Financial Organizations and the MLM/ Pyramid Dilemma

By: Bradley Hamada ¦ Certified Financial Educator ¦ https://www.bradhamada.com

In an age where entrepreneurship is mainstream and business ownership is the norm, financial companies are looking to capitalize on this trend. Instead of a traditional model of multiple layers of agents and managers in a conventional captive or broker/dealer format, financial organizations are moving to an “outlet” model that offers ownership and freedom to those that want more control over their careers. Unfortunately, this evolving model is often confused with old and outdated Multi-Level Marketing (MLM) structures and has often been labeled as pyramid schemes and other generalizations. It is essential to identify and understand what differentiates different business models so that people can feel comfortable with businesses as they evolve and understand what kinds of organizations they ultimately choose to do business with.

Despite their negative connotation to some, many MLM structures are entirely legitimate and legal. Still, many people take exception to these models for a few main reasons: 1) People get paid to recruit members without the need for a useful business transaction, 2) members are required to purchase highly marked-up products and services, 3) a disproportionately high compensation for those that seem to do very little work, 4) a lack of professionalism/ethics/compliance in the business being conducted.

Below, we will evaluate each issue in the context of mainstream financial “outlet” organizations:

Recruiting for money

In the financial industry, whether in the traditional industry or with organizations utilizing the “outlet” model, associates/agents are not compensated for recruiting people to build their “outlets.” Any recruiting is for expansion purposes only, and all compensation is based on products and services rendered through financial transactions. This promotes teamwork and leadership within an organization because people must be developed and trained, not just recruited for money, to build a sustainable business.

Purchase Requirements and Mark Up

In the financial industry, all transactions are based on a minimum standard of “suitability and affordability,” so companies cannot require the purchase of products and services unless they benefit the client. In the financial “outlet” models, most organizations are set up as brokers/dealers, so they will often offer products and services from many different companies that are also readily available in the financial marketplace—and most importantly, without any markup to the premiums, the consumer would pay. Some organizations still sell only their own proprietary products, and it is up to the consumer to decide if those products and services are most appropriate for their situation.

Disproportionate Compensation

Throughout the financial industry, compensation is structured so that the transaction agent is most highly compensated. Like the traditional financial industry, there are multiple compensation levels in the “outlet” model, which are used to promote training and mentorship from the more senior leadership. Numerous levels of compensation allow for the organization’s alignment so that everyone is being compensated for the betterment of the organization. Also, because continued service and maintenance are essential for financial products and services, it is paramount that the servicing agent be compensated and incentivized to continue to service the client in future years. Regarding sustainability, in the “outlet” model, unlike in your typical MLM organization, many agents can make a sustainable living by offering the available products and services without recruiting other agents.

Professionalism/Ethics/Compliance

In the financial industry, every agent must be licensed through the state (and sometimes the federal government) and conform to professional standards and codes of ethics as defined by their license. This does not guarantee that everyone, acting in their own capacity, is fully competent and ethi- cal. Still, the standard is much higher, and any infractions can lead to disciplinary action and even termination.

In conclusion, businesses and business models will continue to change in the future. Especially in the financial industry, it is important to understand that organizations must continue to recruit to expand. Yet, they must offer competitive products, pay their employees/contractors fairly, and provide professional services with the highest levels of ethics and compliance. Before doing business with any company or organization, you must do your due diligence to understand how they do business and if they can serve your shortand long-term needs.