media sites. Some took direct aim at the economic stimulus payment and urged people to use the money to invest in their MLMs. These messages included, "need to make extra money?

Find it difficult to pay your bills? Were you laid off/#fired? Be your own boss with doTERRA essential oils.

Message me to achieve financial independence #laidoff #unemployed #cantpaymybills #cantpaymyrent #student #sales #sidehustle #makemoney #stayathomemom" "Living in quarantine and where 14 million people applied for unemployment just last week. I'll stick with the opportunity to change people's lives. Turn a small investment into six figures. #arbonne #quarantine #2020" "Everyone's getting stimulus checks right now and there is no better investment you could do.

Take that money you're about to get back and figure out a way to make this happen tonight." And even more bleakly, recessions tend to be good for MLMs. During the Great Recession, MLM sellers went from 15.1 million in 2008 to 18.2 million in 2014. So we at TFT spoke to several women in our community who have been at the receiving end of recruitment attempts since COVID hit to hear what it's really been like.

Here are just a few of their testimonials. "Because the Black community in Seattle is small, there's a Slack group that allows us to connect as a community. Around May-ish 2020, I received a message from a woman who I've seen around and have some mutual friends with on Slack asking if I was open to work opportunities. I should have known it was a red flag when she didn't provide any details and went straight to wanting to get on a video call.

But I wasn't really thinking. On the call, she drew out this diagram that basically painted traditional jobs as pyramids, and this job as a web. She then talked about how she has mentors and they're set to retire at 30 and travel the world, and how she's trying to get to where they are and that she'll help me get to where they are too.

I think she was really pulling on our connection of being Black in a predominantly white city and how these people are like a family. She mentioned the next steps would include another meeting with her where she'll go even more in-depth into the opportunity and then I'd meet with the whole team, and honestly it sounded like a cult more than anything. I definitely think if she reached out when I first moved here I'd be more inclined to join whatever it was she was talking about.

I later went on Reddit to figure out what I just experienced. And found out that she's part of Amway and apparently Seattle is swimming with Amway reps. They use the same tactic of randomly reaching out to people online or in person, presenting them with a new opportunity, and then giving them this whole spiel.

I didn't follow up with her after our call and haven't heard from her since. It was a really weird experience and I've told all my friends to be wary if they get any messages from her so hopefully they won't get pulled in." "In mid-April 2020, I had a classmate from undergrad contact me on Instagram regarding her new business. We had taken several STEM classes together and then each gone onto separate graduate programs to obtain PhD's.

After not hearing from her for six years, she was suddenly trying to sell me a tummy wrap that claims to melt the fat off your abdomen while you wear it. I was honestly shocked and upset that someone whose life is dedicated to evidence-based practice and critical thinking had fallen victim to a scheme. However, I was also sympathetic to the possibility that she had experienced a reduction in income due to the pandemic and was just trying to stay afloat.

I researched the MLM and was able to find their recent Income Disclosure Statement, which shows that their average distributor makes around $700 for the entire year. I sent her this information, briefly reviewed the sunk cost fallacy, and respectfully encouraged her to distance herself from this MLM. She simply said, 'thank you for your input' and I haven't heard from her since.

As of January 2021, she is still in the MLM and continuing to post about a range of weight loss products." "I was contacted over Facebook Messenger by a girl that I knew from my sorority during undergrad. She and I were never close, so the message surprised me and honestly seemed pretty suspicious from the get-go. She initially just asked how I was doing and we exchanged a few messages.

She asked if I was still in school or whether I was working. I explained to her that I was looking for a more permanent job. Even though I didn't ask her what she was up to, she replied to tell me that she started working for a wellness company called Arbonne.

She told me that she loves her job. She can do it from home or from anywhere-- as if any of us were doing any traveling at that point in time. And that it's perfect for her because she's a military wife.

She then let me know that Arbonne changed her life for the better and asked if I had heard of the company. At that point I stopped replying to her. I suspected that Arbonne was an MLM and upon googling it, my suspicions were confirmed I have to say, it's super weird to get out-of-the-blue messages from people you used to know.

It's deceiving. You think, hey, this is nice that this person is checking in with me, only to have the rug ripped out from under you when they try to either recruit you to their MLM or sell you product. I think many people were in a pretty emotionally vulnerable place in 2020, and still are-- I definitely was at the time when she contacted me.

In such a difficult time, any effort made by others to reach out is so welcome. That is, until their underlying motive is revealed." So while the practices of MLMs are exploitative, and while we're probably annoyed at the level of #girlboss recruitment attempts that we're seeing in our social media feeds, we must sympathize with people who are getting sucked into these programs, often because they are in dire financial situations and feel that it might be one of the only ways to help themselves in a short period of time. These organizations prey on people in a very intentional way, and use economic catastrophes, like the coronavirus pandemic, to further exploit people's weak spots.

Remember that it is not an indictment of any one individual to have gotten sucked into an MLM, and making people feel ashamed of making that bad decision is only likely to push them further into that community where they find support. And it's also largely due to the lack of competent regulation around these organizations that would prevent them from acting so exploitatively in the first place. While yes, it is very much OK to hate that #girlboss recruiter who is constantly trying to suck new people into the program and making bank off of other people's misfortune, we have to be able in our own lives to leave the door open for people who may have made that bad decision to get out of it before they start harming others.

Remember that most MLM victims are just people who made a bad choice, and the best day for them to get out was yesterday, but the second best day is today. Always have a critical eye for these things, but keep your empathy first. And as always, guys, thank you for watching.

And don't forget to hit the Subscribe button and to come back every Monday, Tuesday and Thursday for new and awesome videos. Goodbye.