Quick Synopsis: Dave Ramsey’s information greatly contradicts the FTC’s guidelines on MLMs/pyramid schemes, which may lead (or already has led) to great consumer harm.

The other day I was reading something about MLM and someone pointed to a video from personal finance guru Dave Ramsey. The video is from his radio show, so you can press play and listen while you read (assuming you are a multi-tasking hero.)

I don’t want you focus on the information specific to the particular MLM mentioned. There isn’t much important there other than the fact the financial MLM is specifically targeting women. Pretty much anyone breathing can join, male or female, and a specific pitch towards women comes across like tailoring a pitch to Red Sox fan in Boston because that’s who you happen to be talking to.

I’m going to pick out a few quote and timestamps from Dave Ramsey here:

Dave (1:35): Multi-level marketing in general is fine. There’s nothing wrong with it in essence.

We’ll circle back to this one at the end, but for now I’ll just show you that over 99% of people lose money

Dave (2:08): I know people who make over a million dollars in 4 or 5 different ones.

I’d be interested to know who these people are. It is extremely rare to make a million dollars in any MLM. We are talking about around 10 people out of 100,000 that are in them. (This is from my experience in breaking down the Income Disclosure Statements of many companies). There are an estimated 15 million people in the US in MLM, which means around 150 people in the United States total making a million in MLM. I guess those people are the types of the “success stories” that get to meet Dave. It’s not like he knows them from his around town when he’s visiting the local coffee shop.

Most MLMs prohibit you from working in another MLM… it’s in the contract of every MLM I’ve studied. It is common for one MLM company to poach an MLM distributor from another company. When poached, they bring their pyramid with them, so maybe this is how Dave Ramsey thinks one person can make a million in 4 or 5 different ones.

Dave (2:15): In that sense [the people who made the million dollars from it] there is a legitimacy to it. It is a real thing.

So in the sense that Enron executives made millions of dollars what they did was legitimate too? It was a real thing, right?

Maybe I’m being harsh on Dave here. Some scams straight-up take everyone’s money. So maybe if you “Robin Hood” a portion of that money to a few people at the top to lure in others, it is somehow more legitimate?

Dave (2:17): Sometimes people call it a pyramid scheme or something like that. It’s not a pyramid scheme. In a pyramid scheme the last man standing gets nothing and that’s not true of multi-level because a product is being sold in there from a technical standpoint or a legal standpoint. That’s kind of the good side of the multi-level.

Dave Ramsey couldn’t be more wrong here!

The FTC has a a guide on MLM and pyramid schemes which says: “Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”

And the FTC has shut down MLM company Fortune Hi-Tech Marketing for running a pyramid scheme years after USA Today exposed it.

So if Dave was referring to “the FTC” as “people [calling] it a pyramid scheme”, I guess he’d be right on that. If he’s referring to law enforcement and judges, he’d be right about that as well.

Dave is clearly wrong in saying that MLM isn’t a pyramid scheme. At best, some are pyramid schemes. Each one of the dozens that I’ve looked at would be considered a pyramid scheme according the FTC guidelines above.

Unfortunately, we don’t find out an MLM is a pyramid scheme until a company “has defrauded hundreds of thousands of customers out of hundreds of millions of dollars.” That’s a quote from the FTC about Fortune Hi-Tech Marketing when it shut them down.

That FTC guide has a lot more information about MLMs that are pyramid schemes. At a minimum, it should be obvious that having a product doesn’t stop something from being a pyramid scheme. Fortune Hi-Tech Marketing sold DirecTV service (among other things) for example.

And according to Dave Ramsey, this is “the good side of the multi-level.” Yikes! Let’s dig into the bad side.

Dave Ramsey (2:37): The bad side of the multi-level is that you need to understand the business you are in. And if you understand that business you’re okay. And the business you are in is not the financial business in this case or whatever they do. The business you are in is recruiting. And you are constantly recruiting, recruiting, recruiting… everyone is a recruit.

Wow!

I’m going to emphasize those FTC guidelines on MLM and pyramid schemes again: “Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”

Let’s repeat that again, Ramsey says that MLMs aren’t about selling the product or “whatever they do.” He says it is about recruiting: “constantly recruiting, recruiting, recruiting… everyone is a recruit.”

Ramsey’s description of an MLM is EXACTLY an illegal pyramid scheme according to FTC guidelines. The FTC makes it clear that a legitimate MLM is focused on selling the “whatever they do” and that “recruiting, recruiting, recruiting” is a pyramid scheme.

Dave (2:59): And if you don’t recruit people… because your fall-out is very, very, high. The vast majority of people are gone within 3-4 months, but certainly in a year almost nobody is there.”

Again, does this sound like a legitimate sales business or a pyramid scheme based on recruiting?

Also, remember that 99% failure rate above? I’m not saying that running a legitimate sales job is easy. However, we know that mathematically pyramid schemes based on “recruiting, recruiting, recruiting” are unsustainable.

A “year-long” person in your hierarchy is extremely rare. When you get one of those and they go build their own hierarchy that’s when the serious money seems to happen.

I like how Ramsey is calling it a “hierarchy” now. Maybe if we call it a “recruitment hierarchy” it won’t sound like a pyramid scheme?

So having one consistent person in your pyramid is extremely rare. And then you have to consider that person needs to build their pyramid of extremely rare circumstances. This continues on and on.

To be successful in MLM is like hitting 10 straight hole-in-ones… just a series of extremely unlikely events. This doesn’t sound like a scam at all, does it? (Sorry if I’m heavy on the sarcasm here. My mind is boggled.)

CALLER (3:30): – So you’re not making money selling financial services…

Dave (3:33):

Not if you want to make minimum wage… In the case of Amway, you are not making money selling the products that Amway sells. You’re making more money getting people on their team, that get people on their team, that get people on their team, that get people on their team. You’re hiring and training a high-turnover salesforce.

I’d be beleaguering the point if I focused once again on how Ramsey mentions that product sales don’t work in MLM and it is instead recruiting. Instead I’ll focus on how he chooses to use the word “team” instead of pyramid. We’d both be talking about the same thing, but just using different nomenclature.

For the next few minutes Dave and the caller speculate a little about the specific company mentioned. Neither one seems to know much about it… and even if they know its name, so I don’t see much point in analyzing this idle talk.

Dave (7:05): So that’s the low-down on the Multi-Level Marketing. So sometimes people say ‘Dave’s anti-multi-level.’ Not really. Umm, I just call it like it is. And like it is sometimes it’s all hyped up and a bunch of crap. And it is a recruiting business. But is it legitimate? Do I have friends who make over a million dollars a year. Yeah I do. So you can’t say it’s not legitimate or illegal or something like that.

I guess I don’t understand what “legitimate” means any more. I guess if the definition is “one can have friends who make over a million dollars” then we’ll have to through embezzlement in the legitimate category too. Of course embezzlement is illegal, but ummm, again, according to the FTC guidelines MLM as Ramsey describes is illegal too. I guess if you can rob banks effectively and make a million dollars, it’s legitimate too?

The rest of the video mentions that MLMers confuse friends as “transactions” and that’s big problem. People get annoyed at hearing your business opportunity pitch all the time. Unfortunately the MLMer, really doesn’t have much choice, because they have to recruit, recruit, recruit and it certainly makes sense to recruit friends rather than strangers at the bus stop. That are chapters in books written about this and I’m not going to try cover it in a paragraph. I’ll just leave it as a HUGE issue that you should know getting in.

So What Can We Conclude from This

What can we say about Dave Ramsey this?

From this, one might conclude any of the following:

1) Dave Ramsey knows a lot about MLMs.

He is informed enough to know that the real business is recruiting and not selling product. He is informed about the high churn rate of MLM. He certainly seems to know his stuff.

2) Dave Ramsey is ignorant about the FTC guidelines on MLMs.

The FTC has been saying some form of the guidelines that I mentioned since the 1997 JewelWay MLM shutdown (and even before that):

“Legitimate multi-level marketing plans are a way of making retail sales of products or services to consumers through a network of representatives. However, in an illegal pyramid scheme the main focus is not on sales, but on recruiting new representatives into the program. Typically, each new representative must buy a certain amount of products and must recruit a specified number of new participants in order to earn money in the program. In a pyramid scheme there is almost no emphasis on making retail sales of products to persons who are not participants in the program.”

I find it very hard to believe he’d know so much about MLMs and not know the basic guidelines of what makes them legitimate or a pyramid scheme, especially when this stuff goes back decades. It’s like being an expert in advanced calculus and at the same time not being able add a couple numbers together. I find the combination so unlikely that it stretches believability past the breaking point.

Maybe something else is going on?

Care to put on a tin foil hat with me for a minute or two? Don’t worry, it won’t hurt a bit.

In the video, Ramsey admitted to knowing some of the top people in MLM a couple of times. Perhaps he’s trying to protect his friends? Perhaps he can’t believe that they would be criminals running a pyramid scheme because they seem like very nice people? Either one would make sense to me.

Ramsey is very Christian in his opinions. Wikipedia writes, “His books and broadcasts often feature a Christian perspective that reflects Ramsey’s religious beliefs.” MLMs often target churches. I can’t tell you how many emails I’ve gotten from people writing (paraphrased), “This pyramid scheme is spreading through our church now.” Maybe Dave Ramsey is afraid of losing a significant audience that may already be in MLMs?

Finally, there’s a couple of mentions of Ramsey getting his start on radio with people (Roy Matlock) from Primerica, a well-known MLM company. He was in fact a Primerica sales person for a very brief time and seemed to come away with a negative impression of MLM with how it worked for him.

At the end of the day, I appreciate Ramsey for telling it like it is with MLM. I just can’t wrap my head around why a consumer advocate would have his head stuck in the sand when it comes to protecting consumers.