A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests.
A fiduciary duty is the highest standard of care in equity or law. A fiduciary is expected to be extremely loyal to the person to whom they owe the duty (the “principal”): they must not put their personal interests before the duty, and must not profit from their position as a fiduciary, unless the principal consents.
Examples of fiduciary roles include:
- Trustees, who manage assets on behalf of a trust.
- Executors of an estate, who carry out the terms of a will.
- Guardians, who are appointed to care for or manage the affairs of individuals incapable of doing so themselves.
- Financial advisors, who manage assets or give financial advice.
- Corporate board members, who have a fiduciary duty to shareholders.
In each case, the fiduciary is required to act in the best interest of the other party, often putting the needs of that party above their own. This involves a high level of trust and responsibility, and fiduciaries can be held legally accountable for not fulfilling their duties appropriately.
Example of a Fiduciary
Let’s consider the case of a financial advisor for this example.
Imagine that you have a significant amount of savings, and you want to invest it to grow your wealth over time. However, you don’t have much experience in investing, so you decide to hire a financial advisor to manage your investments.
When you hire the financial advisor, they become your fiduciary. This means that they have a legal duty to act in your best interest. They cannot simply invest your money in whatever way will earn them the highest commission, or suggest you to invest in a business they have a personal interest in without disclosing it. Instead, they must use their professional knowledge and skills to make investment decisions that are best for you, considering factors like your financial goals, your risk tolerance, and other aspects of your personal situation.
For instance, if you’re nearing retirement age and need stable income, it wouldn’t be in your best interest to put your money in highly volatile or speculative investments, even though these might offer higher returns. As your fiduciary, your financial advisor should steer you towards more reliable, lower-risk investments that can provide the steady income you need.
If the financial advisor fails to fulfill their fiduciary duties and instead acts in a way that primarily benefits themselves (like putting your money in high-commission investments that aren’t suitable for you), they could be held legally accountable for their actions. This is because, as a fiduciary, they are legally required to put your interests ahead of their own.