A fiduciary duty is a legal obligation to act in another person’s best interest.
A fiduciary relationship involves:
In this type of relationship, a principal entrusts a fiduciary with taking care of their money, property, or other assets.
Trust is the key element of a fiduciary relationship. To maintain this trust, a fiduciary is expected to fulfill three specific obligations:
Most fiduciary relationships involve financial matters, but others focus on providing advice or general caretaking. Here are some examples:
|What they have to do
|Lawyer and client
|Provide the client with enough information to make legal decisions and protect the client’s privacy
|Guardian and ward
|Ensure the ward has a place to live, receives the healthcare and education they need, and keeps their finances in order
|Board directors and shareholders
|Use company assets in ways that maximize benefits for shareholders
|Trustee and beneficiary
|Manage assets in the trust and distribute them to the beneficiary
Sometimes, a fiduciary does not meet their legal obligations. This is considered a breach of fiduciary duty. This might occur when a fiduciary:
Although a fiduciary duty is a legal responsibility, simply breaching it doesn’t mean the fiduciary goes to prison (though they could if they did something criminal). However, the principal could sue for damages, or the fiduciary could lose their professional credentials (like if a lawyer gets disbarred).
Fiduciary duty is a hot topic (and source of confusion) when it comes to financial advisors because they aren’t all fiduciaries despite what many people think.
|Registered investment advisors
|Must follow the (more strict) fiduciary duty
|Broker-dealers and insurance agents
|Must follow the (less strict) suitability standard, which requires making recommendations suitable to a client’s personal situation (but not necessarily in their best interest)
In practice, this can mean that non-fiduciary advisors may be more likely to recommend investment options that pay them commissions and could face less strict requirements when it comes to disclosing certain conflicts of interest.
The fiduciary duty is a legal relationship in which one party is required to act in another’s best interest. The duty can arise in lawyer-client, director-shareholder, trustee-beneficiary relationships, and more.