As some regular readers know, I wrote about MonaVie, a multi-level marketing company (MLM), a few years ago and the post has received 6000 comments. Over that time, I've come to learn quite a bit about the multi-level marketing industry - none of them good.
Today, I'd like to share some thoughts on the business of MLM and pair that with well-known personality Robert Kiyosaki, co-author of Rich Dad, Poor Dad. As you can tell from the title, this is going to be a little harsh on Kiyosaki, but keep in mind that Rich Dad, Poor Dad was major motivation for me to begin this blog.
Why Robert Kiyosaki and MLM?
In my MLM articles like the aforementioned MonaVie one and my Nerium one, many MLM supporters say that Robert Kiyosaki is a big supporter of MLM and that justifies getting involved in MLM as a distributor as being a sound business choice.
It does not.
Most people don't know much about Kiyosaki. They hear him say that he has millions of dollars from various complex business ventures and it makes him sound credible. They'll read Rich Dad, Poor Dad and become greatly motivated to find their financial freedom.
It isn't that simple. There are a few things that people should know, starting with:
Robert Kiyosaki's History with MLM
One of things that many people don't realize about Robert Kiyosaki is that he got his big break due to MLM. This letter relates the story in detail. Short version is that a top person at the MLM company Amway, Bill Galvin, found Kiyosaki's book, Rich Dad, Poor Dad, at a car wash before it was published. In fact, Kiyosaki had trouble getting published. It was Bill Gavin of Amway who was able to pull the strings and use the MLM culture to get the book its best seller rating. Kiyosaki also sold tapes at $6 to tens of thousands of distributors. It is fair to say that Kiyosaki's owes the MLM industry a great deal by embracing his products.
In addition to the above, Kiyosaki joined Amway under Bill Gavin, but it appears he was a failure at it. You'll never hear him talk about his Amway rank or the money he's made from it. If Kiyosaki believes that being an MLM distributor is a good business opportunity why isn't he active in the business?
Finally, if you read Rich Dad, Poor Dad, you'll see that there is no mention of MLM at all. This makes sense it was written before MLM played a major role in Kiyosaki's life. In fact, you'll find that the philosophy of the book is to avoid liabilities, which would include most MLMs due to their required autoship policy. It is clear that Rich Dad's advice would be to avoid MLMs for this very reason.
It seems to be that Kiyosaki and MLM have a symbiotic relationship. The MLM industry provides Kiyosaki with a steady set of customers for his products; Kiyosaki provides the MLM companies his support that it is a good business venture.
Robert Kiyosaki and the Cash Flow Quadrant
Many distributors don't know that above history. Instead they have just watched a video from Kiyosaki talking about his Cash Flow Quadrant. Here's one version of the video:
The video is big on marketing and it tells people what they want to hear: "Here's a way out of the rat race." That's powerful motivation. A lot of people are apt to believe Kiyosaki. Who wouldn't want a solution their money problems? The promise of passive income is appealing to just about everyone. However, let's examine the Cash Flow Quadrant in more detail. You might want to jump to 2:45 in the video where he draws it out and follow along:
Kiyosaki describes the Cash Flow Quandrant as having four areas: E, S, B, and I. These are the four types of ways people earn income. E is for employees. S is for small business owners or specialists (doctors for example). B is for big businesses. I is for investors.
Kiyosaki seems to claim that being an MLM distributor is a "B" in the quadrant. It is not. It is on the line between the "E" and "S"... with the major disadvantages of both. Let me dig a little deeper and explain why.
Why being an MLM distributor is an "E" in the Cash Flow Quadrant
Though it doesn’t seem it, an MLM distributor is really an employee of the MLM company. In most MLMs, the company can fire the distributor by terminating their business at any time, for any reason... just like any employee. If you look at "S", "B", and "I", none of those people can be fired by anyone. Also, if the MLM company goes out of business, the MLM distributor has lost his job through no fault of his own. Employees have that same risk, but the other quadrants do not.
With MLM, distributors get all the disadvantages of being able to be fired at the drop of the hat without the benefits of a steady income and or benefits such as health care and disability. In addition, the distributors are required to pay for their own training by buying various tools and going to conferences.
Why being an MLM distributor is an "S" in the Cash Flow Quadrant
MLM has some of the characteristics of being a small business. Distributors work their own hours doing as much or as little as they want.
However, the MLM company strictly dictates how MLM distributors run their businesses. The MLM company restricts the avenues of selling the product as most won’t permit sales on Ebay. The MLM company control the products that you have at your disposal to sell as most prohibit you from selling a product from another MLM company - even if the products don't compete in any way. The MLM may even prevent you from having your own website to promote your business - instead forcing you to use a cookie-cutter website. This prevents the distributor from differentiating their business from their competitors - other distributors of the same product.
In some ways, the distributor is able to determine his income, but this is greatly limited to the mathematics of the compensation plan that in almost every case dictates that 99% of people will lose money.
One of the reasons why people choose a small business is because they want to call the shots and be in control of their destiny. The MLM distributor doesn't get to call the shots and the MLM company controls their destiny.
Why being an MLM distributor is NOT an "B" or "I" in the Cash Flow Quadrant
The video explains that B’s are big businesses like Microsoft and companies with 500+ employees. Clearly that’s not an MLM distributor. No MLM distributor has had an IPO. MLM distributors don't generally have employees. Maybe a few of the ones at the top of the pyramid have a couple of employees, but that is the exception and mathematically this is limited to something like .0001% of MLM distributors since they have to have thousands of people below them to make the money to necessary to pay an employee.
The MLM company itself could be considered a B. Some have gone public. If you were the CEO of MonaVie, instead of a distributor, you’d be in that B quadrant. They are "looking for the good system and good network" in the words of Kiyosaki. For them, this system is to get a bunch of distributors, to work as employees ("E"s), but use the small business ("S"s) categorization to avoid paying them like employees. Instead they pay a very small number at the top well and use that
as a carrot stick to lead the ass to motivate the distributor.
There's really is no "I" in this of MLM discussion because it is about investing in businesses that make money and that's not done in MLM. You can pay money to get started in an MLM business, but it is paying an application fee to start from scratch with no customers and no sales. That is not an investment in businesses.
Kiyosaki tries to make the point that "the [networking marketing] company will work with you to get the business skills that make you rich." This line is bunch of half-truths. The network marketing company will charge you money for the tools and training to sell its products. During this time you are also paying them by spending hundreds of dollars on overpriced products. The "business skills" that you learn are quite vague, but whatever you learn only applies to working in other MLM businesses. You can't cash those "business skills" in for a job as a VP at Microsoft the way you could an MBA.
Kiyosaki mentions the low start up costs to MLM (under $500), but he neglects to mention that over 99% of people lose money. Of the one percent that doesn't lose, some 90 percent of those barely make a few hundred a month. It doesn't sound enticing to explain that for a stadium full of 50,000 people, each paying $500 to get into MLM, only about 50 will make a small supplementary income.
Where do you think the MLM companies make their money? It's from the distributor. That theoretical stadium of 50,000 distributors each paying $500 in amounts to $25 million for the network marketing company, of which they'll at best pay half of it back to the distributors (but in many cases pay less). No wonder they are trying to pitch distributors on "the opportunity."
Kiyosaki goes on to say that if you were trying to build "a Microsoft it would take hundreds of millions of dollars" and then explains that a network marketing company will help you transition to the "B" and "I" side of the quadrant. Since we know that no network marketing distributors are in the "B" and "I" side of the quadrant, this is a very misleading and erroneous statement for Kiyosaki to make.
As we learned before, this is Kiyosaki working his own “S” business - it gets MLM companies to market him as an expert and MLM distributors to buy his books and in return he makes a strong, but critically flawed case for MLM.
Kiyosaki Gives Vague and Bad Business Advice
ABC’s 20/20 put his advice to the test by giving three people $1000 and giving them the goal of making a return on it in 20 days. Kiyosaki coached them personally. It was a resounding failure with all contestants saying, Kiyosaki never gave concrete advice. "All [Kiyosaki] does is, I guess, is open your mind to the possibility. He doesn’t tell you how to do it."
This continues in Kiyosaki's and Trump's book, We Want to Teach You To Be Rich. Read the reviews from Kiplinger's Magazine and the Wall Street Journal. It's not surprising that these two well-known business authorities trash the book citing vague advice and calling it an infomercial for the duo's other products.
When it comes to his businesses it seems that Kiyosaki is scamming people himself. This investigative report shows that Kiyosaki has free seminars designed to get people pay more for expensive training (classes that cost up to $45,000). Part of that training included asking people to raise their credit card limits, which Kiyosaki admitted was poor advice.
Finally, when it comes to Rich Dad, Poor Dad, Kiyosaki admits that the book is a work of fiction. He admits that it is short on practical advice and that it more about motivating someone to take control of their financial future. I admit that it has value in that sense, but let's not confuse a motivational speaker for the purveyor of fine business advice.
Kiyosaki's Company Files for Bankruptcy
If Kiyosaki was a truly great businessman, his company wouldn't file for bankruptcy, right? Isn't that the definition of a failed company. I think it's Business 101: Don't File for Bankruptcy. It's almost like Living 101: Keep Breathing.
Conclusion and Further Reading
Bottom Line on Kiyosaki regarding MLM: Becoming an MLM distributor is not great business advice from a great businessman, it is extremely biased advice that doesn't make sense from someone with known business failures and a history of fraud.
Further Reading (as if this wasn't enough, right?)
- John T. Reed has done a lot of research on Kiyosaki
- J.D. Roth of Get Rich Slowly questions Kiyosaki
- Jeremy Vohwinkle of GenX Finance says Robert Kiyosaki is Off his Rocker (Again)
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