A fiduciary has control over another individual's money, property, or person, and has a duty to always act on that person's behalf in a loyal, honest, and trustworthy manner. A fiduciary must put the individual's needs, goals, and benefit ahead of their own by virtue of their position.
The word "fiduciary" comes from the Latin word fiducia, or "trust." Fiduciary responsibility means acting in the other party's best interest, giving the assignment the highest possible level of care.
What Is a Fiduciary?
Some fiduciaries are hired and some might be court-appointed, such as guardians or conservators of minors or incapacitated adults. They have a "duty of care" to ensure that they're taking the best possible actions on behalf of that person. This might mean using their own expertise or hiring experts who can give expert advice.
A number of occupations and positions have fiduciary responsibilities, from attorneys to real estate agents.
How a Fiduciary Relationship Works
Two individuals make up a fiduciary relationship: the trustee and the beneficiary. The fiduciary is in a position to control the money, property, or wellbeing of the beneficiary, either as an advisor, such an investment advisor, or as someone who's been named as the executor of an estate in someone's will.
A fiduciary can't do anything that can be perceived as breaking the trust of the beneficiary. Prohibited actions include:
- Making decisions that benefit the fiduciary at the expense of the beneficiary. This is considered to be a conflict of interest. For example, a fiduciary can make a contract with their business on behalf of the beneficiary, but not if the contract unduly benefits or favors the fiduciary.
- Hiring individuals who are incompetent or who are taking actions that are illegal. The duty of care extends to making sure that hires are competent and trustworthy.
A written fiduciary agreement should describe the relationship and responsibilities of the two parties. A will, an investment contract, or a board of directors policy manual can be a fiduciary agreement.
In most cases, there is payment involved by the beneficiary to the fiduciary. A board of directors might not be paid, but they're still fiduciaries and they receive a non-monetary benefit from the relationship.
Types of Fiduciaries
Typical fiduciary positions in business include members of a board of directors of a non-profit or non-governmental organization, as well as financial executives, and those who are responsible for business investments. Other types of fiduciaries include:
- An executor or personal representative for an estate
- Attorneys and CPAs because they can influence someone to make a legal or financial decision
- Brokers, bankers in trust departments, and investment advisors
- Physicians and healthcare providers
- A guardian or someone who has a power of attorney or the responsibility to care for another person
A board of directors has a fiduciary responsibility in a general sense because they must make decisions that affect the corporation financially and legally. Board members can't avoid fiduciary responsibility by hiring an expert, because the board is ultimately responsible for its decisions.
Individual board members can be sued for breach of fiduciary responsibility, such as if a board member hired a vendor who had personal ties to the member.
Board members have a general duty of care, but they also have more specific duties. The board must protect the corporation, including not doing anything that would harm it. The board must also use their best skills to make the corporation profitable. A loss of profit might be beyond the control of the board, but they must still put profit at the top of their list of duties.
When a Fiduciary Breaches Responsibilities
It's against the law for a fiduciary to breach their duty to a beneficiary. The two parties have entered into a contract. A court might decide the fate of the fiduciary if they're sued for failing to exercise their duties under that contract. The plaintiff can recover damages, including punitive damages, which are intended as punishment for an act taken or not taken.
State law governs penalties for breaching fiduciary responsibilities. For example, misapplying fiduciary property to use the property for purposes of personal gain or against the wishes of the beneficiary warrants a penalty under Texas law.
- A fiduciary is someone who must maintain high standards of care for an individual’s person, property, or finances.
- Fiduciaries include estate executors, real estate agents, physicians, attorneys, and financial advisors, all of whom are obligated to act in the best interests of their clients.
- A fiduciary relationship is generally established by contract, such as in a last will and testament or a retainer agreement.
- Fiduciaries who breach standards of care can be sued in court and penalized. The exact process depends on state law.