What Is a Fiduciary?

2019_04_fiduciary-duty-legal-responsibilities-picture-id1187312778-300x165

A fiduciary is defined as any person or party who acts on behalf of another party. As such, they have a duty—referred to as a fiduciary duty—to put their client’s interests above their own. Often, this involves the management of other people’s money, such as a shareholder’s investment in a company or the funds placed in a trust.

Role and Duties of a Fiduciary

Put simply, the duty of a fiduciary is to look after the best interests of their clients, even if that means putting the client’s interests above their own. For example, a trustee has a fiduciary responsibility toward the beneficiaries of the trust, and therefore must manage the trust in such a way that it benefits the estate beneficiaries rather than their own selves.

In a corporate context, the duties of a fiduciary typically come in three forms: duty of care, duty to act in good faith, and duty of loyalty.

Duty of Care

The fiduciary has a duty to exercise care when making decisions that affect the client or principal. For example, members of a board of directors owe a duty of care when hiring executives, meaning the utmost care should be taken to make sure they select the best qualified candidates.

Duty to Act in Good Faith

After taking care to investigate options and evaluate data, fiduciaries must take action that aligns with the interests of their clients or beneficiaries. For instance, the executives of a corporation should take actions based on what would most benefit their company based on current data.

Duty of Loyalty

Finally, a duty of loyalty requires that no other interests, causes, or allegiances should be placed above those of the principal (i.e. the party to whom the fiduciary owes loyalty). For example, an investor’s financial advisor should not do anything that puts their own self-interest above the interests of the investor he or she serves.

Types of Fiduciary Relationships

A fiduciary relationship occurs whenever one party is put in a position of trust on behalf of another. Fiduciary relationships come in many forms, including:

  • Trustee and beneficiary
  • Board of directors and shareholders
  • Legal guardians and wards
  • Lawyers and clients
  • Financial advisors / investment firms and investors
  • Insurance companies and policy holders
  • Employees and employers

In each of these relationships, a fiduciary is in a position where their client, beneficiary, etc. has entrusted them with finances or other needs.

Fiduciary Duty in Your Business

Your business may have numerous fiduciary relationships, and it’s important to make sure each of those are managed with absolute integrity. Your executives and managers have a duty to look after the best interests of your organization, your board of directors has a duty to manage the funds of your shareholders, and your personnel have a duty toward both your clients and your company as a whole.

Failure to comply with fiduciary duties can result in hefty consequences, both legal and otherwise. Paying damages and suffering a tarnished reputation are two of the most severe, so it’s best to avoid these issues when going about the daily affairs of your company.

Legal counsel can help you mitigate the risks and comply more fully with your fiduciary duties. If you don’t currently have some form of legal counsel in your company, contact an attorney today.

Contact Information