What is fiduciary?
A fiduciary is a person or organization with an ethical and legal duty to act in another party's best interests. They must keep their customers' or beneficiaries' interests first and guard against conflicts of interest. Fiduciaries, such as trustees or financial counselors, are responsible for acting in a trustworthy, honest, and loyal manner.
Fiduciary Explained
When accepting a fiduciary role on behalf of another person, fiduciaries have both ethical and legal responsibilities and duties. Their first and foremost responsibility is to operate in the best interests of the principal or client whose money they are managing. This requirement is known as the "prudent person standard of care" and stems from an 1830 court judgment.
On the other hand, broker-dealers are held to a lower threshold known as the appropriateness standard. While they must provide recommendations that meet the client's wants and preferences, they are not compelled to put their interests ahead of their own.
The fee structure is frequently used to distinguish between fiduciaries and non-fiduciaries. Fiduciary financial advisors often work on a fee-only basis, charging a fixed fee.
Fiduciary Relationships Beyond Financial Industry
Fiduciary relationships exist in various contexts beyond the financial industry, such as real estate, corporate governance, and legal affairs.
In the real estate sector, agents assume fiduciary roles when representing clients. They are legally bound to prioritize their client's interests, providing transparent information about property conditions, prices, and other relevant details.
Within corporate governance, directors and board members have fiduciary responsibilities towards shareholders. Their duty is to act in the best interest of shareholders and maximize shareholder value. Failing to do so, such as engaging in self-serving transactions at the corporation's expense, can result in legal repercussions for breaching fiduciary duty.
Power of attorney arrangements also involves fiduciary duties. When someone grants a power of attorney to another person, that individual assumes a fiduciary capacity and must make decisions in the best interest of the grantor, often pertaining to financial, legal, or healthcare matters, these fiduciaries are obligated to act in the grantor's best interest, avoid conflicts of interest, maintain comprehensive records of all transactions, and manage the grantor's affairs with prudence and diligence