A fiduciary controls an individual’s property, money, or other assets and is required to act on the person’s behalf in a faithful honest, trustworthy, and reliable way. A fiduciary should put the needs of the person’s goals, requirements, and interests above their own goals and needs due to their role.
The term “fiduciary” comes from the Latin word fiducia which translates to “trust.“ Fiduciary responsibility is the act of acting in the other’s best interests and providing the best possible degree of care.
What Is a Fiduciary?
Certain fiduciaries are employed, and others are appointed by the court for example, conservators or guardians of disabled adults or minors. They are required to fulfill an obligation of “duty of care” to ensure that they’re performing the most appropriate actions for that person. This may require them to use their own knowledge or hire experts to provide an expert opinion.
Certain professions and jobs have fiduciary obligations, ranging from lawyers to real estate brokers.
How a Fiduciary Relationship Works
Two people are involved in fiduciary relationships: both the beneficiary and trustee. The fiduciary has the position to oversee the financial as well as the property, health, or welfare of the beneficiary, whether through an advisory role, for instance as an advisor to investments, or one who’s been designated as executor of an estate under the will of a person.
A fiduciary isn’t allowed to take any action that is perceived as a breach of trust by the beneficiary. Examples of prohibited actions are:
- Making decisions that benefit the fiduciary the benefit of the person who is the beneficiary. This is deemed as an act of conflict of interest. For instance, the fiduciary may sign an agreement with their company to the advantage of the recipient however, the contract cannot be made if it is in any way beneficial or favorable to the fiduciary.
- Hirers who are not competent or are engaging in actions that are unlawful. The responsibility of care includes making sure that employees are reliable and competent. 1
A written fiduciary contract will outline the relationship and obligations of both parties. A will or an investment contract or the board of directors’ policy manual can serve as an agreement on fiduciary responsibility.
In the majority of instances, there’s some form of payment from the fiduciary’s beneficiary to the beneficiary. The board of directors might not be compensated, however, they’re still fiduciaries. They are rewarded in a way that isn’t monetary through the partnership.
Types of Fiduciaries
The most common fiduciary roles in business include being on the board of directors of a non-governmental or non-profit organization and financial executives and those responsible for investment decisions in business. Other kinds of fiduciaries are:
- A personal representative or executor of an estate
- CPAs and Attorneys as can influence someone else to take a financial or legal decision
- Brokers banks, bankers who work in trust divisions, as well as investment advisors
- Healthcare providers and doctors
- A guardian or anyone with the power of attorney or authority of attorney or has the authority to take care of another 2.
A board of directors is subject to an obligation to be a fiduciary in general terms because they have to make decisions that impact the business’s finances and legal. The board members cannot escape the fiduciary obligation by employing an expert since the board is responsible for its choices. 3
Board members could be brought to court in breach of the fiduciary obligation in the event that an individual board member contracted with an individual vendor with personal connections to the member.
Board members are subject to the general obligation of taking care, but they have specific responsibilities. The board has to protect the company, which includes not doing anything that could cause harm to it. The board must also apply their skills to ensure that the company is profitable. Loss of profits could be outside the control that the boards have, however they should still place profits on the top of their list of priorities.
When a Fiduciary Breaches Responsibilities
It is against the law for a fiduciary to violate their obligation to the beneficiary. Both parties signed an agreement. A judge could decide whether the fiduciary will be held accountable should they are sued for failure to fulfill their obligations under the contract. The plaintiff could be awarded damages like punitive damages. They are meant to be a punishment for the act that was performed or not carried out.
State law regulates sanctions for breaches of fiduciary duties. For example, improperly applying fiduciary assets to make use of the property to gain profit or in opposition to the intention of the person who is the beneficiary is the enactment of a penalty pursuant to Texas law.