Wednesday, October 22, 1997
Distribution of Bad
Investments
or
Soap, Vitamins, Long Distance Service, and Mutual Funds
by George Runkle
(TMF
Runkle)
The other day, I was asked, "is it possible to get ripped off when you try to invest?" Unfortunately, the answer is yes. Have you heard of distributive marketing investments? The concept is rather simple. Marketing anything is expensive. With soap, vitamins, and plastic containers, you compete for limited shelf space in retail stores. You have to build relationships, find distributors and build a network -- all before you've made a dime.
What if you could bypass the whole system? Well, you can.
You sell your product through people working directly for you. Obviously, a person selling soap door-to-door can only sell so much. So that's not the whole solution. So why not get them to bring people to help them sell? The people they bring in pay for training, supplies, or whatever, and the person bringing them in gets a healthy cut of that money -- more than they get as commissions for selling the product. The people that they bring in do the same. This setup forms a pyramid, and the people at the top of it get very rich. Unfortunately, only so many people want to sell soap, so at the bottom the train runs out of steam. However, your product is still selling through the pyramid, and you haven't had to find shelf space.
The whole thing is perfectly legal, and is really good for everybody except those at the bottom of the pyramid, and of course for their harassed friends and neighbors. Have you ever been invited to somebody's house to learn about some obscure "way to save taxes" and found yourself being pushed to sell soap and get rich? You know what I mean then. If you go in, you find the commissions you make from selling the stuff is minimal; you desperately need people to work for you. The product is no longer important. But fancy titles are important? Everyone gets to be a "District Manager" or "Regional Vice President." Looks good on the business cards.
This works with many products and one of them is mutual funds. How good are mutual funds that are sold through quickly trained "Regional Vice Presidents"? It doesn't matter. The pyramid is what matters. The person selling you the stuff is less interested in the product sold than getting you roped in to sell for him or her. How good is the financial advice you get from one of these VPs? How good do you think investment advice is from somebody who paid to attend a couple of sales seminars?
One friend of mine sells mutual funds through one of these pyramids. Does he know anything about the way mutual funds work? Somewhat. Does he own any stocks? No. Does he know about Morningstar, Standard and Poor's different reports, Value Line, Investor's Business Daily? No. I doubt that he even reads the business page in the Pittsburgh Post-Gazette. He knows about the Motley Fool because he knows I'm a staff member. He doesn't really know what we do though, he's never seen our site on the Web, or our forum on AOL. Would you really want to buy a mutual fund from him?
Now, I have bought some excellent soap from distributive marketers. It was only a few dollars and cleans really well. However, soap is relatively simple: boil some fat, throw in sodium hydroxide, add perfume, a few other little odds and ends, and voila! You have soap, good for cleaning anything. Investing other people's money in a mutual fund isn't simple, which is why most of them get beat by the market. Would you want to invest a few thousand with my friend the part-time mutual fund marketer? Think about it. Yes, you can get ripped off.
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