What is a Fiduciary? Relationship, Services, and Responsibilities

When you visit a doctor, you trust that they’re going to do everything they can to help you become the healthiest version of yourself. It’s reassuring to know that they’ll take care of you no matter what you look like or who you are. 

Doctors are a kind of fiduciary, but many other types exist to ensure your financial, mental, or physical well-being. So, are you looking for a fiduciary? In this guide, we’ll cover what fiduciaries are, their duties, and the certain relationships that exist. If you want to skip to a particular section, use the links below. 

• What is a Fiduciary?
• Fiduciary Duties
• Fiduciary Relationship Between Trustee & Beneficiary
• Fiduciary Relationship Between Board Members & Shareholders
• Fiduciary Relationship Between Executor & Legatee
• Fiduciary Relationship Between Guardian & Ward
• Fiduciary Relationship Between Attorney & Client
• Fiduciary Relationship Between Principal & Agent
• Investment Fiduciary

 

What is a Fiduciary?

The word fiduciary originates from the Latin term, fiducia, which means trust. A fiduciary is a person who is legally obligated to act in the best interest of an individual, group, or company. It’s a job that must be done with the utmost loyalty and integrity. On the other end, the person they are representing is called a principal or beneficiary. For a fiduciary relationship to function, there needs to be a lot of trusts. A few examples of fiduciaries are: 

• Lawyers
• Accountants
• Board members
• Attorneys
• Doctors
• Financial Advisors
• And more

It’s important to note that not all financial advisors are considered fiduciaries. Financial advisors who have a fiduciary duty must behave in ways that are beneficial for their clients, which means putting their personal needs aside. However, if they don’t have a responsibility to you, then they can upsell and make recommendations that are in their best interest to gain a more profitable commission. Ultimately, this is more costly for you.

With so many financial advisors out there, how do you know they’ll act as a fiduciary? First, make sure they’re a Registered Investment Advisor (RIA). RIAs are registered with the U.S. Securities and Exchange Commission (SEC), which requires them to be fiduciaries. If they are in the SEC’s advisor database, you can rest assured they’ll operate in your best interest. You can also find fiduciary investment advisors through The National Association of Personal Financial Advisors (NAPFA).

Brokers and insurance agents would not be considered fiduciaries because they may base their recommendations and services to make more money.

In most cases, the potential fiduciary and principal must discuss their roles and set boundaries. This should be in the form of a written agreement that’ll outline the specific fiduciary responsibilities of each party. An investment contract or policy manual would be considered an acceptable document.

Fiduciary duties may also be given to trustworthy friends and family. For example, you could ask a relative to take care of your finances in the event you’re unconscious at a hospital. A state judge could also make someone the legal guardian of a minor, making them a fiduciary.

Fiduciary Duties

Fiduciaries have legal and ethical standards that they must adhere to. When someone takes on the role of a fiduciary, they are promising to look after the well-being of another person and work in their best interest. This means putting the needs of the beneficiary first—always.

Generally, fiduciaries won’t gain anything from this relationship unless stated otherwise. Receiving benefits could be considered a monetary or opportunistic gain, and as a fiduciary, conflicts of interest must be avoided at all costs. They must work diligently to ensure your needs are met and surpassed if possible.

 

 

It’s important to find a fiduciary that respects their role. Ideally, they should be transparent with their actions and act in good faith. Without trust or honesty, your relationship may falter, leaving room for malpractice and negligence. Breaches of trust happen when fiduciaries don’t comply with their duties and operate in ways that aren’t in favour of the principal. Examples of this include:

•  Making suggestions based on their commission
• Approving trades without consent
• Neglecting the needs of their beneficiary
• Purposely withholding crucial information 

By law, fiduciaries are held up to extremely high standards and should always work toward the prosperity of the beneficiary. It’s a significant responsibility that has legal repercussions if not taken seriously. Fiduciaries who don’t perform their duties accordingly can face legal action from their clients or the organization they work for. 

Fiduciary Relationship Between Trustee & Beneficiary

When an individual needs someone to look over their estate, which includes properties, finances, and other valuable assets, a trustee and beneficiary relationship is formed. Estate relationships might only last between the two until the principal passes away. During this time, however, the trustee can legally buy and sell assets as they see fit—as long as it’ll improve the beneficiary’s estate. Their goal is to keep the estate running smoothly and leave it in better condition for whoever is inheriting it. 

Fiduciary Relationship Between Board Members & Shareholders

Board members, shareholders, and corporate directors have fiduciary duties they must uphold. Their duties are divided into three parts: care, good faith, and loyalty. 

The Duty of Care

The duty of care is both an ethical and legal standard that requires company board members to act in ways that benefit the business.  Additionally, their decisions should be based on the available information and options, not their opinions. 

The Duty to Act in Good Faith

A fiduciary has a duty to act in good faith, meaning they should always do what’s best for the company.  

The Duty of Loyalty

Just as the name implies, fiduciaries must remain loyal to the organization they work for. They ought to also avoid conflicts of interest and not use their status for their personal endeavours. 

If a board member is caught abandoning their responsibilities, then legal action can be taken by the company or its shareholders.

Fiduciary Relationship Between Executor & Legatee

When you pass away, the fiduciary in charge of your estate and personal affairs will become the executor. They’ll be responsible for ensuring all final financial matters are taken care of and distribute assets to your heir or next of kin.

Fiduciaries can’t tamper with the last living testament of the legatee to benefit themselves. 

Fiduciary Relationship Between Guardian & Ward

When a parent or other individual can no longer care for a minor, a judge may step in to appoint someone else to become their legal guardian. Court-appointed guardians pledge to take care of the child and guarantee their wellbeing. Their duties are to ensure they get an education, have proper medical care, and more. 

Fiduciary Relationship Between Attorney & Client

Legally, attorneys have an obligation to represent you in court without bias. If a conflict of interest arises while they’re working on your case, then they must let you know immediately. An attorney may be necessary if you need a

• Will
• Power of attorney
• Revocable living trust
• Representative in court

Fiduciary Relationship Between Principal & Agent

Fiduciary relationships are formed between a person, partnership, corporation, or government agency. For instance, an individual can become a fiduciary for a large company, which will be regarded as the beneficiary. 

Investment Fiduciary

Investment fiduciaries are responsible for managing an individual’s finances. For example, if you oversee a baseball team’s finances and are on the board, then you would be considered an investment fiduciary.

Choosing a Fiduciary

If you need fiduciary services, there are a couple of things you need to do before you give them access to your assets. 

Discuss Your Goals

When you meet with a potential fiduciary, whether it’s a lawyer, real estate agent, financial advisor, employee, friend, or relative, you’ll want to discuss what you hope to achieve. For instance, you could be looking for a fiduciary to manage your funds so you can buy a home or need someone to take care of your finances because you’re sick. Whatever the case, make sure that they understand your vision and can help you reach your goals. 

Meet with Them

 You’re going to be working with a fiduciary for a considerable amount of time, so it’s important that you get along with them. Ask for consultations with different advisors to find the right fiduciary for you. 

Ask Questions

Before making a decision, you should ask potential advisors about their services: how they monitor your assets, how often the two of you will meet, the types of accounts they manage, and their fees.

With the steps above, you’ll find a fiduciary you trust in no time. 

Do you need a financial planner to help you with your money? Fiduciary financial advisors will work toward improving your financial health. Check out our financial planning blogs to help you with your money goals.