What Is a Fiduciary?
A fiduciary is an individual or group of individuals that act on behalf of an individual and their assets. Fiduciaries have a legal obligation and are required by law to act in a trustworthy and honest manner. There is often confusion about fiduciaries and other jobs that have fiduciary responsibility. For example, a money manager has a fiduciary responsibility but is not considered a fiduciary. Learn more about what fiduciaries do and the duties that are outlined in their role.
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What Does a Fiduciary Do?
According to the Cornell Law Dictionary, “A fiduciary duty is the highest standard of care.” It is left broad because a fiduciary wears many hats. Fiduciaries cover a wide range of responsibilities, helping to manage your assets and estate before and after your death. There are a number of reasons you would hire a fiduciary. These include, but are not limited to:
- General wellbeing: A fiduciary can be any person or institution obligated to help you with anything, from your estate to your personal finances or health.
- Executor: This fiduciary settles your estate per the specifications laid out in your last will and testament. They gather your assets, settle final debts and tax obligations, and distribute what remains of your estate to any beneficiaries identified in your will.
- Buyer agent: This fiduciary can purchase goods or property on behalf of another party.
- Trustee: Trustees manage the assets you have in a living trust. A trustee can be an individual or a financial institution. After your death, their fiduciary responsibility is shifted to your beneficiaries.
- Investment corporations. Investment entities, such as mutual savings banks, have a fiduciary duty to their depositors and investors.
- Guardian: In the event of your death, a fiduciary guardian is responsible for caring for your children if they’re still minors. In most cases, the person handling your estate documents is the person designated to care for your children, such as a spouse or other relative.
- Health care agent or surrogate: This fiduciary handles medical decisions on your behalf that are laid out in an advance medical directive (also called a medical power of attorney). Unlike other fiduciaries, this fiduciary cannot be an institution, such as the health care provider who is currently treating you.
- Confidential advisor: This fiduciary can take on a number of roles, including financial or investment advisors. Regardless of what topic they provide advice on, they should do so with your best interest in mind.
- Attorney: Every lawyer is considered a fiduciary. Unlike executors and trustees, lawyers have an obligation to you, not your beneficiaries.
- Attorney-in-fact: Sometimes referred to as an agent, this fiduciary is responsible for managing assets titled to your individual name, per the directions in your power of attorney agreement.
- Pre-need guardian: This fiduciary takes care of you and your property if a court deems that you’re mentally incompetent. They only step in if you don’t have a revocable living trust that designates a trustee who would step in for you.
- Priest: A priest can serve as a fiduciary to their parishioners, as they must assist members of their parish with the utmost discreetness.
A fiduciary has a set of duties that they owe to the beneficiary (the person whose interests they represent). According to Cornell Law School, if a fiduciary breaches their duties, they would be subject to legal action and held accountable for the ill-gotten profit. Beneficiaries are then entitled to damages.
Duty of Care
A person or board is required to fully investigate decisions and how they will impact business before they settle on a decision. If their actions do not meet the duty of care, acts are considered negligent and damages may be claimed in a lawsuit. The case of Heaven v. Pender in 1883 put this duty into effect.
Duty of Responsibility
The courts cannot impose unlimited liability or hold everyone accountable for other people’s problems. As such, the duty of responsibility helps define a limit as to the duty of care. Duty of responsibility varies by state in the U.S., depending on the outcome of a multi-factor test.
Duty of Loyalty
When acting as the fiduciary for a company, a person or board must not put other causes, interests, or affiliations before the company or its investors. Personal dealings that might put self-interest or another person above the interest of what’s best for the company are not allowed. If it’s found that a fiduciary is doing so, they can be held accountable in court. While it was not the first case to deal with the duty of loyalty, the 2006 case Stone v. Ritter expanded on the duty.
Duty of Good Faith
After investigating all possible options, a person or board of persons are responsible for choosing what will best serve the interest of an individual or business and its shareholders. A violation could include acting for a purpose other than to benefit the client or intentionally breaking the law. It’s also a violation to raise a claim under the duty of loyalty. The New York courts established this in the 1933 case Kirke La Shelle Company v. The Paul Armstrong Company.
Duty of Confidentiality
Confidentiality is a prerequisite for any legal professional. Attorneys are obligated to respect the confidentiality of their client’s affairs. They cannot use any information obtained from a client to benefit personally or professionally.
Duty of Prudence
Duty of prudence is the duty of a trustee to administer a trust with care, skill, and caution. At a minimum, trustees are required to act as a prudent person would when dealing with another person’s assets after given the purposes, terms, and circumstances of a trust.
Duty of Disclosure
The duty of disclosure states that each party involved in a lawsuit is obligated to disclose any and all pertinent information relevant to a case. This includes information like names and addresses of witnesses and copies of documents for evidence. Withholding this information could be punishable by law.
Breach of Fiduciary Duty
Since there are laws in place for a fiduciary to comply with, there are also consequences associated with the breach of laws in relation to fiduciary duty. It’s easier to prove this kind of breach, as there’s no need to prove fraudulent or criminal intent. You only need to prove that the fiduciary acted against the best interest of their client. Wronged individuals can sue and receive damages as well as any profits made by the fiduciary in breach of their duty. Lawsuits for fiduciary breaches can result in a court case. If damages are provided, the fiduciary is responsible for compensation.
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This post was updated November 25, 2019. It was originally published November 25, 2019.