Residual income business opportunity myths debunked

For many people a residual income business opportunity seems like the holy grail of income streams. They believe that once they find that ONE magic residual income business opportunity that all of their money problems will be solved…forever.

But if you look at some of the popular passive income opportunities all may not be as rosy at it seems. Let’s take a look at a few:

1. Affiliate commissions on recurring membership sites

Generating affiliate commissions on recurring membership sites is often touted as the holy grail of affiliate income streams. But what almost NOBODY seems to consider is the average retention rate of those sites.

Personally, all other things being equal (especially conversion rates) I’d rather make a one-time commission of $50 on a product with a % refund rate than a recurring 50% commission of a $30/month membership site with an average retention rate of 3 months – especially if I am BUYING traffic. i.e…

  • ($50 x 100 units) x .95 = $4,750
  • ($15.00 x 100 units x 3 months) = $4,500

It’s business math 101, but it is strangely not talked about much.

2. The Multi Level Marketing (Network Marketing) home based business opportunity

Of course many network marketing (MLM) companies have touted themselves as the ultimate passive income home based business opportunity.  And time and time again that has been proven to NOT be true (note, I am NOT anti-MLM, but I AM against many of the ways network marketing companies are promoted as residual income business opportunities).

Why?

  • Lack of focus on retail sales – The most common problem is a huge lack of focus on retail sales. Without an emphasis on product sales any MLM organization will naturally implode from the bottom up. This is one of the reasons for what’s commonly known as “the 70 percent rule” which requires that distributors are not reordering until they have sold or personally used at least 70 percent of previously purchased products (see Jeffrey A. Babener’s article here on the 70 percent rule)
  • The focus on “leveraging time” by “leveraging the time of other people”. Conceptually this sounds great, but as anyone who has ever managed people knows managing people is HARD work. So what do you have typically in network marketing? You have a lot of people with little or no management experience attempting to manage people with little or no business experience. Sounds like a recipe for disaster, doesn’t it?
  • You do not truly own a network marketing business in the traditional sense of “owning a business”. While, obviously any business can fail or go out of business, there are two things unique to the network marketing residual income business opportunity – you have little or no control over how the entire company does AND most network marketing companies have distributor termination clauses (when’s the last time you heard of a business owner firing him or herself?)

3. Generating Passive Residual Income Through Real-Estate

One of the big sales techniques of the Real Estate seminars of the 70s and 80s would be for the presenter to ask the following 2 questions in a room full of people:

  1. “How many of you know a traditional business owner who lost their shirt in business”? (a lot of people would raise their hand)
  2. “How many of you know a real estate investor/owner who has lost their shirt”? (almost nobody would raise their hand)

Of course it’s possible that less people know real estate investors/owners than business owners. But even if that isn’t true, I think it’s fair to say that there have been many examples (especially recently) of people losing a lot of money in real estate.

And despite slick real-estate seminar “gurus” trying to convince you that finding and managing tenants isn’t a big deal…for most people it WILL be.

4. Earning Residual Income Through High Yield Investment Programs or HYIPs

As Lynndel Edgington of Eagle Research Associates pointed out in this discussion of the recent PTVPartner HYIP:

“THERE ARE HIGH YIELD INVESTMENTS, BUT THERE ARE NO HIGH YIELD INVESTMENT PROGRAMS THAT ARE LEGAL. Every one is a scam or Ponzi. It just depends on how it is set up that determines if it is a scam or Ponzi.

Real investments don’t use payment processors so they can stay below the radar of government agencies. That statement alone is proof this is a scam. No legal investment has to stay below the radar of any goernment agency, anywhere in the world. The moment you hear those words, alarm bells should be going off warning you this is a scam or Ponzi.”

5. Generating Residual Income Via Royalties

It seems to be the dream of many aspiring authors and musicians to get signed on with a big publisher and generate residual income from the sales of their books or music.

Best-selling author David Copeland explodes that myth in this great video presentation on how to publish a book.

6. Residual Income Business Opportunity Systems Based On Buying Traffic

There have been many affiliate marketing training programs that promise that the holy grail of residual income is to BUY traffic through Pay Per Click marketing, Pay Per View marketing, Banner Advertising or other types of media buys.

This was a favorite promise of many questionable PPC training products.

What almost ALL of them fail to mention are the following aspects of buying traffic:

  • Managing bids (this is why bid management software exists)
  • Managing campaign creation (this is why so many campaign creation tools exist)
  • Managing offers (this is why products like OpenX exist)
  • Managing email lists (remember an email list is a list of PEOPLE)
  • Building landing pages (this is why expensive automated landing page builders exist)
  • Analyzing conversion statistics (this is why tools like Amish Shah’s Magic Bullet, StatsJunky, etc. exist)

All of the tools mentioned above AUTOMATE tasks that take a lot of time. And why do those tools exist? Because generating residual income through Pay Per Click marketing and other means of buying traffic is NOT “hands-off”.

That’s not to say there isn’t a lot of money to be made by buying traffic. There is. But most people decide to take the plunge into buying traffic for all the wrong reasons and are surprised when they lose all their money or it isn’t as easy as they were led to believe.

7. Residual Income Opportunities Based On Search Engine Optimization

I think systems like Niche Blitzkrieg do get a bit closer to what some might consider passive income. However, there are still downsides to a system like Niche Blitzkrieg:

  • Unless you learn to outsource and automate you’re income is typically capped at a much lower level than systems that focus on buying traffic.
  • You have to be organized enough to monitor your site’s rankings and income and tweak the sites from time to time.
  • It can be fairly easy at times for someone to figure out what all your niche sites are and use that information to attack the same markets (this is surprisingly rarer than you might expect, but it is a real concern).

8. The Hard Truth About “The 4-Hour Work Week”

Tim Ferris’ popular book does drive home a lot of important and interesting points. But as many people have pointed out he seems to have the attitude of “it worked for me so it will work for you”. And when it comes to the skill of outsourcing and even automation this is definitely NOT true. There is a ton of money spent by both large and small companies to learn how to effectively outsource, so the idea that it is the holy grail of passive income seems patently absurd.

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PTVPartner Warning

There is a fairly new organization that I’ve been advised you need to be aware of and avoid.

The organization is called PTVPartner and PTVPartner itself encourages you to do your due diligence when they state:

“This Is The Perfect “Free Money” Strategy
That Will Not Keep You Up At Night
From Worry!

Perhaps this sounds too good to be true. You wouldn’t be the first to think that. Nor will you be the last. But from the start, we are telling you honestly, with conviction that, after reading this release and doing your own due diligence, you will never be “ordinary” again!”

So think of this information as a way of helping you with the due diligence that PTVPartner.com themselves recommends.

I’ve invited my friend Lynndel Edgington of Eagle Research Associates who alerted me to problems with PTVPartner to offer his insights here for all of you.

His comments, insights, and cautions about PTVPartner follow…

Note: His original comment got buried, so I’m reprinting it here:

Lynndel ‘Lynn’ Edgington says:

Thanks Paul for inviting me here, and to be able to point out some major red flags we see with this program. Most of what I am going to share comes from an interview that was done with the admin of this program, Garrett Rainier.

The first red flag is this statement of his, and I quote: “The reason we selected these two processors (Liberty Reserve and Perfect Money) to begin with was to allow members the most anonymous venue of participation. Like it or not, most of the world is of an oppressive nature. Governments like control. The majority of HYIP participants don’t pay taxes on the money they earn in this arena. Governments don’t approve of this and attempt to cause problems for Members and perhaps at some point ourselves. So an anonymous entity was expected to be preferred. We personally do not want to participate with any vehicle that will cause undue scrutiny on our endeavors or those of our members.”

Any time you have an admin telling you that governments are oppressive and could cause their members and them problems, and undue scrutiny on themselves is a major red flag. If you are legal, you don’t worry about regulatory scrutiny.

They have announced that their main thrust of advertising will be on work-from-home sites, click-to-pay sites, and MLM sites. Now ask yourself, they claim to be this investment program, so why would they want to advertise on these specific sites instead of the normal investment sites? This is to keep from drawing the attention of the authorities to their program, but would if they were advertising on the financial sites.

Here is another major red flag, and I quote: “We have made some decisions regarding AP and STP. Since they are not offshore and potentially can cause challenges for us with respect to their government’s decision to allow or disallow participation in programs like ours. According to our terms of service, you are responsible to determine if your government will allow you to participate here or not. We are not required to uphold a KYC policy. However, if your government does not allow you to participate, then don’t. We would prefer you to remain out of our program than participate here and cause problems. We are not going to police this. What we are going to do is protect ourselves, this program and those that are in compliance.”

I’m sure you recognized some of the issues I said were red flags, but the major one is this: As an investment company you cannot absolve your responsibility of complying with the KYC rule and force that on the customer by fiat. Well not if you are real and legitimate. Of course any investor should look into this being legal in their country, but that also means this investment must be registered in that country as approved by the agency that oversees investments. Here in the U.S. that means the SEC (Securities and Exchange Commission).

To sell any securities allowing U.S. citizens to invest, the offerings must be registered with the SEC, and also with each State’s security agency charged with this responsibility. So all you have to do is check with EDGAR, which is the SEC’s database of all registered securities approved for sale by the SEC. Another red flag is the myth of being offshore elmiinates the need to be registered in the country from which they solicit customers. It makes no difference where the organization is registered. If they sell to one U.S. citizen, they must be registered and they are not exempt from U.S. laws or law enforcement.

When the reporter who did this interview gave his intro, he said this, and I quote: “I am a bit more enthusiastic about this program than many of the recently opened short term programs I could compare it too and would not be at all surprised if we see bigger things from this one and see it run for that bit longer than such programs usually go for.” Now what is striking about this statement is the admin in the interview says they will be around for the long haul. I guess the intervewer is not as optimistic about them as the admin is on this point.

Like everything, you must do your due diligence before investing in any program. There are enough red flags flying here to tell me this program has major issues, no matter what they say in their hyping this program. They also say this program is drawing a lot of people, but their website is barely registering with Alexa. It does not mean this cannot get traction quickly because it could. We just see a lot of hype with very little to back it up, and they have all the trappings of a classic HYIP Ponzi scheme.

They also claim this is a private placement offering, but this is limited to just 100 people if this is true. You also have to be a ‘qualified’ investor before you can participate in a true private placement. So what does “qualified’ mean? It usually means that you have a gross income of at least $250,000 and assets excluding cars of $1 million dollars. I’m sure that everyone reading this is a ‘qualified’ investor. LOL. Another major red flag.

It is your money and you can invest in anything you feel is right for you. All we can do is warn you of things we see with this program that warrant a thorough due diligence review before reaching your decision. I hope this information has been of help to all of you, and you know how to spot some red flags you didn’t know about before.

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Bremen Man Charged with Operating $7 Million Investment Scam

5/13/2009 U.S. Department of Justice Press Release:

NEWNAN, GA—JEFFREY WALLACE “J.W.” EDWARDS, 43, of Bremen, Georgia, has been indicted by a federal grand jury on charges of mail fraud, wire fraud, and money laundering in connection with an alleged $7 million fraud scheme. EDWARDS was arrested this morning and has made an initial appearance before a federal magistrate. EDWARDS is scheduled to have his bond hearing before United States Magistrate Judge Linda Walker on Monday, May 18, at 10:00 a.m. The indictment had been sealed until his first court appearance.

United States Attorney David E. Nahmias said, “In this latest chapter in the long book of investment fraud schemes, a man who lives in a small town in west Georgia allegedly persuaded investors from around the country that with his secret government contacts and other plans, he could make their money multiply into millions. He will now be prosecuted in open court, where he is alleged to actually be just a thief who used lies to steal millions from his victims.”

IRS Criminal Investigation Special Agent in Charge Reginael McDaniel said, “If it sounds to good to be true, it probably is.  People should diligently check out claims of high rates of return before investing.  They should not blindly follow the advice of one person, and should always get a second opinion.”

According to United States Attorney Nahmias, the charges and other information presented in court: Starting in early 2006, EDWARDS allegedly promised investors that they would receive returns of between 40 and 150 percent on the money they placed in his “high yield” investment programs. EDWARDS variously claimed to own a bank, to have access to confidential and lucrative investment opportunities, or to be a “special agent” of the Federal Reserve whom the United States Government had authorized to stimulate the economy with cash injections. Between February 2006 and February 2007, 31 investors mailed or electronically transferred over $7.4 million to EDWARDS, who allegedly spent the money on Haralson County real estate, vehicles, jewelry, fur coats, art, gambling trips to Las Vegas, and family cruises to Alaska, Hawaii and the Mediterranean. EDWARDS allegedly never invested any money, though he did make nominal payments to a few investors who persisted in asking to see their returns.

The indictment includes charges of mail fraud, wire fraud, and money laundering. The mail and wire fraud charges each carry a maximum sentence of 20 years in prison and a fine of up to $250,000, and the money laundering charges each carry a maximum sentence of 10 years in prison and a fine of $250,000. In determining the actual sentence, the Court will consider the United States Sentencing Guidelines, which are not binding but provide appropriate sentencing ranges for most offenders

The indictment also includes a provision seeking to forfeit real estate, vehicles, and cash that allegedly were proceeds of the fraud scheme. Additionally, in June 2008, the Government filed forfeiture liens on EDWARDS’ real estate holdings, and it seized his Cadillac Escalade, Lincoln Town Car, and Lincoln Mark LT pickup truck.

Members of the public are reminded that the indictment contains only allegations. A defendant is presumed innocent of the charges and it will be the government’s burden to prove a defendant’s guilt beyond a reasonable doubt at trial.

This case is being investigated by Special Agents of the Internal Revenue Service-Criminal Investigation and the Federal Bureau of Investigation.

Assistant United States Attorney William G. Traynor is prosecuting the case.

For further information please contact David E. Nahmias (pronounced NAH-me-us), United States Attorney, or Charysse L. Alexander, Executive Assistant United States Attorney, through Patrick Crosby, Public Affairs Officer, U.S. Attorney’s Office, at (404) 581-6016. The Internet address for the HomePage for the U.S. Attorney’s Office for the Northern District of Georgia is www.usdoj.gov/usao/gan.

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