The investing world is full of little-known charges and fees that can add up and have a huge adverse impact on your investment returns. Exit fees are charges that a fund or investment company imposes on investors when they sell shares or withdraw money from their investment. These fees come with different names depending on the context; annuity withdrawals are sometimes referred to as "surrender charges," while mutual funds can impose "back-end loads," "redemption fees," or "deferred sales charges." Whatever it's called, an exit fee reduces your profit on an investment position, and because it doesn't get imposed until the end, you might naturally ignore its impact on your returns until it's too late.
The different forms of exit fees
Exit fees have several things in common, the most important being that the charges come when you're trying to exit your investment. Another common thread is that most exit fees are expressed as a percentage of the money you take out of the investment.
There are many common exit fees. They include:
- Early-withdrawal fees from bank certificates of deposit. These usually entail forfeiting the interest earned over a specified period, such as six months or a year.
- Deferred sales charges on mutual funds. Also known as back-end loads, these charges are expressed as a percentage of the value of the shares you sell. The longer you've held your shares, the lower the deferred sales charge typically is. Back-end loads of 1% to 6% or more are typical.
- Redemption fees on mutual funds. In contrast to back-end loads, the proceeds from these fees typically go back into the fund to compensate ongoing shareholders for the expenses the fund incurs to handle your transaction. Fees are usually in the range of 0.5% to 2%.
- Surrender charges on insurance products. Annuities and life insurance policies often impose a percentage charge on the cash value of an insurance policy or on the withdrawn amount of an annuity. As with back-end loads, the amount of the surrender charge usually falls over the time as you hold the investment, but surrender periods of 10 years or more aren't uncommon in the insurance world.
How to avoid exit fees
Smart investors can avoid exit fees. The easiest way not to pay exit fees is to look closely at investments before you buy them and avoid the ones that charge these fees. You can generally find similar funds that won't impose unnecessary charges.
However, if you're committed to an investment with an exit fee, there are steps you can take to cushion the blow. First, some companies waive the exit fee if you make an exchange to another investment that the company offers. For instance, if you switch from one annuity to another offered by the same insurer, you shouldn't have to pay an exit fee on that transaction.
Also look to see if there's a time limit on the exit fee. It can be feasible in some cases to run out the clock on exit fees, especially if you're close to an anniversary date on which the fee is set to go down or disappear.
Exit fees are sneaky, and by the time you know they're involved in an investment you own, it may be too late. By keeping some simple avoidance techniques in mind, however, you can minimize their impact.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at firstname.lastname@example.org. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.