Fiduciary Responsibility Definition

A fiduciary is an organization or person that acts on behalf of another person and has an obligation to put that person’s best interest first and above the fiduciary’s interest. A fiduciary owes the beneficiary a fiduciary duty, the highest standard of care in law and equity.

What is fiduciary duty?

Fiduciary duty is a legal and ethical concept that establishes a relationship of trust and confidence between parties, where one party (the fiduciary) is obligated to act in the best interests of another party (the beneficiary) while putting the beneficiary’s interests ahead of their own. This duty requires the fiduciary to exercise a high standard of care, loyalty, and honesty when making decisions on behalf of the beneficiary.

Fiduciary duties can arise in various contexts, such as in the relationships between:

Financial Professionals and Clients: Financial advisors, investment managers, and other professionals who manage the assets of clients have a fiduciary duty to act in the best interests of their clients, making investment decisions that are aligned with the clients’ goals and risk tolerance.

Company Directors and Shareholders: Company directors have a fiduciary duty to act in the best interests of the shareholders. This means they must make decisions that maximize shareholder value and avoid conflicts of interest that could harm the company or its shareholders.

Trustees and Beneficiaries: Trustees, who are responsible for managing assets held in a trust for the benefit of beneficiaries, have a fiduciary duty to manage those assets prudently and to distribute them according to the terms of the trust.

Attorneys and Clients: Lawyers have a fiduciary duty to act in the best interests of their clients, providing competent and diligent legal representation while maintaining their clients’ confidentiality.

Executors and Heirs: Executors of wills have a fiduciary duty to manage the deceased’s estate and distribute assets to the heirs according to the terms of the will.

Real Estate Agents and Clients: Real estate agents have a fiduciary duty to act in the best interests of their clients when buying or selling property, ensuring they receive the best deals and proper representation.

Fiduciary duties impose a higher standard of conduct compared to ordinary business relationships. Fiduciaries such as corporate law attorneys in California are expected to avoid conflicts of interest, be transparent in their actions, make informed decisions, and prioritize the interests of the beneficiaries or clients. Breach of fiduciary duty can lead to legal consequences, including lawsuits and financial penalties. The specific nature and scope of fiduciary duties can vary based on the jurisdiction, the type of relationship, and the applicable laws and regulations.

What is the Role of a Fiduciary?

Fiduciaries are tasked with ethical and legal duties. Simply accepting a fiduciary duty to another party means that the fiduciary promises to act loyally and for the client’s best interest.

While the fiduciary pledges to perform a certain duty for the client or principal, for example, managing their money, both parties must also ensure no conflict of interest. In fiduciary relationships, conflict of interest can lead to self-dealing and distrust.

When fiduciaries fail to live up to their responsibilities and do not fulfill their obligations, their behavior may be classified as “fiduciary negligence.”

Fiduciary relationships feature in a variety of business relationships, including:

Executors and legatees
Promoters and stock subscribers
Corporate board members and shareholders
Guardians and wards
Attorneys and clients
Investment corporations and investors
Trustee and beneficiary
Insurance companies/agents and policyholders

Is There a Fiduciary Relationship Between a Trustee and Beneficiary?

Trustees and beneficiaries are involved in all trusts and estate arrangements. In this case, the person named as the trustee acts as the fiduciary. The beneficiary is the principal. Within the arrangement, the fiduciary owns the assets or property. The trustee is also known as the “executor” of the estate.

As is expected in fiduciary relationships, the trustee makes decisions in the beneficiary’s best interest.

What is the Most Fundamental Fiduciary Duty?

Examples of fiduciary relationships occur everywhere and are very common in the business world.

When a client buys into a business’ stock, for example, the client expects the business to help improve the value of the stock. Therefore, if the business were to purposefully destabilize the stock, this act would constitute a breach of fiduciary duties.

Fiduciary duties can exist between many different entities, including:

Individuals in confidential relationships, such as doctors and patients
Shareholders and corporations
Charity officers and charity financiers
Financial partners in joint ventures

What Are the Three Main Fiduciary Duties?

Fiduciary duties exist in various industries and different fields of business. As a result, many individuals and corporations feature fiduciary relationships.

In California, there are three main fiduciary duties. These are:

Duty to total loyalty
Duty to confidentiality
Duty to sensible care

Some of the standard examples of organizations and individuals involved in fiduciary duty relationships are:

Lawyers and clients
Corporations and stockholders
Insurers
Trade unions to union members
Banks and borrowers
and those insured
Real estate agents and clients
Stockbrokers and clients
Business partners
Spouses
Joint venturers
Controlling shareholders and minority shareholders
Trustees and beneficiaries

All individuals and entities are lawfully required to act in the alternate party’s best interest and honor the abovementioned three duties.

When fiduciaries do not uphold their duties, a fiduciary breach occurs.

In California, the courts dictate that violating fiduciary duties can be grounds for the aggrieved party to collect damages in a court of law.

Is There a Fiduciary Relationship Between Board Members and Shareholders?

Corporate directors are bound by fiduciary duty, and their duties include:

Duty of Care

Duty of Care includes the board’s decisions about the company’s future. Therefore, the board must research all available decisions and decide what is best for the business.

For example, if the board is voting on a new CEO, the choice should be based on all applicants’ qualifications. Even if the board is familiar with one candidate, and everyone approves, it must fully investigate the pros and cons of all possible new CEOs.

Duty of Loyalty

A company’s board cannot place any other entities above its loyalty to the company itself and the investors. Therefore, board members cannot deal in any way that places their self-interests first.

For example, if a board member learns of some market details that will impact the company’s stock, they must disclose these details.

When board members violate their fiduciary duty, they can be brought to court by the shareholders or the business itself.

Duty to Act in Good Faith

The board must choose the option that benefits the interests of the company and its shareholders. Then, after investigating all the options, the board must make a clear choice, and their motives must also be honorable.

Who is Considered a Fiduciary?

To understand what a fiduciary is, one must understand what constitutes a fiduciary relationship.

A fiduciary relationship occurs when one person or party (Person A) trusts another party or person (Person B) to act in Person A’s best interests. Person A is, therefore, the principal, and Person B is the fiduciary.

The relationship begins when the “fiduciary” party (Party B) begins to consciously act on behalf of the other party, also called the “beneficiary” party (Party A).

What are fiduciaries expected to do? First, the fiduciary party must treat the beneficiary reasonably and with care. They must be honest with the beneficiary about any relevant information they receive and commit to being loyal and trustworthy. They also must act in what is commonly called “good faith,” placing the beneficiary’s interests above their own.

Here are some specific fiduciary relationships:

Executor and Legatee

The fiduciary label applies to limited transactions, such as the sale of the property. In this case, a fiduciary deed helps transfer property rights. The fiduciary acts as executor of the sale on behalf of the property owner.

Fiduciary deeds are helpful when property owners want to sell but cannot deal with the sale based on sickness or other issues. The fiduciary, in this case, acts for the property owner. If the property owner is dead, a fiduciary can also be helpful.

A fiduciary must always disclose the realistic condition of the property sold to the buyer. The fiduciary also cannot be paid for the sale. And they cannot receive any financial benefits from the sale.

Guardian and Ward

The guardian can be the fiduciary in a relationship between a ward and a guardian. Since the fiduciary is the legal guardian of a minor in this case, they must act on behalf of the child. The state court usually appoints the guardian.

Acting on the child’s behalf may include schooling, food, health care, and other essentials.

Attorney and Client

The fiduciary relationship between lawyers and their clients is very strict. The Supreme Court says that trust must be very high between attorneys and their clients. Attorneys also must conduct their affairs with the following:

Fidelity
Impartiality
Equality

When violations occur within attorney/client unions, attorneys are often liable.

Principal and Agent

The agent/principal relationship can be observed when a group of company shareholders elects their managers. This fiduciary arrangement means that certain individuals and entities can act as agents of principals, including:

A person
A partnership
A corporation
A government agency

In this case, the agent or fiduciary is lawfully appointed to act on behalf of the client. The agent must agree to do so without any conflict of interest. If a conflict of interest occurs, it usually violates the fiduciary contract.

Investment Fiduciary

An investment fiduciary can be anyone with the lawful responsibility to control and oversee somebody else’s finances.

This concept means that “investment fiduciary” is a broad concept. For example, a person in charge of the investment board of a local charity must obey their fiduciary responsibility.

What is the Suitability Standard?

Many people confuse the suitability standard with fiduciary responsibility. However, in finance, suitability refers to the ethical standard financial workers must uphold regarding their clients. Investments must therefore meet the requirements of suitability in FINRA Rule 2111 before a firm can recommend the investment to an investor.

Therefore, financial advisors are held to a suitability standard that directs that they only recommend ideas, products, and strategies that will benefit their clients. This idea is similar to fiduciary responsibility but differs in specificity.

What is the Short-Lived Fiduciary Rule?

The US Department of Labor has proposed a Fiduciary Rule that could significantly impact clients, brokers, advisors, and investment firms. However, in 2018, the US 5th Circuit Court of Appeals vacated the Rule. It remains to be seen exactly when the decision will be revisited, but all signs point to the fact that it will be.

The Fiduciary Rule focuses on retirement financial advice. The Rule ostensibly expands the definition of a fiduciary to encompass any professional who makes a recommendation in this field. While before, only financial advisors who charged for this service were considered fiduciaries, anyone providing ongoing financial advice concerning retirement would be a part of a fiduciary relationship.

What Are the Risks of Being a Fiduciary?

Similar to all relationships, some fiduciary relationships suffer based on a lack of trust or poor performance.

When a fiduciary does not act in the client’s best interests, there is an element of fiduciary risk. This risk does not always imply that the fiduciary agent is self-dealing; it could mean that the fiduciary is simply not making the correct choices.

For example, a trusted investment manager makes several errant trades, damaging a client’s portfolio. The manager is hurting the client, but these may be honest mistakes. The manager is not profiting from their mistakes, either.

However, if the manager made errant trades on the client’s behalf and the manager profited from them while the client suffered, this would constitute a breach of fiduciary duty.

What Damages Are Available For Violations Of Fiduciary Duty?

When a violation of fiduciary duty occurs, there may be an opportunity for legal action. However, the plaintiff must prove specific aspects of the case to move forward. These aspects are:

Prove that the fiduciary relationship existed
Show that the individual who was considered the fiduciary violated their duty
Prove that the violation caused harm to the beneficiary

If the plaintiff can establish these ideas, then they are free to try to collect the following:

Compensatory damages
Possible punitive damages

When breaches of fiduciary duties result in legal actions, individuals should consult with an experienced attorney. A licensed, professional lawyer with experience in fiduciary violations will provide suggestions, including:

Litigation options
Arbitration
Settlement options

Some fiduciary cases involve multiple parties, which means that fiduciary violation cases can be time-consuming and costly. For this reason, we recommend immediately contacting a professional attorney when this issue arises.

Nakase Wade: Expert Business Attorneys in California

At Nakase Wade, our business lawyers excel at perceptive, thoughtful advice for our clients. In addition, our corporate attorneys act as capable, experienced legal consultants for companies of all sizes across California.

If you experience a fiduciary duty breach in California, contact Nakase Wade. Our skilled team will quickly get to the heart of the matter and help you determine the appropriate strategy for dealing with this violation.

We care about our clients and realize how damaging it can be when a party you trusted violates their fiduciary duties. Contact Nakase Wade for a free consultation today.

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